For Whom the Deal Tolls: (of Dogma and Dealers)

Political Review July/August 1996., p.24-29. Also published in a symposium on The New Zealand Experiment: A World Model for Structural Adjustment by Jane Kelsey , published in the Electronic Journal of Radical Organization Theory (EJROT), (

Keywords: Business & Finance;

It is sometimes hard to recognize the New Zealand which the enthusiasts for the recent economic reforms described by Kelsey portray.

They do not mention that the unemployment rate is today over half higher than when they started (under four percent to over six percent) with the expectation that it will not remain at this high level (for New Zealand) for the rest of this century. Nor do they mention that labour force participation rates are depressed by depressed economic conditions, so that there is substantial disguised unemployment.

– They do not mention that New Zealand had during the reforms the worst economic growth rate of all OECD countries, choosing to highlight a couple of good years. And as they still celebrate these good years, which occurred over two years ago, they do not mention that the economy is now stumbling a long at a 2.0 to 2.5 percent growth rate, with the more optimistic forecasters expecting it to get back to the (3.0 percent) average growth rate of the rest of the OECD (the rate New Zealand grew before the reforms took place).

– Their acolytes claim that there have been big productivity gains as a result of the reforms. The reality is that the increase has been low: only a 5 percent rise in average labour productivity over the last seven years, about half the long run average for the economy.

– Nor do they mention that the reason that they are personally more prosperous is that the tax, benefit, and government spending regime has been deliberately changed to increase the advocates’ spending power while reducing that of the poor or those on middle incomes. The vast majority of the population (somewhere between 70 and 80 percent) are still worse off than they were when the reforms began a decade ago. As the Rountree Report on Income and Wealth concluded “income inequality has been growing more rapidly in the UK than any other country [from a total of 20] except New Zealand”. (Rountree Foundation 1995) Since their data series ended New Zealanders have experienced major cuts to benefit levels and reduction of benefit entitlements which would reinforce their conclusion.

– The collapse of the New Zealand sharemarket in 1987 involves another memory lapse by the reform advocates. It was the largest percentage fall among rich economies, and nine years later, the market still has not recovered. Understandably there is no mention of the two members of the Business Roundtable (BRT), that powerful and well financed lobby group of big businessmen who advocated the reforms, who were incarcerated for fraud. There is little mention of the “Wine-box Enquiry” which involves a number of shady (and possibly fraudulent) dealings of various New Zealand companies using the Cook Islands as a tax haven. (Wishart 1995) The best guess is that further jailing of businessmen will be avoided by the ingenuity of a well remunerated law profession.

– While their enthusiasm for reforms to particular sectors is frequently mentioned, the disastrous outcomes are not. Proposals to partially privatize the public health system have been put in place in order, we were told, to obtain greater efficiencies. The reforms failed. Waiting lists rose. The government has begun throwing money at the health sector, and still the waiting lists rise.

– Or what about the tragic death of fourteen young people, as the result of a badly constructed platform overlooking a scenic site – badly constructed because of an under funded and demoralized department of state. The Judge of the enquiry concluded “Standing back and viewing the evidence objectively, I am left with the overwhelming impression that the many people affected were let down by faults of governmental department reforms.” Fourteen young people dead are a lot of New Zealanders. But the reformers ignore them – pressing on – endangering the lives of another three and a half million people.

Except for the last story, which came out after the book was published, you will find the above and many more in Jane Kelsey’s New Zealand Experiment. Why won’t you find them prominently in the media? Why are the issues not being addressed by the reformers, who instead describe a South Pacific economic paradise which has little connection with the reality ordinary New Zealanders experience?

The answer to this central question is instructive, if somewhat disturbing. Initially the reformers argued that their theory was correct. Therefore prosperity would happen. When it did not they said it would, eventually. Every indicator was interpreted to support the theory. Those that could not be constructed favourably were ignored. The basic rule has been the theory is right, the reforms are right, only indicators which support the theory and reforms, are relevant, reality is wrong. If the reformers were ordinary members of society they would be subject to attention from a psychiatrist. Instead the reformers are remunerated and honoured.

A second reason for their strange perception was that the advocates of the reforms have done very well out of them. They said that if top income tax rates were reduced, and government spending and social security benefits were cut, the additional incentives would result in better economic performance. It has not, but what has happened is the advocates are better off. Most have 25 percent higher income after tax, have more influence, and more status. Meanwhile, the average standard of living has fallen. (Easton 1995) Thus there is a practical basis for their perception that everything is going well – but only for them. It is just that the rest of the population is paying for their prosperity. Moreover if they were to admit the reality of the effect of their policies, they would be faced with the possibility that some of the policies would be reversed, especially the ones which have made them well off at the expense of the rest of the nation. Better to pretend otherwise.

Third, the reforms were a revolution in the sense of there being an overthrow of the elite, an intergenerational coup within the establishment. The executive director of the BRT was quite explicit about this when he said “The average age of chief executives of major companies has dropped ten years … A generation of human capital has been obliterated.” (Spicer et al 1992) One is reminded of the leadership of Stalinist Russia desperately hanging on to power by pretending that the misery of the people was a figment of dissidents’ imaginations.

But the most complex reasons is instructive in the context of the wider political economy, and the way that the world is changing. The orthodox account of the creation of wealth involves a process in which factors of production (labour and capital) are ultimately consumed (or invested). Each factor is paid a reward for its contribution to output. It is not necessary here to discuss whether those rewards are justified. But in passing we note the traditional account is that the ownership of capital is more concentrated into the hands of a few than the ownership of labour. That higher concentration plus the way that the management of the production process is organized (typically by the owners of capital in corporations) favours the rich.

What the traditional model overlooks is that increasingly in today’s world economy there are many activities which have the most tangential connection with production of commodities for consumption. Those activities might be called “dealing”, although a more technical description is they are the financial transactions industry. Dealing involves transfers of financial paper such as money, debt instruments, foreign exchange, property titles, shares, forward market entitlements and the like. The most recent development are syntheses of financial paper called derivatives, which have an even more tenuous connection with reality. That the dealers have become so enthralled with them, tells something about their mind state.

Karl Marx described how in the nineteenth century the pattern of economic exchange had changed from
C(ommodity) -> M(oney) -> Commodity
M -> C -> M’.

In the twentieth century the rather messy business of producing commodities has been short circuited altogether, and nowadays there is a huge industry whose raison d’etre is
M -> F(inancial) P(aper) -> M’.

This is not to argue that dealing is a totally useless activity. But it is a far less useful one than making something like a car. Dealing would be unimportant in the world economy if the dealers stuck to their financial roundabout, but they also want to consume commodities like cars (BMWs actually). Thus the dealer economy has to toll the producer economy in order to share in the latter’s output for consumption. The toll rate is not usually high, but the number of transactions in the dealer economy are so enormous that marginal charges generate substantial profits.

This account of the world has two important differences from the traditional story. It is not at all obvious that dealing adds much to the world’s net wealth (i.e. availability of commodities). Formal economic theory (known as the Arrow-Debreu general equilibrium model or “value” theory) can be used to treat commodities and financial paper as equivalents, and therefore equally beneficial. However a major weakness of the model is that it does not have money rigorously incorporated into it, so it fails to include the most central feature of the dealer economy. To put it simply, no-one holds financial paper for its own sake (in contrast to owning a BMW), but primarily because it is a means of making money (which enables one to purchase the BMW). It must be emphasized that this phenomenon is not an integral part of the value theory model which is being used to give credibility to the notion that dealing is as important in wealth, and welfare terms, as producing.

Moreover the traditional view is also wrong when it sees the interests of the dealers and the owners of wealth as being aligned. Certainly they have formed coalitions for political purposes, and dealers are a growing proportion of the rich. But there is an antagonism between the two groups’ objectives. The dealers have to toll the transactions of the wealth owners in order to obtain a share of the producer economy. (Later the wealth owners may push part of the toll charges onto the owners of labour.)

A good example of this antagonism between dealers and the wealth owners occurred in the mid 1980s in New Zealand (and Australia, and indeed throughout the world). The dealers collected together the savings of New Zealanders (for a fee), which they invested (for a fee), and paid interest and dividends to the savers (for a fee). The chain letter miracle of M->FP->M’, evident in the share market and property price boom, inevitably collapsed because it was not producing any extra products, even though the dealers and the savers were consuming them. (Firms found the disruption of constant changes of ownership, as their shares whirled around financial markets, actually reduced their productive effectiveness.)

Eventually the house of cards/financial paper collapsed, and the investors found their profits came from the consumption of their own capital (further reduced by dealers having consumed a part). Following the 1987 world share market crash, one might have thought the dealers would have been humiliated, but such is their arrogance they barely understood these events. Admittedly some lost all their paper wealth, others were found to be acting fraudulently, but the rest kept on with their dealing.

The share market crash meant there were not too many New Zealanders willing to trust them (even those with any capital left). So the dealers turned to a different sort of dealing – the privatization of public assets. Essentially this involves the government paying dealers to alienate its assets. The amounts involved can be huge. It has been estimated the government spent, one way and another, $100 million to privatize the state owned telecommunications company. Most of that went to dealers. (In addition the bidding corporations may have spent as much on their dealers.) On world terms the $100 million may not seem much, but that represented around $30 per New Zealander. The recipients of the largesse were few in number, even as much as a 1000 would be $100,000 each. This amount is not financial paper, but real money which can purchase commodities for consumption by the dealers. It was paid for by the lower return to the state, and higher prices by consumers.

The dealers will tell you that privatization increases the nation’s welfare by increasing economic efficiency. However there is no unequivocal evidence that privatization always increases efficiency and in certain cases it can decrease it (if the firm is a monopoly for instance). Moreover there has been no reputable study which has demonstrated that any of the New Zealand privatizations have improved efficiency. Dealers do not need such studies. They know “the truth”, even if it is an extremely rarefied version of reality.

There is an irony in all this. Dealers are insistent that no industry or firm should receive a government subsidy or other form of assistance. But when their own industry collapsed in the chaos that followed the 1987 sharemarket collapse, they rushed to government for hand-outs in the form of privatization fees. This is not the only assistance they get. There is no capital gains tax in New Zealand, creating anomalies which can be exploited by dealers. And the indirect tax GST (goods and services tax) is almost comprehensively levied on every market transaction, with the major exception of financial transactions. (Of course, there is no pressure from the New Zealand dealer community to correct these anomalies.)

The greatest weakness of privatization from the point of view of dealer is that eventually the state runs out of saleable assets. New Zealand is practically near that stage today (although dealers and their acolytes have indicated they would be willing to assist in the sales of public hospitals, schools, and the conversation estate. There was even an interest in selling off the building in which parliament sat). Of course privatization does add stock to the share market, a useful source of deals, especially as many of the high flying companies of the 1980s went into liquidation and are no longer traded. Over half the top companies on the New Zealand share market are either ex-state companies or have been major buyers of state assets.

So where are the transactions which are the dealer’s lifeblood to come from? By the mid 1990s money was pouring in from overseas. Nominally it was to invest in New Zealand, but actually it covers the widening external deficit because the poor economic performance means that exports are growing faster than imports. Every time money comes through the foreign exchange market, at least one dealer makes a toll. Every time that money is invested in New Zealand, at least one dealer makes a toll. Every time the investment is flicked on to another investor, at least two dealers make a toll, and when the money is transferred back into foreign currencies, there is at least one further toll.

So how to convince foreign owners of capital to invest in New Zealand. The reality of the poor performance of the New Zealand economy would put any prudent investor off, so an unreality is presented. That is why there has to be a constant outpouring of propaganda about the success of the reforms. As German poet Hans Magnus Enzenberger wrote “the reader of the Financial Times shouldn’t be deprived of what the reader of Der Bild gets. Everybody has a right to a daily horoscope.” (Enzenberger 1995) We need to add that the horoscope writer will invariably craft favourable messages for the reader. Upon such promises the reader comes back for more. But note that the dealer and the investor interests are quite divergent. The wealth owner is looking for a safe and profitable investment, the wealth transactor wants a deal and a fee. It is fundamentally a repeat of the pre-1987 financial boom. Ultimately foreign investors will be robbed of their savings just as the domestic investors were. No doubt then the dealers will move onto new clients.

How long before the reality of the New Zealand economy comes home to the foreign investor? Perhaps sooner than the dealers hope. The macroeconomic indicators have been deteriorating for some time: the external deficit is rapidly opening up (“due to the investment boom”, say the dealers); economic growth is slowing down (“but it will recover”, say the dealers); the rate of inflation is outside the target range (“temporarily”, say the dealers); interest rates are rising (“an opportunity for investors”, say the dealers); and while exports are relatively stagnating the exchange rate is rising (“shows what a sound currency we have”, say the dealers). Yet the unease is there. There is talk of a forthcoming balance of payments crisis, in terms of when, not if. The worries are beginning to sneak in commentaries among the more sober financial journalists. At the beginning of May the junior partner of the government coalition called for an early election to avoid going to the polls as the economy is clearly deteriorating.

The 1996 election may be a watershed, not just because it is on a new electoral system (mixed-member-proportional representation, similar to the German system). The dealers are beside themselves with anxiety. Why should they be? If the economy is doing so well would not people be flocking to their cause? Thus far the party most associated with the dealers, heavily backed by their donations, is having trouble exceeding the margin of error of the opinion polls. Every other party is distancing itself from the dealers as well as they can. (Although National, the majority party in the government coalition, and Labour which when in government began the reforms, require amnesia to hide their past relationships with dealers. National has announced it will not accept any donations from corporations involved in the Wine-box deals. It was not so fastidious in the past.)

The underlying message is not only does the electorate not think as well of the state of the economy as the dealers portray it, but the changes were forced down its throat without consultation and without agreement. Had the reforms been successful and made the population better off they may have reluctantly accepted them, even though the reform’s philosophical underpinning is inconsistent with most New Zealander’s beliefs. But the economic performance has not been successful, and so instead, in wrath over the way that the changes were imposed without their consent, in 1993 the electorate voted for a new electoral regime in order order to prevent the sort of unilateral impositions of the past.

In 1996 it looks as though they will vote for economic policies rather different from those of the reforms. No wonder the dealers are hysterical about the election, although it has to be muted in case the foreign investors think there are problems in New Zealand. The dealers will blame the next economic crisis on the elections, which will be small comfort to the foreign investors. As the Brazilian colonel is said to have remarked after adopting policies only half as extreme as those that New Zealand has adopted: “It is funny, for you tell me the economy is doing well but the people are not.”

This essay has had to be broad brush. Jane Kelsey’s book fills in the detail. It is invaluable for the overseas reader, who is concerned about such policies being implemented in her or his country. Dealers are not peculiar to New Zealand.

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Easton, B. H. (1995). “Poverty in New Zealand: 1981-1993”, New Zealand Sociology, Vol 10, No 2. November 1995, p.182-213.
Enzenberger. H. M. (1995). Political Crumbs, (translated by M. Chalmers) Verso, London.
Joseph Rountree Foundation. (1995). Inquiry into Income and Wealth. Joseph Rountree Foundation, York.
Spicer. B, Bowan. R, Emanuel. D, and Hunt. A . (1992). The Power to Manage. Oxford University Press.
Wishart, I. (1995). The Paradise Conspiracy. Howling at the Moon Productions, Auckland.
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