Politics, Policy and Modernisation

Presentation to a Union Gathering: July 2, 2008

Keywords: Globalisation & Trade; Growth & Innovation; Political Economy & History;
 Central to policy is that there are always new forces which are requiring to adapt policies to new circumstances – what may be called ‘ongoing modernisation’. There are three major sources of these forces.

First, there is technological change, most notably developments in biotechnology, information technology and new materials. Later I shall be discussing telecommunications, so let me remind you that a mere twenty five years ago there were hardly any personal computers, no internet, no broadband, and no Google. Do you remember?
 The second group of forces driving change are those external to New Zealand. The liquidity crisis is not of our making, but it is impacting on us. So are rising prices for oil and for food. Global warming is hardly our fault. Globalisation has transformed New Zealand in the last 250 years. It reminds us that these changes are opportunities as well as threats.

The third group is social change and changes in social aspirations. Many of these changes do not directly impact on the economy, but they do require a policy response. Take the homosexual law reform legislation of a couple of decades. If you werent there you would be surprised how bitterly it was fought over. More recently we have had the civil union legislation. In a couple of decades most will think it normal. Some changes, however, provide profound economic policy changes. The increasing desire by women to have jobs and careers is an example. Population aging presents new challenges. So does the increasing sensitivity to the environment and sustainability.
 There are two or three broad strategies to cope with these external forces. The easy approach is of the traditionalists, who deny a response is needed. In the 1970s the standard response of men to their wives going out to work, was they approved providing nothing changed at home. The traditionalist is happy to take the upsides of any change – in this case the extra family income – but not the downsides. Traditionalists make minimalists responses to the changes.

A good example of the traditional approach was the Muldoon government from 1975 to 1984. As well as the usual sorts of changes – hard enough to respond to in normal circumstances – there was the impact of the wool price collapse of 1966, which was twisting the economy. The external sector adapted magnificently, diversifying products and markets, but there was no complementary change in the domestic economy. Muldoon thought the public would not like it.
 That is true. Its easier to let things drift, and you can get away with it for quite a while. That is why it takes enormous courage to belong to the second group, the modernisers. The Labour government which followed Muldoon were modernisers, although they became split over the degree and direction of modernisation. We might symbolise the conventional modernisers by David Lange, who knew that policy changes had to be introduced, not only to adapt to the new forces while he was in office, but to catchup for the changes that Muldoon did not make. There was a period of rapid policy change occurring under his prime ministership.

Historically Labour has been the government of modernisation. Usually it has been a progressive modernisation, aimed at maintaining the evolving social texture. Even as something which appeared to be as radical as the modern welfare state, introduced by the first Labour government, had considerable continuities with what went before. People may grumble it was not a revolutionary government nor even a very radical one. Exactly, that has not been the nature of our Labour governments.
 However, withing the fourth Lange-led Labour government there were radical modernisers, who wanted to fundamentally transform the texture of New Zealand society, they used the need for modernisation to promote their revolution. This third response is usually known as ‘Rogernomics’, although the campaign continued under National’s Ruth Richardson, and trickled on into the late 1990s after she left office. The Rogernomes wanted a different society from that which had evolved in New Zealand – a more individualistic less socially collective one – one where the community was unimportant and where there was more individual freedom and less social solidarity. In truth is not clear that the Labour politicians who were Rogernomes understood this, but many of their advisers did and earnestly desired a different society.

This difference between the two forms of modernisation – either as a means of adapting to the forces of change or to use it to transform society – led to the clashes of the late 1980s, and the destruction of the fourth Labour government to be replaced initially by a government which was even more explicit about its radical objectives. Its foundation document was called ‘The Economic and Social Initiative’, signalling it wanted to change society as well as the economy.
 So where does the fifth Clarke-led government stand? Many people – especially the more traditionalist – think it is as muted Rogernomics. What they have missed is this is a modernising government in the great Labour tradition, proudly so, but it has not been a radical modernising government. Helen Clark described herself as an economic dry and a social wet, but she could equally have said she was an economic moderniser and a social traditionalist.

One consequence was the fifth Labour government had to reverse many of the extremist policies of the Rogernomes and their kin predecessors, while at the same time modernising. To give an example:
 In 1989 the Labour government privatised Telecom in an extremely stupid way, albeit one which satisfied the extremists. Whatever you think about privatisation, it makes no sense to privatise a monopoly without effectively restraining its abuse of market power. An unregulated Telecom performed exactly as you would expect. It made large profits but on all other measures of performance it did badly.

Thus New Zealand ended up with an inadequate telecommunications sector, by international standards, despite telecommunications being a key element of the infrastructure of a modern economy. The fifth Labour government mucked around for over six years trying to sort out the mess. Eventually – and I give considerable credit to minister David Cunliffe’s leadership for this – it required Telecom to separate itself into three business reflecting each activity’s different market situations, thereby making the monopoly element transparent, easier to regulate and open to competition. Meanwhile, new technologies arrived – especially the DSLAMs which can be install in telephone exchanges, which give faster access and can be installed by competing firms. This will not be the last technological change and we will see further interventions arising as a result.
 That is what modernisation is about. Continually, but incrementally, introducing new policies to deal with new problems. Traditionalists complain about reform fatigue. The term ‘reform’ is a much favoured word by radicals, but everyone knows they do not mean a one-off change. Modernisers are aware of reform fatigue and that slows down their response to the forces, but they know as long as technology, external circumstances and social aspirations change they will keep on reforming until they have got the society they want.

Of course, there is always a danger that a long incumbent modernising government loses the energy and direction for modernising, and comes to a stagnant end. That is what happened to the first Labour government in the late 1940s. The incoming government will institute some modernising changes which its predecessors could not or would not address, but the modernisation slows down, and the economy gets behind the forces driving it. The traditionalists rather like that, and so the sluggard government keeps getting reelected until the gap between its policies and reality becomes too large.
 I want to illustrate these general issues in my last few minutes by focussing on one of the most difficult problems the government faces – dealing with globalisation. I have written a book on the topic – Globalisation and the Wealth of Nations. Its central thesis is globalisation is a response to the falling costs of distance, and as long as they continue to fall we have to adapt.

The essential issue is this. Globalisation creates both opportunities and problems for the economy; how does New Zealand seize the opportunities and cope with the problems?
 The government’s policy framework is called ‘Economic Transformation’ – not, you will notice, ‘Economic and Social Transformation’, for the Labour government is not as arrogant as the Rogernomes. It has concluded – rightly I think – that globalisation requires a ongoing transformation of the economy. This is not a rqdcial notion. Structural transformation has occurred through the last two hundred years of the New Zealand economy. What is radical is the attempt to influence the transformation.

Economic Transformation is a multi-pronged approach. It envisages structural transformation not by selecting firm winners, but by supporting key elements which will make good firms succeed:  creativity, innovation and design; education and training; infrastructure; research, science and technology; improving savings and capital markets, workplace (productivity) reform. Another element is to get our key global city – Auckland – to function a lot better than it has.
 The aim is to getting into businesses, which are less vulnerable to being undermined by globalisation processes occurring elsewhere, especially in Asia. That means an acceptance of getting out of those low productivity businesses easily replicated offshore by cheap labour. That means they are going to have to close down and workers become redundant. I dont think we have got this bit right yet. What we need is an active labour market  – ‘flexisecurity’ is the European term – to enable workers to move from low productivity to high productivity businesses with a minimum social loss.

The strategy also involves promoting national identity as a part of the social cohesion which is necessary for a nation facing globalisation pressures, and also a redistribution  – evident in the tax changes over the nine years – aimed at sharing the benefits from the economic transformation with everyone which again promotes social cohesion.
 A critical notion has been global engagement, not only economically but culturally, in foreign policy, defence and socially. In some ways though, the economic global engagement appears to be a deviation form the more inward looking strategies of earlier Labour governments. Even so you can find some of the directions presaged in the speeches of Norman Kirk. What this government has had is the understanding that the New Zealand economy has to engage with the globalising world if it wants to survive and prosper, and the courage to pursue that course.

This has had to be brief. It does not cover all the government’s economic policies, for other forces such as the state of the world economy, global warming and sustainability aspirations are also pressing on us. The important lesson though is that as much as we are traditionalists and nostalgic, we need to pursue modernisation.
 In The Leopard, the novel’s hero tells his nephew:  ‘In order for things to remain the same, things are going to have to change.’ That is what modernisation is about.