State Leadership in New Zealand’s Economic Development

<>Public Sector Conference: 5-6 September, 2013

<>Published in Foreign Control Watchdog 134, January 2014: p.46-50


Keywords: Business & Finance; Globalisation & Trade; Governance;  Political Economy & History;


If you look at the top ten companies on the New Zealand share market, you will find that half were once owned by the government or once bought a major business from the government, one is dependent on government for a large proportion of its revenue, two depend upon government licences, and only two – Fisher & Paykel and Trade Me – are relatively free of government involvement.


The stock exchange list does not include businesses that are owned offshore and do not trade on our sharemarket, some of which are or have been as equally dependent upon New Zealand government. Three of our biggest factories – at Bluff, Glenbrook and Kawarau – are like this.


Or to cut the story a different way, recently political journalist Colin James wrote in his Otago Daily Times column that in the last month or so the government has deemed three businesses ‘too big to fail’ and has gone about assisting their survival. The three were Fonterra, Meridian, and Chorus. Allow Chorus is not even in the top ten of the sharemarket. Add those which are not on it and there must be at least thirty odd businesses which are in the ‘Too Big to Fail’ category.


This paper is not a rant against private enterprise. Rather it is to point out that the history of New Zealand economic development has been about a close relationship between the private sector and the public sector which has been far more intricate and nuanced that the political rhetoric of ‘private enterprise good, public enterprise bad’. As Colin James was pointing out, the complicated relationship between the two is likely to continue into the distant future.


It was not always like this. Before the arrival of the market, Maori had no national government while their economic activity was integrated into their life activity in a way foreign to us today. Early European contact involved business largely without government although even sealing and whaling were affected by British maritime law designed to exclude Americans. The sealers, whalers, gold miners and many other of the first Europeans worked in what we call quarries; their resources depleted and they moved on.


Adventurer Baron de Thierry presaged the future. Acquiring, he thought in a large chunk of land in the Hokianga with the intention of establishing his authority as sovereign chief. In 1823, he asked the British government to provide him with an armed vessel to defend his holdings.


The imposition of sovereignty was the prime interest of the early governments of New Zealand. While they were not greatly concerned with the economy, the provinces – wanting to attract migrants and mop up unemployment – offered bounties to stimulate economic activity; the most famous is the one which Gabriel Reed got for finding gold.


However, once the sovereignty problems in the North Island were resolved by the ending of the New Zealand Wars and with the gold boom exhausting itself in the South Island, the state turned its attention to promoting economic activity. We call this state-led economic development, called ‘Vogelism’, after its first great advocate, Julius Vogel.


There were two legs to Vogel’s strategy. The first had the state borrowing in London, hoping to service and repay the borrowings from the proceeds generated from the economic prosperity. The second leg was to spend the borrowings on improving the productivity of the economy. That included building the transport infrastructure and bringing in migrants to bulk the population.


The strategy of stimulating of economic development had a precursor in the provinces’ activities, but not to the extent which Vogel envisaged. Their borrowing was often more reckless than Vogel envisaged, which is why the provinces were abolished in 1876, making New Zealand one of the most politically centralised states in the OECD.


As much as we honour Vogel, his strategy was deeply flawed and could well have gone badly awry. The export quarries were replaced by wool, whose falling price was not fully offset by improved productivity on the farm and after the farm gate to which state. Involvement made a considerable contribution. When the foreign borrowing became restricted as the world economy entered the Long Depression of the late nineteenth century, the New Zealand economy stagnated too.


Ultimately we were saved by the arrival of refrigeration in 1882 which made it possible for meat and dairy products to be sold north of the equator. Vogel’s 1889 book, Anno Domini 2000, missed the new economy; it thought our salvation was in canned fruit. Without the benefits of refrigeration we probably would have had a similar destiny to Newfoundland. Overwhelmed by its debt and without a sound economy, the Dominion collapsed in 1933, becoming a province of Canada. Without refrigeration we would be a poor state of Australia today.


The New Zealand government responded to the opportunities of the export of processed grass by (you’ve guessed it) borrowing, although the deepening of the economy meant it was borrowing more from New Zealanders than from London. Less was spent on immigration but infrastructure still loomed large in government spending.


Now more of the borrowed funds were used for land settlement. The opportunities based on crossbred sheep and dairying were not suited to the great sheep-for-wool stations of the South Island, which were bought up by the government and ‘burst’ up into smaller farms, to be broken in by the sweat of a family. In the North Island much suitable land was still owned by Maori in the late nineteenth century and was similarly acquired by the government for farm development.


When we talk about infrastructure we usually think of roads, rails, ports and the post and telegraph, adding – in the twentieth century – energy, airports, airlines, telecommunications. But there had to be an institutional infrastructure to go with it. In 1876 Vogel founded the Public Works Department to supervise the building of the physical infrastructure while what became the Department of Lands and Survey was intimately involved in land development.


The government also established a number of businesses either because the private sector would not invest (or its investment collapsed) or because it was a means of regulating what was considered an over-rapacious private sector. That includes the Public Trust Office, the Government Life Office and the State Insurance Office. The State Advances Corporation was established to channel government borrowing to farms and, later, housing. The Bank of New Zealand partially fell into the government’s hands in 1894 when it had to be rescued from incompetent – some would say fraudulent – private governance. The similarly placed Colonial Bank was merged into it the following year. (Business ethics in the nineteenth century were not a high as today, and politicians more often failed to recognise a conflict of interest between their public duties and their private activities.)


Other organisational forms – neither public nor private business models – also sprung up, especially farming cooperatives. These might provide farm insurance and the like, but best known is the organisation of dairy processing. The first cooperative dairy factories might involve only six farms but over time they merged into Fonterra and smaller competitors. You will not be surprised to learn that even in the nineteenth century the government skewed the taxation system to favour cooperatives – in response to farmer lobbying of course. (Not-for-profit economic organisations still have an important role in some parts of the economy today.)


Another example of private sector failure occurred in the early twentieth century when, recognising that the native forests were being quarried to extinction, the government began planting exotic forests. This was not the last time that the government had to lead the private sector. Two recent examples are the establishment with Crown Fibre Holdings to head the ultra-fast broadband roll-out and the concessions to Sky City to establish an international convention centre in Auckland. The order in the expression ‘Public Private Partnership’ is a reminder of public leadership.


I shall not extend this brief history into the twentieth century, although I shall give further examples as I develop my main theme of the central role of the state in New Zealand’s economic development. Rather I want to make a couple of key points.


The first was that the state involvement was largely pragmatic and practical rather than politically inspired. Which is why it worked.


There were exceptions; perhaps the full nationalisation of the Bank of New Zealand in 1945 was the greatest. Moreover a government of the right was more likely to select a pro-private enterprise organisational structure than one on the left. When the Reserve Bank of New Zealand was established by the Coalition Government in 1934 it had private shareholders; but they were bought out by the Labour Government; today it is wholly government owned.


There is an important issue here. New Zealand history is sometimes presented as if the leftish governments were the promoters of state development and the rightish ones were not interested. In fact for most of its history the New Zealand right has supported and promoted state economic leadership although they organise it differently from the left.


State leadership need not mean state ownership although there have been two important drivers – other than politics. One was that until recently only the New Zealand government could borrow offshore in any quantity. There is a sense that remains true today for all the overseas borrowing of the banks is implicitly carried out under the umbrella of the state. That is why the Reserve Bank has to impose some restrictions on the trading banks’ overseas funding. If things go belly up, it will be the state which rescues them.


But not only the banks. For instance, under a National government the state has put nearly a billion dollars into Chorus as a part of its broadband roll-out. (Half of the taxpayer investment is in non-voting shares, half interest-free loans; my guess is that a Labour government would have done much the same, but had a stronger element of state ownership.)


The other driver for state ownership was monopoly (sometime compounded, in the case of some infrastructure by the absence of any practical way to price it properly). State ownership is a means of regulating monopoly, especially important in New Zealand given the size of the national economy and the isolation of many regions. Although our first competition-promoting legislation was passed in 1908 we did not really take pro-competition law seriously until the mid-1970s and it is still settling in. I’ll describe how we got telecommunications dramatically wrong a bit later, but I mention as an aside that in my opinion we have not got the electricity market properly organised yet. Instructively the current alternative regime, promoted by the Opposition but not the Government, involves a state-owned enterprise.


If the state involvement in the leadership of the economy was largely pragmatic and more bipartisan than the political rhetoric proclaims, my second key point is that it was sometimes inefficient. I am not using ‘profitability’ here as the measure of efficiency, although the Rogernomes who I am about to talk about equated the two. I mean that the state interventions did not always effectively attain the (multiple) targets set for them. The targets might be profit but could be such things as employment generation, regional development, technological innovation or simply state leadership.


But if state involvement is not always efficient, sometimes private enterprise is not very efficient either. Again I am not going to detail its failures – telecommunications is still to come – but recall that we privatised both New Zealand Rail and Air New Zealand with the promise that they would be more efficient (whatever that meant) as private enterprises. In each case the private sector management was so lamentable that they had to be renationalised.


Yes, while we need to keep inefficiency to a minimum – providing the means do not stifle innovation and progress – the real test is overall economic performance, the standard used when economists are evaluating capitalism.

If you do not get over-sentimental about what a wonderful country we are in, you will be struck by all the economic disadvantages it faces. It is small and isolated from the rest of the world. It has few valuable minerals (water excepted); even our soils are not particularly fertile. Our comparative advantage has been in foodstuffs and natural resources whose price relative to the price of imports fell through most of the twentieth century. And yet, despite all these handicaps and despite the inefficiencies of the public and private sectors, we have one of the highest standards of living in the world. Surely we are not saying that had there been no state leadership in economic development we would be even better off. As likely as not, without it, we would be more like Argentina, Chile or the Falklands (or Newfoundland).


New Zealand has had five great stagnations in the last 150 years. (We are probably in the sixth.)

1. The Long Depression: 1878-1895 (caused by a world depression)

2. The Interwar Stagnation:  1908-1935 (caused by stagnations in the British market stagnation, the Great Depression and soil fertility depletion)

3. The Post-War Adjustment: 1944-1950

4. The Wool Price Collapse: 1967-1978

5. The Rogernomics Recession 1986-1995

6?  The Long Recession: 2007-? (caused by the Global Financial Crisis)


Four of the five were largely caused by events outside our control. Only one can be readily attributed to poor economic management by the New Zealand government. Between 1986 and 1995 there was hardly any rise in per capita output – it fell horribly in the early 1990s. Ironically, the only stagnation that seems to be entirely our own fault was when we abandoned state leadership in development strategy.


Pretending inefficiency exists only in the public sector but not in the private sector is like awarding the prize in a singing competition to the second diva after having only heard the first. It is what the ‘public sector bad; private sector good’ rhetoric is about. Sadly that was the mode of political thinking in the 1980s and 1990s. It turned out the second diva by herself was a bit of a disaster, but together they can sing beautifully.


I do not have the time to detail how we got into such a muddle in the 1980s. In summary the world had moved on. It was no longer necessary to frame the issue of economic development as the social ownership of the means of production, distribution and exchange. Instead, the issue became the social control of the means of production, distribution and exchange.


Social control does not necessarily require ownership, which explains something which once greatly puzzled me. If public ownership was so good, why not nationalise all corner dairies? The answer is that subject to various laws, market competition means the dairies act in a way that society requires. We control corner dairies for social purposes by market regulation.


A step further was to recognise there was a need to separate political and commercial decision making. That does not mean that there should be never any political involvement, but it had to be a lot more restrained and transparent than it was in the Muldoon era.


The Fourth Labour government came to power wanting to accelerate the modernisation which Muldoon had delayed. However, for reasons that remain obscure, it chose to do so via the most extreme option of neo-liberalism – we call it ‘Rogernomics’. Antagonistic to the nation-building state, it is no coincidence that it dismantled historic institutions of the strategy, such as the Ministry of Works and Development.


The simplest explanation of this odd choice was set out by the French observer, Andre Siegfried, eighty years earlier. He thought that New Zealanders’ outlook was


not too carefully reasoned, and no doubt scornful of scientific thought, mak[ing] them incapable of self distrust. Like almost all men of action they have a contempt for theories: yet they are often captured by the first theory that turns up … In most cases they do not seem to see difficulties, and they propose simple solutions for the most complex problems with astonishing audacity.


Yes, for every complex problem there is a solution which is simple, obvious, easy to implement and which is bound to fail. Thus it was with Rogernomics. Not only did the economy stagnate, but many of its extremist polices – those opposed by the more sober modernisers – have been reversed, although it has taken two decades to do so. I give a couple of examples.


The first, as promised, was the privatisation of the state-owned Telecom. It was legislated – overnight as it happens – without putting into place a proper regulatory framework over its monopoly of the copper line between exchange and user. It was like putting a carrier in charge of the road; other carriers could use it, but they had to chug along behind the monopoly carrier. The result was an unregulated private monopoly which proved to be very profitable for its owners but which set back the development of telecommunications sector relative to other rich economies.


Eventually, after two decades, the business had its monopoly element was separated out into Chorus. Having lost its privileged position, Telecom appears to be struggling. (I hope it can overcome its difficulties for we need a competitor to offset Vodafone’s market power.) The lesson is that commercial profitability may not be a good measure of economic performance in an uncompetitive market.


My second example is the ‘so-called’ leaky buildings disaster (although there are also earthquake problems with some recently built buildings too). As in the case of Telecom the poor regulation of material use and design was the consequence of the penchant for ‘light-handed regulation’ which too often meant very little regulation industry at all. (Light-handed regulation is sometimes called ‘light-headed’ regulation; sometimes ‘light fingered’ regulation.)


There is no authoritative estimate of the size of the unfit-building disaster, but it seems likely to exceed the cost of the failed Think Big major energy projects – perhaps more than double – while additionally there is the misery of many of those personally involved. A significant proportion of New Zealand’s building industry activity is now devoted to replacing the inadequate buildings – often at very great cost to individuals, if not bankruptcy. Too much of today’s New Zealand investment is cleaning up the mess of failed regulation rather than adding to the economy’s productive capacity.


Did I say two examples? Briefly, a third. We have an unusually high rate of industrial accidents – about double the Australian one and well above comparable countries like Britain, Canada and Norway. The exemplar is the 29 fatalities at the Pike River coal mine (which occurred later than these statistics). It is hard to conclude light-handed regulation has been a success on the workplace floor either.


The conclusion has to be that the Rogernomes implemented the market reforms poorly and that we continue to suffer from that poor implementation. Even where we publicly reject neo-liberalism we still carry much of its baggage in our thinking and in our practices.


The solution is not to return to old ways. The socially and technologically transforming economy in a globalised world rules that out. Instead I want to finish by suggesting the policy framework that we should be using.


The most important lesson from the past – from our successes and from our failures – is that the state is going to be actively involved in the economic development of New Zealand. Its involvement is evolving. Here are five general principles.


1. The state will continue to play a major role in the provision of key infrastructure of New Zealand. Sometimes it will be necessary for the state to own the infrastructure, sometimes it will be a careful – but by no means light – regulator of private monopoly.


2. The state will remain involved in funding New Zealand economic development. Sometimes it will be by direct ownership financed by savings from its fiscal surplus or its borrowing. A new development is its sovereign funds such as those for New Zealand Superannuation, Accident Compensation, Government Superannuation and the National Provident Fund, and for quasi-sovereign funds, such as the Kiwi Savers. It is important that these funds have opportunities to invest in New Zealand – to reduce the proportion of New Zealand owned overseas.


3. The state needs to regulate actively but not onerously; where the market is not competitive, where there is an imbalance of marked power between the parties involved, where long-term considerations have to be taken into account. That covers such things as competition law, consumer law, workplace law and quality standards. It also needs to be involved where the failure substantially pushes back onto the taxpayer – as it would following a systemic financial failure.


4. The state needs to be careful not to be captured by a particular pressure group. For my taste, the current government is overly close to some business interests, although every government has to be sensitive to the needs of business. This must always be the understanding the purpose of business is to help to meet our social goals; never that business is the goal.


5. My fifth general principle is that the core public sector and the commercial sector operate in quite different ways. The Rogernomics revolution, which aimed to make the public sector like a business, was quite misconceived. It downgraded professionalism and responsibility, which is at the core of the public service ethic, and upgraded generic management and accountability, which more characterises business. While the public and private sectors should have the greatest respect for each other’s mode of operation, does not mean that one is always better than the other; each has a different purpose and functions in a different way.


The final point I want to make today – although there is much else I could add – is that while historically state economic development has been concerned with economic growth, in the future were are going to be less obsessed with economic growth as conventionally measured. Jobs and adequate minimum living standards will remain important, but environmental, political and social sustainability and the quality of life will become increasingly relevant. All in the context of the world we live in with the opportunities it creates and the limitations with which it constrains us.