In late-2019 I was involved in the start of what was set to be an exciting project. It was motivated by an increasing sense of frustration as transition remained the priority over and above the need for economic transformation. Adding to the frustration was the simplistic painting (by many) of ‘the economy’ as the evil enemy, with little alternative proffered. One aim of that project was to highlight that a more sophisticated understanding is critical if the communities (current and future) of Aotearoa are to practically respond and adjust to the future challenges to be weathered.
In a nutshell, ‘the economy’ is not the enemy, but transformation is required. That transformation will not be costless, but is better than the ongoing tinkering transition preferred by the powers of the embedded status quo.
Unfortunately, that project got overtaken by 2020 and so never got fully underway. Consequently, some of my initial notes gathered dust in archive files in a virtual cloud in the e-sky.
In a tidy-up of my archive files I revisited these notes. As the first section was relatively complete, and still relevant, I share below. Later sections of my initial notes (as outlined at the end of this note) need tidying and completing, and so will follow over the coming months.
A blast from the past
The prelude to the 1984 schism
The post-WWII economic consensus agreed a moderately active role for governments in the management and regulation of economic activity. The rules for cross-border trade and payments were founded on the 1944 Bretton Woods Agreement, with the International Monetary Fund (IMF) and World Bank providing further institutional frameworks. Governments were, by and large, especially active in what were called non-market sectors (e.g. health, education, and transport infrastructures). There was acceptance of the provision of collectively-provided safety nets, or supports, for unemployed and others unable to work - although, admittedly, the levels of ‘generosity’ varied across countries.
While results varied, the economic recovery from the devastation of WWII enabled employment and incomes to generally grow through the 1950s and 1960s. Additionally, improved health services and education opportunities became increasingly available to many more.
For New Zealand, the structure of our economic activity was best reflected in the following two pictures. With close to £8.50 out of every £10 of export earnings coming from dairy, meat, and wool products, and just under a half destined for the UK, our fortunes and prospects were heavily dependent on our farming sector and our UK relations.
Admittedly, the picture was changing – with the proportion of exports destined for the UK already down from two-thirds (66%) a decade earlier. However, changes in the picture were about to accelerate dramatically in the face of two unconnected but seminal events. First, was the collapse in wool prices in late 19661. Second, was the confirmation in May 1967 of an official application by the UK to join the E.E.C. Despite the UK’s stated desire to safeguard the interests of some of its Commonwealth family, it was clear that the UK may not be as close a relative as some might have believed.
"There are highly important Commonwealth interests, mainly in the field of agriculture, for which it is our duty to seek safeguards in the negotiations. These include in particular the special problem of New Zealand …"
Statement of UK Prime Minister Mr Harold Wilson conveyed to The Lords on 2 May 1967 by the The Lord Privy Seal
Internationally, stresses and tensions over the financing consequences of US involvement in the Vietnam War and the breakdown of the Bretton Woods agreement took hold over the late-1960s.
Along with disruptions to oil supplies and prices, the 1970s saw an unstable economic era with price-wage inflation spirals and limited income growth. Increased unemployment along with government debt and deficit concerns accentuated the unstable situation. Despite efforts to diversify its economic activity and reduce its dependence on the UK, New Zealand was particularly vulnerable to the changing international climate.
What we were promised
The mid-to-late 1970s saw a sea-change across mainstream economic thinking take hold. The prescription surged towards favouring a more market-oriented approach to economic management and regulation. Critically, governments were severely criticised for their interventionist approaches and their hampering of the mechanism of the markets.
This sea-change in thinking was given huge boosts with the elections of Prime Minister Thatcher in the United Kingdom (in 1979) and President Reagan in the United States (in 1980).
This was the beginning of the era of small government, low taxes, and reduced regulation. This era promised prosperity for all in the sense that those who participated in market transactions received beneficial returns commensurate with their effort (adjusted for the risk of the activity). Hence, those employed would receive a wage consistent with the market value of their labour’s share of the goods or services produced by their labour. Similarly, the owners of capital (land, buildings, machinery, and equipment) would receive profit consistent with the market value of their capital’s share of the goods or services produced by their capital.
In 1984 New Zealand saw a new administration elected that was to become a faithful, enthusiastic, and indeed leading proponent of this prescription – with significant impetus provided by that year’s Treasury Briefing to the Incoming Minister2.
An emasculated government was the solution …
Government activity and involvement was to be restricted to taxes required to enforce the rules of the market and the laws of society, along with defence of the realm. Government safety nets were to be minimised to that necessary to avoid abject poverty, but needed to be insufficient so as not to interfere in the incentive to participate in the market (i.e. offer your labour for work).
Further, in terms of overall management of the economy, the government was not to be trusted with control over the issuing of currency and credit. In direct response to the inflation experience of the 1970s, which were deemed the result of insufficient government control of monetary supply, the control over the issuing of currency and credit was officially contracted-out to central banks. They were to operate under a devolved mandate that targeted stability in the level of prices, either through manipulation of interest rates, or the control of credit.
The use of fiscal policy (i.e. changes in government taxes and/or spending) to manage inflation, unemployment, or other aspects of the economic cycle was actively discouraged. This discouragement was through a combination of explicit legislation, political pressure, and influence from international institutions like the IMF, the World Bank, and the Organisation for Economic Co-operation and Development (OECD).
… with capital mobility assisting new markets
The breakdown of the Bretton Woods agreement eventually led to a range of floating exchange rate mechanisms for most major currencies. Alongside this change was a move to much freer financial capital movements across international borders. Global financial integration assisted in financial capital moving to areas with better (risk-adjusted) returns, with interest rate and share price movements across borders inevitably becoming similarly integrated.
In a similar vein, global trade barriers were relaxed across a range of goods. Multi-lateral trade groupings and agreements were advanced (e.g. EU, APEC, NAFTA, ASEAN) and the role of the World Trade Organisation (WTO) became increasingly prominent. This assisted in the development of globally integrated supply chains with the inclusion of new markets like China, India, South Korea, Taiwan, and other south-east Asian nations into the global trade environment.
New Zealand was an exuberant cheerleader for this relaxation of international barriers, moving to a floating exchange rate in 1985 with accompanying free mobility of financial capital across its borders. However, this exuberance was not fully reciprocated by other nations, as the primary products that remained the staple of the New Zealand’s export basket continued to face significant barriers internationally.
What we got
The past 30 years have seen a large increase in global integration, as supply chains, financial capital, people, and technological advances have been shared across (and in all corners of) the world. Relative and absolute reductions in numbers in abject poverty have resulted in many parts of the world.
As for New Zealand, although diversification of its economic activity and export earnings has continued, our efforts remain predominantly at the commodity (or production) end of the value chain. New export products and services have indeed been added to our export basket, and new markets developed. However, as depicted, products relating to primary production involving little post-production added value remain prominent. Consequently, dairy, meat, wool, other primary, and forestry, alongside relatively low-wage tourism and volume-based education services, continue to account for close to two-thirds of our export earnings.
Promisingly, the lower-middle strata of societies across China, India, and several east-Asian nations have increased in numbers as many of the formerly rural poor have migrated to manufacturing centres and cities. Communication technology advances have assisted in this integration. The supply of low-cost clothing, manufactured, and technology products have benefitted many consumers in most developed economies.
The race to the bottom
Despite these advances, disparities between the privileged and the poor have become entrenched and, in places, have widened.
The model of globally integrated business – with reduced government regulation – assisted the development of a race to the bottom in terms of conditions of employment, wages, and addressing external costs. The accumulation of market power by large cross-border enterprises acted against the ability of governments to impose minimum criteria (for example, employment or environmental regulations).
The race to the bottom was reflected in increasing numbers in minimum wage employment, reduced allowances for leave, as well as increasing casual and contract work arrangements.
In terms of external costs, environmental degradation has accelerated, despite numerous attempts to impose environmental charges, or taxes, or regulations. International agreements continue to be hindered by domestic political agendas, which can be relatively easily manipulated by enterprises, sectors, and industries wishing to protect their status quo.
… while inflation control favoured asset holders
Central bank management of economic cycles did indeed control price inflation of consumer goods and services but assisted (directly and/or indirectly) in the inflation of asset (land, housing, property, shares) prices. This provided gains to those with existing wealth (in terms of increasing the financial value of that wealth). Conversely, those with minimal or no existing wealth were faced with increasing difficulty in attempts to acquire wealth.
The depths and regularity of recurring global crises has undermined the argument that the market mechanism is inherently self-correcting. Further, the origin of these crises being the financial markets illustrated the weaknesses and vulnerability of minimally regulated globally integrated financial capital markets.
1987 – share market crash and government rescue
1997 – Asian Financial Crisis and IMF rescue
1999 – dot.com bubble and rules rewrite
2008 – Global Financial Crisis (GFC) and government rescue
Ironically, in times of crisis the expectation for government to intervene is uncritically accepted by market proponents. However, the response of governments to these crises has appeared to disproportionately favour those with existing financial assets. Those engaged in economic activity (including those employed in the production of goods and services) have been left with the impression they are further back in the queue. This impression has been reinforced in the post-GFC era, with a stagnation in real wages for those employed (and actual reductions in several countries) compared to a large and prolonged boom in asset prices (in particular, house and share prices) over the 2010s.
As for the economy of Aotearoa, results reflected our export activities stuck in the commodity mire and not delivering the much-vaunted promised lift in productivity and incomes. Consequently, there were many who enjoyed the fruits of low-priced imported items, but also many who saw their increased efforts resulting in standing still at best.
At the national economy-wide level this is best reflected (as pictured) in our export earnings regularly falling short by 10% (or more) of that required to balance our transactions with the rest of the world. Notably, this deficit balance is further magnified by interest payments on accumulated earlier borrowings used to shore up house values and previous year’s spending and life styles.
Alienation
The perceived manipulation of the rules of the game in favour of large cross-border enterprises, or groups with existing wealth and power, has further alienated communities who increasingly see little to gain in playing by the rules.
The importance of cohesive communities and social capital to a well-functioning economy has, for far too long, been taken for granted. Meeting current and future challenges will require cohesive communities to address collective and long-lasting threats and external shocks. However, the vulnerable and least resilient have seemingly borne a disproportionate burden of the changes in business and economic activity over recent years.
To restore the social contract, and the consequent social capital, requires behavioural and institutional changes – ensuring the rules of the game are reflected and implemented in a manner consistent with equitable opportunities for all.
Following sections (to come)
Burning challenges – depending on one’s perspectives, there are many pressing issues that threaten our way of life and our traditional models of analysis. From an economic perspective, the pressing challenges facing Aotearoa can be grouped as:
disconnected and disenfranchised – inequality of opportunity that risks increasingly disconnected and disenfranchised communities
extracted and exploited environment – a fragile environment depleted through economic activity continuing to focus on use, extraction, and exploitation of natural resources
increasingly precarious jobs and incomes – a market model of jobs and incomes that is unable to sustain household, family, and whānau
Spheres of change – we need to confront four spheres of our world. Without change across these spheres, our ability to successfully navigate the challenges outlined will be severely curtailed.
understanding the economy – a mature and sophisticated understanding of the economy, beyond that of financial market commentators. An understanding that recognises its critical dependence on (rather than independence from) social and community outcomes
Tangata Tiriti – understanding what it means to be Tangata Tiriti in 21st century Aotearoa
the role of government – an agreement on a pro-active role for government (both central and local), and its accountability to people and their communities
the voice of future generations – tilting the playing field away from decisions favouring short-term pay-offs towards truly long-term nation-building investments that actively hears the voice of future generations
A forward agenda – physical, social, institutional infrastructure for an inter-generation horizon.
developing v’s managing the economy – a macro policy framework beyond inflation control and management of government financial deficits and debt
workforce planning and resilience preparations for the long term – a population policy alongside related investments in technological advancements
regional and industry development – where transformation confronts the coalface
property rights and obligations – collective and individual perspectives, market rationing and obligations, establishing and maintaining a social floor
On 14 December 1966 the auction price for coarse wool fell by 40% overnight.