chapter from Manufacturing Prosperity; Ideas for Industry, Technology and Employment
ed. Rodin Genoff and Roy Green

© 1998  The Federation Press,
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Ideas for New Zealand Industry

Keith Rankin

 

published chapter plus endnotes


New Zealand's Liberalisation Legacy

There has been a massive reduction in direct government assistance to industry.... Philosophically the fall represents a policy view that the government's major role in assisting industry should be to establish an economic environment that is conducive to business.
   Lewis Evans et.al. (1996), p.1884.
 

The New Zealand economy has been through a liberalisation process since the mid-1970s. After 1984, the process both accelerated and changed in character, following the election of the Fourth Labour Government. 1 The 'new right' policies of economic rationalism implemented since 1984 are known, euphemistically, as 'the reforms'. The rhetoric of liberalisation is misleading, however, in that it overemphasises microeconomic policy in particular, and the importance of political initiatives in general.

Taking a diametrically opposite direction from the 1938 to 1975 strategies which emphasised 'insulation' (Hawke 1985, p.204), liberalisation has been predicated on the assumption that full-on exposure to whatever the global economy delivers can only benefit New Zealanders. Staple agricultural activities, supported in 1982-84 by guaranteed minimum prices, were seen to be on the wane (Kelsey 1995, p.95). No longer would any sector be regarded as strategically important. Global interests are seen as always stimulating, and never predatory. In reality, globalisation has been a process through which capital has acted as an increasingly dominant transnational interest, placing sovereign nations in direct competition with each other, turning governments more into international players than national referees. Overexposure to global markets makes New Zealand particularly vulnerable to global market failure.

As a result of the reforms, very high levels of foreign capital have come to be invested in New Zealand equity and $NZ denominated assets. Many such investments are very liquid, on call or for capital gain rather than profit. 2 The profits accruing to international capital are only reinvested so long as returns in New Zealand are high relative to returns elsewhere. Continued - indeed increasing - balance of payments current account deficits mean that New Zealanders' liability to foreign claimholders is very high and increasing. New Zealand can be said to be in a state of 'creditor dependency' in that foreign capital is making huge claims on its domestic product, ahead of the claims of more traditional dependents: children, students, care-givers, retired persons, the disabled and the unemployed.

The dominant macroeconomic reform was the 1989 Reserve Bank Act, which officially demonised inflation, requiring annual inflation rates to be contained within a tight range. 3 Supported by the major political parties, the Act accepts an explicitly monetarist view of inflation's dangers, its priority, and the remedy to be used in its suppression. As a result of the policy tightening signalled by the Reserve Bank's 27 June 1994 monetary policy statement, interest rates rose sharply (National Bank 1994, p.1), to the detriment of New Zealand industry. Subsequently, the exchange rate has risen markedly, 4 the quantity of money has risen significantly, 5 consumer price inflation itself has been consistently higher6, and the balance of payments current account deficit has risen. 7 GDP growth fell sharply in 1996, 8 and employment growth followed. 9 Producer price inflation has been relatively high in the non-tradeable sectors, while negative for agriculture and manufacturing.

The Reserve Bank Act has placed New Zealand into a high interest rate / high exchange rate trap. Financial markets know that monetary policy will maintain this status quo, leading to what some call a 'one-way bet'; in only rare (but predictable) circumstances will the exchange rate be allowed to fall more than a few percent. This gives rise to an ongoing net inflow of capital; a situation that may be sustainable in the medium term owing to New Zealand's small size relative to the global economy, but only so long as other countries do not force an upwards spiral in world interest rates by adopting similar monetarist legislation.

Although it is generally accepted that the New Zealand economy "went into virtual hibernation during the reform years of 1985 to 1992" (Simkin 1997, p.12; Brash 1996b), such 'slowth' is attributed by the liberalisers to the problems the reforms were supposed to be addressing. 10 Australian 1980s' growth data and expanding world demand in the late 1980s suggest that New Zealand should have experienced significant economic growth after 1985, regardless of the policy environment. There has also been an uncritical tendency on the part of the new right to attribute the growth of 1993-95 to the reforms (Simkin 1997, p.12; Bollard et.al. 1996, p.13) rather than regarding it as a normal recovery from recession. Most of the growth is due to increased labour supply and not labour productivity (Rankin 1995).

Evans and others have documented the reforms from an academic new right perspective in the Journal of Economic Literature. 11 Easton's (1997b) comments relating to Evans' article are pertinent to the politics of reform advocacy: "The technique is simple. Quote only the material that supports your case, and do not address the critics. Do not even mention them, because the reader might look up the critic and see the strength of the argument [or] if you have misrepresented it."

Evans' notion (1996, p.1884) of creating an environment "conducive to business" is delightfully ambiguous. 12 While the Government has succeeded in establishing an environment conducive to capital - especially international capital - it has manifestly failed to establish an environment conducive to domestic entrepreneurship. To appreciate the distinction, entrepreneurs hire capital and labour. They hire capital from capitalists. Thus, whereas the owners of capital like the price of capital - ie interest rates - to be high and predictable, entrepreneurs like low interest rates and opportunities for super-normal returns. Undercapitalised businesses are struggling in New Zealand in 1996-97, thanks to high real interest rates in 1994-96, and will continue to do so whenever inflation is deemed to be too high, or deemed likely to become too high.

In a study of Australian economic history, White (1992) identifies three distinct sources of risk and uncertainty: environmental, market and political. It is in fact arbitrary political acts - such as those arising from monetary policy in particular and the reform process in general - that have led to recurring crises in New Zealand industry. The reforms have accentuated rather than eased political risk. Executive government in New Zealand is manifestly bigger and stronger than ever before.

 

Establishment Opinion and Analysis

Biologists are not the only scientists who, having made extravagant claims about their merchandise, deliver the goods in bite-size packages. Nor are they the only manufacturers of knowledge who cannot be bothered to pick up a return package when the product turns out to be faulty.
   
Richard Lewontin, New York Review of Books, 9 January 1997.
 

Many economists have invested too much faith and effort in the reforms to be able to assess them objectively. As a result of a widespread conviction that the reforms have succeeded, New Zealand economists, journalists and politicians tend to see the recipe for ongoing success as being more of the same. Success, in this context, really means low inflation, low labour costs, a low welfare safety net, and a weak union environment (Hazledine 1997). While one magic recipe is ongoing tax cuts (eg Arnold 1997), there is little willingness to acknowledge that company tax rates and upper tier personal income tax rates are already dangerously low (33%), 13 or that tax cuts have favoured and will continue to favour high income recipients.

Evans (1996, p.1861) suggests that the liberalisation process needs to be taken further if New Zealand is to "again enjoy living standards comparable to those of the most successful countries". This has been the standard refrain on the part of the more astute pro-reform economists who recognise that outcomes have so far failed to match oversold expectations; they say that the reforms failed to live up to their expectations due to a lack of political courage, a loss of momentum, or perhaps a sequencing problem. Whatever the diagnosis, the solution continues to be more from the same pot.

Some representatives of the new right are more ebullient than ever about the future prospects of New Zealand in a market driven global economy. The most glowing commentaries come from the New Zealand Business Roundtable. Making no allowances for population growth, the Roundtable (1996, p.3) concludes that four percent average annual growth would lead to a doubling of average household real incomes by 2012. They accept the view of the National Bank in 1994 that New Zealand (1996, pp.2-3,8), although having an "average per capita income equal to only 35% of that of Switzerland ... and 72% of Australia's", can fairly be described as a "'Porsche economy' ... capable of moving into the 'fast lane' provided that the momentum is maintained.... If the economy moved into the fast lane, New Zealanders could expect their average per capita income to double every 10 to 15 years, at least for the foreseeable future"! This Porsche is in fact no more than an alchemist's dream. 14 And we might note that most New Zealanders would probably prefer a lower cost, more utilitarian, 'Toyota Corolla economy'; an economy that delivers more leisure, relaxed working environments, and steady improvements in general living standards.

The Treasury, noting the emergence of low wage rates combined with longer hours and more stressful work environments (1996, p.43), see recent developments, by which workers produce much more for each dollar they are paid, as fully consistent with their goal of a "high-income high-employment society" (1996, p.44). The problem with this kind of wishful thinking is that such developments, while possibly leading to a higher average GDP per person, are fully consistent with reduced wellbeing to ninety percent of New Zealanders - underpaid, overworked or both. Income concentrates to the owners of the capital invested in New Zealand, plus a managerial elite on salaries that represent increasing multiples of the average wage.

Treasury and others see skill deficiencies in the workforce as an ongoing bottleneck. But advocates, such as Treasury, of privately funded skill acquisition, do not show how a generally increased level of worker skill will lead to higher returns to workers. Evidence of a rising income gap between well-educated and under-educated workers (Maani 1997) cannot be used to project absolute income gains to a population increasingly participating in the labour force. High real wages are paid on the basis of scarcity. Alfred Marshall (1883, p.193) recognised this over a century ago, when reductions rather than increases in labour supply were understood to constitute the route to worker prosperity. In the absence of the persistent and ongoing emigration of skilled workers, any removal of the skill bottlenecks that create pockets of scarcity will make wages universally low. Skill deficiencies are a barrier to higher profits, not higher wages.

The high-employment economy remains a long way off, despite Treasury's upbeat rhetoric. In 1996, at least 13 percent of New Zealand men aged 25-60 do not do as much as one hour of paid work each week, 15 according to the Household Labour Force Survey (HLFS). The Quarterly Employment Survey (QES) of firms with at least one employee, showed that in 1996 there were 50,000 fewer full-time jobs held by men than in 1984. In that time the number of men aged 25-59 increased by 150,000. While it is true that the QES excludes self-employed persons with less than two employees, and that self-employment has become an increasingly important employment option, as well as a form of disguised unemployment, it should not be forgotten that the largest single group of self-employed in New Zealand have been farmers, and that farming has been in crisis through most of the reform process and remains in deep trouble in 1997.

Government policy in 1993-96 looked forward to a zero-tariff environment by 2004 (NZ Government 1994, p.ix). This is unlikely to happen, given the overvalued exchange rate and present role in the Government of the New Zealand First Party - a party that tilts at nationalist windmills. There is only one constituency seeking the reintroduction of protective tariffs, labour unions (Enderwick 1993), which now have negligible political influence. 16 The official Government policy is simply for unilateral tariff reductions (NZ Government 1994, p.vii).

The manufacturers' and employers' establishments remain in favour of the policy environment that was established, in particular, in the early 1990s. Thus, they have yet to appreciate that the deteriorating circumstances of manufacturing in 1996 were integral to that environment. The main single policy change advocated by the Manufacturers Federation is a tightening of fiscal policy accompanying a slight easing of monetary policy. They seek a $100 million cut in planned public expenditure, including major reforms in the social welfare area. The Coalition Government, which promised new spending of $100 million on industry assistance, has no intention of funding any such initiatives through a looser fiscal policy (Edlin 1997). The Manufacturers Federation upset many of its members by rejecting proposed assistance measures (in a combined statement with the Chambers of Commerce, Employers Federation and Federated Farmers), in favour of fiscal stringency, including cuts to already low company tax (Riordan 1997, Sara 1997, Martin 1997). There is a considerable divergence of interest between well-established firms holding little debt and making adequate profits, and the smaller new entrants who would much prefer lower interest rates to lower taxes.

We should allow for the role of official literature as a means of talking up foreign investment and not as genuine analyses of the prospects of New Zealand industry. In Manufacturing for Growth (1995) the New Zealand Manufacturing Advisory Group, a body coordinated by the Ministry of Commerce, argues for long term certainty in the political environment, meaning a commitment to the three principles of the 1989 Reserve Bank Act, the 1994 Fiscal Responsibility Act (which gives expenditure priority to repayment of Government debt), and the 1991 Employment Contracts Act. 17 'Certainty', never a feature of historical capitalism, is used as a euphemism for fiscal stringency and the kind of 'political stability' that attracts foreign investment.

The underlying view of the Ministry of Commerce is that its main role is to support New Zealand producers in their quest for international 'competitive advantage'. They judge manufacturing performance primarily in terms of exports rather than total sales. 18 In 1996, one of the Manufacturing Advisory Group's challenges for government was to ensure that, within an existing tight fiscal policy context, "public investment in science and technology appropriately reflects emerging market opportunities" (1996, p.4). This kind of policy used to be called 'picking winners' and it became a no-no policy associated with the pre-reform era. In the code language of the new right, however, this really is a recommendation for the redirection of increasingly scarce public resources away from areas such as pure science that are not directly linked to international trade rivalry. The Manufacturing Advisory Group places considerable emphasis on public assistance in the development of management and workforce skills, again linked to the goal of prioritising public expenditure in favour of capital invested in exportable production.

In February 1996, the Manufacturing Advisory Group (1996, pp.2,6) was confident that a "sustainable 7 percent growth in the sector is achievable with the right policy settings and the commitment by all manufacturers ... this will require double digit export growth from the sector". The then Minister of Commerce claimed (p.1) that "the foundation has been laid for long term sustainable growth in the sector. The emerging challenge is to identify and manage the risks to that foundation". The main risks are perceived as market sourced; inflation, rising wages and globalisation. The latter was acknowledged (p.5) as a new and risky feature of the environment faced by New Zealand industry, reflecting the tendency of the Commerce Ministry - unlike Treasury - to see globalisation as a zero-sum game. New Zealand is also described as having a "post industrialised economy"; hardly an endorsement of domestic industry.

Another interesting comment from the Manufacturing Advisory Group (1996, p.14) is that "compliance costs associated with government regulation are an increasingly heavy burden on businesses". How could the costs of regulation be high and rising after 12 years of deregulation? Nevertheless, there is an ironic truth to this claim. Transaction costs being absorbed by New Zealand industry have been rising, as the huge differences between domestic and imported inflation attest. Regulation is a component of transaction costs, but it is certainly not the most important component. Other transaction costs have arisen from deregulation, and are revealed by both the rising costs in the finance and business services sector, and the rising demand for risk management and other services performed by that sector. The transaction sector (North and Wallis, 1986) - a cost to industry - bids human and financial capital away from industry.

An important aspect of the rhetoric on the part of all parties - including the trade unions - is to increase the value added by domestic industry to exportables. In practice, however, there have been a number of examples - especially the forestry industry - where the post-reform experience has been that less value has been added to primary products prior to export. The theories of Michael Porter - creating competitive advantages in further processing of New Zealand's primary products and by reallocating resources into industries for which their was a "sophisticated demand" for their products - have been very popular with the new right, with New Zealand becoming the subject of one of Porter's projects (Crocombe, Enright, Porter, 1991). 19 While the liberalisers have seen tax cuts and vocationally-oriented education as sufficient means to this end, union groups have proposed strategic planning, partnership and West European-style cooperation (Harris 1996, p.110). Harris (p.7) argues that the well-capitalised firms who can take a lead need incentives to move into areas of greater reward but higher risk. Unfortunately for the left, concepts like planning and social contracts fall on deaf ears in key policymaking circles. Suggestions not conforming with new right principles tend to be ignored rather than subjected to disinterested evaluation.

Economics, supposedly the 'hardest' of the social sciences, has not served New Zealand well. University economists have not been willing to challenge establishment views (Easton 1997a, p.140) - views that in many cases have no credible empirical basis. Scientific knowledge is no longer valued in post-reform New Zealand, and many of New Zealand's most capable scientists have emigrated (Easton 1997a, p.237). The pretence of scientific rationalism underpinning public policy makes the New Zealand public unsympathetic towards 'expert' technocratic values. Instead they look for solutions to populist leaders such as New Zealand First's Winston Peters, Deputy Prime Minister and Treasurer since December 1997. But it is not politicians that create growth. More than ever, New Zealand needs its creative, critical, educated, scientific minds.

 

A Crisis of Vision? Policy Alternatives for New Zealand.

'Globalisation' of production carries unsettling implications for all advanced capitalisms, including the lowering of social, environmental, and labour standards through the forces of market competition, and the rise of newly industrialised countries as major rivals for market shares. In a related development ... [the] internationalisation of finance seriously limits the ability of advanced nations to carry out domestic fiscal and monetary policies that are not compatible with the 'will' of a stateless world financial market.
   
Robert Heilbroner and William Milberg (1995), p.121.
 

Capitalism - let alone social democratic capitalism - is being seriously hampered by a "crisis of vision" in the economics profession (Heilbroner and Milberg 1995). Economics has become more of a self-perpetuating profession than as a means to solving practical problems of public policy (Hutchinson 1992). In New Zealand, this professional ennui is reflected in the 'TINA' acronym: "there is no alternative" to the new right policy agenda.

Heilbroner and Milberg point to a vision of capitalism as a successful force in history forged from an interaction of two domains - private and public - which, having become distinct, nevertheless interact synergistically. They argue that we need a heightened vision of the role of the public domain in order to give capitalism a renewed dynamic. From this perspective, a healthy international economy requires democratically accountable public institutions to address areas of international market failure. New Zealand can be seen as a laboratory case of a nominally sovereign nation entrapped within an international economic order which does not have such an institutional framework for the provision of public goods and for the management of international externalities. 20

While long term solutions require the development of an international public sector, there are a number of national policies that can be followed which need not harm other nations. In recognising that globalisation is creating provinces out of nations, increased public policy attention can be placed to regional development within nations. The free market has failed to direct industry to places where there is unemployed labour, undervalued housing, and underutilised infrastructure. The utilisation of labour force and capital stock can be enhanced considerably through incentives to counter such market failure. Furthermore, sound regional development theories and empirical evidence from national experiences of regional development initiatives can help form a basis for the future implementation of regional development on a global scale.

The exchange rate problem can be easily solved. Countries like New Zealand with overvalued currencies should not be as fearful as they are of sudden depreciations. Where large market-led devaluations have occurred - eg Great Britain in 1931 and 1992, and Australia in 1986 - a significant recovery of industry has often ensued. Such devaluations often overstep the mark, creating an undervalued currency, and an attractive climate for subsequent investment. Indeed, New Zealand's 1993-95 growth spurt was due in large part to a low exchange rate in 1992-93.

While, many of New Zealand's existing creditors would be displeased if the authorities allowed this to happen again, historical precedent suggests there is no reason to believe that the future capital required by New Zealand industry would be any less available following such a devaluation. To create such an environment, favourable to employment growth, monetary policy needs to be conducted in a democratically accountable way, fully coordinated with other components of economic policy. Monetary policy should no longer be conducted on a 'beggar-thy-neighbour' basis, seeking to divert internationally mobile capital away from other countries. The 1989 Reserve Bank Act should be seen as a failed experiment, and modified accordingly.

'Beggar-thy-neighbour' policies can be taken as any policies whereby a nation seeks to take more from the international economy than it contributes to it. Much of the literature on the Great Depression equates 'beggar-thy-neighbour' with import protection. This is a mistake. In fact, it is low wage, low tax and high interest policies, designed to import capital and export unemployment, that only make sense in zero-sum game (or negative-sum) terms. Beggared neighbours become obliged to respond, lowering their tax rates, and making their wages downwardly flexible. Such policies create a global macroeconomic environment that aggravates world unemployment by reducing world aggregate demand. At the same time, they increase the scarcity returns to capital.

A 'first-best' free-trade world - could it ever be realised - requires a global system of demand management. In a more practicable 'second-best' world, nations seek their own way forward, taking care not to harm other nations in the process. Such 'nationalist' tariff protection has played an important role in both the growth of the international economy in the nineteenth century and in the recoveries from the Great Depression of the 1930s (Bairoch 1993). The point is that raising domestic activity with the help of tariffs need not generate a fall in the demand for traded goods; in history, the 'income effect' has tended to outweigh the price 'substitution effect', leading to more imports as well as more domestic production. Each national recovery constitutes a piece of an international recovery. Tariffs may create price distortions, but they may equally help to redress some form of market failure - as implicit in "new trade theory" (Preeg 1996, pp.112-114) - thereby improving the price allocation system. Unemployment and underemployment resulting from international macroeconomic failure are greater sources of inefficiency - 'third-best' - than are most tariff-induced price anomalies.

Tariff protection in New Zealand's past was an integral part of the 1960s' world that Hazledine (Kelsey 1995, pp.360-361; Hazledine 1997) sees as still being the best blueprint we have for full employment in the 21st century. I see protection as having been part of a national social contract, whereby firms would pay high wages and high taxes, as they would expect to in a closed economy at full employment. Protection was not there to support inefficient industries (although it was supporting infant industries). Rather, it was required to maintain full employment in an economy committed to high 'family' wages and a high social wage. Protection was compensation for certain social costs that firms were required to pay as part of an implicit contract with the people of New Zealand. In a social contract for the future, a financial transactions tax, as supported by the Alliance Party (Alliance 1996), can be a means to discourage excessive growth in the finance sector, while raising additional revenue for social wage expenditure.

A universal welfare state is probably the most important risk-encouraging institution that modern industrial economies have, in that it acts as an automatic stabiliser to reduce if not eliminate depressions, and it acts to minimise the consequences of entrepreneurial failure. 21 Assisting industry at the expense of social expenditure - as the New Zealand Manufacturers' Federation seek - is likely to be counterproductive, leading to gains for those already receiving high incomes and risk-averse strategies by those on the margins. A society rich in socially-owned capital must expect to distribute income in cash and kind in quantities commensurate with the size of its public domain. We might consider the suggestions of Meade (1995), who ties the achievement of non-inflationary full-employment to the payment of social dividends ("citizens' income") from what can be called the social wage fund, thereby providing a mechanism for some of the surplus value arising from public domain resources to be returned to employees and dependents. The citizens' income is essentially a form of negative income tax, seen to both complement employment income and provide a first tier of social security.

Productivity is not just about producing more outputs for a given quantity of inputs. It is about releasing resources from what a community has to do so as to raise resources that can be committed to what members of that community want to do. In many communities, a significant proportion of the population may be more interested in contributing to the public domain - and drawing on the social wage for income support - than in selling goods, services or labour in the sometimes destructive environment of the competitive marketplace. Public domain careers already include the quasi-voluntary activities which characterise 'academic' research. Knowledge, the product of such careers, is a public domain input subject to increasing returns. It has probably been the most important determinant of long-run economic growth (Romer 1994). Productivity improvement is an end in itself; it is not simply a means to fund increased imports (which is the sole purpose of exports). Labour productivity gains are not achieved by creating an environment that underprices labour; likewise undervaluing public inputs in order to gain a competitive edge against other countries is not conducive to gains in total factor productivity.

Reich (1992) emphasised the role of intelligent well-educated technocrats which he calls "symbolic analysts". In his analysis, a wealthy nation is one in which a relatively high proportion of the population are employed in the creative, abstract and technically sophisticated occupations which fall into this category. In placing this emphasis, he downgrades the importance of property ownership - of rentier capitalism - as the basis of national wealth. He sees symbolic analysts not only emerging as the principal source of 'surplus value', but also as powerful enough to appropriate for themselves most of that surplus value. While in the context of the American debates, Reich is a liberal, his conclusion is consistent with that of conservatives Herrnstein and Murray (1994) who argue that the world is becoming the property of the intelligent, the "cognitive elite". The message is also similar to that of Porter, who emphasised the importance of "high performing clusters" (Hunt 1997).

We should take this message seriously, while resisting the temptation to equate human capital with technocratic or meritocratic class consciousness. Creative people are not the narrowly self-interested automatons of pure economic theory. Activities intensive in human capital producing "narrow-latitude" quality-enhanced products (or ideas) nevertheless contain powerful development linkages (Hirschman 1986, pp.15-22, 56-76). Nations that suffer a net drain of highly educated persons are likely to be the 'losers' of the future. The linkages partly come about from the expenditure requirements of a technologically advanced society - backward linkages - and, more importantly, from the opportunities to use their outputs within both the private and public domains - the forward linkages.

Being educated is now more important than being physically strong; we don't need to look further than at the rapidly increasing contribution of women to appreciate that. But it is not enough to simply promote or pay lip-service to education, or training. An economically successful society must be prepared to employ its educated population, and to employ them within a career structure that makes use of their acquired skills. Otherwise, educated people either emigrate, or crowd-out the labour market, taking moderately skilled jobs from the moderately skilled, who in turn are forced to take low skill jobs from those with minimal skills. There are other forms of underemployment; many professionally qualified people are employed in jobs that contribute little to the national economy; jobs that lack the critical forward linkages. 22

I see a need to foster publicly-spirited yet technically and culturally advanced activities. This means that the New Zealand state should guarantee sufficient research fellowships to well-educated publicly-minded New Zealanders so as to at least give them an alternative to emigration. This is not an argument that the state should pay high salaries to symbolic analysts; rather it is a reflection that many capable people would rather pursue careers in the country of their citizenship, and that many gain utility from making contributions to the public life of their nation (Hirschman 1982). Such professionals are likely to be willing to trade off foreign salary advantages for such opportunities which give them a high degree of control over the content of their work. Indeed, many very capable people are most happy and productive when in situations in which they do not depend on finding markets for their outputs.

It is my contention that the public employment of underemployed human capital can both provide powerful linkages into the domestic economy as a whole, and can act as a Keynesian automatic stabiliser, whereby stable if modestly remunerated work helps to maintain the circular flow of production and income. Such employment policies create downstream jobs for less skilled workers, while drawing skilled workers out of low skilled positions, thereby creating further openings for the less skilled. The measure of the success of a countercyclical human capital policy is thus its stimulus to the private sector. The simple knowledge that human capital is publicly valued can help a country to retain its critical but internationally mobile human capital resource; a resource that responds to many incentives in addition to price. Countercyclical public investment policies can also focus on environmentally sound initiatives; such as urban public transport, public recreation amenities and cleaning up messes arising from unsustainable practices in the past.

 

Summary and Conclusion
 

New Zealand has become a victim of the downside of globalisation and attempts to promote a uniquely private form of capitalism. Policies that can redress these imbalances include:

  1. Cooperate with other governments to counter the power of international capital, by promoting a democratically accountable international public sector.
  2. Promote regional development as a means of encouraging capital to migrate to areas of labour surplus, recognising that regional development models will in future be applied to the global economy.
  3. Devalue the overvalued currency, or encourage sufficient capital flight to bring about a slightly undervalued currency.
  4. Use fiscally-based forms of import rationing, such as a general tariff schedule or a foreign exchange tax, so as to ensure that the balance of payments constraint doesn't prevent full employment of domestic factors.
  5. Introduce a financial transactions tax so as to ensure that the financial sector, and heavy users of the financial sector, make a greater contribution to the social wage fund.
  6. Use the social wage as a complement to labour wages to ensure adequate social security without destroying incentives to seek employment.
  7. Enter into a social contract with the highly educated 'knowledge creating' community to ensure publicly funded employment opportunities sufficient to enable scientists, critics and literary achievers to build careers in New Zealand.
  8. Adopt counter-cyclical environmentally sound public investment initiatives such as urban public transport, public recreation amenities and cleaning up messes from the past.

A policy program as outlined above, can become the basis for sustainable economic growth, for full employment without overwork or socially unacceptable wage rates; a 'Toyota Corolla' economy in which creative talent is supported but not unduly rewarded; a business environment more friendly than at present to productive entrepreneurship and less friendly to the owners of private capital.

I would like to see a vision emerging in Wellington - a vision of social capitalism - a vision that recognises that the public component of capitalism is crucial to both the domestic and the international economy, and that seeks cooperation with other nations with the view to: (i) raising tax rates to fund social expenditure, (ii) the promotion of international full employment by means other than competitive wage cutting, and (iii) eschewing the use of national monetary policies as means of diverting international capital from its optimal employment.

  

Notes

  1. Gould (1985, p.72), Easton (1997a, pp.8-9) and Evans et.al. (1996, pp.1878,1884) comment on aspects of pre-1984 liberalisation. [back]
  2. For example Citibank Tokyo had 17.4% of its foreign deposits denominated in New Zealand dollars in September 1996 (Garran). New Zealand has no capital gains tax. [back]
  3. 0-2% from 1990 to 1996; 0-3% in 1997. [back]
  4. 21% on a trade-weighted basis, June 1994 to April 1997 (Statistics NZ INFOS database, and The Independent, April 24, p.33). [back]
  5. 14% per annum in the two years to June 1996 (Statistics NZ INFOS database). High interest rates relative to other countries inevitably boost the supply of money in a small open economy. [back]
  6. Higher by both the Reserve Bank's own "underlying" measure and Statistics New Zealand's "headline" measure (see Evans et.al. 1996, pp.1864-67); ie at or above 2% compared to just above 1% at the time of tightening. Inflation has come down rapidly in 1997 (to minus 0.3% for the first quarter of 1997), but only after a marked fall in interest rates subsequent to the formation of the Coalition Government in November 1996. In October 1996, call money market rates were 10%; they were 6.8% in April 1997. [back]
  7. $4.2 billion in the year to September 1996, compared to $1.6 billion in the year to June 1994 (Statistics New Zealand's INFOS database.) [back]
  8. The GDP growth rate was 2.7% in the year to September 1996, cf. 6.7% in the year to June 1994. For manufacturing, the respective data are 0.8% and 7.4%. [back]
  9. Employment was up 2.1% from December 1995 to December 1996. Two years earlier the annual growth rate was 4.9% [Household Labour Force Survey]. In manufacturing the respective data are minus 9.2% and plus 11.8%. [back]
  10. The NZ economy was growing at an annualised rate of eight percent per annum in the first half of 1984. New Zealand's 1979 to 1984 growth rate significantly outpaced Australia's. [back]
  11. Easton (1997a, p.92) gives a useful discussion and definition of the meaning of 'new right'. And, while not using the term 'new right', Bollard et.al. (1996, p.8 passim) tabulate the key theoretical underpinnings of the reforms that characterise new right thought. [back]
  12. This goal was also central to 1975-84 National Government, which was, by any objective evaluation of the statistics, more successful. [back]
  13. Public sector cost-cutting has contributed to a spate of killings linked to poor mental health services and the findings of an official inquiry about the death of 14 young people falling from a sub-standard viewing platform at Cave Creek erected by a cash-strapped Department of Conservation (Kelsey 1997). [back]
  14. Assuming population growth of one percent per annum, the average annual growth rate of the New Zealand economy will have to be in excess of eight percent if average real incomes are to double every ten years. [back]
  15. The Survey tends to overstate employment, eg compared to census data. This is probably due to jobless persons being overrepresented among the 10 percent of the population who do not respond to the survey. [back]
  16. The Alliance Party, which received 10% of the vote in 1996, advocates "fair trade", but its tariff policy is linked more to the balance of payments than to the promotion of manufacturing employment (Alliance 1996). [back]
  17. The argument for certainty belies the fact that, historically, many of the best opportunities for manufacturing entrepreneurs have arisen from uncertain environments. [back]
  18. This public policy goal of seeking a balance of payments surplus was called the "new mercantilism" by Joan Robinson. The new mercantilism is epitomised by John Major's claim, in a BBC interview: "We are dealing with competitiveness in a world that is changing; we aren't living in the world of the 1960s and the 1970s and even much of the 1980s. Unless we compete and beat [emphasis added] the French and the Germans and the Japanese, the Pacific Basin Countries, the United States, we will have huge unemployment, structural unemployment, and dramatically falling living standards" [BBC Panorama, 5 April 1995]. In New Zealand, there is a desire on the part of government to run a current account surplus and a capital account surplus at the same time! Governor Brash (1996a, p.8), knowing that the Reserve Bank is acting to generate a capital account surplus as a means to fighting inflation, blames the current account deficit on New Zealand households for not saving more. In fact New Zealanders are saving more (Inder 1997). [back]
  19. In April 1997, Porter returned (Hunt 1997). His "key task was to rally public support for New Zealand's role in the global economy". [back]
  20. The 'laboratory' metaphor comes up in anti-reform literature (Kelsey 1995), moderately pro-reform literature (Bollard et.al. 1996, p.19), and the new right who seek to export the New Zealand model. [back]
  21. Entrepreneurship in Schumpeter (1947) is broadly defined as innovative activity throughout the economy. [back]
  22. Such jobs include the 'poverty industry' and the 'criminal-justice industry'. In the private sector - especially in financial and business services, North's 'transactions sector' - they include jobs whose central focus is market-share; ie the displacement of rivals in zero-sum games. [back]

 

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