After a while, I’d move on and go back to admiring the BBC, but nagging doubts would remain.
I’m feeling something a little similar about John Kay.
And I’m enjoying it, for the most part. It’s a useful, refreshing and comprehensive account on the way markets (by which he means all sorts of markets in goods and services, not just the financial markets) work. Achela calls it “the only book you need to read about economics” and I can see why.
So I was very interested to come across a section in it on New Zealand.
Kay’s coverage of New Zealand began compellingly enough, with the sort of gloomy economic diagnosis you’ve become familiar with on this blog. He identifies nineteen rich countries, ranging from Switzerland and Norway to Australia and Italy, and then twelve intermediate countries, ranging from Israel down to Hungary:
Many of these intermediate countries — Spain, South Korea, Slovenia — are clearly on the way up, and will one day join the rich states . . . One is on the way down: New Zealand would until the 1980s have been grouped with the prosperous countries of Western Europe. (p. 20)
Later he takes a broader historical sweep. Of the ten productive economies in 1870, New Zealand is the only one not in the current list of rich countries. Kay goes on to discuss New Zealand along with Argentina as “these two once rich states.” (p. 43)
As I said, these themes won’t be new to regular readers, but his description does drive home just how unusual New Zealand’s downward (relative) trajectory is, which I hadn’t completely appreciated.
But then we come to Kay’s explanation for this decline, and here disappointment sets in. He puts it all down to “three phases of adverse economic experience, one externally created, two self-inflicted” (p. 46), namely:
- 1960-75: The export relationship with Britain fractures as Britain moves closer to continental Europe. “New Zealand could find alternative markets only at lower prices” (p. 45).
- 1975-1984: Muldoon and the expensive errors of ‘Think Big’. Kay is not a fan: “There may have been worse prime ministers in rich states than Muldoon, but not many.” (p. 392)
- 1984-1999: the era of privatisation and deregulation. “No country modelled its policies more deliberately on the American business model — applause for self-interest, market fundamentalism, and the rolling back of the economic and redistributive functions of the state — than New Zealand after 1984, not even the United States.” (p. 45)
I don’t particularly disagree with any of that, as far as it goes. Britain entering the EEC (as it was called then) was obviously a major challenge, and I’m no fan of either Muldoon or Rogernomics.
But I was expecting something a bit more insightful. The message of much of the rest of the Truth about Markets is about the importance of societal institutions in making the difference between rich nations and poor ones. Yet with New Zealand — which he would probably see as the most extreme example of relative decline by a rich country — it’s all down to one external shock and two periods of mistaken policies?
I’m sure I’ll forgive Kay, as I did the BBC — his work definitely has a lot to offer — but I’m frustrated by his coverage of New Zealand. I feel he didn’t really analyse our economic problems, but just turned us into a parable about the follies of market fundamentalism.
We now have the vantage-point of nine years of the return to what Kay calls “a Labour government with conventional policies” (p. 46), which, while obviously fantastic, wasn’t able to dramatically turn around this trajectory of decline. I’d be interested in what lessons from The Truth about Markets Kay would now bring to bear to explain what has now been at least sixty years of decline.
Postscript: it turns out that this subsection of the book is largely drawn from Kay’s August 30 2000 column for the Financial Times, Downfall of an economic experiment. To be fair, this article does contain a little more substantive (or at least numerical) analysis about the 1984-99 period, although the basic argument is the same as above.
It also contains the following passage, which parallels my recent post about Gross National Income vs Gross Domestic Product:
New Zealand also has an unusually large gap between GNP and GDP. (The difference is net property and investment income from abroad). In 1997, when the difference was widest, GDP exceeded GNP by around 10%. GNP is the most appropriate measure in assessing the standard of living of the New Zealand population, GDP in measuring New Zealand output. New Zealand is a richer country than New Zealanders. There are several associated reasons why this difference is so large (some connected to the reform programme, some not) New Zealand has run a persistent balance of payments deficit: in part, presumably, as a result of consumption being maintained despite falling or slow growing incomes. There have been substantial capital inflows and there is extensive foreign ownership of New Zealand debt. While the reduction of New Zealand’s public overseas debt has been a policy priority (and largely successfully achieved), private overseas debt has risen very rapidly.