I’m a big fan of BBC News. However, while it hasn’t happened recently, it used to be that every once in a while NZ television would repeat a clip from the BBC about New Zealand — often involving race relations — that would be so overly-dramatised and simplified that it would cause me to wonder if I really was getting an accurate story about all those other countries they report.
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.
After writing about his critique of the market failure doctrine and the alternative he offers, I thought I ought to go back and read his most famous book The Truth about Markets (2003)
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.
Tags: Gross National Income, John Kay, NZ economy, Robert Muldoon, Rogernomics
Agree Kay’s reasoning shallow – to me the problem is that it puts the emphasis on what’s happening in NZ (with the obvious exception of the UK joining the EEC) when the most influential factor was what was happening on world markets. The EEC thing was also part of the latter. The way world trade developed in the second half of last century played into the hands of the rich manufacturing nations by offering larger markets for their high-value products while those with, now relatively low-value commodity-based economies, were put at a disadvantage. NZ has never managed to bridge the gap, in fact it has widened. Not sure how Australia fits into this picture. But I’m an optimist – I feel the world is heading back towards NZ’s court (our abundance of water, Clean & Green branding), if only we have the wit to realise it.
I’d like to hear more about why you think the world is ‘heading back towards NZ’s court’, BigCake.
From reading Coe, Kelly, and Yeung, among others, about the value chain, I understand that the larger fractions of value accrue to the places where product development, marketing, and finance activities are carried out. (Returns to the production function are mostly under 20% of the total.)
Those activities–product R&D, marketing, and finance– all show increasing returns to scale (bigger -> more profitable), meaning they will be increasingly concentrated in large cities in large countries. That’s why NZ’s “gap” opened up once globalization re-started in the late 1970s, and why it inexorably widens–why, for instance, Lion Breweries moved to Australia, and why F&P Appliances moved from Dunedin to Thailand and China.
(If you’re interested, the economist Paul Krugman laid out the mechanism in mathematical terms with his core-periphery model.)
Fonterra and, to a lesser extent, Zespri show what is necessary. We have to move to a “New Zealand Inc” approach to doing business with the rest of the world; and even then we’ll have to be smart and persistent.
…about my optimism, which I’d emphasise is contingent on our decison makers (public and private) having the wit to take advantage of changes going on in world market places. And many times you are forced to wonder if this can be done.
But at last the wind is behind us.
And it is about getting more value out of what we export. The Icebreaker example has been done to death, but it is a classic of what NZ can achieve on the back of its positive international image – clean and green, remote (as in removed from all the shit that goes on in the world), different, authentic…
BTW – the move towards authenticity is another tail wind.
And note that Icebreaker clothing is made in China – the value end (IP, marketing etc) remains in NZ.
It is difficult for our meat and dairy exporters to fully replicate the Icebreaker model, but they can do more to add value to their products by taking advantage international demands for clean and green products and product authenticity. Fonterra is useless at this.
One of the things Icebreaker does is offer customers a “baa code” which allows them to trace the wool in their garment back to the original farm – can you imagine Fonterra doing this?
This type of proof is going to be demanded by the world’s middle class consumers who we should be chasing. Farmers are opposed to product identification because they see it as a cost.
At the same time as these new opportunities are arising, it’s becoming clear that the NZ commodity model of being the lowest cost producer in the world is no longer feasible – we’ll get creamed by South America, Eastern Europe etc
So there’s got to be change anyway.
Anyway back to the original point. ING has identified eight interdependent crises that are powering our way towards a “third industrial revolution”:
• demography
• ethics
• social-economic
• food
• water
• climate
• energy and
• political.
They’re all areas where New Zealand has competitive advantages over nearly every other country in the world.
Even climate change on balance represents a plus for New Zealand.
Yes, I think that’s certainly part of it. Although I also want to have a look into the linked issues of our low savings ratio and our low rate of capital formation. And Philipp McCann, who you’ve looked previously on your blog, has some interesting ideas I’d like to explore a bit as well.
I haven’t looked at Australia in particular, but my impression is that they’ve fallen in relative terms too, but also from a high base, and not nearly to the same extent as us.
1)I remember a co-worker telling a story about when he was being taught by John Hicks probably around the turn of the century – they had a similar discussion about NZ’s relative performance particularly post reform. Hicks pointed to our significant sustained levels of unemployment and implied that there was a very heavy price to be paid for all that destruction of human capital.
2) That last point about ‘New Zealand is a richer country than New Zealanders’ reminds me of the recent discussion I had with the CTU over their alternative economic strategy – our productivity has been growing but wage levels have not been reflecting that. i.e. the owners of the capital used by the NZ economy are the ones who are benefiting.
Re the post-script, the difference between GDP and GNP is the return to foreign investment.
I didn’t respond to your comment about foreign investment a few days ago, David — I was a bit late; but this excerpt shows why foreign investment is a bad thing. Investment is done in order to receive a return. If the return goes overseas, it is not available within Aotearoa/NZ to fund further investment. (This is part of the explanation of our low savings rate; and also part of the cause.)
Why, then, allow foreign investment? (Leaving aside coercion by our erstwhile ‘allies’.) The short answer is, in order to get something that will outweigh the costs. Foreign investment is useful to do two things: accomplish something that we can’t do with our own resources, or grow a critical mass of expertise in some industry. Mining our outer continental shelf is an example of the first kind of thing, perhaps. We don’t have the financial resources or the know-how to do that ourselves. Encouraging biotech and software firms to set up research centres is an example, perhaps, of the latter. If we can grow a large enough ‘cluster,’ it will eventually become self-sustaining.
Why do we need foreign investment on the present scale? The short answer to this is that we lack both a capital gains tax and an inheritance tax, and also we lack regulations on banks that could compensate for the lack of taxes. The lack of a capital gains tax directs people into ‘investments’ that do not produce a cash return, in preference to investments that do return cash. The absence of bank regulation lets people borrow to do that. Either a capital gains tax or a requirement for minimum 50% equity (deposit) when buying a house would help a great deal. Encouragement to keep savings as money (for example, cutting tax on interest earned, as the Aussies have) might help a little.
It seems to be political anathema to state things as plainly as this. And with good reason – a policy change like this would wipe out the illusory wealth that people thought they had in their houses. Far better to wring our hands and bewail the situation. While our politicians do that, though, we will continue to buy ‘consumer durables’ (which is a better way to view houses) rather than capital goods (things that provide a cash flow); we will continue to be short of money for investment; the gap between our GDP and GNP will continue to grow; and we will continue our relative decline.
Some good core things entering the analysis here: things I always thought the NZ Institute with its slightly shrill alarmism missed consistently.
One is the Krugman thing about returns to scale, another is the future of a place which simply still has a lot of what the world economy needs.
I would throw in another couple of large, less ponderables, things I would have liked NZ Institute etc to have had a crack at figuring.
One is the basic peripherality/ what i might call structural implications of thin/ small scale of the NZ situation. This partly relates to Krugman, but I guess suggests and even more structural response. Basically things are fairly thin here. Big corporates like Fletchers or in the 1980s NZI are few: and when they take shock related or even just bad business hits, as both spectacularly did (NZI in 1987, overleveraged to buy overpriced shares; Fletchers over the Chinese forests partnership) there are not a lot of local comers behind to pick up the opportunities and slow the invisibles flow out. In insurance, we were pretty much wiped out, once State too went to AIG. Banking nearly followed: who would have picked TSB, SBS and Kiwibank to take on the big banks, after Westpac Trust etc happened? We are the Shakey Isles in terms of corporates capable of providing the institutional strength in a number such areas: hence the need to watchover Fonterra: and do better with finance companies next time… All this suggests a much more cautious/ conservationist approach is prudent re core corporates> conservationist in the ways TSB clearly are; and not the radical pruning, perhaps, we were provoked into by Telecom… But, given so much failure in these areas, surely there are 1. long term growth effects, and 2. lessons here…
The second is around some other aspects of economic geography, partly around regional hubs and their scale (eg why Australasia has one/ two major finance centres (eg Pitt St Sydney), but perhaps more around regionalisation per se. Regionalisation was not really much expected in the literature, which broadly assumed globalisation . The role of what world systems theorist Immanuel Wallerstein called the semiperipheral sites (sites brokering capital relations, finance etc into peripheries of primary production)- and what it takes to become one- hasnt been well framed up I think for this part of the world. And in a regionalised setting focussed on Sydney Melbourne, what might second tier semiperipheral palces (Auckland, Adelaide, Brissy, Perth) expect? What level of scale, and thus level of finance company etc concentration and capability, depth in capital markets etc might we expect, and what can we plausibly do to grow these.
I dont read widely enough in economic geography, and may have missed this debate happening here, deep in the bowels no doubt of MED, if not Treasury. But still, can we finesse Krugman and blend him with Wallerstein, for this part of the world? I think it might offer some pointers!
Another book laced with NZ comparators- and something of a classic already, though with a wider reach into welfare, tax, neoliberal reform- is Andrew Glyn’s ‘Capitalism Unleashed: Finance, Globalization and Welfare, Oxford 2006′. Glyn draws lots of comparators where NZ and the UK line up on one side, with other economies and welfare regimes on the other.