From sclerosis to stagnation, Brian Easton

Remaking New Zealand and Australian Economic Policy: Ideas, Institutions, and Policy Communities
Shaun Goldfinch
Victoria University Press, $39.95,
ISBN 0864733933

Shaun Goldfinch’s Remaking New Zealand and Australian Economic Policy is the latest version of what is becoming the standard account of the origins, implementation, and outcomes of the economic changes of the 1980s and 1990s. It goes something like this.

In 1984 the New Zealand economy was suffering from a sort of sclerosis in its economic mechanisms. This arose from the unwillingness of the Prime Minister and Minister of Finance of the time, Rob Muldoon, to respond to the social and economic changes which New Zealand had experienced in the 1970s, and from the tight interlocking of the various pressure groups protecting their interests. The external sector had seen rapid diversification – greater than in any other OECD country – which was impacting on the internal organisation of the economy too, as was some technological change. In parallel to the economic change, there was an increasing social heterogeneity as various groups which had largely been ignored in the past – such as women, Maori and other ethnic groups – became more prominent and demanding of a proper role in their society.

The “Rogernomic” economic polices introduced by the Labour Government which came into power in 1984 were those set down in the Treasury’s 1984 and 1987 post-election briefings. The Treasury (and, where relevant, the Reserve Bank) was enormously influenced by the neoclassical economic paradigm in general, including such developments as public choice theory, law and economics, and transactions analysis, as well as monetarism, with the rational expectations variant prominent. Typically, the particular application was always at the right wing end of the political spectrum. (It has to be added that any simple statement of the paradigm is necessarily inadequate. There is no totally satisfactory account of its intricacies. Goldfinch’s 13-page account is certainly not.)

It is convenient to separate Labour’s policy changes into two phases – roughly before and after the 1987 election, although the second phase was presaged by a private letter from Roger Douglas to David Lange as early as April 1987. The Business Roundtable did not have a great impact on the first phase, but its public support and pressure were critical in implementing the second. The OECD and IMF were largely supportive, but had little impact, other than indirect influence on forming the analysis of Treasury officials.

A key element is their implementation by the Minister of Finance, Roger Douglas, and his close associates. Douglas did not come to the broad thrust of these policies until 1983, and then primarily at the prompting of a Treasury official attached to his office while in opposition, and of another economist in the Labour Party Research Unit. The implementation was characterised by two major features. First, politically, they were introduced very rapidly – blitzkrieged through – ignoring the spirit of the usual democratic conventions, although usually keeping to their letter. Secondly, the policies tended to be at the extreme end of the spectrum.

A third phase of the reforms began with the election of the National Government in 1990, although the blitzkrieg phase lasted only a short time. The pressures here were from the right of the National Party and the Business Roundtable plus some other lobby groups which had been converted to the policies.

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The outcomes of the policies have been marked by no overall improvement in economic performance, except that the inflation rate is now slightly below the (comparable) OECD average, rather than markedly above it. The economic growth rate and the growth of productivity decelerated, so the economy has been growing more slowly than the OECD, and is falling further behind. There is a view that the sustainable growth rate is currently at about the OECD average – which is where it was in the seven years before 1985. Until recently, advocates promised the growth record would improve in the near future, but after a decade of promising, this claim has been dropped. At the moment New Zealand has a large structural current account deficit on the balance of payments, which is likely to compromise economic performance if there is a major international financial crisis.

Unemployment has risen markedly (especially if we allow for depressed levels of labour force participation), and most social groups are much the same as or worse off economically (after adjusting for taxes and benefits and price changes) than they were 15 years ago. The exception is the top income decile (tenth) who are markedly better off (a 25 percent improvement in after-tax real incomes is a common estimate). So income equality has increased largely as a result of the tax and benefit reforms favouring the rich.

Particular beneficiaries, in the short run anyway, of the policies were the corporations who are members of the Business Roundtable. They are mainly from the financial sector that today is politically more powerful than it was in the early 1980s. Producers are correspondingly less powerful. Whether consumers are better or worse off depends on their spending power.

An unexpected consequence of the new policy regime was that the electorate voted for constitutional reform to an MMP electoral regime. MMP and the failure of the reforms have resulted in a drift back to economic orthodoxy. However, the Rogernomes used their power to eliminate competition so that the development of an alternative policy paradigm is being delayed by Rogernomes still in senior positions of power, and by the continued suppression of those who might offer a different approach. Thus policy continues to carry over much of the failed extremists’ approach and – business cycles aside – the economy has not shown a lot of improvement. The danger remains that in a world financial or economic downturn, New Zealand’s economic vulnerability – magnified in the last two decades – will be exposed.

That is a brief summary of the standard academic story. The more comprehensive story can be found in whole or part in books written in the last few years by Alan Bollard and his colleagues, Jonathan Boston and his colleagues, Ellen Dannin, John Gould, Colin James, Bruce Jesson, Jane Kelsey, and by this reviewer, as well as in numerous scholarly articles, with special mention going to Geoff Bertram, Paul Dalziel, Tim Hazledine, Pru Hyman, Hugh Oliver, Bryan Philpott and Joe Wallis.

What does Goldfinch’s book bring to the story? He broadly agrees with the mainstream. His new material is twofold. First, he carries out a comparison between New Zealand and Australia. This story has already been explored in The Great Experiment by Frank Castles, Rolf Gerritsen and Jack Vowles (1996). While Goldfinch’s book adds no new major insights to the earlier one, it is valuable in again laying out the two stories side by side. Both books conclude that the different political arrangements allowed blitzkriegs in one country but not to the same extent in the other. It seems that the more clumsy Australian processes weeded out more of the incompetent policy, so the Australian economy performed much better than New Zealand’s despite, on some measures, suffering a more difficult external environment.

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The other feature of the book is interviews with 180 “leading policymakers”, on both sides of the Tasman. While there are excerpts from them, the main content is a series of tabulations that recorded their responses to the question about who had the most influence on various policy initiatives. The reader will increasingly see all the flaws in this method, and eventually discover an appendix which sets these down, although perhaps the author did not recall all his caveats when he was writing up his interviews.

The fundamental questions are what is the meaning of influence, and does the recall of the elite shed much light on the topic? The results are rather odd. Goldfinch asked, for instance, 87 apparently informed New Zealanders, “Can you name about five or six individuals you think were particularly influential in forming this policy?” Some 60 percent said Rod Deane (Deputy-Governor of the Reserve Bank at the time), 51 percent said Roger Douglas (Minister of Finance), and 37 percent said Graham Scott (Assistant Secretary at the Treasury with these responsibilities at the time). They would be on my list too (although Douglas’s role in “formulating” – as distinct from driving – is problematic). The next down the list was named by 21 percent, and there are a further 18 names. We are not getting a lot of agreement on how the policy was formulated. Neither the head of the Treasury macroeconomic division at the time, nor the chief economist of the Reserve Bank, is mentioned. Some choices are odd: they include Rob Muldoon, who was in opposition, and businessmen who were not yet in the policy loop when the liberalisation happened in 1984. Or consider the four nominations for Rob Cameron, who left Treasury in July 1984, before it happened (and was not in a macroeconomic division before then). Does the elite know something that the rest of us do not?

Unfortunately, Goldfinch’s tables contain errors and vagueness. Scott is described as a Deputy-Secretary of Treasury. He was an Assistant Secretary and was promoted straight to Secretary. Two union leaders are described as members of the Employers’ Federation. Officials are described as leaving Treasury in the “mid-1980s”. Cannot one be more precise? Cameron apparently, according to Goldfinch, has not yet left Treasury.

One could see the procedure as a preliminary survey to identify the key players, the scholar using the compiled lists as the basis for a serious investigation, perhaps reinterviewing them and going to the documentary evidence. I have looked at the papers of a number of policy developments – some covered by the book – and one can make a lot of sense of what was going on. A reinterview can clear up the obscurities. What one finds is that there was a systematic policy development, although sometimes the ideology overlooked difficulties or blocked off options. For instance, the papers on floating the dollar looked only at the extremes of the fixed peg, which was then in existence, and of a clean float, which was adopted: there are numerous options between. This does not tell us much about the political implementation issues, but recall that the question was about the “formulation” of policy. Its political management and implementation often involve different people. Perhaps that is why the respondents gave such odd answers.

Goldfinch does not go to the documentary evidence, despite acknowledging that people’s memories are unreliable and that they also rewrite history. He does not even rework the data. Suppose that in a preliminary survey the majority identify four actors as key to a particular policy development. Those whom the key players nominate as significant are far more interesting than businessmen who were not there and made things up. There are within the book some quotes from interviews of key players which scholars may use (although one always has to read a statement of any official with an understanding that a decade later many still accept the notion of confidentiality). But sadly the book adds little to the academics’ account: neither does it challenge it.

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What the book does is shed light on “the network” of insiders, one of the least studied but most potent elements of the Wellington political scene. These are the group who are either in the core of policy, or who hover around its edges. Goldfinch’s sample was from a “snowball”: getting the insiders on the list to nominate others from their network. Some are very powerful and knowledgeable. Others, the book shows, have only the vaguest idea about what was happening, either because of their failing memory (one recalls cross-examinations at the “Winebox enquiry”) or because they were not there, or because they simply do not know or understand the policy process. Their political power and prominence come not from some intellectual excellence or policy competence, but from protecting and promoting one other. They will pretend they know when they don’t, and nominate other members of the network on the basis of solidarity rather than actuality. One suspects that from Goldfinch’s raw interviews there is an intriguing story to be developed. It is a pity he did not read his own appendix on method, and think how he could usefully use the material he gathered.

 

Brian Easton is a Wellington economist and commentator on public affairs.

 

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