In Stormy Seas: The Post-War New Zealand Economy
Brian Easton
Otago University Press, $39.95
ISBN 1 87713308 6
Brian Easton’s account of New Zealand’s post-war economic performance has already received some mixed reviews. In view of the generally critical stance Easton takes to the reforms implemented in this country since 1984, it is perhaps not surprising that opinion should be divided on the contribution his book makes to the literature on its recent economic history. What is somewhat surprising is that the reviewers appear to have focussed primarily on the form rather than the substance of his arguments.
Favourable reviews have mainly been forthcoming from non-economists who appreciate the clarity of Easton’s style, his vivid use of metaphor and avoidance of the “tribal dialect of economists”, and the curiously intimate way in which he takes readers into his confidence when he “alludes to the venom with which apostates like him are treated – right down to being personally attacked and by-passed for contracts”, as Bill Southworth puts it.
The economists who have reviewed this book have been less impressed with these “personal” and “idiosyncratic” features of Easton’s style. In particular, their eyebrows appear to have been raised at Easton’s decision to exclude references to what he does not consider to be quality work since “quoting a lot of weak and inadequate analysis would be adding water to the gruel” and to his failure to “doff his cap”, by way of explicit citation, at leading figures in the contemporary debate between “New Classical” and “New Keynesian” macroeconomists. Regardless of whether these reviewers find these breaches of academic etiquette refreshing or questionable, they all seem to acknowledge the depth and comprehensiveness of Easton’s research.
But what is the substance of Easton’s argument? To appreciate this, it is necessary to clarify just what he is attacking, by recapitulating the main features of the current official (Treasury) explanation of New Zealand’s comparatively poor post-war economic performance. From this perspective, a small open economy like New Zealand will experience relatively slow growth in its per capita GDP if successive governments fail to provide the conditions for sustainable, market-led economic growth. Most fundamentally, they should ensure that the set of market-determined relative prices provide producers with clear signals to guide the reallocation of resources to those areas in which they can maintain a comparative advantage in a dynamic global marketplace. They will fail to do this if the cumulative effect of government intervention is to distort prices both in those sectors that are subject to special treatment in terms of tariffs, subsidies and regulations and, in the economy as a whole, as the growth of government beyond its fiscal capacity gives rise to inflation and an increasing burden of debt and taxation in relation to GDP.
The reform programme introduced since 1984 is hailed by its architects and apologists as a giant step in the right direction, since it removed both microeconomic distortions through trade liberalisation and the deregulation of financial, goods and labour markets, and macroeconomic imbalances through monetary and fiscal policies that, over time, sought to bring inflation and debt under control. The main piece of unfinished business in this programme would seem to be the drastic scaling back of government spending on social policy so that the aggregate level of taxation can be significantly reduced as a percentage of GDP.
A careful scrutiny of the evidence on New Zealand’s post-war performance does, however, pose a number of puzzles that are difficult to explain in terms of this conventional wisdom. Easton highlights, in particular, the success of the New Zealand economy from the mid-1930s till the late 1940s – a period during which a highly interventionist policy regime was set in place – and shows that the problems of stagflation and rising unemployment from the mid-1970s to the early 1980s should be viewed in the context of the more severe incidence of these problems in other countries and the dramatic relative decline in New Zealand’s performance from 1984 to 1991.
Like other critics of the New Zealand experiment, Easton does however seem a little too quick to dismiss the significance of the recovery experienced after 1991 although this is understandable, given the breathtakingly optimistic predictions its advocates have made about the effect of these reforms on this country’s long-term growth path. Nevertheless, Easton does seem to have uncovered sufficient anomalies in the official version of New Zealand’s recent economic history to demand an alternative explanation. Unlike highly critical studies of the reforms by scholars such as Jane Kelsey in The New Zealand Experiment and most of the contributors to Roper and Rudd’s recent edited collection of essays, The Political Economy of New Zealand – which tend to draw on a range of disciplinary and philosophical perspectives that are unlikely to be shared by mainstream economists – Easton draws on an “open economy”, “multi-sectoral”, Keynesian macroeconomic framework that should be familiar to most of his professional colleagues.
In essence, Easton’s thesis is that the relatively poor performance of a country such as New Zealand can be largely attributed to the greater severity of the constraints its producers face in sustaining an investment-driven growth process. The forward momentum of this process depends on the upswing phases of business cycles being long enough to induce businesses to engage in high levels of capacity-increasing investment that embody the latest technological advances. As Easton puts it: “If the (long-term) growth process involves getting as much investment as possible in place, then the longer the cycle (especially the boom), the more investment and so the greater the contribution to the growth process”. The boom phase of the business cycle can nevertheless be cut short by two mechanisms. First, rising levels of imports tend to cause current account deficits which governments often try to correct by tightening monetary or used policy. Secondly, if the institutional mechanisms that induce employers and employees to restrain wages break down, then an upward spiral in wages and prices can make domestically produced tradeable goods less competitive. Sufficient export earnings relative to imports will allow a boom to be sustained longer so that more investment can be put in place. The higher level of imports they help finance will also moderate the domestic demand pressures that underlie inflation.
Easton thus looks to factors that have adversely affected New Zealand’s export growth to explain a large part of its relatively poor post-war performance. Not all of these can be attributed to government policy. He attaches the greatest significance to externally generated shocks such as the collapse of wool prices in 1966 and the oil price hike of 1973 which adversely affected New Zealand’s terms of trade – the ratio of export to import prices – strengthened the external constraint on growth and increased dependence on foreign sources of savings.
The structural problems caused by external factors did, however, require an internal response to ameliorate them. Easton argues that this was largely forthcoming prior to 1984 and was reflected in an impressive diversification of New Zealand’s export structure by both product and destination. He observes that:
It is hard from the perspective of the early 1990s to appreciate the extraordinary achievement of export product and market diversification. Once there was wool supported by meat and dairy products. Today meat and dairy products remain second and third, but they hold a much smaller share of exports. The chief foreign exchange earner is tourism, while horticulture, fish, wood products, and general manufactures all earn more than the wool clip. Once there were British markets, with the United States as a minor adjunct. Today Australia and Japan are up with the United States, while Greater China and South Korea also surpass Britain. New Zealand was among the three most concentrated exporters by product and destination in 1965, but was near average in 1980. No other OECD country has diversified as greatly.
According to Easton, falling terms of trade and the drive toward export diversification made market liberalisation necessary. This was because “the fall in the terms of trade substantially reduced the land rents, and hence that which could be transferred by protection without seriously damaging the export effort”. Moreover, as exporting became “so pervasive that virtually every market sector was involved in the activity”, deregulation was required to increase the availability of a broad range of sophisticated services and inputs to the export sector. He points out that while there was “considerable liberalisation under the Muldoon era”, there was also an “unwillingness to abandon or modify the controls quickly enough . . . for frequently the defenders of the controls were the incumbent beneficiaries”. Easton thus asserts that pro- and anti-interventionist arguments should be viewed in their historical context and that “there need be no conflict between suggesting that the controls were helpful to economic growth in the 1940s, but that a more market approach was relevant in the 1970s”.
Easton contends that export diversification led to a transformation of New Zealand’s economic and social structure as significant as the establishment of pastoral farming based on refrigerated trade with Britain and the development, behind protective barriers, of light industry which underlay earlier transformations. In each case political and social change occurred as a result of shifts in the means of economic organisation which Easton likens to “long-term movements in tectonic plates”.
Easton thus views the post-1984 reformist experiment as a “political revolution” that could only take place after the “social revolution” that “followed the dramatic change in the economic structure from the mid-1960s”. The latter “deep change” in the “core structures” of society threw up a new generation of business, government and political leaders that was able to “seize power” after the 1984 election and forge a “new establishment” that committed itself to advance the reform process.
Easton’s economic evaluation of this revolution is based on his assessment of whether or not it assisted or hindered the development and diversification of the export sector. His basic argument is that whatever advantages New Zealand’s exporters derived from the acceleration of market liberalisation after 1984 were overwhelmed by “maladroit” macroeconomic policies which imposed a particularly heavy burden on this sector. In particular, the decision to “freely” float the dollar in 1985 and ignore the effect of monetary and fiscal policy on its value led to an excessive appreciation of the “real exchange rate” that substantially undermined the competitiveness of New Zealand’s tradeable products.
These decisions also launched the country into a “decade of greed” in which the “bubble effect” of financial speculation obscured the damage that was being done to the productive sector of the economy. When the bubble burst after the share market crash in 1987, policymakers sought to bring New Zealand’s macroeconomic situation under control through austere monetary and fiscal policies that impacted severely on the most vulnerable members of society by removing many of the social protection mechanisms established by the welfare state. The final chapters of Easton’s book thus provide an account of the economic and social damage inflicted by “ideologically-driven” and misconceived macroeconomic policies and public sector reforms.
While the last decade has witnessed an impressive resurgence of Keynesian thought in the economic journals, this has yet to be reflected in the media and the popular writing on economics where the New Right continues to hold sway, largely through the prolific outpourings of its well-funded “think tanks”. The ventures into presenting Keynesian ideas to a popular audience by writers such as Lester Thurow, Paul Krugman and Robert Reich have nevertheless stood out as attempts to redress this balance. Easton’s book would seem to fall within this genre. As he points out in his preface, it is directed not just toward professionals but also aims to “interest the general public” and meet the needs of first-year students undertaking courses on the New Zealand economy. The positive reviews the book has received from non-economists attest to the way it has generally “hit the mark” with this broader audience. It would be a pity, though, if economists refuse to take Easton seriously since his arguments are coherent and well-substantiated – even if he does seem, at times, to flout the norms of polite professional discourse.
Joe Wallis is a Senior Lecturer in the Department of Economics at Otago University.