TIM HAZLEDINE, replying to Roger Kerr of the Business Roundtable, says the state of the economy shows it is time to assist a revival of manufacturing for the local market.

NZ Herald, 3 June 1999
 

Fifteen years on, New Zealand's Great Economic Revolution is revealed as a bit of a fizzer. The failure of the more-market economic reforms to deliver economic growth is now pretty much common ground among economists and commentators of all political stripes. Where the differences surface is on what we do about it.

To a few diehard ideologues, such as Roger Kerr of the Big Business Round table, the answer is more of the same - the revolution has stalled because of pauses for "cups of tea" by timid politicians.

This argument is not quite as silly as it sounds there has been an increase in costly rules and regulations in some sectors, as Mr Kerr claims - but it is pretty silly all the same.

After all, our 101 major policy changes from 1984 to 1991 added up to the biggest package of radical Government interference in a civilised country's economic affairs seen since, perhaps, the British Labour Government stormed the "commanding heights" of capitalism with its mass nationalisations after the Second World War.

If radical change on this scale cannot by now show success as promised, then it seems implausible to push for another 101 "reforms" to do the trick.

The facts of failure are quite stark: a doubling of unemployment since 1984; widening inequality and increased poverty; a feeble sharemarket; and economic growth which instead of surpassing, say, Australia - which did not subject itself to a revolution - has by now let us fall well behind, as much as $200 billion in total by 1998, or some $10,000 a worker a year, on the calculations of Lincoln economist Paul Dalziel.

These are staggering and tragic sums, dwarfing even the excesses of the Birch Muldoon Think Big megaprojects of the early 1980s. Something needs to be done. We can't relive our history but we could at least manage to learn from it. I see two big lessons - one political and one economic.

The political one is that the disruptions caused by truly radical change - however well-meaning (and I'm not too sure about motives, in this case) - are just about guaranteed to knock the stuffing out of any economy, and that these things are not easily reversible.

When you wipe out one manufacturing job in three, as we did from 1986 to 1991, you should not realistically expect the survivors to shake off the shock and flourish - not soon, and perhaps not ever. We need to be more cautious, less dogmatic, more eclectic in our policy-making efforts.

But we need also to get those efforts headed in the right direction. And this is the economic moral to be extracted from our muddles. In short, the Kiwi history lesson is this: you cannot consume your way to prosperity; you have to make stuff.

We have been obsessed with free trade and getting the lowest prices, and have forgotten that before you can consume you have to produce. However cheap are the goods and services, you still have to earn the wages and profits needed to pay for them.

This lesson has seemed pretty obvious to every successful industrialising economy, including, to an extent, New Zealand itself before 1984. Full-on free trade is very good at eliminating supposedly inefficient local industries, but it doesn't, for a number of reasons, ensure that the resulting gaps are filled by more efficient new industry and employment.

For that, a more proactive production policy is needed - something most political parties have been almost too scared to consider in New Zealand, so intimidated have they been by free trade dogma.

So what would a pro-production economic policy look like? Some people think that more production is just about synonymous with more exports. I have my doubts.

Exporting is fine, but doing things to increase exports may not be smart use of scarce resources. Consider our traditional commodity-based exports: these face probably the highest transport costs in the world. They are sold to countries that in many cases are deeply reluctant to accept our products and put all sorts of impediments in the way.

And they depend a lot for their profit ability on New Zealand remaining a low exchange rate, low-wage economy, whereas we want to move in the opposite direction - towards the prosperity marked by a strong currency and high wages.

What about high-value "niche" exports, such as computer software and luxury yachts? Such make for stirring success stories, but I don't see that you can build a whole economic strategy around them. They just don't add up to a big enough share of GDP and it is often difficult to replicate the very unusual combinations of skills and talents needed for success in these difficult activities.

So my production strategy would be, well, just that: a strategy to foster local production for the local market. Some would call this an import replacement strategy, but I would rather call imports "production replacement".

Most of the goods and services produced in New Zealand are still sold and consumed on the domestic market, but we have largely neglected this sector, or even done our best to undermine it with the cheap-import free-trade policy.

Our manufacturing industry, the core of any developed economy's production sys tem, has shrunk to little more than 15 per cent of GDP - lower than anywhere else, and possibly too low for sustained viability.

We should have a short-term goal of reversing manufacturing's decline, and a long-term target that the sector should contribute substantially more - say, 20 per cent - to GDP The growth should be balanced across industries and regions and between small, medium and large firms.

With a strong and growing domestic production sector, exports and the trade imbalance would look after themselves. Other worrying macro-economic problems, such as persistent mass unemployment and the low local savings rate, would also melt away or at least recede into manageability.

Even what some analysts are starting to see as perhaps the most worrying modern economic and social trend - the hollowing out of the distribution of earned income - would become easier to do something about in an environment of prosperous production for a secure domestic market.

What are the specific policies that the Government could deploy to help the private sector to achieve these goals and targets? We should be laggards not leaders in implementing unilateral free trade policies (from which the rest of the world is moving away, in any case).

The Government should actively encourage local procurement and be willing to inject judicious doses of public funds to help to bring supplier and customer together in the local market, on the lines of the successful insurance and market brokering programmes that many governments have successfully operated for years for their export sector.

Further harmonisation of policies with our one natural trading partner, Australia, is on the cards. There is definitely a role for a revitalised union movement, and also for regulation of our big network industries, such as telecommunications and electricity.

Other people have other good suggestions - I make no apology for not coming up with a detailed blueprint. But I assert the primacy of the big idea: that we must make before we take; produce before we consume; and earn our way to prosperity and growth.
 

NZ Herald, 3 June 1999
 

In the past 15 years, the manufacturing sector in New Zealand has shrunk.

We no longer have factories assembling television sets that were disassembled for that purpose before being shipped from Japan. We no longer have factories putting together cars from imported kitsets, at a huge cost to consumers. Most low-income New Zealand families can now afford to own a decent car.

We no longer have factories set up for the sole purpose of getting import licences for components because the importation of finished products was prohibited. Instead, we have factories making things that someone, here or overseas, is actually prepared to buy.

This seems to be highly undesirable to our socialists. The Alliance would impose an import tariff on all products, if only New Zealanders gave it a chance. Labour would freeze all scheduled tariff reductions at this year's levels and would set up a committee of political appointees, called Industry New Zealand, to figure out how to spend more than $100 million of taxpayers' money every year on corporate welfare schemes.

Professor Tim Hazledine, of Auckland University, would "inject judicious doses of public funds to help to bring supplier and customer together in the local market." One wonders how suppliers and customers ever managed to find each other without the professor's judicious use of other people's money.

Professor Hazledine also thinks we should be laggards, not leaders, in implementing unilateral free trade policies. This probably means we should continue to try to protect local manufacturers who are unable to compete internationally.

This is not such a novel idea. It has been tried before, here and elsewhere, and has failed every time. Today, the most prosperous nations are also those that have the most open economies. Countries such as Cuba and North Korea fiercely protect their manufacturers, starving their people to death in the process.

In New Zealand, similar policies saw our per capita income slide below that of free- trading Hong Kong and Singapore in less than a generation. Given time, we would have become a source of cheap labour for our Asian neighbours.

New Zealand socialists are quick to point out that advocates of free trade, such as the United States, can be protectionist. American sheep farmers and New Zealand pig farmers would like their Governments to transfer money from consumers to their own bank balances to compensate for their inability to compete internationally.

Governments, in the US, New Zealand and elsewhere, are run by politicians who are susceptible to the special pleadings of self-interested groups.

The same provisions invoked by the American sheep farmers were used here by Philip Burdon to impose high tariffs on Chinese underwear not long ago. Imposing tariffs on imports is much the same as imposing a voluntary unilateral trade embargo against New Zealand - an own goal.

The fact remains that we do not have the slightest ability to influence the decisions of our trading partners. It makes as much sense for New Zealand to threaten other countries with retaliatory tariffs as it is to threaten to hold your breath until your opponent's face turns blue.

We have reduced our tariffs for the benefit of New Zealanders. We decided to keep very high tariffs for clothing and shoes until 2006 for the benefit of some uncompetitive manufacturers and politicians who courted popularity by acceding to their pleadings.

Professor Hazledine is right when he says that we cannot consume our way to prosperity. He is wrong when he prescribes solutions that amount to protecting our way to prosperity New Zealand is still too dependent on commodity exports. To reduce this dependency, it is necessary first to free up our competitive producers from the shackles of producer boards.

These Stalinist economic constructs exist for the sole benefit of commodity traders employed by the boards and elected farmer- politicians. Instead of setting up new indicative planning boards, such as Labour's proposed "Industry New Zealand," our politicians should concentrate instead on reducing the twin burdens of runaway regulation and high taxes.

Successful New Zealand manufacturers are no longer in begging-bowl mode. They are not asking the Government for assistance or economics professors for prescriptions on how to spend their taxes judiciously. If politicians really want to help, the most they can do is to get out of the way and let businesses do what businesses do.
 

letter by John Gascoigne to Herald, 25 June 1999
 

It was inevitable Professor Hazledine's recent contribution would draw the usual uninformed criticism, in this instance from Daniel Silva, secretary of the Importers Institute.

The reasons for New Zealand's economic decline are complex and not all politically correct, but free-market liberalism with the absence of import controls has been a major contributory factor.

Free-market capitalism, like socialism is notorious for allocative inefficiency. Since 1984, unprecedented luxury consumption unmatched by production, particularly in the export sector, has resulted in a huge overseas debt which has reinforced our status as a low-wage, low growth, limited-prospect, agricultural-export nation.

Advanced, high-income, industrial nations such as Norway, Singapore and now Ireland have mixed economies with varying, often high levels of state intervention and reasonable, not extreme, protection for their domestic industries.

There is a vast difference between exposing a domestic economy to the cold winds of international competition as most nations do and Professor Hazledine advocates and simply letting an economy freeze to death in an ideologically inspired attempt to create a fully competitive market economy. No nation in the world has fully competitive economy.

Mr Silva perpetuates the old New Right myth that the only alternative to extreme economic liberalism is socialism. All European social democracies have mixed economies, not free markets.
 

NZ Herald, 24 June 1999

There's an old saying that those who don't learn from history are bound to have to relive it. The trouble with Tim Hazledine's Dialogue article is that he wants us to join him on his nostalgia kick.

Between 1840 and 1984 New Zealand tried every one of his economic panaceas and several more as well. The result, as most of us know, was a country in a state of near-collapse at election time in 1984.

New Zealand began protecting its economy from the rest of the world in earliest times. After 1938, when Savage's Labour Government introduced import and ex change controls on top of tariff protection, insulation became a high art form.

Small industries of the kind Professor Hazledine wants us to recreate flourished for a time. They employed people and turned out goods to substitute for those available on the world market.

The trouble was that the New Zealand market was too small for economic runs, and even under Nafta and CER with Australia it was not possible to keep the end price of the product comparable with a world-market equivalent

Many of us can remember paying 50 per cent above Australian or American prices for electronic goods, whiteware and many simple items of clothing.

Purchasing goods overseas by those lucky enough to travel became a growth industry.

Rather than retool, or re-assess the wisdom of persevering, manufacturers started seeking subsidies and export incentives from the Government to keep doing things in the old way.

New Zealand consumers found them selves paying twice for the articles that were being produced locally.

They paid first by way of extra high prices for the local product, and secondly through their taxes for the subsidies to keep everything ticking along.

The unions wanted as little change as possible, and no one was prepared to adapt to the world market.

Gradually Professor Hazledine's brave new world gave us a cost structure that was out of line with most other countries in the world. New Zealand's inflation rate ran at a higher level than everywhere except the banana republics, and its growth rate subsided to one of the lowest in the developed world.

The cost of persevering with subsidies, controls and other forms of stimulation became excessive. The export prices we received for our primary produce began to slide inexorably alter 1965 and our access to the British market was endangered be cause of the EEC. Our growth rate fell.

New Zealand's most ambitious exercise in planning emerged from the National Development Conference in 1969. It aimed at a growth rate of 4.5 per cent a year. Instead, the average rate in 1970-74 was 2.8 per cent, and had fallen away by the end of the 1970s to nothing.

New Zealand's standard of living was third in the world in 1956. It had slipped to 24th by 1984.

It became clear to all who were pre pared to think carefully about New Zealand's predicament that the sorts of policies which Professor Hazledine now wants us to adopt were surefire losers and had to be changed.

All of which is not to say that New Zealanders have found the economic change forced upon them since 1984 by an excess of Hazledine type policies easy to handle. They haven't

But a world without inflation is one that is much kinder to wage and salary earners, and to the vulnerable on fixed incomes, than the rampant inflation that was part of our lives in the 1970s and 1980s.

Our levels of indebtedness are now much more manageable, and economic growth over the past five years - too sluggish of late for sure has nevertheless been better than was produced in the later stages of the world to which Professor Hazledine wants us to return.

If we could only move on from the politically correct attitudes to social problems that were getting a vicelike grip on the bureaucracy before 1984, and which few politicians have since had the fortitude to question, a newer; better set of social values might emerge, giving us back a world freer of crime.

That is something which all New Zealanders should feel nostalgic about.

The awful lesson which our generation of New Zealanders has had to learn - willingly in some cases, grumpily in others - is that neither the market, nor social or economic engineering can guarantee prosperity, although the market together with a modest level of government intervention is likely to produce a better result.

Like it or not, New Zealand is part of the wider world, and insulation will never work. Efforts to produce some version of Aldous Huxley's Brave New World in the South Seas collapsed in 1984 of its own dead weight.

Those academics and politicians who feel nostalgic about it could probably all fit on the Chatham Islands.

We should give them a chance to recreate a nirvana, but this time without the mainland subsidies that kept those islands prospering for so long.

Those of us who have learned from history can then watch and see whether lightning will strike twice.
 

letter by Russell Armitage to Herald, 6 July 1999
 

Michael Bassett, in his article headlined "No nostalgia for NZ's brave old world," extols the virtues and correctness of market-forces economic policies. He may be right. The vehemence of his advocacy is understandable given that he is a convert to such policies. Converts are always more extreme in their promotion of ideologies.

However; we should not forget, and nor should he, that Dr Bassett, as a long-time member of the Labour Party and a Labour Government, was once a strong believer in quite different policies more concerned with social justice.

Obviously, he now thinks those past philosophies were wrong. As commendable as it is to be able to change one's views, he should allow for the possibility that he could just as easily be wrong in his new belief in the religion of unbridled market forces.

Dr Bassett expresses no nostalgia for the New Zealand of the 1950s and 1960s (I wonder how many who knew those decades would agree?) except for the fact that there was less crime, far less violence and much less social decay than we now have.

It is somewhat surprising that he, as a historian, did not consider that perhaps there might some connection between unfettered market forces and today's state of social degradation and violence we have in 1990s New Zealand.