To what extent has New Zealand been absorbed into the flows and networks of global financial capitalism since 1984 and the economic reforms of the fourth Labour Government. Was this process inevitable, is it desirable, is it reversible?
(modified from a paper on Globalisation as part of a PG Dip Communications)
The neo-liberal economic reforms of the Fourth Labour Government were not unique in their content, many of which were consistent with earlier and concurrent policies in Britain under Margaret Thatcher and the United States under Ronald Reagan; and also with the Structural Adjustment Programmes imposed by the International Monetary Fund on a number of countries. What made them unique was that they were voluntarily undertaken rather than imposed and the extent and ideological nature of them. The New Zealand economy was certainly facing a number of problems in the early eighties but they had been a long time building and previous governments had not been unaware of them. Many of the measures undertaken especially by Robert Muldoon’s National Government just prior to 1984 had been ineffective, in the case of Think Big reacting too late to previous crises, and there was a deeper social malaise in the country that made the electorate eager for change. However the economic agenda of Roger Douglas et al was hidden from the electorate and had little mandate outside certain members of the business community and
“exposed a small country of 3.8 million people to the full impact of international market forces. The theoretical template on which it was based treated the country’s colonial history and the contemporary reality of its social and political life as irrelevant.”[i]
Nowhere else in the world was it decided to impose the neo-liberal theory of the Washington consensus with such ideological vigour and with such speed. There was a deliberate attempt to impose change at such a fast rate that opponents would be unable to rally effective resistance and to embed policies so that they were irreversible. Roger Douglas himself described the process as a “blitzkrieg”. To a certain extent change was inevitable but from 1984 successive governments have refused to acknowledge the clear reality of the anecdotal evidence that pure neo-liberal policies have failed to deliver what they promised. To what degree they are reversible is uncertain, particularly binding external agreements New Zealand has been signed up to, especially those of the World Trade Organisation that involve sanctions for withdrawl or non compliance. But as Jane Kelsey noted in 1999;
“The claim that ‘there is no alternative’ to the right wing revolution has, by sheer repetition, become accepted truth. But in fact this was not the only option available to the New Zealand government. It was simply the only option that had been conceived and promoted at the time – the option that enjoyed the patronage of the political, bureaucratic and business elites.”[ii]
There are always alternatives. There still are.
You do not have to dig very deeply into neo-liberal or classical economic theory to see how it fails the reality test. Greed and fear are powerful human emotions that rule the market. This means one of neo-liberal economics underpinnings, that markets can be self-regulating, always returning to equilibrium is patently absurd. Far from swinging gently above and below a long term trend line, free markets absent regulation are instead prone to gyrate wildly in fits of boom and bust, euphoria and despair. Even prior to 1984 New Zealanders had shown themselves to be given to bursts of rampant speculative activity, involving gold mining and property in particular. This is a general human weakness rather than being peculiar to New Zealanders but also reflected somewhat the frontier mentality of a new colony and a propensity to borrow heavily from overseas lenders in the absence of deep indigenous capital markets.
So it should have come as no surprise that after the restraint of Muldoon’s wage and price freeze was lifted and financial flows in and out of the country were completely deregulated, that massive speculative bubbles would arise. In New Zealand’s case they flowed first into the share market and commercial property. Bruce Jesson is particularly scathing of the euphoria surrounding the boom and bust of the New Zealandshare market and his quote from Allan Hawkins book The Hawk is a nice indicator of the times.
“But nothing gets the circulation going, the blood pumping, like greed. The public gallery was packed with investors riding high on excitement. They had been desperate to get some shares from the public pool and make some fast money….The yearning for commercial freedom was warm in the air and somehow we all knew a hot time was ahead. The day of the market was coming.”[iii]
As Jesson notes the result was a typical speculative frenzy that has happened many times under capitalism where rising asset prices allowed more borrowing and more speculation. Share prices became inflated far beyond their asset backing.
“One of the things I found astonishing at the time was how the entire country was sucked into a speculative whirlpool. It should have been obvious to anyone who could read a balance sheet that what was occurring was a destructive madness….But generally speaking, New Zealand society moved in unison, with business, politicians and the media all shouting the market up and contributing to the ultimate debacle….Middle class New Zealand revealed itself to be greedy and gullible. The financial press showed itself incompetent.”[iv]
This pattern has since been repeated in the residential property market and to a lesser extent the finance company debacle as small investors took undue risk chasing a few more percent in interest.
The above also shows the absurdity of another of neo-liberalism’s premises that markets are rational and the optimal result for the economy and society is the sum of each individual’s rational self -interest. This stems from a fallacious use of both John Stuart Mill’s utilitarianism theory and the selective use of Adam Smith’s “invisible hand” metaphor in Wealth of Nations (1776). Neither man wrote in the context of unfettered global finance and indeed Smith writing in 1776 was describing his ideal circular economic flow within a national economy, not a global trans-national one. Mill too spent much of his later life trying to soften his initial theories from Principles of Political Economy (1848) by adding extra chapters and recognising that sometimes the state was required to protect the weak from the strong, even in commercial affairs.
It should seem obvious that often the net aggregate of all the self-interested actions of individuals can be detrimental to society as a whole as often as it can be unintentionally beneficial. A primary reason individuals group together in a society and form political institutions is to provide protection against one another under a rule of law, so individuals can’t take actions which may be personally rewarding but are detrimental to too many of their fellow citizens. Brian Easton points out in New Zealand
“The pursuit of self interest became the central ethical principle in public policy of the rogernomes….It is an enormously attractive principle for what it says is ‘do what feels good for you and that’s good for society’. At a stroke most of the great ethical dilemmas are resolved.”[v]
The premise that self-regulation will be effective in commerce or finance is naïve, more so given the fear and greed impulses and the human herding instinct. Ever since capitalism began there have been crazy financial manias that have benefited early participants and devastated the “greater fools” coming in later.
“Men, it has been well said, go mad in crowds and only come to their senses slowly and one by one.” – Charles MacKay, 1856
The New Zealand share market boom and crash 1984-1987 was obvious to participants in hindsight but at the time the speculative fever had been exacerbated by both the cathartic release from the confines of Muldoonism and the massive influx of capital encouraged by the reforms of Roger Douglas. The problem was the neo-liberal advocates didn’t think through, or in many cases didn’t care, what the consequences of their reforms would be. They were so sure of their own infallibility that they were determined to push ahead no matter what, based on flawed and untested models. Jesson is particularly scathing of this.
“A model, however, is of no more use than a metaphor when it comes to debating economic reality. A model merely shows what happens logically when certain assumptions are made. A model may illustrate something about an economy, but in itself can prove nothing….Since 1984, unfortunately, New Zealand policy makers have been people who do not understand the distinction between a model and reality, nor the distinction between a metaphor and a law of economics.”[vi]
Australian economist Steve Keen is perhaps the easiest to read and most cogent critic of the theories and models underlying neo-liberal economics. His book Debunking Economics: The Naked Emperor Dethroned? (2011) is a devastating critique of the faulty logic and indeed the faulty mathematics behind many of its core principles.
Arguably the strongest advocates of extreme individualism and neo-liberal policies have been the Business Roundtable and its recently deceased executive director Roger Kerr. Kerr, like many of the free market ideologues, had come from Treasury. He became one of the most polarising figures in the economic debate. Again Jesson provides a scathing reflection of Kerr and the Roundtable’s input.
“Kerr is a driven man, whose tall and sombre figure stalks the land preaching a free market, anti-state message….Under his direction the Roundtable has assumed the role of an intellectual-political institute and has produced a formidable output of books, studies, speeches and articles. The output may be formidable but the quality isn’t….They are often commissioned from overseas academics who belong to an international New Right circuit – which makes a statement about the intellectual depth of the New Right in New Zealand.”[vii]
Another of the most influential and rabid members of the Business Roundtable was Alan Gibbs. Not only a vocal proponent of privatisation, he even suggested he would have given away New Zealand’s pine forests if that’s what it took to get them out of public hands. Like many privatisation exponents though, Gibbs had a personal interest, becoming one of the first major shareholders of a privatised Telecom.
But the most controversial figures in the Labour and subsequent National governments privatisation projects, where they sold 39 state owned assets for $19 billion, where Fay Richwhite and the various entities controlled by them. There were massive conflicts of interest as they acted as both advisors to the government and partial purchasers in the case of Telecom, Railways and most notoriously the Bank of New Zealand. Unbelievably they were also given exceptionally favourable treatment as shareholders when the BNZ was bailed out twice in quick succession then acted as advisors again in its sale to National Australia Bank!
Where the sharemarket crash and the privatisation programmes overlapped was timing. The former state assets were sold at knock down prices into a depressed local market. Post crash
“New Zealandcompanies were in no position to buy Government assets in the late 1980’s and early 1990’s. Consequently a large number of these assets were bought by offshore interests.”[viii]
Not all went to overseas buyers. Many of New Zealand’s most wealthy people got their big break with the bargain purchases of the late 1980’s and early 90’s including Australasia’s wealthiest man Graeme Hart purchasing the Government Printing Office; or as noted above had substantial minor shareholdings in concert with overseas partners. David Grant notes though that;
“despite the devastation wrought by the stockmarket debacle, it cannot carry all the blame for the recession that gripped New Zealand from late 1987. Before the October crash, booms in the market, as well as in finance and construction industries, masked the downturns in agriculture and manufacturing that began in 1984 as a strong, deregulated kiwi dollar cut exporters incomes. Interest rate deregulation and a tighter monetary policy pushed interest rates higher. The removal of import controls put some local manufacturers out of business, especially those forced to compete with cheap Asian factory labour. State sector reforms created waves of job losses, thus reducing the spending power of New Zealanders. The crash merely aggravated the recession. High flying construction and financial services companies contracted drastically as the recession set in, as did businesses dependent on them, such as merchants and retailers.”[ix]
A recession was going to happen anyway because of the economy’s reaction to the Labour government’s shock treatment. The sharemarket crash exacerbated it and prolonged any recovery. The economic reforms had caused such a massive rise in New Zealand’s sharemarket it had much further to fall than its overseas counterparts.
The neo-liberal policies of both the Fourth Labour Government and the following National Government were, Brian Easton points out, not mainstream.
“In fact a small group within Treasury and the Reserve Bank developed a set of ideas and analysis, which was then imposed on the rest of the government economists, and ultimately the nation.”[x]
Nor were they forced by an outside agency like the IMF or World Bank. Many of the ideas and subsequent policies may have originated overseas
“but their ideas were accepted voluntarily, if uncritically….The importation of foreign ideas without a process of national intermediation could be explained by the anxiety of those involved not to have their ideology and ideas modified by other (or local content)….Without intermediation, the importing of ideas can be very clumsy. One of the justifications for a research effort within a country is to ensure that the whole range of possible theories floating around overseas are sifted and evaluated, and adapted for local use. This did not happen in the case of Rogernomics – those involved had little ongoing research experience – with the result that overseas ideas were taken without understanding their complexity or subtlety.”[xi]
Easton also notes there was little evidence of pressure from local interest groups including business. Roger Douglas was initially an outsider before becoming a devout convert. He scathingly goes on to describe Douglas as
“a strange mixture…with pretensions to be cerebral….His record is one of adopting numerous ideas, not all of which are coherent, and some of which are contradictory….Detail bored and confused Douglas. He saw himself as a grand strategist, not appreciating that detail is a check on coherence. But once set on a direction Douglas showed a drive and tenacity which no other minister in the fourth Labour Government could match plus a willingness to cut procedural corners which left some of his colleagues aghast and others outwitted. In this way he became the barely challenged driving force in the cabinet for economic policy change.”[xii]
It was quite remarkable how a small cabal of bureaucrats and politicians took unadulterated, unmediated theory and applied it to a countries economy with no evidence that it would be successful, only their own conviction that it had to be better than what went before. This displayed a fundamental weakness in New Zealand’s political structure, particularly its unicameral parliament with a dominant executive. Although MMP has forced coalition governments that have moderated the excesses of majority single party governments under FPP, the executive remains dominant.
And this introduces the other major issue involving globalisation and neo-liberal influence on the New Zealand economy. Jane Kelsey writes extensively on the difference between internal and external sovereignty.
Internal sovereignty is the political authority to make laws and force compliance within defined territorial boundaries. Although the executive is the dominant institution, laws have to be passed by the legislature and generally go through the select committee process. The economic reforms from 1984 did this and while they may not have been transparent to many of the electorate, they were passed into law by parliament and are thus legitimate.
External sovereignty is the recognition of the independence of sovereign states in their own matters of domestic politics and their right to defend their territory. Each state may delegate some of its powers to an international body and in theory withdraw that authority if it so chooses. When it comes toNew Zealandand its international treaties, including economic agreements, there are several big problems.
The first is that in this country
“the authority to enter binding international treaties is effectively the prerogative of the Cabinet….Participation in the international community is mediated through the state’s exercise of ‘external sovereignty’, whereby the government, on behalf of New Zealanders, determines and protects New Zealand’s interest abroad.”[xiii]
This is in contrast with ‘internal sovereignty’ which is about “public debate, consultation and parliamentary processes.”[xiv]
Effectively the executive can sign New Zealand up to any treaty or commit the nation to compliance with an external organisations protocols and sanctions without worrying about the democratic processes involved with internal sovereignty. Given the importance of economic treaties and agreements in a global economy this is archaic and undemocratic. The WTO agreement for instance required a multi decade commitment and involves sanctions for withdrawal or failure to abide by its adjudications. All future governments have to abide by it whether they are in accord with it or not or risk economic sanction.
This surely is too big a commitment for the executive alone to make without public or select committee consultation or a vote in the legislature. It was the secrecy behind the Multilateral Agreement on Investment (MAI) negotiations and the lack of transparency that caused huge public outcry not only in New Zealand but around the world in the late 90’s and eventually caused its abandonment. The MAI has since been revived in part as the Trans Pacific Partnership (TPP) with a smaller more manageable number of participants. The secrecy and lack of transparency remains however, although as yet opposition has not reached the pitch of that against the MAI. Both agreements would have extended the investment rights of foreign investors in signatory nations jurisdictions, including the right of foreign companies to sue a government for compensation for domestic policies they felt had unfairly affected them. The current National Government seems as keen as its predecessors to bind New Zealand into binding international agreements complete with sanctions and no pleasant way of exiting.
“Most provide rules for exit, although in practice the cost to reputation, payment of compensation, and the risks of retaliation and international exile make that almost unthinkable.”[xv]
The second related problem is the fear of something happening if a country changes its mind or retreats from the neo-liberal prescription. There is an “assumption that capital will respond in a way that has catastrophic consequences for the country.”[xvi]
This impression is fostered by proponents of neo-liberalism both inside and outside government. However it cannot be tested without risking the very consequences these proponents are talking about and none of the main parties seem inclined to do so. Even if a future government had a mandate for change it is likely in the face of both internal and external threats of sanction or capital flight they would desist. “The deep penetration of international capital into New Zealand’s economy and the economy’s increased exposure to international markets have heightened this ‘fear factor’”.[xvii]
In particular the floating exchange rate and the ease of speculative attacks on such a small currency (the current PM has himself been involved in such speculative attacks against the kiwi when working for Bankers Trust and Merrill Lynch) makes this a very real threat and would cause short term instability. This fear of what international finance markets would do to New Zealand would frustrate any major attempt at re-regulation.
There is little evidence to support the claims of neo-liberal proponents, either here or overseas, that their policies work. Indeed the Global Financial Crisis should be proof that deregulation/self regulation of financial markets is unwise and has made them more unstable than ever. Nor do any of the equilibrium theories have foundation in reality. Given the short term speculative nature of financial capitalism and the ease with which capital can be moved globally in many different forms, markets act often irrationally and mostly according to momentum in extreme directions. Marx knew it 150 years ago and so did Minsky and even Keynes (who was himself a speculator of note).
Yet the neo-liberals ignore all the historic evidence right up to the current day and vow to push on claiming it is only because countries including New Zealand haven’t gone far enough, taken enough “medicine” that the desired results haven’t materialised. Economic nirvana is always just around the corner if only everyone tries harder. Kelsey, quotes Hugh Fletcher from a 1998 Independent article, words that the Key government would do well to note.
“In the 15 years since the Lange government was elected and New Zealand opened up to the forces of globalisation, we have performed dismally, both economically and socially….Prospering in an age of globalisation requires us to determine simply and clearly what is really important to us, and then to focus on insightful and unconventional strategies which will deliver success on these matters. That requires us to exploit not only the spirit and drive of competitive individual entrepreneurship but also the power of co-operative endeavour. Both must be harnessed to make New Zealand residents the ‘owners’ of unique capabilities, so that overseas customers and capital are dependent on us.”[xviii]
Unfortunately the policies of Rogernomics are now firmly embedded in not only the Labour and National parties, but also the bureaucracy, business and indeed many of the public. In addition to those who have benefited financially from a deregulated, speculative environment, particularly with regard to property, there is a whole generation who have grown up after 1984. These policies are what they consider the norm. Try rolling back their choice of consumer goods or making their overseas travel more expensive.
Also waves of immigration especially from Asia have bought many new New Zealanders who have no historical attachment to social democracy or a gentler society. Dog eat dog is their normal experience. Neither these immigrants nor many European New Zealanders care about the implications for Maori and the Treaty of Waitangi. Some may even see binding international agreements as a useful way of absolving New Zealand of its obligations under the Treaty.
“The mythology of globalisation is enormously powerful. It allows governments to abdicate responsibility for the consequences of their own policies, laws and practices; it justifies a refusal to consider alternative policies that might cause less harm to people, communities, and their environment.[xix]
Researching this essay reminded me of how wilfully ignorant many of us can be and how easily humans are seduced by the “animal spirits”, especially greed. What I find most disturbing is the lack of empathy many have now for their fellow citizens. Perhaps it is rose tinted nostalgia but I would agree with Jesson that it “became smart to be amoral” and that the kinder attitudes of a gentler age have become an object of ridicule.[xx]
More than that, while appreciating that there are possible alternatives to the current orthodoxy it is perhaps too late for any alternative to be implemented voluntarily without resorting to the same undemocratic processes that the Fourth Labour Government used and the Blitzkreig tactics. People may have to learn the hard way, be it death by a thousand cuts or a super nova financial meltdown, that the current system and its policies are not sustainable.
[i] Kelsey, Jane. Reclaiming the Future: New Zealand and the Global Economy, Bridget Williams Books, 1999, p8
[ii] Kelsey, Jane. New Zealand “experiment” a colossal failure, PMA Newsletter,9 July 1999
[iii] Allan Hawkins quoted in Jesson, Bruce. Only Their Purpose is Mad, The Dunmore Press, 1999, p115
[iv] Jesson, Bruce. Only Their Purpose is Mad, The Dunmore Press, 1999, p120
[vi] Jesson, Bruce. Only Their Purpose is Mad, The Dunmore Press, 1999, p28
[vii] Jesson, Bruce. Only Their Purpose is Mad, The Dunmore Press, 1999, p14
[viii] Brian Gaynor, 1997 quoted in Jesson, Bruce. Only Their Purpose is Mad, The Dunmore Press, 1999, p125
[ix] Grant, David. Bulls, Bears & Elephants: A history of the New Zealand Stock Exchange, Victoria University Press, 1997, p337
[xiii] Kelsey, Jane. Reclaiming the Future: New Zealand and the Global Economy, Bridget Williams Books, 1999, p47
[xiv] Kelsey, Jane. Reclaiming the Future: New Zealand and the Global Economy, Bridget Williams Books, 1999, p47
[xv] Kelsey, Jane. Reclaiming the Future: New Zealand and the Global Economy, Bridget Williams Books, 1999, p40
[xvi] Kelsey, Jane. Reclaiming the Future: New Zealand and the Global Economy, Bridget Williams Books, 1999, p31
[xvii] Kelsey, Jane. Reclaiming the Future: New Zealand and the Global Economy, Bridget Williams Books, 1999, p30
[xviii]Kelsey, Jane. Reclaiming the Future: New Zealand and the Global Economy, Bridget Williams Books, 1999, p18
[xix] Kelsey, Jane. Reclaiming the Future: New Zealand and the Global Economy, Bridget Williams Books, 1999, p56
[xx] Jesson, Bruce. Only Their Purpose is Mad, The Dunmore Press, 1999, p126
Akoorie, Michele. The historical role of foreign investment in the New Zealand economy, Chapter 2, Foreign Investment: The New Zealand Experience, edited by Peter Enderwick, The Dunmore Press, 1997
Campbell, Gordon. Bruce Jesson Memorial Lecture 2006
Easton, Brian. The Relevance of Rogernomics, www.eastonbh.ac.nz
Easton, Brian. Nation Building and the Textured Society, Bruce Jesson Memorial Lecture 2001
Enderwick, Peter. The Role of Foreign Investment in the Contemporary World Economy, Chapter 11, Foreign Investment: The New Zealand Experience, edited by Peter Enderwick, The Dunmore Press, 1997
Gould, Bryan. Rescuing the New Zealand Economy: Where we went wrong and how we can fix it, Craig Potton Publishing, 2008
Grant, David. Bulls, Bears & Elephants: A history of the New Zealand Stock Exchange, Victoria University Press, 1997
Haworth, Nigel. “And its Black Magic for New Zealand”: National Identity, National Sovereignty and Internationalisation, Chapter 10, Foreign Investment: The New Zealand Experience, edited by Peter Enderwick, The Dunmore Press, 1997
Jesson, Bruce. Only Their Purpose is Mad, The Dunmore Press, 1999
Kelsey, Jane. At the Crossroads: Three Essays, Bridget Williams Books, 2002
Kelsey, Jane. Reclaiming the Future: New Zealand and the Global Economy, Bridget Williams Books, 1999
Kelsey, Jane.New Zealand“experiment” a colossal failure, PMA Newsletter,9 July 1999
Le Heron, Richard and Pawson, Eric (Edited by) Changing Places: New Zealand in the Nineties, Longman Paul, 1996
New ZealandBusiness Roundtable, Wake Up New Zealand, 1999
Rosenberg, Wolfgang. New Zealand can be Different and Better: Why deregulation does not work, New Zealand Monthly Review, 1993
Scollay, Robert, St John, Susan and Horsman, John. Macroeconomics: Principles and New Zealand Policy Issues, Longman Paul, 1993
Scott-Kennel, Joanna. Foreign Investment and Privatisation in New Zealand, Chapter 4, Foreign Investment: The New Zealand Experience, edited by Peter Enderwick, The Dunmore Press, 1997
Trotter, Chris. No Left Turn: The distortion of New Zealand’s history by greed, bigotry and right wing politics, Random House NZ, 2007
Trotter, Chris. What’s Left, Bruce Jesson Memorial Lecture 2002