New Zealand’s unhappy parable for insular nations
The Pacific nation offers a chilling lesson of Britain’s post Brexit future, says RUSSELL JONES
In anticipating how the UK economy will perform post-brexit, there is unfortunately little precedent on which to fall back for guidance.
The only country previously to leave the EU was Greenland, in 1985. But it had a population of only 50,000, and 90% of its exports were fish. Moreover, courtesy of its close ties to Denmark, it continues to enjoy significant EU funding and preferential trade treatment. It is therefore hardly a good comparator for a complex, mature, and seemingly determinedly independent economy like the UK.
That said, although manifestly never an EU member, the post-1973 experience of New Zealand could offer some more useful insights about what lays ahead. In the early 1970s, New Zealand was one of the wealthiest countries in the world. It had long enjoyed sustained growth, full employment, and a comprehensive social security system. Life there was good. When the UK joined what was then the EEC, however, strict quotas were imposed on agricultural imports from New Zealand. By the end of the 1970s, Britain’s share of New Zealand’s exports had slumped from close to 50% to less than 15%.
New Zealand’s policymakers had long recognised that UK accession to the EEC was likely, and that there was therefore a need for the country to seek out other markets, and diversify its exports. But the reality of actually coming to terms with the dramatic diminution of its main overseas market, coupled with the first oil crisis, was another matter. It amounted to a major shock, and the ramifications rapidly spread throughout the economy.
Between 1975 and 1979, the country tumbled down the league table of the richest nations. Output fell sharply, inflation surged into double digits, the external balance went deep into deficit, and external debt rapidly accumulated. Furthermore, despite the recognition that the economy needed to restructure, the dominant policy response was to seek to cushion the effects of the country’s change of circumstances. Successive governments resorted to large-scale deficit financing, maintained generous social benefits and subsidies, and imposed an increasing number of controls, not least on wages and prices, and even interest rates. A number of white elephant public infrastructure projects – the so-called ‘Think Big’ strategy – were also initiated.
By the early 1980s, however, it was clear that this approach was a dead end, and that the situation had become unsustainable. In 1984, a new (Labour) government undertook a major policy volte face. It instigated a root and branch programme of structural reform in an effort to enhance incentives, create new opportunities, and bolster productivity, while also underpinning longer-term macroeconomic stability.
The NZ dollar was floated; the tax system overhauled (indirect taxes were raised, direct taxes lowered); the central bank given operational independence; a formal inflation target introduced (New Zealand was the first country to do this); transparent fiscal policy rules adopted; import tariffs reduced; subsidies eliminated; employment law amended; social policy recalibrated; and the ports, airports, and forests privatised. It was little short of a policy revolution.
The international investment community was at first sceptical, but then increasingly impressed at the speed and breadth of the change, but GDP growth remained miserable, unemployment ratcheted ever higher, inflation proved sticky, and the budget and external deficits remained onerous.
It was only in the 1990s, 20 years on from the initial EEC shock, that the new
approach bore fruit, and the economy adjusted structurally and made serious inroads into new markets. Wool, sheepmeat, and dairy production fell. Wine and kiwi fruit production expanded. Tourism flourished. A racing-yacht industry developed, as did translation services. Growth picked up and remained robust. Prices stabilised. The unemployment rate finally peaked, at more than 11% of the labour force, and started to come down. Public and external indebtedness stabilised and then declined.
Over the past 20 years, helped by the inexorable rise of China, India and the rest of Asia, the economy’s performance has remained impressive, and today New Zealand is frequently cited as a model of a flexible, dynamic, inclusive, and open economy.
The moral of the story is that when confronted by large structural change, and have no doubt Brexit falls into this category, it is vitally important that a country gets its policy-settings right, and that the international environment is sympathetic. Only then can the adjustment process progress relatively smoothly, and the costs be minimised relative to the benefits. Turning inwards, and focussing on the amelioration of the symptoms of change is not a sustainable strategy. Indeed, it makes the ultimate adjustment harder.
The risk for the UK is that in the wake of Brexit, a fragile, minority or coalition government is confronted by a hostile global backdrop, considerable domestic disruption and economic hardship, and the ire of pro-brexit voters who have been sold a pup. Can we really trust such an administration to do the right thing on policy, or will they, like the New Zealand governments of the 1970s turn inwards and instead seek to cushion and protect? My sense is the latter. After all, the history of post-war economic policy in the UK is hardly one of unmitigated success.