New Zealand’s un­happy para­ble for insular na­tions

The Pa­cific na­tion of­fers a chill­ing les­son of Bri­tain’s post Brexit fu­ture, says RUS­SELL JONES

The New European - - Agenda - Rus­sell Jones is a part­ner in Llewellyn Con­sult­ing, an eco­nomics ad­vi­sory firm based in the City of Lon­don

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.

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.