
Issue No 70		07 September 2000

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Economics

A Vandalised Economy

By Peter Conway - Economist, NZCTU

Since New Zealand was opened up to the forces of globalisation, it has performed dismally, both economically and socially. NZCTU Economist Peter Conway reports.

'Globalisation' has been characterised in many different ways. The ILO describes globalisation as - firstly, the heightening of competitiveness as a result of the liberalisation of trade and financial regimes alongside the integration of markets. And secondly, rapid change in the area of information technology.

Some describe globalisation merely in a technical sense as the "death of distance" through falling communication and transport costs that facilitate international production networks and enlarged trading areas. These allow firms to exploit international cost differentials through fragmentation and relocation of production and global sourcing of materials.

Certainly New Zealand has high hopes of maintaining the advantage of tranquility that distance provides, while minimising the costs and missed opportunities due to our remoteness.

A major industrialist has commented that:

Since NZ was opened up to the forces of globalisation, we have performed dismally, both economically and socially. (Hugh Fletcher)

He urged a focus on not only the spirit of individual entrepreneurship but also the "power of co-operative endeavour".

Others describe globalisation in terms of the new requirements for rules to ensure positive outcomes. Ken Douglas, in his role as President of the NZCTU said on 1 July 1999 in a speech entitled "Free Trade in the New Millennium: Globalisation with a Human Face" that:

"...while the phenomena of global economic integration is crashing through the national barriers of sovereign states it needs to be recognised that it is essentially man-made. It is demonstrating, sometimes with quite disastrous consequences in human terms, that it requires rules and standards, structure and strategies, for harnessing its positive potential, and mechanisms to impose compliance to address the recognition of standards of behaviour that reflect equity and fairness".

ILO Director-General Juan Somavia says bluntly that "globalisation has yet to pass the test of social legitimacy". Jane Kelsey sees globalisation, not as inevitable in all its forms but subject to significant opposition. She observes that:

"Globalisation as ideology is the grand vision, a meta-narrative that imagines an interdependent and self-regulating global economy where goods, capital and ideas flow freely, irrespective of national borders, social formations, cultures, or politics. Globalisation in practice describes a highly contested process where the competing interests of people, companies, tribes, governments, and other groupings overlap and collide; alliances form; accommodations and more drastic revisions are made; and new contradictions arise."

In the New Zealand context, the process of globalisation is contested, but our recent history over the last 15 years, has seen a relatively weak response to a policy platform of market deregulation. This platform has made New Zealand vulnerable to the negative effects of globalisation, while painfully slow at realising the benefits. We are in danger of being simply a "branch economy".

Major structural problems in the economy

There are very many economic problems in the economy. But these go back a number of years. NZ has a huge current account deficit of 8% of annual GDP and overseas debt of 106% of GDP. There are structural economic problems that will take many years to reverse.

There is a "lost generation" of workers including those laid off in the mass redundancies of the late 1980s, as well as those young unskilled workers of the late 1990s in highly casualised work on individual and sub-standard contracts.

The economy has been efficient at making sure the sun sets on unprofitable companies but ineffective at helping the sun rise for new firms. 1984 per capita income stood at 95% of OECD average - by 1992 it was down to 80.6% and by 1995 it rose to 87%.

The NZCTU believes that we have suffered economically due to the slavish adherence to economic fundamentalism. In the decades before economic rationalism came to dominate policy, the New Zealand economy had followed the ups and downs of the economic cycles experienced by the rest of the world - but with two qualifications. The commodity base of production and the dependence of such key imports as oil meant that New Zealand was more vulnerable than most other countries to external shocks and to commodity price shifts.

This meant that the loss of markets when Britain entered the EEC in 1968, and the oil price shocks of 1974/75 and 1979 caused greater adjustment in New Zealand than in many other countries. On the other hand, the commodity price boom of 1972/73 produced a more spectacular expansion than in many countries.

The process of economic restructuring was predicated on an assumption that short-term pain would produce massive gain. The reality is that the policy programme created neither stable conditions nor better growth rates.

The restructuring period covered two business cycles. The reforms essentially "parked up" the New Zealand economy so we were outside the upward phase of the world business cycle in the late 1980s. There was zero growth for about 6 years from 1986 to 1992. In terms of real gross domestic product per capita, New Zealand has fallen from being ranked fourth in the OECD in 1960 to fifteenth in 1993. GNP per capita from 1984-99 was 0.2% per annum on average compared with 0.6% over the 1969-84 period. In addition, in 1960 labour's share of GDP was around 60% whereas now it is closer to 50%. Real wages in 1997 were lower than in 1974.

If the New Zealand economy had grown at its previous trend rate, or matched Australia over the same period, output would be a third higher than it is now. The previous CTU Economist Peter Harris noted that:

"the amounts of personal and public income associated with this are staggering. At current tax rates the extra income would have generated an extra $11 billion of tax revenue per annum - enough to halve net government debt, or double spending on health and education".

In fact, this scenario was made even worse by the National Government's programme of tax cuts which were not only damaging to state sector capacity, but also significantly weighted towards high incomes. One-third of the income gains from the tax cuts of 1996 and 1998 went to those in the highest twenty per cent income earners.

At the end of this restructuring, New Zealand is still an unstable and vulnerable economy that has retained an unhealthy dependence on particular economic factors rather than a broad-based diversity of strengths.

The dependence we had before the late 1960s was on preferential access to the British market. In the 1970s there was an unhealthy dependence on commodity prices. After the oil shocks it shifted to dependence on government subsidies to producers. Now we have an unhealthy dependence on the expansion of private consumption as the primary growth engine. This was exacerbated by the acceptance of the theory of dead-weight losses through taxation. The resulting tax cuts boosted consumption. The reduced Government capacity constrained investment in infrastructure, skills and industry development. Our vulnerability was apparent during the NZ drought in 1997/8 combined with the Asian crisis although some ability was shown to switch markets.

In the last 6 months there has been the start of a turn around with an emerging growth in exports. But the reliance on private consumption fuelled by high levels of private debt persists. Household savings were positive until 1998. Household debt as a proportion of household annual income has risen dramatically from 48% in 1990 to 92% by 1999. Net worth of NZ households declined by 1.3% over the June quarter (mainly due to falling house prices and rising debt levels). This is the fourth quarterly decline over the last 5 quarters.

Another key problem that has emerged is the relatively low level of Research and Development expenditure. Total Research and Development was 1.1% of GDP in 1997/98 compared with the OECD average of 2.1%. It is indicative of a "cost-cutting" rather than "innovation" perspective as a driver of economic growth.

In addition, our economic sovereignty has been weakened by the privatisation programme. Since 1987, 40 state-owned commercial assets have been sold for a total of $19.1 billion. This included the Bank of New Zealand, Petrocorp, New Zealand Steel, Postbank, Shipping Corporation, Air New Zealand, State Insurance, Tourist Hotel Corporation, Telecom, State Railways, and State forests.

As at August 1999 these assets had an estimated value of $35.7 billion, nearly double the original sale price. Remaining Government commercial assets are worth below $5 billion. The privatisation has been a huge windfall for overseas investors. Just over 79%, or $13.1 billion, of the increase in value has gone to offshore interests. The net gain to domestic investors has been just $1.9 billion. Bryan Gaynor notes that:

"in the final analysis many of our best and biggest companies have been sold to offshore interests, yet New Zealand's total overseas debt has risen from $46 billion in 1989 to $102 billion".

The debt is now at $109.1 billion which is 106% of GDP. Gaynor is also extremely critical of the Government for not using the proceeds from asset sales to either invest in new sunrise industries or for dedicated investment funds to finance future pension or superannuation liabilities.

Telecom is one example of a sale that was significantly underpriced. In June 1990 it was sold for $4.25 billion. Since then Telecom has paid $5.5 billion in dividends and its total value has risen to $16.6 billion. In late 1989, there was 16,265 staff at Telecom. By 1998 this had reduced to 8,136.

In December 1986, many of New Zealand's largest companies were Government owned and the sharemarket was more than 95% owned by New Zealand based companies, managed funds and individuals. However, overseas ownership of the New Zealand stock market rose from 19% in December 1989 to 61% in August 1997. In the last 2 years foreign ownership has declined to 55%, as international investors became impatient with New Zealand's poor economic performance.

It is also significant to note that the New Zealand sharemarket was subject to considerable deregulation in the post-1984 period. Many believe that this is a contributing reason for the more drastic impact in New Zealand (40% greater cut in value) compared with other countries of the 1987 crash and the slower recovery.

Manufacturing was hit very hard by the post-1984 policies. As the late Bryan Philpott noted:

"many reasonably competitive manufacturing industries making exportable and importable products were suddenly exposed to the full rigors of world competition, and have either closed down or emigrated to Australia. Now when we could well do with such industries to help solve our current structural problems they no longer exist"

The post-1984 programme included: the removal of import licensing; removal of exchange regulations and deregulation of finance markets; reduced tariffs; removal of export incentives, and; repeal of Economic Stabilisation Act. The effective rate of assistance for manufacturing fell from around 37% in 1985/86 to around 19% in 1989/90.

Under these circumstances it is no surprise that between 1986 and 1991 manufacturing sector employment fell by 20.2%. Lingering problems in the manufacturing sector have included: the dominance of simply transformed manufactures in the export mix; lack of penetration of northern hemisphere markets, dependence on Australia for sales. The sector has also been disadvantaged by the harsh monetary environment, uneven industry assistance and weak infrastructural supports.

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Issue 70 contents

Interview: New Internationalism
In its battle with Rio Tinto the CFMEU has pioneered global campaigning. National Secretary John Maitland talks to Workers Online about globalisation, a union response and using new technologies to organise .

History: Pickets and Police
S11 protestors would do well to be wary. Fred Paterson, CPA member of the Qld Parliament, was bashed by the Queensland police on St Patrick's Day 1948, when a Labor Government was in power in that state.

Education: The WEF -Why Should We Care?
An event like the World Economic Forum attracts all the spin doctors for every interest, often obscuring real issues. For educators the issues may seem remote but a closer look shows that services like public education could be dramatically affected by the unfolding agenda of global trade liberalisation says Rob Durbridge.

Economics: A Vandalised Economy
Since New Zealand was opened up to the forces of globalisation, it has performed dismally, both economically and socially. NZCTU Economist Peter Conway reports.

Unions: Our Vital Role in Society
Eight months into his new role as ACTU Secretary Greg Combet reflects on the challenges facing Australian unions.

International: Turning Up The Heat
John Sweeney of the AFL-CIO says the union movement can and will reform the global economy, for as Dr Martin Luther King taught us, the moral arc of history is long but it bends towards justice.

Satire: Threat to withhold pocket money derails S11 protest
MELBOURNE, Tuesday: Members of the activist collective S11 announced today that they had decided to cancel their protest at the upcoming World Economic Forum meeting at Crown Casino.

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