Post-war New Zealand economic protection

In my last post, I mentioned how a small company came into a joint venture with a multinational, and for many of you, this will make no sense, after all, why would a multinational reject a project, then become interested again? The answer may lie in context, and since I lived through the background, but very few readers of this did, I shall give my impression of the relevant history, and in particular, the economic history.

New Zealand is a small country far away from anywhere else, and together with Australia faced serious problems during the great depression of the 1930s. In New Zealand, the Labour Government of 1936 started a program to relieve the worst of the suffering for “the working man”, but the program was running into financial problems until World War II occurred. Now, instead of serious unemployment, there were problems in finding manpower as large numbers of young men went to Greece, then Africa. At the end of the war, however, a new problem arose: large numbers of returning soldiers, many with no useful skills. The government of the day responded in a number of ways, but the relevant response to this story was that it decided to encourage local industry as a way of promoting economic growth. It slapped on huge tariffs on imported goods, to encourage local manufacturing. It also encouraged multinationals to at least part manufacture in New Zealand through the tariff structure and favored treatment for “good citizen companies”.

This program had mixed results, and was overturned in the late 1980s, but let us look at what happened then. Some businesses took advantage of this, and developed into significant industries that grew as the politicians had hoped. Some, such as car assembly, put moderate local economic activity into basically imported goods, and these were later argued by the liberal right to be “bad” because they distorted the market. Perhaps they did, but they also led to a number of further local businesses that supplied parts to these assemblers. Now, these parts were obviously going to cost more to the consumer than parts made at scale in Japan, say, but they had three advantages that are seldom acknowledged. The first was they provided employment, the second was that they provided a supply of certain sorts of parts, and the third was they reduced the amount of variation in models. This latter point is never acknowledged, because in a small market far from anywhere the cost of carrying obvious replacement parts for a huge variety of models has led to parts actually being more expensive now in real terms, as can be seen if you have an accident.

The real problem with this policy was that many were simply enterprises that were designed to make the owners rich through the enforced subsidies (i.e. payments made through imposed tariffs). So, what went wrong? Put this question to various groups, and most of the answers are trite. Examples include, governments should stay out of business, protection does not work, businesses have to stand on their own two feet, etc. My response to these trite responses include, state reasons why or why not, as platitudes have no analytical value. As for no intervention, consider gardening. If you just sow seeds and leave it alone thereafter, all you will get are weeds. Darwinian evolution involves survival of the adequate to survive in that niche. There is no reason not to modify the niche!

While this is the start of a series of related posts, at this point I would like to know your views on how you think a country should go about getting things done. After all, I am writing a series of futuristic novels (see http://www.ianmiller.co.nz  for more details) and the answer to this question (which I do not have) would be of value to me. So, what do you think?

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