Post-war New Zealand economic protection (2)

Whatever your thoughts on the policy in the preceding post, it worked, at least for a while. New Zealand was selling agricultural products to a world still recovering from the war, and the Korean War created a wool boom. Unemployment was measured in the hundreds, and most of those were desperately trying to avoid work. Nevertheless, there was an underlying problem. As a senior schoolboy in the late 1950s, I recall being asked to write an essay on helping undeveloped countries. Mine was about helping ourselves, because I pointed out that our economy was dependent on a very few products and one, wool, was already in decline. Needless to say, this was not popular with the teacher, but the point is, we still get economists saying we have to diversify our economy out of basic commodities. So, a problem still being discussed by economists now was seen by a schoolboy 50 years ago.

What it says, of course, is that in economics, at least, it is relatively easy to see a problem. The difficult part is working out what to do about it. Part of that problem lies in an inherent lack of flexibility, or, if you prefer, an intense economic inertia. A sheep farmer cannot simply give up sheep and start manufacturing microprocessors. Even the youth cannot get jobs with microprocessor manufacturers if there are not any there. The unemployed have to take up existing jobs, which means somebody else has had to make the necessary investment in capital and educational/skills, and find the markets for whatever they have invested in. Thus politicians can talk all they wish, but it is extremely difficult to turn a small economy around, and even harder to turn a big one around. Right now we see everybody saying countries like Greece, Spain, etc, have to put their houses in order. Notably missing from such exhortations is a clue as to how to go about doing it.

It was not long that New Zealand found a new problem. Like Australia, the New Zealand economy was closely tied to Britain’s, but then Britain decided to join the Common Market. Now what? New Zealand did win special concessions, and far more than Australia, but Australia had an answer. An immense deposit of iron ore was found in the Pilbara region, so Australia could prosper by digging bits of itself up and selling them. New Zealand did not have that opportunity.

What it did was to try to protect what it had, through more controls and subsidies, which required more taxes. Marginal tax rates hit 66% at the lower middle class, sales/excise tax on cars was about 120%. That did not work. The economy was choked, the dollar got progressively devalued, huge government debts built up and perhaps the main growth industry was from tax accountants, working on loopholes and tax structures. As if this were not enough, in the early 1970s, the first oil crisis struck. This was more a political crisis than a supply crisis, and consequently the major economies of the world simply inflated their way out of it. New Zealand followed suit, with perhaps more enthusiasm, and this had the effect of making people who could get large amounts of borrowed money very rich, usually by investing in property. The politicians could see that something had to be done, but what? The government decided (correctly) that the country needed new industries, but the question then was, how to get them? Its answer was eventually, “Big Fixes”, but it also made money available to fund new businesses. If you do not know whether that was good or bad, try guessing before next post. I would also be interested in your comments on what you think the government of a small country could do.

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