Does New Zealand economics have a useful past? The example of trade policy and economic development

ABSTRACT

We examine the history of economic thought on trade policy in New Zealand from the 1920s to the early 1980s. The focus is upon the different doctrinal perspectives taken by academic economists in New Zealand. Throughout the period under review policymakers supported an inward-looking trade and development regime buttressed by extensive interventionist trade policy. Appeals to the employment argument for industrialization through import substitution lent their policies a veneer of economic respectability. Most economists were not persuaded; they argued against quantitative import controls, discriminatory tariffs and cumbersome export incentive schemes and offered, in vain, constructive alternatives that relied on price signals rather than administrative rules. One of our main findings is that most of the early work exposited here anticipated the rent seeking explanation for the configuration of trade policy.

KEYWORDS:

• Trade policy
• industrial policy
• economic thought
• rent seeking

JEL Codes:

• B20
• F13
• N77

Acknowledgment

We are grateful to two referees for their constructive comments on an earlier version.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Hight may be regarded at the founder of academic economics and the teaching of academic economics in New Zealand (Condliffe, 1950). At the very least he founded the ‘Canterbury tradition’ in New Zealand economics from the early 1900s that was quite distinctive up to about 1940 (Endres, 1991).

2. The inverted question, ‘Does New Zealand's past have a useful economics?’ might also be posed on this anniversary, as it has been for the general case (McCloskey, 1976). However, given the present paucity of specialist economic historians on New Zealand economics faculties, any answer might be delayed for some considerable time.

3. On this occasion we will give special mention to selected contributions of NZ economists in the Economic Record from 1925 and NZEP from 1966. The contributions of some academic economists who worked in government-appointed special commissions and committees, and quasi-government think tanks such as the Monetary and Economic Council, the Economic Monitoring Group and the New Zealand Planning Council will also be relevant. However, the role of economists and their ideas in government, even though this question is of great importance, will not be considered here. Though see McKinnon (2003).

4. For instance, there is a rich history of thought on economic crises and cycles in New Zealand; macrostabilization policy; money and monetary policy; demographic economics and economics of immigration; agricultural economics and policy; econometrics and econometric modelling; the economics of social policy; Maori economic development, and so forth.

5. The full account of trade policy changes is available in Wooding (1987) and Lattimore and Wooding (1996).

6. We have no space to give biographical details of the dramatis personae mentioned in this paper. For full information on the academic economists mentioned henceforth, see King (2007) and Blyth (2008).

7. According to Bertram (1988, p. 1), the NZ tariff structure was the ‘least protectionist of the British Dominions’. This judgment was earlier made by Condliffe (1939) but without empirical support. See too Blyth (1974, p. 19) and Jackson (1988).

8. His words: ‘industrial poor relief of the most uneconomic kind’ (p. 310).

9. Hight was no exception. See Hight's (1928, pp. 28–9) important paper for the League of Nations on the NZ economy.

10. On the NZEC and the fine details of its deliberations and recommendations see Endres (1990a, pp. 67–71; 1990b, pp. 4–5), Blyth (2008, pp. 83–86).

11. Perhaps that was deliberate rather than unintended and therefore an accurate reading of the likely slow responsiveness of domestic secondary industry to possibilities for import substitution? Hawke (1987, pp. 120–21) maintains that the expenditure switching response was negligible in the following several years post-devaluation.

12. For more details on Fisher's critique of orthodox policy proposals in the 1930s see Endres (1988). It should be added here that, well in advance of his time, in his response to the REC policy prescriptions Fisher proposed a floating exchange rate regime for NZ.

13. Thus, Rodwell (1932, p. 15) concluded that a ‘largely self-contained economic Empire stands in the path of [long-term] development’.

14. Neale (1938, pp. 86–87) discerned the more likely reason for (ii): i.e. resistance ‘by pressure groups within the Dominion’. Moreover Neale (1934, p. 258) opined that NZ ‘was exceptionally badly placed for tariff bargaining’ and that the high rates on non-Empire countries would more likely ‘foster reprisals than an atmosphere conducive to negotiation’.

15. Smaller scale experiments with ‘guaranteed’ prices occurred in the mid-1920s in the fruit industry but they were more like cooperative, price-smoothing schemes using growers’ pooled resources without the large government subsidy component formulated for the dairy industry in the late 1930s.

16. See also Belshaw (1939a) in which such schemes are charitably interpreted as macroeconomic instruments used in the cause of stabilizing a component of national income, though in Belshaw's view this kind of stabilisation is better achieved in conjunction with the exchange rate instrument. See too Blyth (2004, pp. 89–91) where Belshaw in 1939 is seen as having revised his earlier, very negative view of price supports.

17. Belshaw's point is confirmed in detail by Rosenberg (1959) who offers a case study of the period 1936-41 and explains the negotiations, and the tradeoffs made, between the level of price supports offered to dairy farmers to afford them ‘reasonable comfort’ and periodic agreements between the government and Federation of Labour over national wage adjustments to afford wage earners a living wage.

18. Fisher made these points on many occasions in the 1930s, culminating in his well-received book, Fisher (1935).

19. See Belshaw (1939b, pp. 174, 178) and for detailed textual evidence see Endres (1986, pp. 19–21).

20. Indeed Holt (1939, p. 67) reviewed the evidence for the exchange crisis in 1938 and found that it was not the result of a fall in the terms of trade or major reductions in external prices. The expansionary public works programme coupled with the suppression of interest rates by the politically controlled Reserve Bank caused a surge in the propensity to import. See too, in a similar vein Belshaw (1939b) and Murphy (1939a, p. 638).

21. Simkin was strongly influenced by Karl Popper while they were both at Canterbury. Specifically, Simkin (1945) reflected Simkin's early access to Popper's manuscript of The Open Society and its Enemies, published later that year. Popper (1945, p. x) acknowledges Simkin's contribution to that work.

22. Export pessimism was widespread in developing countries at the time. It was based on the premise ‘that both the global income and price elasticities of demand for primary commodities were low. Consequently, it was anticipated that export earnings would not grow very rapidly, if at all’ (Krueger 1997, p. 3). There is some suggestion that by 1960 the New Zealand Treasury (1960, p. 47) had begun to take up the case against export pessimism previously prosecuted by Simkin, Belshaw and Rodwell.

23. This advice was similar to his recommendations following the initial implementation of import licensing (Copland, 1939, p.30). Copland, an expatriate NZ academic economist, was on a visit to NZ in 1960 and made the following remarks worth quoting here:

outside the field of sports…our scale of values gives competition a low priority. In the economic field in New Zealand the spirit of competition is weak…New Zealand is at the stage where its manufacturing must meet the comparison of the world…Unless we have price competition with the resultant search for lowering costs we end up with lowering living standards. (Copland, 1960, pp. 9–10)

24. The preeminent position given to full employment may explain the framing of trade policy in the 1950s but the official time frame for achieving that goal was opaque (Endres, 1984).

25. This set of schemes did not include direct production subsidies to farmers of various kinds, culminating in the generous supplementary minimum price scheme for meat production in the late 1970s. On these subsidies see Lattimore and Wooding (1996, p. 326).

26. Holmes knew perfectly well that the obligations to GATT were not well monitored.

27. To be sure, Holmes and other academic economists wanted to suggest using the exchange rate more often but as he recalled later, ‘these were the days when it was irresponsible to advocate that publicly’ (Holmes, 1994, p. 9; see too Holmes, 1959b). We imagine that his comment might also have applied to advocating use of the price mechanism in general.

28. Condliffe, on an extended visit to NZ in 1968–1969 on leave from the University of California Berkeley, produced The Economic Outlook for New Zealand (1969) in which he concluded that New Zealand economic policy overall was based on ‘government of producers, by producers, for producers’ (p. 116). In terms of trade policy he argued that the import substitution approach had failed and was adamant that ‘the result of import restriction is a net cost to the consumer and a net diminution of available foreign exchange’ (p. 120)

29. For a critical response to Rosenberg's approach by his Canterbury colleagues see Hampton, Hudson, Miller, & Tay (1964).

30. Blyth speculated that it would take a 30%–40% average effective tariff on imports to make a major difference to the long-term trend rates of industrialisation and employment in manufacturing (p. 23).

31. As Holmes (1994, p. 16) commented much later with some satisfaction: ‘a significant number of New Zealand manufacturers discovered that they could compete quite effectively with Australians’. He noted that the 4:1 ratio in the balance of trade with Australia in the early 1960s had reached an even balance by the 1990s.

32. The old Bretton Woods-type intellectual consensus on the exchange rate and capital account did not seem to break down until the early 1980s. Wooding's (1982) review article of Dean, Nicholl, & Walsh (1981) illustrates that an intellectual shift had occurred in external economic policy at the RBNZ toward views earlier anticipated by the publications of academics e.g. McCann (and Fisher in the 1930s).

33. Here we refer to basic texts in international finance, though as Blyth (2004, p. 59) reports, in Auckland at least, a separate course in international finance did not appear on the list of subjects taught until 1985.

34. Preston (1978, p. 112) surmised that if an anthropologist from another age visited NZ in 1978 they would observe ‘vigorous participation of organised lobbies in the debate on policy formulation and in helping to shape the number of government interventionist activities in fields as diverse as industrial protection, wages policy, and farm income stabilization’.

35. Holloway (1964, p. 195), Labour Minister of Industries and Commerce Minister in the late 1950s writing on the subject of government assistance to manufacturing, pointed to the overriding consideration of the ‘politically possible’ and the ‘immediate electoral climate’ as decisive factors; Shand (1962, p. 435) National Minister of Labour in the 1960s judged that the criteria economists provide for policy ‘are woefully inadequate as a guide to action in the field of economic management’.

36. It may be tempting to conclude from the foregoing that the end of the period under review marked the triumph of economic analysis over sectional interests. We warn against drawing that conclusion. In the subsequent period of economic liberalization it is arguable that what actually occurred was not so much a major change in the influence of economic analysis on policy formulation as a change in the beneficiaries of rent seeking activities. An examination of the evidence on this point might yield some interesting insights into the recent history of economic policy in NZ.