July 16, 2000

Policies can't guarantee success for any country

Posted in Politics ·
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They’re very like us. They speak English, are, by and large, well educated and mainly of Celtic descent. Anyone who has ever worked in London as a student will know that they live like us too. Up to five people in a two-bed flat, working two shifts, carousing heavily and ultimately blowing most of the cash before they get home.

When they get older, they also tend to emigrate in significant numbers, mainly again to London, where no self-respecting company can do without them in the IT, legal and accounting fields. They are also employed behind bars or waiting on tables.

They are typically blessed with a good sense of humour, an obsession with sport and a weakness for gargle. And like us, although many of them get all their breaks in London, they still love to see the English getting trashed.

Back home, there are only around four million souls. The country is split geographically — and, to an extent, religiously — North and South. It is still regarded as mainly agricultural, although that stopped being the reality many years ago, yet it is famous for its agricultural exports.

Like Ireland, it has suffered (and some might argue it still does) from an inferiority complex regarding its much bigger and brasher neighbour. To counteract this, the country has taken a more independent stance on regional relations, often in an outspoken manner. Again like ourselves, official policy is vehemently anti-nuclear and the country has often campaigned strongly against the nuclear policies of others in the region.

Recently, its political system, which had been dominated for years by two big parties, has become much more varied with independents, environmentalists and new alignments holding the balance of power.

These people are Kiwis, the country New Zealand and this week a number of factors caused me to remember my time pulling pints in a bar staffed and frequented by Kiwis in Earls Court .

Charlie Dempsey, a 78-year-old Scot with an Irish name and resident in New Zealand, represented Oceania at the crucial World Cup vote. Single-handedly, he did more for property and land prices in German cities than Gerhard Schroder could ever achieve.

This peculiar event underscores just how interdependent the global economy is now, and how seemingly unrelated events can have profound economic consequences elsewhere.

For example, the Irish builders whose future riches may have been in doubt due to ambiguities over Eircom Park and Stade Bertie, have potentially been thrown a lifeline by Charlie Dempsey’s decision and could, as they did in the late 1980s, be raking it in before too long, over in Germany.

The idea that totally disparate events can be related is called chaos theory and has been interpreted by many as signalling that the old rules of economics no longer apply. It is contended that in the new, interconnected global economy — the ‘global village’ — old barriers such as geography, peripherality and distance do not apply and that countries, no matter how small or distant, can achieve great things with the right policies.

On the policy question, our government is in no doubt that further income tax cutting and national debt reduction is the only way forward.

Although nobody has said it yet, our own government is adopting a very similar model of economic development to the one the New Zealanders put in place in the late 1980s and early 1990s.

Given the similarities between the two countries it may be interesting to see what happened there and ask whether old barriers such as geography matter and, if not, why are there still thousands of young Kiwis in London.

In 1950 New Zealand was the sixth richest country in the world in terms of GDP per head.

By 1990 it had fallen in rank to the late 20s and appeared to be sliding precipitously. In tandem with this relative decline was a marked increase in government expenditure in the 1960s, which exploded post-1973. EU agricultural barriers also played a negative part. By the 1980s, a series of inflationary bouts had left the country in a very wobbly position and the brain drain had become endemic.

In the late 1980s the Kiwis said enough is enough, lurched to the right and voted in a government so radical that it made Maggie Thatcher look like a member of Militant.

Agricultural subsidies were slashed, government departments contracted out to the private sector, an inflation target of 1.5 to 2 per cent written into law and huge reductions in taxes, public services and the dole were instigated. In fact, the country was turned into a giant, ideological economic experiment.

At first things seemed to work quite well. Unemployment fell, growth and exports rose and things began to look up. Inflation remained subdued and interest rates fell. But soon large falls in commodity prices affected exports badly, inflation began to tick upwards and the overzealous central bank reacted by increasing interest rates and pushing the exchange rate up, causing competitiveness problems.

Elsewhere, the private sector did not respond to some government cutbacks and certain public services just were not provided.

London began to swell with Kiwis again, because there were not enough jobs or opportunities for graduates, and the experiment came unstuck.

The huge investment expected as a result of this new pro-business orientation did not occur, despite the well-educated labour force, the language, and proximity to the fast-growing Pacific Basin.

Despite all the talk of the death of distance, many companies believed that New Zealand was simply too far away from any markets. Therefore, no matter what policies they put in place, how efficient production processes were or how low transport and communication costs became, it still made more sense to invest close to the market. If you are a small, open economy dependent on trade, then geography clearly matters and matters more than the ‘global village’ theorists believe.

This leads us back to our own government’s policies. The New Zealand experience tells us that policies cannot guarantee success. So when politicians make inflated claims about the impact of their policies they might be missing the point that the economy is much more complicated than tax rates alone, and simple facts such as geography could be much more important.

Although the world is becoming a global village, as in every village there is a difference between being smack in the middle of the crossroads and out in the new development up the back of the mountain. Maybe in global economics, as in the property market, a crucial factor in determining success is the three Ls: location, location, location.