New Zealand Economics/Monetarism-Neoliberalism

Introduction

“Nobody spends somebody else's money as carefully as he spends his own. Nobody uses somebody else's resources as carefully as he uses his own. So if you want efficiency and effectiveness, if you want knowledge to be properly utilized, you have to do it through the means of private property.” - Milton Friedman

Monetarism and neoliberalism confidently strut side-by-side through the schools of modern economic thought: the prevailing economic paradigm, the ‘way of the future’ – or so Treasury would have you believe. The central assumption of monetarism/neoliberalism is that the smoothly functioning and self-adjusting market economy, unhindered by government, will spontaneously achieve equilibrium with full employment of resources. With Treasury’s faith in the market’s invisible hand, the utterly rational actions of homo economicus, and a tight grasp of the reins of the money supply, they proposed to make New Zealand (NZ) a lean, mean, wealth-generating machine.

Monetarist/Neoliberal Interpretation: 1945-1973

Treasury was blunt in its 1984 and 1987 briefing papers to the Fourth Labour Government: “The New Zealand economy continues to display one of the most lacklustre performances among countries in the developed world”. Whilst it acknowledges the impact of the decline in terms of trade and the global downturn in economic performance on NZ’s economic growth (“When world prices move against us, there is an unavoidable loss of income”), Treasury clearly lays the blame at the feet of the Muldoon administration (1975 – 1984). The National Government’s management of the economy, its Keynesian-style policies, and its “unwillingness to adjust to changing external conditions” explained rising unemployment, NZ’s comparative economic deterioration, and soaring inflation.

The monetarist argument for the end of NZ’s economic “golden weather” was simple and clear: economies are assumed to tend to equilibrium and maximise resource utilisation, therefore the state must have interfered in the market’s distribution of resources. Expansionary monetary and fiscal policy, anathema to monetarists, had generated excessive inflationary pressures, undermining growth, distorting market signals, and reducing the competitiveness of NZ producers by raising (relative to trading partners) their cost structures. These problems were compounded by the pegged nominal exchange rate’s inability to adjust to ease the mounting current account deficit. The National government’s interventionism was ad hoc and inconsistent, rife with excessive regulation, and structural disincentives to excel. Furthermore, misallocation of resources within an overprotected economy, and an inflexible and rigid labour market, increased economic susceptibility to both the exogenous supply shocks of the 1973 and 1979 oil crises, and the collapse of prices for agricultural exports.

Thus, Treasury’s prescription was for the Fourth Labour Government to reject Keynesianism, and to adopt a strong monetarist economic policy framework, with minimal government intervention and emancipation of the market. Integral to the underpinning neoclassical foundation of Treasury’s counsel was the reduction and maintenance of inflation at a diminutive level (initially legislated at 0-2%, currently 1-3%) in order to enable price flexibility, unambiguous market signals, and ultimately, spontaneous economic growth, balance of payments equilibrium and maximised unemployment. This was strongly supported by the Reserve Bank, who argued that “the control of inflation was among the most important changes required for faster economic growth”. Other remedies for the economy included reform of the ‘bloated’ public sector, regressive taxation reform to attract investment and provide incentives, and a reduction in the scope of welfare to a limited ‘safety net’ system.

Monetarist/Neoliberal Interpretation: 1974-2005

Monetarist proponents have proclaimed the increased growth rate and severely reduced inflation since the ‘revolution’ of the mid-1980s to early-1990s to be irrefutable proof and vindication of the neoliberal reform. Treasury’s response, under the apt title, ‘A Sound Economic Position’, states that the contrast between the decline of the pre-1984 epoch and the “current dynamism is largely attributable to the shift in the approach to economic management” and “good policy foundations” .

Whilst the policy regime has attracted praise – notably Evans, Grimes, and Wilkinson – it has also stimulated criticism regarding the costs and outcomes of these policies. Monetarists claim in defence that the reform measures were impeded and ill-sequenced by events outside of their control. Barriers to early labour market reform, to reductions in welfare expenditure, and to the correct sequencing of reforms led to a higher-than-desired ‘sacrifice ratio’ . Furthermore, it has been claimed that not all benefits of the reforms have become manifest, and “the ultimate benefits to output can take a long time to achieve” .

A final defence cited by monetarist apologists is that the reforms are incomplete. Lange’s announcement of “a breather and a cup of tea" obstructed and delayed the necessary reforms : “further reform[s] in…education, health and welfare, are likely to be necessary if New Zealand is to achieve its potential” , and additional labour market liberalisation and tax reductions are essential to greater economic performance .

Notes

1. ^ New Zealand Treasury, Economic Management (Wellington: Government Print, 1984), 103.
2. ^ New Zealand Treasury, Economic Management (Wellington: Government Print, 1984), 108.
3. ^ New Zealand Treasury, Economic Management (Wellington: Government Print, 1984), 104.
4. ^ Brian S. Roper, Prosperity For All?: Economic, Social and Political Change in New Zealand Since 1935 (Victoria: Thomson, 2005), 10.
5. ^ New Zealand Treasury, Economic Management (Wellington: Government Print, 1984), 167.
6. ^ A. Bollard and D.G. Mayes, "Lessons for Europe from New Zealand's Liberalisation Experience," in National Institute Economic Review, 83.