Remember the days of Fortress New Zealand when tight import licensing and high tariffs allowed domestic producers to sell goods at far above the price of competing foreign goods?

TVs, motor vehicles, whiteware and many other goods were often available only at twice or more the price which producers sold them for in other countries (and were often shoddy into the bargain).

One of the popular arguments for import protection was that it created or saved jobs in the protected firms.

However, such jobs came at the expense of jobs elsewhere in the economy, especially in internationally competing industries that faced higher costs (including wages that were bid up by the protected firms).  Policy makers finally came to understand that there was no free lunch in import protection and barriers were lowered.

Yet pockets of protectionist sentiment still exist.

Yesterday I read this letter in the New Zealand Herald.

At a time when the country needs a boost in morale and employment, why is the Government so reluctant to intervene and stop the building of KiwiRail locomotives and rolling stock going overseas, with the loss of 70 jobs.  Its intervention would preserve and possibly create jobs at both Hillside and Wellington.

And also this one:

Money spent in New Zealand to manufacture our railcars circulated in our economy.  Wages become purchases, savings, taxes and investments.  There is a multiplier effect, both economic and social.

Money spent importing Chinese railcars simply leaves our economy, increasing our debt and increasing our balance of payments deficit.  Importing, rather than building, railcars will have a negative multiplier effect, including increased foreign debt, lack of local venture capital, unemployment and related social costs.  

Even if it were to cost twice as much, though no one has said it would, to build the cars here we would be far better off.  What game is our merchant banker Government up to?  Where is it sense of national identity?  Perhaps they should change their party name to the Nationless Party.     

Here we are seeing the same old protectionist fallacy.  Assuming KiwiRail has got its numbers right, building rolling stock here at higher cost would mean its customers would face higher prices across the board.  They would grow less and create fewer jobs.

Many of the customers would be in the export sector.  The badly needed rebalancing of the economy would be hampered.  And of course KiwiRail would be an even bigger drain on taxpayers.

The lessons of economics have to be learned anew in every generation.

Home thoughts from abroad

Melbourne University professor and member of the 2025 Taskforce Judith Sloan has an excellent article in The Australian today.

Entitled ‘New Zealand seems to have lost track of its reform agenda’, she writes:

New Zealanders are good at lots of things. Rugby, sailing, rowing, netball and film-making all spring to mind. But running a national economy does not appear to be one of their strengths.

On the income gap with Australia, she says:

Some commentators attribute New Zealand’s poor economic performance to its small size and distance from markets. The trouble with this explanation is [that] New Zealand has always been small and distant and so these characteristics cannot explain the growing gap.

She puts a finger on a key problem:

In Australia, there is broad-based acknowledgement of the benefits of the reforms undertaken by the Hawke-Keating and Howard governments. These involved removing import protection, financial sector deregulation, privatisation and other pro-competition measures.

By contrast,

New Zealand suffers from the consequences of an incomplete reform agenda. Public ownership remains prevalent, statutory marketing arrangements are still in place and the labour market has been re-regulated. There is even a single desk (monopoly) for the export of kiwi fruit.

Many New Zealanders think of Australia as a big government country, with governments at federal, state and local levels.

But as Judith points out:

The overall size of the public sector is considerably greater in New Zealand than in Australia. General government outlays as a percentage of GDP are around 45 per cent in New Zealand, some 10 percentage points higher than in Australia. Even if cyclical factors are taken into account, the relative size of the public sector in New Zealand is considerably larger than in Australia and has been growing particularly strongly since 2005, well before the GFC.

And the point here is that:

While there are exceptions, the higher the level of government activity in a country, the lower the rate of economic growth. And there is no example of a country with a public sector of equivalent size to NZ that has grown at the sustained rates needed to eliminate the per capita income gap between the two countries.

The article goes on to talk about New Zealand’s inferior policies such as interest-free student loans, ownership of KiwiRail, the Resource Management Act and the lack of public private partnerships: these “are almost unheard of in New Zealand.” Judith pinpoints the risks for New Zealand:

[T]he spanner in the works relates to the fact that New Zealand and Australia essentially have a common labour market. Trans-Tasman migration is completely unfettered. As a consequence of the income gap between the two countries, the flow of migrants is almost completely one-way, to the point that there are now about half a million New Zealanders living in Australia.

The consequences for New Zealand of this flow of people are both economic and social. Economic in the sense that there is little return to New Zealand for the investment in its citizens’ early years, and social in the sense that children (and grandchildren) live at a distance from their parents (grandparents) and possibly even barrack for the Wallabies!

She notes that the Key government has made modest moves in the right direction:

But if the aim is to close the gap with Australia by 2025 — and the taskforce of which I am a member will be recommending how to achieve this objective — modest policy is not nearly good enough.

Wise counsel from a good friend of this country.


O wad some Pow’r the giftie gie us

To see oursels as others see us!


The full article is here