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Editorial [Paddy McGuinness], “New Zealand — an economy of fear,” The Australian Financial Review, August 16, 1983, p. 12.

The relationship between Australia and New Zealand is one of long standing and will become closer still over the next few years as a result of the Closer Economic Relations agreement which came into force on January 1. (The Financial Review’s annual survey of New Zealand is published in this issue.)

It is a relationship, the closeness of which so far and the even greater closeness which is to come, require that both countries should be able to freely comment on each other’s policies. Moreover, it is important that comment on this side of the Tasman should not be muted by the very closeness of the relationship between the two countries.

So it is important that several things be said quite clearly on the state of the New Zealand economy at the present time, things which are known to economists, businessmen and politicians in New Zealand but which are often not bluntly said there.

The first is that the management of the New Zealand economy is based on bullying and fear. It is an economy which is laden down with restrictions, licensing, quotas, permits, subsidies, tariffs, instructions and threats by government. A recent example was the announcement by the New Zealand Prime Minister and Minister for Finance, Mr Muldoon, on the eve of the Budget just over two weeks ago, that interest rates would have to fall by about four percentage points.

This was in the context of a highly successful prices and wages freeze — successful because it simply reinforced the direction of downward movement of wage and price inflation in recession — but also of a Budget deficit and a balance of payments deficit of frightening proportions. The budget deficit New Zealand has to finance this year is about 10 per cent of the Gross Domestic Product. (The precise figure is arguable because of peculiarities of definition.)

All economists in New Zealand, official and unofficial, believe that such a deficit cannot be financed without either strong upward pressure on interest rates or massively inflationary expansion of the money supply. The official economists are muzzled; the unofficial are not listened to. Yet it is a major contrast with Australia that none of the economists believe that deficits do not matter — they are too near the coal face of economic reality.

The ukase on interest rates produced total confusion and consternation in the financial sector. No details as to implementation were given, no guidelines, none but the threat of punishment unless the Government’s wishes, unclear and unspecific as they were, were complied with. Threats of retaliatory action were however clearly made and just as clearly believed.

Amazingly, the New Zealand financial sector and the business community generally refrained from public protest. There was plenty of muttering outside the Prime Minister’s office, but inside it there was a good deal of forelock pulling. The situation is of course unsustainable. As the pressures of credit rationing or monetary expansion build up, more controls will be needed to prevent an explosion. The only possible result will be a seizing up of the New Zealand economy.

And it is not as if the New Zealand is, in any case, without serious problems. As well as a mounting internal budget problem, New Zealand has an external debt problem which has already led to a downgrading of its credit rating in international capital markets. It is wastefully investing in grandiose projects with uncertain yields which will not pay off on the best scenario for some years. It is maintaining its current living standards by reckless borrowing abroad.

Again, serious analysts do not disagree on New Zealand’s fundamental external problem. It stems from the fact that New Zealand’s dollar is very substantially over-valued, such that a devaluation of 25 to 30 per cent would be required to correct the relative cost disadvantage of the New Zealand economy. A devaluation alone would not be a sufficient cure. It would need to be accompanied by a dismantling of the maze of costly distortions and subsidies which are inflicting so much harm on the New Zealand economy.

This is all now a very pressing problem for Australia. For the implementation of the CER will require not just the removal of tariffs and ultimately of all import restrictions operating between the two economies but the harmonisation of the various aspects of economic policy which affect trade.

These include the restrictions on investment by New Zealand companies in Australia which at present supply as well as the irrational and arbitrary policy-making of the New Zealand Government, and, to a lesser extent, of the Australian Government.

One central difference between the two countries is that of different political systems. The likenesses between the two countries, and the common origins in the Westminster model of Parliament as well as the Common Law, obscure the fact that in economic matters Australia tends to operate under a checks and balances system, in which the rule of law is predominant.

By contrast New Zealand has no written constitution, no courts with standing independent of the wishes of Parliament, no limits on the legislative authority of Parliament and not even a second chamber of the Parliament with powers of review and delay. The result is that a government with a majority of one and with virtually unlimited powers to act by regulation, that is by decree, can establish a reign of terror in the economic sphere.

Far from being conducive to prosperity and progress this system of economic management has produced for New Zealand declining living standards, a stagnant economy, a greatly overvalued currency and a threat to any fruitful development of the CER agreement with Australia.

Unless there is a substantial change of policy in the not too distant future, New Zealand can expect to encounter not just more severe problems but a crisis in its domestic and external economic affairs. Not surprisingly, in an economy of fear, it is possible to misrepresent the situation. So much the worse for New Zealand.

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