The collapse of the New Zealand dollar, now worth only a fraction of its former value, says a lot about the sorry state of economic punditry nowadays.
For much of the 1980s and early ’90s, our business and economics experts told us how ruthless laissez-faire, liberalization, privatization and tariff cuts would turn the once-stodgy New Zealand economy into an economic powerhouse.
New Zealand diplomats in Tokyo toured the country lecturing all on the need to emulate smart, little New Zealand. Japan’s Keidanren sent business delegations to study this miracle economy firsthand.
Rightwing and neoconservative editorial writers, from the Wall Street Journal and the London Economist to Nihon Keizai and the Australian Financial Review, used New Zealand’s alleged success to condemn anyone who did not agree with their own Reaganite/Thatcherite economic ideologies.
And today? New Zealand’s annual current account deficit now runs at 8.2 percent of gross national product. Last week, the New Zealand dollar hit an all-time low of 46 yen (it was once worth around 400 yen, as was the Australian dollar). The economy is in the doldrums. Those gung-ho editorial writers and diplomats have lapsed into silence.
New Zealand’s income per head used to be among the world’s top five or six, well ahead of Japan’s. Today it is struggling to keep up with Taiwan and Korea
How do people manage to get it so wrong? Even when the so-called reforms were under way, it should have been obvious that New Zealand was headed for trouble. Imported manufactured and even food goods were driving domestically produced goods out of shops and markets. Privatization had left much of the countryside bereft of needed post-office and other services.
In Auckland’s Victoria open market, thin-faced youths would sit around for hours trying to sell homemade handicrafts and knitted sweaters in competition with cheaper, freely imported products from the Philippines and Afghanistan. The only things moving in the economy were the statistics for increased unemployment, bankruptcies and balance-of-payments deficits.
But none of this worried the laissez-faire dogmatists. Their gurus and textbooks had told them that the labor and other resources pushed out of bankrupted industries and closed post offices would automatically move into new and more efficient areas of the economy.
In other words, those people making and selling knitted sweaters would transfer automatically to sophisticated, high-tech industries that can easily sell around the world.
The final insults to intelligence were the monetarist, high-interest-rate policies that gave artificial short-term protection to the New Zealand dollar. They were seen as crucial to the all-important task of killing inflation. They also helped kill the economy.
Australia fell for the same dogmatic madness. As tariff slashing in the ’70s and ’80s forced key industries into bankruptcy, successive prime ministers boasted how Australia would emerge as the clever or creative country with new-born industries selling sophisticated, high-tech manufacturing products into cheap-labor Asia.
Today, thanks to a currency collapse almost on a par with New Zealand’s, Australia can now try to rely partly on its relatively cheap labor to export what it can into the sophisticated markets of Singapore and Japan.
The craziness did not end there. As the fall in currency value stimulated some recovery by cutting imports and expanding exports, the dogmatists then loudly proclaimed that the recovery was due to the original tariff cutting. A tariff cut of around 20 percent on imported cars in the early ’90s, for example, was supposed to have forced lazy domestic car manufacturers to improve productivity by the same amount.
In fact, what saved the industry was a collapse in the Australian dollar from 200 yen down to around 100 yen (today it is worth a bit over a mere 60 yen), which provided the industry with the equivalent of well over 50 percent net tariff protection and gave car makers the breathing space they badly needed to improve productivity.
Forced currency collapse is one way to restore a nation’s competitiveness. But it is also an inefficient way, since it occurs only after key industries have collapsed, and imports have begun to flood in as a result.
In the meantime, much of the industrial and social base has been destroyed, which makes recovery that much more painful and lackluster. Indeed, the relentless decline of both the New Zealand and Australian currencies suggests both nations could now be on a downward spiral similar to that of Latin America in the past.
Ironically, one of the key arguments of the laissez-faire dogmatists was the need to avoid the harm that protectionism had done to Latin America.
True, currency decline is not the same as economic decline, which can be staved off by occasional outbursts of frenzied consumer spending, as we see in the United States and most other Anglo-Saxon economies today. But these outbursts ultimately lead to currency decline if, and unlike with the U.S., foreigners are not willing to lend indefinitely to fill the resulting trade deficit.
When we say that someone is too dumb to be able to chew gum and walk straight at the same time, we say in effect that the inability to handle two different things simultaneously is a sign of advanced stupidity.
The same is true for many of our Western policy dogmatists. They see only one side of an argument, cling to it, and announce its universal infallibility.
Japan and some other Asian nations owed their economic success to an ability to move flexibly and pragmatically between free trade and protectionism, controls and laissez-faire, pump-priming and spending cuts. Our dogmatists can learn much from them.
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