Free Trade and Blind Faith
What’s not to like about free trade? Trade is obviously a good thing, and free trade must surely be better than the alternative? So convinced are New Zealanders of its merits that the “free trade” label need only be attached to this week’s talks about a Trans Pacific Partnership to persuade us that a successful conclusion would be an unalloyed blessing. Yet the actual basis for this touching faith has almost never been debated.
Ever since British membership of what was then the Common Market ended well over a century of managed trade, and Rogernomic fervour persuaded us that the “free” market would always produce the best results, it has been an article of faith in this country that free trade is the only way to go. Yet other developing countries (and who is to say we are not one?) have almost always seen the advantages of protecting nascent and vulnerable industries against the full force of competition from more powerful economies.
We, however, have approached the global marketplace as a child would a candy store. With astonishing naivety, we have optimistically and often unilaterally removed tariff and other trade barriers, confident that our trading partners would also one day see the light, and that our tiny and vulnerable economy could in any case prosper in direct competition with some of the largest and most efficient economies in the world.
Each new step towards free trade nirvana is celebrated and justified by pointing to the increased exports that increased free trade will bring. No matter that our trading partners only buy our goods because they want them – and in a world short of food that is likely to become even truer, as witness the proprietorial interest the Chinese are showing in our dairy industry.
No matter that the claimed increase in exports seems to owe little to the presence or absence of a free trade agreement. The sharp rise in our exports to China, for example, had already happened before our free trade agreement had time to take effect this year.And no matter that, in virtually every case, the increase in exports has been more than offset by a sharp increase in imports, with consequent damage and in some cases actual destruction of domestic industries. We are so dazzled by the prospects of export growth that we are ready to take any risk and make any concession.
If free trade were really as beneficial as is claimed, why have we endured our perennial trade imbalance over such a long period? And do we understand that free trade arrangements are not just about trade, but are really designed to produce an integration of economies?
A free trade arrangement operates very much like a single economy. If the whole of the combined market can be accessed without any restriction from any point within it, why would anyone manufacture anywhere else but the most populous part of the market and the most efficient or low-cost manufacturing centre?
That invariably produces a concentration of skills, resources and capital in the most efficient parts of the single market, and that does not usually include small marginal economies like New Zealand – just ask the Greeks or Irish or Portuguese.
And it is not just tariffs that have to be aligned. Anything that could be argued to upset the “level playing field” will not be allowed. As others have discovered before us, a free trade agreement with the United States, for example, would mean that our cooperative marketing of dairy products or kiwifruit through a “single desk” like Fonterra or Zespri would be targeted as an unacceptable distortion of trade.
A monopsonistic purchaser like Pharmac, which has saved us millions of dollars, would be attacked as inimical to the “free” market that the major pharmaceutical companies would want to exploit. And across the board, any attempt to give priority to local suppliers would be outlawed.
If the Trans Pacific Partnership follows, as American “free traders” have assured us it will, the model provided by the North American Free Trade Agreement, there are yet more far-reaching consequences in store. A NAFTA-style arrangement would give individual companies the power to enforce rights against our government in specially constituted international tribunals, even if those rights were not available to our own firms.
This is an international agreement of an unusual type – one where individual corporations have the same rights as governments. Those rights could include exemptions from domestic obligations in fields like health and safety, or concessions on tax treatment, or preferential treatment when it comes to awarding contracts, or relief from attempts to protect the local ownership of assets. Even if our own government – perhaps a government of the future – wished to change domestic law in these respects, foreign corporations could still enforce their rights under the “free trade” agreement.
There is no reason why a sensible trading relationship should not benefit both parties. There are many situations where free trade is appropriate. But we would be foolish to go on, as we have done for 25 years, taking on trust that the “free trade “ label is the only safeguard we need.
Bryan Gould
5 December 2010
This article was published in the NZ Herald on 7 December.
Bridging the Teaching Divide
The recently published assessment that New Zealand has the best education system in the world is a valuable antidote to our predilection for beating ourselves up about our supposed failings in this regard. It should not, however, reduce our vigilance in identifying issues that will continue to need attention.One such issue is the perennial complaint of tertiary institutions that school-leavers are inadequately prepared to study effectively at tertiary level. This complaint has been around for as long as there has been university education. To some extent, it is simply a reflection of the belief of every older generation that standards have slipped. Supposedly sliding standards of grammar, spelling, and general literacy have all been targets.But the issue may not be as simple as that. One example of an area where the complaints may have particular substance is in maths and science, and particularly physics. Universities are constantly urged to produce increasing numbers of graduates in these areas, but – all too often – school-leavers themselves are deterred from studying these subjects because their secondary education has left them short of the level required for university study.Whatever the truth of that, there is growing concern about a new and different problem, involving not so much what is taught as how it is taught. Secondary education has, over recent years, undergone major changes. The introduction of the NCEA, in particular, has signalled and required a substantial shift in how students are taught and how they learn.There is a growing acceptance across the education world that these changes have been – on the whole – beneficial. Students themselves have responded well. Most students have flourished in a regime which encourages them to work and to stay involved over a whole period of study, rather than one that simply requires cramming when it comes to exam time. Our top world ranking suggests persuasively that we are reaping the rewards of these changes.These worthwhile changes may nevertheless have created a new disjunction between the methods and skills needed for studying and learning at the secondary level, and those required at tertiary level. It may be that tertiary education has not yet fully woken up to the new and different skill sets that students bring with them as they begin their tertiary studies.Much secondary teaching now rests less on formal teaching, where the teacher provides the information and tuition and the student then assimilates and regurgitates it, and much more on informal collaborative and group work, on inquiry and project work, on assembling and exploring relevant information from sources other than the teacher. The aim is to raise involvement and interest levels and to prepare students for new kinds of life-long learning in the modern world.These changes are of course not only a function of different teaching methods. They also reflect the student’s experience outside the classroom – an experience greatly influenced by today’s electronic media and in particular by the internet.The results, however, have a downside – at least from the viewpoint of the traditional university teacher. The first-year student is increasingly unfamiliar with what is required for university study. Taking in, understanding and then articulating a particular body of knowledge, mastering it accurately and comprehensively and then demonstrating that by putting it in written form in a properly constructed paper or essay which offers a reasoned conclusion – these are skills that have not been practised by many of today’s school leavers. Little wonder that some struggle to adapt.The evidence that this should be a cause for real concern is still quite fragmentary. Further research is needed, and is currently being undertaken in a number of projects supported by Ako Aotearoa – the National Centre for Tertiary Teaching Excellence. It is clear that if we want our tertiary institutions to produce the best-equipped graduates, we must be alert to factors such as this which might inhibit the ability to get the best out of tertiary education.To identify this possible disjunction is not to apportion blame, or even to think that there is blame to apportion. But, if the gap exists, it should be addressed. The benefits of the changes at secondary level have been too great to be cast aside, but we will all benefit if tertiary students are helped to achieve a better learning experience by closing the gulf between the demands of secondary and tertiary education.It is already the case for some students who are thought to have been disadvantaged at secondary level that they begin their tertiary study with an introductory course in what is needed for success at that level. This should perhaps be provided as a matter of course to all first-year tertiary students. It would of course add to the costs that taxpayers and students alike have to bear for tertiary education. But, if the outcome is that we get better value for the resources we put into tertiary education, wouldn’t that be worth it?Bryan Gould
4 November 2010
This article was published in the NZ Herald on 17 November
Re-opening the Debate
Something important has happened in New Zealand politics. After two and a half decades in which economic policy has been a no-go area for political discussion, we have at last seen the beginnings of a debate about what is potentially the central issue of our politics.
“There is no alternative” was very much Mrs Thatcher’s mantra, but it held equal sway in New Zealand. Indeed, it has been even more significant here, because the aggressive free-market orthodoxy first introduced by a Labour government was then reinforced by their National successors. As a consequence, the major parties chose not to engage each other over the basic principles of economic policy, and the whole question of how our economy should be run was consigned to the sidelines.
The reluctance to discuss economic policy was nevertheless surprising, given the constantly expressed concern and disappointment at our poor economic performance. As the gap between New Zealand and Australia widened, and our productivity figures remained stubbornly unimpressive, the finger was pointed at every conceivable explanation – bar the obvious one. It is only now that the realisation seems at last to have dawned that our comparative economic decline might – just might – have something to do with the economic policy settings we have faithfully followed for twenty five years.
For most of that period, we have slavishly adhered to the view that government’s involvement in the economy should be limited to regulating monetary conditions and that even that limited function should be delegated to unelected bankers charged with the equally limited goal of controlling inflation. Beyond that, the rest of the economy could safely be left, it was thought, to look after itself.
It turned out that things were not so simple. The apparently simple and technical question of controlling inflation through interest rates and exchange rates proved to have important and unfortunate consequences for the real economy. The productive sectors of our economy were constantly handicapped by high interest rates and an overvalued dollar, and by secondary consequences like the relative attractiveness of investing in property as opposed to productive capacity and of bingeing on cheap imports as opposed to saving. There was, in other words, a price to pay for using instruments like the exchange rate for purposes they were not meant for.
Government over this period, of course, was let off the hook, disclaiming any responsibility for managing the economy as a whole. It was content to dabble in micro-economics, and in balancing its own books, but showed no interest in issues of competitiveness or demand management. Macro-economics simply did not exist.
So, what has changed? The Labour opposition has been thinking. They seem to have grasped that there is no upside in either electoral or practical terms in simply agreeing with the government, and that the evidence before our eyes demands that New Zealand should strike out in a new direction.
So, the two-party consensus on economic policy is at an end. It is proposed that the purpose and techniques of government’s involvement in economic policy should change. Macro-economic policy is back.
What are the chances of the debate taking off? They are better than one might imagine. The current government continues to stick to orthodoxy, but they are led by a pragmatist. Sooner or later, and hopefully sooner, John Key is going to realise that he and his government will get nowhere near the goals they have set themselves if they continue to slog along the same road that has led nowhere for so long. That would mean just watching the Australian tail lights disappearing into the distance.
There is also reason to hope that the official mind might be less rigid than it has seemed for so long. The regime at the Reserve Bank under Alan Bollard is clearly less doctrinaire than it was under Don Brash. Even the Treasury cannot be entirely immune from common sense.
To get the debate under way is not of course to win the argument. But whatever the outcome, our public life will be stronger for re-opening a real discussion about the role of government in achieving economic success. And not for the first time, we might even lead a world-wide trend.
The voters may or may not reward Labour for its courage in challenging an orthodoxy that has prevailed for so long. But we all owe Labour a debt of gratitude for starting a debate that is long overdue.
Bryan Gould
25 October 2010
This article was published in the NZ Herald on 27 October.
A Shadow of a Shadow Chancellor
Ed Miliband’s choice of Alan Johnson as his Shadow Chancellor is, for all the obvious reasons, likely to define the opening period of his leadership. It has been welcomed in some quarters as evidence that he is very much his own man and is determined to maintain control of economic policy himself. Not for him, it is said, the establishment of a rival centre of power at the Treasury.
But there is clearly a downside as well. It was clearly identified by Alan Johnson himself, in a way that drew attention not only to his lack of any knowledge of economics, but also must surely have raised questions about his political acumen. Ministers must have salivated at his admission that he would need to consult “a primer on economics”.
The appointment raises further issues. The challenge for incoming ministers (and shadow ministers) is always to equip themselves with enough knowledge about their brief to allow them to make a proper assessment of the advice that is proffered by their expert advisers. Too often, ministers come into office armed only with a few simple slogans and find that within a short time they have been persuaded that they are not a satisfactory basis for policy. From then on, they are lost and become the prisoners of their advisers.
This danger is particularly acute when it comes to the Treasury. Economic policy is not something that can be mastered by “reading up” for a week or two. For one thing, who decides what should be on the reading list? There is no
widely accepted orthodoxy that need only be understood to be safely adopted, and even if there were, the recent history of such orthodoxy does not engender great confidence. An incoming Treasury minister (or shadow minister) will be entirely at the mercy of official advice unless he or she has enough expertise to be able to evaluate that advice.
The appointment of Alan Johnson and the sidelining of those Shadow Cabinet members who have some real expertise in economic policy suggest strongly either that he is to be a mere cipher and Labour’s economic policy will be made elsewhere (and possibly by Ed Miliband himself), or that Labour is content to have its economic policy decided by officials. If that is the case, Ed Miliband’s Labour party will have failed to remedy one of New Labour’s central weaknesses. It was New Labour’s failure to question free-market orthodoxy that helped to usher in the recession and that ultimately did for them electorally.
On surely the most important issue of the day, it is essential that Labour is able to mount an effective assault on the coalition government’s constant assertion that “there is no alternative” to deep and damaging cuts in public spending and to offer a coherent and persuasive alternative view. It will not be enough to rail against the damaging impact of the cuts; that impact will be obvious to everyone, but will be trumped as an argument by the contention that the deficit makes the cuts inevitable.
What Ed Miliband’s Labour needs to do is not only attack the unfairness, harshness and ideological bias of the cuts. They must also argue that they are the wrong response in economic policy terms to the crisis – that giving priority to the government’s finances and to getting their deficit down in the short-term rather than restoring the health of the economy as a whole in the longer-term is to ensure that the recession is longer and deeper – and the deficit more persistent – than they need be.
There is of course a perfectly legitimate economic policy argument to this effect. It is supported by a great deal of expert opinion around the world and by the lessons that should be drawn from what we know about what caused the recession.But already, the evidence is that the argument is being conceded. Nothing is more depressing about our economic plight than the success the Tories have had in establishing in the public mind that it was “Labour’s recession” and that they have been left to clear up the mess by imposing unavoidable cuts.
To fail to engage the coalition government effectively on this issue is to concede a huge amount of political territory for no good reason. Sadly, the appointment of someone who, whatever his other strengths may be, has to be guided towards whatever current orthodoxy demands suggests that Labour will – at best – bide its time in responding to the central political issue it confronts.
Bryan Gould
9 October 2010
Recovery? What Recovery?
It is surely beginning to dawn on us, nearly three years after our recession began, that anything approaching a full recovery is still a long way off.
It is now clear that unemployment remains stubbornly high, that the housing market is depressed, and that property values have fallen sharply so that most people no longer feel as wealthy as they did. Lower housing values and employment uncertainties explain why domestic demand is sluggish so that – barring an unlikely pre-Christmas boom – we can expect to see increasing numbers of empty retail premises in our high streets in the New Year. Little wonder that confidence in the economy is ebbing and that employment and investment intentions are at low levels.
As a consequence, the exodus across the Tasman has resumed. Australian living standards continue to rise faster than our own, as both demonstrated and assisted by the growing strength of their dollar against ours.
Yet a great deal is going right for our economy. Our major export markets in Australia and China are performing strongly and demand for our goods is buoyant. Commodity prices generally and dairy prices in particular are at historically high levels. Our trade figures mean that a trade imbalance is not so much a constraint on expansion as it has been over such a long period.
Inflation is not an immediate problem and the Reserve Bank governor has signalled his intention to keep interest rates at low levels. Our banks are in good shape (though, sadly, the same cannot be said of our finance companies). The warnings of the “bond vigilantes” that increased government borrowing to fund their deficits will mean rapidly rising long-term interest rates around the world have not materialised. Our own government’s finances are stronger than forecast and are in any case among the healthiest of any advanced country; most European governments can only dream about our relatively and historically low levels of government indebtedness
In these unusually favourable circumstances, there is something wrong with us if we cannot make a good fist of coming out of recession in good order. So, what is going wrong?
What we are seeing, I believe, is a simple failure of analysis. An economy in recession is by definition an economy in which there is a deficiency of demand. If we want to recover from recession, we have to see somewhere a lift in demand. The question is, therefore, where is it to come from?
For once, a partial answer is provided by the export sector. The improvement in export prices is helping to re-balance the economy towards exports and away from domestic consumption –something the government is keen to see and a process that could be made even more beneficial by a more competitive exchange rate.
But is the relatively strong performance of the export sector enough to counter the impact of lower levels of activity in the other two sectors – the private sector and the government? If the answer to that question is no, then we have our answer as to why our recovery is so sluggish.
It is of course only too evident that activity and confidence in the private sector have suffered during the recession. Consumers are keeping their wallets closed, and businesses are cutting costs rather than taking on employees and investing in new capacity.
So, if we are to lift ourselves out of recession, we need the government sector to be playing its part in stimulating the level of demand, so as to offset and eventually reverse the current depressed state of the private sector. Yet, when we look to what the government is doing, we see priority given to the government’s finances rather than the health of the wider economy – to getting the government’s deficit down, rather than on using fiscal policy to stimulate the economy as a whole. The effect is that depressed demand in the private sector is reinforced rather than offset. The government is not, in other words, helping towards a solution but contributing to the problem.
The government says of course that it must cut back because it has to borrow just to maintain current spending, let alone spending at a higher level. But that is simply to re-state the problem rather than resolve it. The government has a deficit because a depressed economy means that its revenues are down. If the government is not helping but hindering recovery, then it will take longer to reduce the deficit and the recession will drag on for longer. And the longer it takes, the greater the risk that less than optimal levels of employment, investment and output will become permanent features of our economy.
The government is quite right to insist that it must, like the rest of us, get value for every dollar it spends. But isn’t it time that ministers took a wider and longer view of the role they must play if we are to shake off the shackles of recession?
Bryan Gould
2 October 2010
This article was published in the NZ Herald on 12 October.