Presentation to the Wellington Labour Party Conference on Globalisation 1 September, 2001.

Keywords Globalisation & Trade; History of Ideas, Methodology & Philosophy

I begin by affirming the central tenet of any realistic and fundamental analysis of New Zealand: The dominant single feature of New Zealand over the last two centuries has been its ongoing engagement with the rest of the world. Unless one understands that principle, New Zealand’s history makes no sense. Unless one uses the principle one cannot think realistically about the future, nor meet its challenge. Isolationist strategies are bound to fail. There have been isolationists of the Left, who have tried to isolate New Zealand from the world by a self-sufficient economy. But like the rest of us, their ideas came from overseas, they used imports unobtainable in New Zealand, and they travel overseas. There have also been isolationists of the right, the most recent of whom were the Rogernomes, who thought they could ignore the external sector, and by fiddling the financial sector gain us prosperity. They failed.

The Labour Party has always been engaged with the rest of the world. Not only in international relations and human rights; not only in its engagement with the ideas from the rest of the world; and even when it was supporting industrial protection that support came out of an analysis which reflected an account of New Zealand=s trading relationship with the rest of the world. The foundation New Zealand Left-wing thinker is John Ballance, who was premier from 1890 to 1893 before his promise was tragically cut off by an early death. His theme was ‘self-reliance’. It was not an isolationist vision, but that New Zealand had to move away from a colonial status to that of a nation. It is the self-reliance of adulthood, rather than the dependence of childhood. Adults engage with the rest of their world, they communicate, they trade, they specialise, their prosperity depends on others, and yet they are self-reliant.

The fashionable term used to summarise trends in the current world economy is ‘globalisation’. Unfortunately it has a myriad of definitions – including ‘international capitalism’, ‘American imperialism’ – or it is defined by particular activities – international capital movements, foreign investment, free trade – or particular supranational institutions B IMF, the World Bank, WTO … A more analytic approach uses a definition such as globalisation is the consequence of decreases in the costs of distance.

The reduction in the costs of distance applies to faster and cheaper transport of goods. Some German car manufacturers keep their main inventories for replacement near Frankfurt because they can distribute by airfreight to most of the rest of the world within 24 hours. Containerisation and more efficient shipping has reduced the cost of transport by sea. It takes just over a day to fly to London, costing about $2000 return. Forty 35 years ago, it took more than two days, and cost much the same, except the purchasing power of money has markedly reduced since. Costs of transferring information have also reduced. Today, one can read many foreign newspapers on your New Zealand computer before they are read by the waking inhabitants in the cities in which they are published. Ideas, fashions, and jokes flit around the world. If once distance was very expensive and cumbersome, today it is considerably cheaper for many sorts of personal travel, goods, and information.

The consequential changes are both beneficial and detrimental. They include the economic, the social, the political, the cultural and of course the spatial. Thus foreign investment and supranational institutions are a response to an underlying phenomenon which is primarily technologically driven. So New Zealanders need not be disheartened. We say we are distant from the rest of the world. In fact we are closer today than at any time in the past. The problem New Zealand faces is not distance.

Unfortunately, the costs of distances decrease for different kinds of distance. The globalisation problem can be thought to arise from this unevenness. It now takes microseconds for information to race around the world, but days for a person to travel the same distance to Europe, albeit considerably less than the months when my ancestors came here. Shipping there is in the order of weeks, but not months, while my heart will never leave its turangawaewae. I’ll develop the issue of unevenness shortly, but another strength of the definition is that it recognises that at other times globalisation has also been important.

The period from about 1850 to 1914 is recognised by many scholars as the greatest era of globalisation, at least among European nations. Keynes recalled its fruits: ‘The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth. … He could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages. … He could secure … cheap and comfortable means of transit to any country or climate without passport or other formality.’ The shifts that we associate with today=s globalisation are not new.

Nineteenth century globalisation was caused by technological changes (and Pax Britannia). The arbitrage that telegraph and transport facilitated brought prices of commodities closer together. Telegraph enabled dealers to identify price differences; railways reduced the cost of moving them between the towns.

Refrigeration, with steamships and telegraph, enabled New Zealanders to produce meat and dairy products and to sell them in Britain 12,000 miles away. British migrants could continue to do much the same things as they did in Britain, but use a superior climate and better land laws to produce more efficiently. If that reduction in the cost of distance had not occurred New Zealand would be a much smaller, and a more impoverished, society.

The migration from Britain had benefits for those Left at home. Because there were fewer workers, their wages rose. They got cheaper food and a larger share of the nation’s production. Slums were less overcrowded. But globalisation had its downside. British hill farmers, their farm prices undercut by New Zealand supply, had their livelihood diminished.

During the 19th century economic activity shifted from agriculture to manufacturing, for it was also a period of industrialisation. Manufacturing processes, once performed at home, moved to increasingly larger factories, as the falling costs of distance made possible the reaping of economies of scale. Our ancestors moved from their villages into the vast slums of Britain and Europe. There was an extraordinary destruction of the environment, polluted air and water, billowing smoke stacks, ‘dark satanic mills’. Economic historians still debate whether living standards rose or fell over the nineteenth century. They probably rose for some, fell for others. Deteriorating conditions caused many to travel from their homes to the other side of the world. The process of industrialisation led to much personal trauma and environmental damage, even if their descendants of today benefited.

Over time mankind learned to harness the new technologies by the creation of regulating social institutions. Factory Acts preventing the use of child labour, regulations, Public infrastructure dealt with the disposal of waste and public hygiene (as well as reduced the costs of distance). Public income protection and support developed. Workers’ compensation started in Germany as a response to factory accidents: it was copied in New Zealand in 1901. So gradually – step by step – the capitalist tiger unleashed by nineteenth century technological change was tamed. Mankind learned to control the forces and make them work in our interests.

At an early stage of nineteenth century globalisation and industrialisation, a major dispute took place within the Left. On one side was the French anarchist, Pierre-Joseph Proudhon. Appalled by the human costs of the changes, he argued for a reversion to the way of life which preceded these changes, with a nostalgia for an Arcadia which never existed, but he hoped to recreate. Another version of the Arcadian nostalgia was in some of the reasons people came to New Zealand and similar settlements. They thought to escape the trauma of European industrialisation by coming to a green and pleasant land, and starting afresh to create a utopia (not, one adds, always sensitive to the indigenous people already there).

The best-known opposition to Proudhon came from Karl Marx, a man we often see through the perspective of his twentieth century followers, many of whom misrepresent him. He argued that industrialisation and globalisation were essentially progressive forces. The processes, he said, was unstoppable, even though they caused misery to the worker caught up in the transformation to the new economy. But, Marx went on to argue, ultimately the outcome would benefit workers with the creation of a communist state, in which they would enjoy the fruits of their labour.

With hindsight we can see that Marx was broadly correct. Sure, we have not reached any communist state – Marx himself was a bit vague about what he meant by the notion. But ultimately the workers of the world are better off. Had they retreated to the nostalgia of Arcadia, they would not be, for they would be isolated from the benefits of the technology which drove globalisation and industrialisation. Admittedly there has not been much equity in the sharing of the fruits of the transformation. Among those who have benefited least were those in the continents of Africa and Asia. Nineteenth century globalisation only really applied to those of European origin. (Interestingly some of the main beneficiaries of late twentieth century globalisation have been East Asians.)

Yet no matter how awful some of the effects of nineteenth century industrialisation were, our ancestor, informed incidentally more by democratic socialism than the ideas of Marx or Proudhon, learned to control it and to benefit from it. That is the challenge and the prospect for this bout of globalisation too, to harness the forces of globalisation, not to deny them. So we need to understand the implications of the uneven reductions in the costs of distance.

Consider the Taranaki. Once the region was covered with dairy factories. Initially it was costly to ship milk any great distance so the dairy farmer took the cream to a nearby factory. As the roading network improved, and tankers became bigger, the costs of distance became less important. Fewer factories were needed. Today, throughout the Taranaki there are towns whose location only makes sense only in that once they existed to service the now defunct local dairy factory, which if still there, it is abandoned or used for something else – perhaps by an antique dealer.

What happened to the towns when the dairy factories closed? For most workers the new factory was still close, and the additional travel time to work not large, so the effects of redeployment were not great either. The redeployed would still tend to use their local shops, so at worst the town would contract only slowly. Hence the factory closure would not usually cause an abrupt disruption to workers and residents. People could cope with this regionalisation.

If lower costs of distance in a region caused some disruption, what about when the costs of distance change the balance between regions? Consider breweries. When the costs of transport were high every town of significance had one. Over time they became concentrated into a single factory in each region. But the process did not stop there.

There used to be a brewery in Thorndon. Today it is the site of a supermarket which sells beer brewed in Hastings. Modern roads, modern tankers, and economies of scale in the production process mean that it is cheaper to manufacture the product there. But what of the brewery worker? Unlike the Taranaki dairy worker who could commute to work a short distance away, the relocation of the brewery meant workers had to change locations or change jobs, Some may have wanted to transfer to Hastings, and some may have done so reluctantly and be pleased in retrospect. But generally many workers were initially worse off from a local business closure and relocation.

Yet the nation as a whole may not be. More workers in Hastings get jobs, Hastings has more economic activity, and the tax the brewery and its workers pay still goes to the national exchequer. Consumers may be better off too, if the beer is cheaper. These gains offset (to some extent) the disadvantages to the individual worker and family. If the redundant worker can be redeployed locally reasonably easily, the nation may be well pleased with the relocation of the business.

(To mention briefly small breweries. ‘Boutique’ suppliers arise where the economies of scale are not overwhelming and where there may be a demand for nonstandard products – fashionware is an obvious example. Moreover, boutique producers may also benefit from lower transport costs if their few consumers are widely scattered. That ‘boutiques’ exist reminds us that economies of scale need not be decisive, which has an important implication for New Zealand’s development strategy.)

Now to move from the regional and the national to the international. Suppose lowering costs of trans-Tasman distance meant the Hastings brewery closed and the company concentrates its brewing in, say, Sydney. The impact on the brewery workers – and the nation – would be more severe than the shift from Wellington to Hastings. It is much harder for the worker to move to Australia, and this time the fiscal revenue moves offshore too. The niggling problems we saw with the impact on a region or a nation, become serious when a business moves offshore.

Note however, these shifts need not be all in the same direction. New Zealand increasingly supplies milk products to Australia, so the Hastings brewery worker may find a job in a Taranaki dairy factory. Of course there will be disruptions, but they need not be disastrous if new industries are creating as many jobs in the nation as the old ones are destroying.

Some sort of economic change is inevitable if we want take advantage of new technologies and industries to create higher standards of living and wider choices. We tend to look at business closures, and not see them as related to the business openings. We tend to assume that our location – wherever we live – will suffer from globalisation and all the benefits are elsewhere. That cannot be true for the whole world. And it was not true for New Zealand in the nineteenth century, for it was one of the major beneficiaries of the reduction of the costs of distance from telegraph, steamships and refrigeration.

Is today’s globalisation different from the past? No and yes. No, because there are similarities. It is not even clear that this time the process is faster or more pervasive than occurred in the nineteenth century, or involves more fundamental technological changes. But yes, because this time globalisation involves more of the world B the nineteenth century globalisation was largely confined to those of European descent and their colonies – and it probably involves less migration.

It also involves more industries. We divide economic activity into the three divisions: primary industries; manufacturing industries; and service industries. Why the distinction? Primary industries are characterised by being close to the key resources they use. Manufacturers can choose whether to be near the resources they use or to their customers, and their location is a question of balancing those costs, while reaping any economies of scale in the production process. Service industries have been traditionally characterised by their being located close to their customers.

Today, they may no longer need to be. In some cases – tourism and tertiary education and medicine for instance – customers can travel to the provider. The telephone line means others can provide services far from the client. When I book an air ticket, the call centre might be anywhere in New Zealand, or even overseas. Books can be bought from a retailing outlet offshore via the world wide web, so even some retailing can be footloose B globalised. As unsettling as these changes are, they may be no more so than when in the nineteenth century when factories – such as a brewery or dairy factory – that had been local since time immemorial, moved away.

So like the transformation which took place in the nineteenth century, we are once more experiencing technologically driven forces which are transforming out way of life B where we produce, where we consume, where we live. Again people are going to suffer. Again we have the choice of a nostalgic attempt to reverse the untamed forces or we can make a vigorous effort to harness them for the common interest. Our ancestors of two centuries ago took up the progressive challenge. It will not be easy to repeat their courage. Marx, the Methodist socialists and all, made many mistakes. Notions which seemed unambiguous change their meaning. Verities which seemed eternal prove to be temporal. Policies which succeeded in the past, will fail in the future. How then are we to grapple with this bout of globalisation?

There are many issues, but I suspect the key ones are the question of sovereignty, and the meaning of nationhood. The notion of national sovereignty is of course being undermined from within, by the rise of nations within nations – in our case the rise of some sort of Maori nation. That belongs to another seminar but, as far as I can judge, that issue is quite different from the pressures that the forces of globalisation are placing on states.

There is a view that globalisation will destroy national sovereignty. But there cannot be total destruction. International business needs laws, and those laws occupy territories. The London Economist of 17 August 2001, almost completely reversed its position on the existence of cyberspace, when it argued that the world wide web will remain subject to national laws. While cyberspace may seem to be ethereal, it requires geographically located servers, land lines and physical points of entry. Globalisation may make policing more difficult but, as best we understand it, it does not undermine the very notion of a sovereign state having laws which it enforces.

It is true that states may find their ability to act limited by the existence of supranational laws. Again this is a complicated area. Some of these ‘laws’ seem to be concocted by the greatest imperial power – currently the United States – pursuing its own interests. But that has past parallels with, say, the Nuremberg trial, and the British gunboat – a law unto itself. The more serious problem, particularly in economic policy, is supranational agreements to which countries more or less voluntarily sign up on. The Left has had little difficulty seeing this applying to human rights – consider the way in which it insisted on intervening in the sovereignty of South Africa under apartheid – so let me take an economic specific case.

The handout elaborates the case for some sort of Multilateral Agreement on Investment. (See Metal, May 2001, p.14-15.) It argues the issue was not whether there should be an MAI, but what should be its contents. If we are going to trade overseas we are going to be involved with foreign investors – despite my favouring Ballance’s self-reliance which suggests we should save more and invest more here.* They need assurances of a stable policy environment if they are going to invest here, and an international agreement as to what the terms of that environment is means of giving those assurances.

One could argue that we go voluntarily into signing up to any agreement and can opt out later if we wish. Thus, de jure sovereignty is not compromised. But often we will have little choice but to sign up to an international agreement which is in some ways unsatisfactory to New Zealand, because staying out would have been the worse option. The MAI would have been an example if it had proceeded. (Fortunately, everyone else decided it was unsatisfactory too.)

The MAI debate in New Zealand exposed the uncritical way the previous government and its advisers considered the issue. They seemed to think that once the agreement was on the table there was nothing we could do except sign up. I have no sense that they were actively lobbying with like-minded countries to get favourable amendments, or that deep consideration was given to our signing subject to strong caveats. Perhaps I am wrong, and like the swan gracefully drifting towards the weir, there was a lot of paddling going on out of sight of the public. Perhaps the real issue was there was no public debate, so that public resistance centred around nostalgia rather than progressive realism.

Once there is an economic engagement with the rest of the world – trade, investment – a country necessarily loses some sovereignty, and a small country loses more than a large one. Economic engagement is like marriage. One gets into it because there are mutual benefits for both partners, but each partner has to give up some freedoms to reap the benefits. Focusing on the international agreements and the international institutions, and their threat to New Zealand sovereignty, ignores the fundamental issue is the economic engagement. Treaties are consequences of international engagement, not limitations in their own right.

The only solution to avoid loss of sovereignty from economic engagement is total insulation – no trade, no investment, no travel. But the alternative is not the other extreme – known as ‘trading naked’ analogous to taking all ones clothes of at a picnic, in the expectation everyone else will follow suit (or non-suit). When we followed this strategy in the 1980s and 1990s, everyone else looked at us – and put on another jersey. We have choices about how we engage with the world. That may not include all the options we would like – nostalgia is not an option – but some are more attractive than others. Let me try to set down the sort of strategy which might be available and which would not be unattractive to many New Zealanders.

At its heart is the notion of New Zealand as a nation. Because New Zealand’s de facto sovereignty is limited, and will be further limited, by ongoing globalisation, we are going to have to evolve a notion of nationhood somewhat different from the idealised sovereign state that we have. Although a nation will desire to have some control over its destiny, its state will not have full sovereignty. Because for most of its existence New Zealand has been a colony or neo-colony that is going to be easier for us to think through than, say, for Britain. My guess is that the core of future nationhood is some notion of common identity embedded in a functioning society, with a dynamic culture which symbolises and enhances the identity and society. I am reasonably sure we are going to have to separate the notion of nationhood from that of the state.

The approach must recognise that supranational institutions arising out of globalisation are an inevitable limitation on national sovereignty, but sees their potentiality to harness the dynamic, but often destructive forces, of unbridled capitalism. A central tenant of our foreign policy will be to move the institutions towards controlling the excesses while maintaining the benefits of globalisation.

A crucial principle could be ‘subsidiarity’ – a German and now European Union, notion that activities should always take place at the lowest possible political level that it is efficient to do so. It is with pleasure I see the notion sneaking into the relationship between central and local government in the latest local government discussion document. If we do not practice subsidiarity at home, we can hardly argue for it abroad, to restrain others who want to impose on us.

I have not time to detail the internal policies which might flow from such a strategy, although you will find I have canvassed many of them – economic, cultural, social political B in my other writings, including my next book The Nationbuilders. Economically it seems likely that a successful New Zealand will have a specialist economy with a structure which reflects its circumstances. Some of these particularities include the resource base of climate and geography which makes us relatively important suppliers of some food and fibre, and offer the opportunity of further processing and related products. Other opportunities involve tourism, or activities where there are seasonal and time zone advantages (as in our translation service which turns texts around while Europeans sleep). I suspect an important competitive advantage is our life style. It may not be everybody’s preference, but it will attract and retain certain sorts of internationally-footloose highly-skilled workers who value it. They will work in businesses where size (economies of scale) are not important, and where costs of international distance are low. (Some computer software development is an example.).

Rather than elaborate this strategy here, I want to end on a more sombre note, although there is an upbeat. Today the New Zealand elite is riddled by self-doubt and defeatism. Perhaps one should not be surprised given the way they have mismanaged New Zealand over the last two decades. You will not be surprised to learn a survey of the elite, administered by Bob Cately of Otago University, found they saw our destiny down a path which will ultimately lead to New Zealand joining Australian in a full political union B in effect New Zealand becoming a state in the Australian federation. Some 88 percent believed that New Zealand would benefit from a single economic union with Australia, and 55 percent that economic amalgamation would lead to political union.

Ordinary New Zealanders may not be so despairing of our future. What they have, against the elite, is the weapon of MMP. Parliament has probably never been so sensitive to the public, and if New Zealanders are not as defeatist as the elite, our politicians are going to have to provide a creative leadership for nationbuilding and a positive response to globalisation. Our likelihood of success is fortified by that our Left wing ancestors took up the challenge, and triumphed over the nineteenth century equivalent.

* In the discussion which followed, I was asked to elaborate this proposition. If we trade our foreign customers and suppliers will often want some vertical integration, which means their owning parts of the New Zealand supplying processes. Moreover, access to advanced foreign technologies will often require accompanying foreign direct investment. However we have also had foreign investment in New Zealand, simply because the nation does not save enough and has had to borrow to cover its excess expenditure. John Ballance would have considered this sort of borrowing to be evidence of a lack of self-reliance.