Notes for Panel Discussion, National Library, 14 February, 2002.

Keywords: Globalisation & Trade; Literature and Culture;

The superficial relationship between Australia and New Zealand was captured by last night’s Evening Post article ‘Why do We Hate Australia?’. The short answer is, of course, if the ‘we’ refers to New Zealanders, that we dont hate Australians – we have a complicated relationship with them which is similar to a couple of siblings living with one another in the same unfashionable corner of a city.

However if you are a columnist or a journalist the cheap easy is to vigorously pretend that we hate one another – or that we ought to – blowing past incidences into eternal grievances. Of course we should laugh at, like siblings do, over events of the past, the other’s foibles and the interactions that occasionally go wrong, perhaps with a gentle affectionate chiding. But ths is not hate. And note – as curator Ian Grant observed the smaller less successful sibling jokes more than the other, for there are more New Zealand than Australian cartoons in the gallery.

Yes, in many ways the Australians have been more successful than New Zealand in recent years. There are exceptions – not all of which are contestable – but that shallow journalists can list those exceptions reminds us that they are uncommon. So let me talk about the largest failure in my own area of economics.

I first got into the systematic comparisons of the Australian and New Zealand economies about twenty years ago, when international data began becoming available. Reflecting this improving data base, the Australians then had a richer more robust debate on their relative place in the world economy and it was natural to look to it as an alternative to the thinness of the New Zealand discussion. By about ten years ago it became quite clear that the Australians had managed their economic transformation in the 1980s better than we had, despite on some measures having the more difficult task. That superior economic performance applied through the 1990s, as a recent paper by Paul Dalziel confirms.

It seems that the superior Australian economic performance reflects superior economic policy. Both sides of the Tasman had vigorous advocates of those neo-liberal polices we call Rogernomics. The difference was we implemented them, but the Australians were much more selective, so the extremism of Rogernomics was moderated.

Why did the Australians fail to adopt rogernomics? The answer seems to be in the different constitutional arrangements. Until recently it was possible in New Zealand for a small group of politicians – inside parliament and out – to seize power and implement policy without any public consultation or agreement. If those policies are effective, then the economy benefits, but if they are flawed – in the way that rogernomics has proved to be – there is no mechanism to weed out faulty policies. This the story of the decade after 1984. Australian political institutions, with their complicated set of formal and informal checks and balances, broadly prevented the seizure of power by bolsheviks – albeit in this case bolsheviks of the right – and required policies to be debated and evaluated, so that bad policies get eliminated, or if implemented reversed as their failure becomes apparent. I add that MMP means seizure of power by bolsheviks – of the right or left – is much less likely nowadays. It is now an interesting question whether as to whether New Zealand or Australia has a better political framework for economic management.

One test may be the question of a common currency – which really is about New Zealand adopting the Australian dollar as its underpinning currency, in a manner similar to the Argentinians who until recently had a full US dollar backed peso, except their whole system has collapsed in the last month or so, to great economic and political turmoil.

It would be easy to argue that the New Zealand advocates for the common currency are post-rogernomes, and suggest that, like Jubilation T. Cornpone, undeterred by their ongoing record of failure they march from defeat unto defeat, . One might also note the incredulity (and mirth) of the Australian economics profession when the proposal was first mooted. Hooking into the Australian dollar may be in some New Zealander’s interest. A fixed exchange rate between one’s two markets is clearly advantageous to the exporter whose one ambition is to sell to Australia. Unfortunately over 80 percent of exporters, and over 90 percent of the economy, have other ambitions..

But really to argue the case we need to go back to fundamentals. At issue is a fundamental weakness of the economic model which Rogernomics used. Basically it is a one price model – the price between money and aggregate production. If relative prices between the various components of production and expenditure do not change or do not change quickly, then the one price model works reasonably well. But the reality is that sometimes prices of the components change rapidly. For instance the Argentinian crisis was precipitated by the US dollar rising relative to other currencies, which impacted adversely on the exporters who operated outside the dollar zone, and the import substitutors who competed against imports from elsewhere.

For a number of reasons Argentina was not a well run economy and we could easily get bogged down in the details of its failure. So consider another example of a country which was in a common currency which slumped into economic and social turmoil when there was a significant relative price shift: New Zealand in the early 1930s, when the economy had a common currency with sterling, which had the merit that most of our exports went to sterling destinations. Even so, when the world depression crashed New Zealand export prices relative to import prices, much of the policy of the time was focussed on how to restructure the domestic price levels. A part of that restructuring was the devaluation of the New Zealand currency against sterling – in effect the busting of the common currency union we had with Britain. In the seventy years since, New Zealand has never entered a common currency.. Nothing has happened since to suggest it will work a second time, if we get a major relative price shock – which the Argentinian experience shows remains a real threat in the volatile international system.

Why then advocate a currency union with Australia? As I have said up to 10 percent of the economy may be beneficiaries. And of course, those who have only got up to speed on the exceptionally simple one-price model (the model used by monetarists) are not going to see the treacherous prospects for a real economy with many prices. But I think there is a deeper issue.

There exists a group of New Zealanders who suffer from the colonial cringe – an inferiority complex about the prospects for New Zealand. They do not have that sturdy faith in the country being a success which I portray in my recent book The Nationbuilders, and which is common in Australia today. Instead they believe that New Zealand cannot make a go of it on its own, but needs to hook up with some bigger economy.

Australia is an obvious economy to combine with, and so little brother – lacking confidence – suggests he rejoins big brother. But if New Zealand is too small to go it alone, then the likelihood is that Australia is too small too. Its economy is after all only six time bigger than New Zealand. The two countries combined would be but 2 percent of the OECD. So let me make a prediction if New Zealand adopts the Australian currency. The benefits – if any – would prove minuscule. In a very short time the Jubilation T. Cornpones would be advocating joining their cousin, the United States of America.