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1Varieties of liberalism at the2008 financial crisis: The case of New Zealand James LockhartCollege of BusinessMassey UniversityTe Kunengaki PrehuroaTe Kunengaki Prehuroa2

6th generation New Zealander

Farming background

Have held multiple commercial directorships

Leading NZs progressive approach to governanceFonterraCrown company and entity director trainingRural sector economic engine room

MAgSc (Hons) 1986 -1989; PhD 1995 -1996

12+ years in RNZIR (Territorial Force)

Academic with career portfolio

IntroductionTe Kunengaki PrehuroaTe Kunengaki Prehuroa3

Historical overview post WWII - Utopia

Keynseian Era Unheralded intervention in 1970s

Rogernomics Conventional liberalism from 1984

Social democrats - The wasted decade of 2000s

GFC - Impacts

Summary and questions

Presentation OutlineTe Kunengaki PrehuroaTe Kunengaki Prehuroa4

One of the oldest democracies in the world (1853), with universal right to vote passed in 1893 (first in world)

Member of the Commonwealth of Nations

In 1952 New Zealand enjoyed the third highest GDP per capita in the world

New Zealands terms of trade have declined steadily since the 1950s now resurging (equiv to 1974) boosting exchange rates to 27 year highs

Mix of centre left and centre right interventions date to post WWII

Pop 4.3m; land mass 268,680 sq km; capital Wellington; maritime climate; first country to have all top posts held by women

Historical OverviewTe Kunengaki PrehuroaTe Kunengaki Prehuroa5Source: The Conference Board Total Economy DatabaseOECD countries: average GDP per capita growth, 1950-2009

New Zealands long-term income growth recordTe Kunengaki PrehuroaTe Kunengaki Prehuroa6Keynesian EraKeynesian era emerged in late-1960s

Peaked in early 1980s assistance measures, subsidies, price support, fixed exchange rate

Policies produced side effects that were only countered by additional measures that produced more side effects

Sub-optimal decision making from a national point of view

Regular devaluations of currency to correct payments imbalances, triggering inflation (near 20% in 1983)

Balance of payments crisis in 1984, coincided with elections

Te Kunengaki PrehuroaTe Kunengaki Prehuroa7Human capital and labour supply

Trends in main benefit types as proportion of working age population

Source: TreasuryTe Kunengaki PrehuroaTe Kunengaki Prehuroa8RogernomicsGovernment policy in 1984 was to move to a lower and more even level of policy across all activities in a progressive and predictable manner

Rogernomics, Reaganomics, Thatcherism started with interventions to restore competitiveness of US manufacturing sector

Private sector, especially agriculture, was immediately exposed NZ agriculture suddenly became least supported in OECD and eventually emerged as most competitive

Sticky sectors remained cup of tea (1988)

Some resurgence in liberalisation agenda in early 1990s

Te Kunengaki PrehuroaTe Kunengaki Prehuroa9Source: NZ TreasuryTradable and Non-tradable sector growthRecent real GDP growth trendTe Kunengaki PrehuroaTe Kunengaki Prehuroa10Social DemocratsChange in government in 1999

No real change in fiscal policy from former neoclassical liberalism

The one significant change compared to the previous PTA is that, with the new words in bold, section 4(c) of the PTA now states: "In pursuing its price stability objective, the Bank shall implement monetary policy in a sustainable, consistent and transparent manner and shall seek to avoid unnecessary instability in output, interest rates and the exchange rate.

But, Government spent all of accumulated current account since 1975 between 2002 2008

Gap met by non-resident funding, deterioration in net international investment position (1/3 in $NZ; 2/3 in foreign currencies)

2002 Policy Targets Framework enabled Reserve Bank to attempt to manipulate currency June 2007 (@ US76c)

Te Kunengaki PrehuroaTe Kunengaki Prehuroa11Source: TreasuryAverage Cost of social services received by a household in each decileShift in transfer paymentsTe Kunengaki PrehuroaTe Kunengaki Prehuroa12

New Zealands business environmentSource: OECDOECD Index of product market regulation 2003Te Kunengaki PrehuroaTe Kunengaki Prehuroa13Source: OECDOECD Index of product market regulation 2008

New Zealands business environmentTe Kunengaki PrehuroaTe Kunengaki Prehuroa14Source: TreasuryGovernment, Non-tradable & Tradable Sector GrowthGrowth in Government expenditureTe Kunengaki PrehuroaTe Kunengaki Prehuroa15Global Financial CrisisNZ ran current account deficits, and strong growth in house and land prices to mid-2007

Financial system is bank-dominated through mostly - historically - foreign owned (now Australian) institutions

60 finance companies collapsed, owing more than NZ$848.2m

Real estate bubble burst

Basel III interventions were promoted

Current Government are not convinced about RBNZs ability to intervene (@US 82.6c)

Introduction of FMRA succeeding NZSC

Te Kunengaki PrehuroaTe Kunengaki Prehuroa16Government debt & net foreign asset position, 2008

Australia AustriaBelgiumCanadaCzech RepublicDenmark FinlandFranceGermanyGreeceHungaryIrelandItalyJapanKoreaLuxembourgNetherlandsNew ZealandNorway PolandPortugalSlovak RepublicSpain SwedenUKUSAOECD020406080100120140160180-100-50050100Net foreign asset position (% of GDP, 2008)Gross government debt (% of GDP, 2008)Source: OECD, IMF, TreasuryGovt debt and net asset position post GFCTe Kunengaki PrehuroaTe Kunengaki Prehuroa17SummaryRepeated governments and institutions have attempted to shift wealth creation from agriculture sector, without success

New Zealanders appear comfortable with big government (38.9% GDP), relative to private sector

Increased productivity being demanded from public sector

Conservative banking environment

Finance companies largely gone, SCF

New set point in real estate (housing & land), rural and provincial NZ is booming

Unemployment is 6.6%, household spending cautious

Easing of credit restrictions

Te Kunengaki PrehuroaTe Kunengaki Prehuroa18