John Gascoigne: Paradise lost – NZs tragic story of economic decline

OPINION

The satisfaction of living in one of the safest, richest, and most progressive nations on the planet is simply a distant memory for a dwindling number of elderly New Zealanders.

In fact, New Zealand’s post-war economic performance is a story of economic decline unparalleled in the developed world.

As a tiny, highly literate, resource-rich nation with unrestricted access to ocean transportation, New Zealand should rank as one of the richest nations on the planet (in per capita income).

Far from enjoying living standards among the highest in the world, however, we now confront a cost of living crisis.

This crisis has not come about solely because of a resurgence in inflation or from the policies of the present Government. Conversely, it has been decades in the making.

While inflation certainly is a factor. the public is apt to forget that there was no cost of living crisis during the 1970s and early 1980s when inflation was consistently higher than at present. That was because New Zealand’s living standards were higher back then (with our team of three million) than they are today (with five million). In fact, our gravest cost of living crisis struck during the Great Depression with deflation.

The present crisis is symptomatic of a much deeper malaise; our long-term trajectory of economic decline was brought about by very powerful, underlying forces of economic retardation. Those forces can be traced back to the 1950s.

A nation’s living standards are determined by its national income (GDP or economy) and the number of people sharing its national income.

New Zealand prospered in the 1950s because of an agricultural boom and a population sufficiently small to be subsidised by that boom. Those conditions are long gone.

A 1985 OECD survey of the New Zealand economy reviewed our post-war performance. That report found our overall rate of economic growth between 1950 and 1984 was only slightly below the OECD average over those years. The problem was that we had above-average population growth over the same period which inexorably eroded our per capita income or national living standards. Hence, we fell behind.

The substantial infrastructural costs and consumption needs of a rapidly growing population fueled by immigration sop up scarce resources which could otherwise be put towards raising the living standards of the resident population.

It is totally futile for a nation to increase its national income on the one hand and increase the number of people sharing its rising national income on the other. One simply cancels out the other. Like a cat chasing its tail, higher living standards remain forever elusive.

Economic development is basically a contest or race between economic growth and population growth; the benefits accruing from economic growth only percolate down to a nation’s population when its rate of economic growth exceeds population growth over a considerable period of time.

All this is an overlooked but major contributory factor to New Zealand’s relative economic decline.

In 1984, New Zealand switched from a mixed economy to a free-market economy, or neo-liberalism. That doctrine maintains that in a market economy unbridled, unregulated market forces lead to the optimum allocation of resources with positive, spill-over benefits across the entire population. That is just nonsense on stilts.

Economic growth is a function of national savings productively invested, chiefly in high-return export industries, research and development, and infrastructure.

Neo-liberalism is notorious for allocative inefficiency – notably property and stock market speculation to the detriment of savings and capital formation – and inequality. Hence our anaemic economic growth and absence of substantial national wealth creation since 1984.

New Zealand remains an agricultural export nation with a large service sector and a relatively small industrial/ high-tech sector. Unlike all the tiny, high-income nations we are not an export powerhouse.

The combination of these two very powerful, underlying forces of economic retardation – low economic growth wrought by gross allocative inefficiency and strong population growth – rather than inflation, have brought us to the grim situation of the moment.

• John Gascoigne is a Cambridge-based economic commentator.

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