Opinion: How Neoliberalism has failed New Zealand

By Selwyn Pellett Neoliberalism has become so entrenched in the political and economic thinking of our country that we can no longer see the value in simply applying common sense to solve our economy's problems. It seems that unless a solution can be couched in terms of Neoliberal economic theory then we dismiss it as having no merit. We have ticked all the boxes of accepted, mainstream Neoliberal theory, often long before others were willing to do so: deregulation, trade liberalisation, free flow of capital, selling off state assets, semi-privatisation of remaining state owned enterprises, the removal of indiscriminate subsidies, tinkering with our tax system (hopefully way more to go) and the opening of our economy to all comers. All of these measures we were assured, would help secure our economic future, because that's what the theorists said they would do. So here's the surprise; some theories don't work in the real world. New Zealand now languishes at No 46 in GDP per capita (PPP) wedged between Gibraltar and Slovenia and only just above Israel and South Korea. We are well below Singapore which sits at No 9 (CIA World Fact Book January 2009).

Those countries above Singapore in the list - Liechtenstein, Luxembourg, Qatar, Bermuda, Jersey, Norway, Kuwait and the United Arab Emirates "“ either have natural resources (oil) or are heavily involved in financial services (Liechtenstein, Luxembourg, Bermuda and Jersey) that bolster their economy. So what does Singapore have that keeps it in such company? Frankly, nothing other than a Government that introduced common sense policies to make the most of what they did have (labour) and prevented exploitation because of what they didn't have (capital). Over time Singapore has grown a significant capital base that could now buy and sell New Zealand. There have been many articles and blog comments about why we can't or don't want to adopt some of Singapore's policies and I keep asking why not? Many of these criticisms have focused on Singapore's social policies which we might not find palatable. Let's be clear on this, there are economic policies and there are social policies and I'm not advocating that we adopt the latter. Critics of the idea that New Zealand should look carefully at the cause of Singapore's economic success should not be side-tracked by debates on the merits of Singapore's social policies. If we had the death penalty for murder or drug trafficking, canning for some offences, limited opposition parties (but free elections) would that fix our economy? Of course not, so why have these social policies been used to justify why we can't adopt some of the common sense economic policies. I think, and it seems that many foreign economists agree, that Singapore's absolute rejection of Neoliberalism has been its salvation. In a paper on Monetary Policy in East Asia: The Case of Singapore, Bennett T. McCallum says "In light of Singapore's macroeconomic success over the past 15 years, as discussed by various writers including Devereux (2003), Gerlach and Gerlach-Kristen (2005), McCauley (2001), Parrado (2004), and Rajan and Siregar (2002), it seems apparent that this type of policy regime could be an attractive contender for adoption by other highly open economies" -- open economies like ours, in point of fact. So why do we remain locked into this Neoliberalism mantra that our politicians keep chanting? I suspect we are suffering from what could be termed "battered country syndrome" and have developed a codependent relationship with our "abusers", the international, freewheeling money markets. You need look no further than the way the media and the consumers get excited by a high Kiwi dollar, as if it was some tacit endorsement of our worth by those outside our shores, to see this syndrome in action. Just today a commentator was talking about high yielding currencies like the Kiwi and Australian dollar. Well high yielding to whom is the obvious questions and it's not New Zealand. International banks can and do generate their profits anywhere. If the opportunity is good here they will take the quick gain and leave at a time of their choosing. Could that explain the volatility of our exchange rate, an exchange rate that is traded at more than 118 times our GDP while the Singapore dollar is only traded at half that figure relative to GDP? Could it be that Singapore's Capital Management Techniques - that were introduced specifically to insulate the country's economy against disruptive speculation, protect their soft foreign exchange peg and to increase financial stability - are actually working? Imagine that; restricting capital flows actually improves financial stability and, dear I say it, delivers economic sovereignty as well. You will not see any cap- in-hand behaviour from the Singaporean government, sucking up to international financiers. Why? Because they don't have too. Singapore has won economic sovereignty by believing in itself and showing the world it had the pragmatism and tenacity to go it alone. As long as New Zealand continues to employ variations to the OCR as its only monetary lever our economy will continually be played by foreign interests. We have to introduce restrictions on capital flows. Reserve Bank Governor Dr Bollard has already said that he "can control the price of money but not the volume of it". Frankly a high school economics student could tell you how flooding the economy with surplus cash will inevitably lead to asset inflation and that will lead to an increase in the CPI and a lift in the OCR and that will lead to a lift in the exchange rate and increase in our need for debt-funded consumption to balance the economy as exporters' incomes die. We can continue to sell houses to each other, using foreign capital to finance the transactions, until our ability to pay the interest component trends to zero as all our exporters shut up shop, but then what? I've yet to see a "Plan B" for meeting interest payments without exporters providing the revenue to do so. Singapore knew it had to have a strong tradable economy and set about introducing policies to protect that first and foremost. Isn't it amazing how planning for a particular outcome instead of leaving it to the market to decide actually works? Neoliberalism has failed us badly but the question is do we have the guts to stand up and say we too can go it alone? Nation building doesn't happen by accident and it doesn't happen by following popularity polls. It happens when people of vision stand up and ignite the passion within all of us to strive for something better. The world has changed and those that can't see that are locked into the past and need to be pushed aside so those of us who want to look forward can get on with building a nation that can actually support itself. * Selwyn Pellett is the co-founder, director and former CEO of Endace Ltd, founder, CEO and Chairman of Imarda Ltd and Spokesperson for the Productive Economy Council.