Economist Brian Easton says we again face the question of 40 years ago: what are effective development strategies?

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

When in 1980 I introduced the term ‘Think Big’ to characterise the major (mainly energy) projects, I was concerned about the wider issue of state-led development strategies. From that perspective, the 1980s program was not our  first ‘think big’. That goes back to Vogel in 1870, who wanted to develop New Zealand with a major expansion of infrastructural investment and immigration financed by state borrowing. (It does not apply to Wakefield because his plans hardly involved the state.)

In 1870 when the economy was staggering following the ending of the (offshore-financed) New Zealand Wars and the exhausting of the alluvial goldfields. Vogel saw the potential of the under-utilised land but it needed people and infrastructure. He was not quite right, because the staple to drive the economy that he seems to have had in mind was wool, but it was insufficient to underpin the scale of New Zealand he envisaged. (Wakefield’s staple was grain.) Fortunately refrigeration bailed the Vogel vision out from 1881. Pastoral farming was our staple for the next three-quarters of century. We looked to diversify; Vogel suggested exporting canned peaches.

The Great Depression showed New Zealand was overly dependent upon pastoral exports. Alternatives were sought. The postwar surplus of radiata pine following the planting programs in the Central North Island (Kaingaroa) to sop up labour in the 1920s and 1930s, led to the pulp and paper mill at Kawerau – located there for the geothermal energy.

The Tasman project, commenced in 1953, was our first ‘modern’ Think Big project, based on underutilised resources. This time the state did not run the entire project, as it had done earlier with the expansion of hydroelectricity. There was considerable tension between those who wanted it to be a state-run enterprise (led by Pat Entrican of the NZ Forest Service) and those who saw private enterprise as necessary (the key civil servant was Bernard Ashwin of Treasury). The compromise was that the state provided the (transport and housing) infrastructure and contributed some of the capital in the enterprise. Fletchers built the plant and held much of the equity.

NZ Steel at Glenfield and the aluminium smelter at Tiwai Point followed in the 1960s. Each involved considerable state involvement to exploit an underutilised resource. So the ‘Think Big’ of the 1980s was a continuation of past trends, this time based (mainly) on Maui gas which was coming ashore and a South Island electricity surplus from an overbuilding program.

On the whole, the 1980s Think Big projects are considered commercial failures (although that may have been as true for any alternative program utilising the gas and electricity). One reason was construction-cost blowouts (something I warned of in my 1980 paper, although they happen so often, it was a safe bet). The bigger reason was that the world price of oil collapsed in the mid-1980s just when the projects were coming on-stream (from about $30 a barrel on which the investments were predicated to an actual level of about $10 a barrel).

The collapse was worsened by a feature of the financial arrangements which few knew about the time. The Crown (that is Prime Minister and Minister of Finance, Rob Muldoon) had provided guarantees to the corporations investing in the projects, which meant that while the upside profits were shared between Crown and corporations, the downside losses were carried only by the Crown. The losses were huge and they went onto the Crown balance sheet as debt in the mid-1980s.

(Such secret deals do not happen today. The 1989 Public Finance Act requires them to be reported to parliament. The budget papers include pages of lists of ‘contingent liabilities’, the potential liabilities if things go wrong.)

I’ve gone through this quick history because again we face the question of forty years ago: what are effective development strategies? Think Big belonged to the class of state-led development ones. Except for the financing farmers onto the land and providing infrastructure, there was not a lot of state in the pastoral boom which began with wool and refrigeration at the end of the nineteenth century. (Waikato’s The dairying potential was only unlocked in the early twentieth century, when the railways to carry the butter and cheese were established.)

On the other hand, the import-substituting industrialisation of the 1960s, which had little public investment in the enterprises, was not a great success. Attributing the failure to import licences and other such government interventions ignores that doing nothing may have left the labour resource underutilised and it may have migrated offshore. The greater success was manufacturing exports but they have not been substantial enough to drive the economy – presumably because we lack scale and are far from potential markets.

Each development story told here has a leading sector – a cluster of businesses in an industrial group – which drags the rest of the economy along with it. Typically, the opportunity was  a new technology or under-utilised resources. In contrast, the development strategy, such as it was, which evolved after the 1980s was to do nothing, except general education and not well focussed science and technology, expecting the economy to develop on a wide front and praying ‘the market will provide’.

It has not really happened has it? The closest we have got to an expansionary sector was by a few service firms (such as Wellywood which received generous tax breaks) and a minor Think Big in the expansion of dairy-based irrigation in Canterbury, (which I discussed in the early 1980s, actually) and for which there are increasing environmental doubts. Insofar as the New Zealand economy has shown any real thrust over the last few decades, it has come from improving prices for foodstuffs (the terms of trade), which are likely to continue, and overseas borrowing which has financed a speculative housing boom (but which did not provide many new dwellings) which wont.

Perhaps we are reaching the stage of the 1870s, the 1930s and the 1970s of growing unease about the state of the New Zealand economy. It is not stagnating, but it is not obviously going anywhere either. Will we have another ‘Think Big’ and if so, what will be the balance between the private and public involvement?

What will be the new leading sector? It is unlikely to be farming. There will be further productivity improvement but we are running out of land and water, while there are head winds from pollution and emissions reductions. Nor can it be forestry, because the trees storing the carbon emitted by cars cannot be felled and exported so are not a source of additional foreign exchange. Switching to electric vehicles will, in that it is import-substituting for oil. But we will still have to pay for the cars and batteries obtained offshore.

The current projections are for international tourism perhaps quadrupling in the next four decades. I am not convinced we have the capacity. It wont be state-led. Even a Minister of Tourism who was also the prime minister did nothing (except promote bike trails). Moreover, tourism’s international travel involves substantial carbon emissions which are currently not included in our carbon budgets. When they are, farming will look a lot more attractive.

There are opportunities from 3D printing as a form of import substitution – but we will still need to import complex precision machinery and materials – and from export services via cable, although there is no certainty that the work or the workers will remain here,

The short answer is that we don’t know. Perhaps other affluent countries are similarly stagnating. But if they grow while we stagnate, there will be out-migration to them. That was one of the indicators which triggered the previous rounds of Think Big.

(I discussed matters related to this column with Brian Crump on Nights 9 June, 2022. Here.)

PS. John Boshier’s just published Power Surge is very strong on the energy sector under Think Big.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.