Bill Rosenberg is the Policy Director/Economist at the NZ Council of Trade Unions. This is the text accompanying a Powerpoint presentation which he gave to a symposium in December 2012 at Chapman Tripp’s offices in Auckland. It was organised by law firm Chapman Tripp, the Faculty of Law at University of Auckland, and the New Zealand Centre of International Economic Law at Victoria University. Ed.

What I want to do is put the Trans-Pacific Partnership Agreement (TPPA) in its historical context in order to illustrate why it is the wrong model for New Zealand’s future economic and social development. I’ll suggest a more appropriate model of international economic relationships. New Zealand went through a brutal round of opening to the world in the 1980s and 1990s, first with Australia and then the World Trade Organisation (WTO), deliberately accompanied by dramatic domestic deregulation, privatisation and related changes. Other countries did similar things, but few were as extreme as New Zealand.

We were told that opening the economy to the full forces of the market would lead to rapid growth, rising productivity and wages, and international competitiveness. It failed to do so. This quote from a study published in 2012 by leading researchers illustrates the grave social dislocation and disadvantage it caused: “We … find that controlling for changes in household composition, demographics, education, and employment rates does not explain the increase in poverty that occurred in the 1980s. Taken in conjunction with previous work …, these results suggest that the structural reforms undertaken in the 1980s led to permanent changes in the distribution of resources across households in New Zealand, in particular a reduction in resources for the poorest households”.1

NZ: Fastest Rising Income Inequality

One result was that New Zealand saw the fastest rising income inequality in the Organisation for Economic Cooperation and Development (OECD). Another was shameful levels of child poverty – currently a quarter of NZ’s children, or 270,000, live in poverty, 40% of them in working families.  Market incomes of the lowest 50% of households have been static in real terms over more than 20 years despite the per capita growth in the economy. The principles of the structural reforms were aimed at greatly increasing the power of the market in determining the shape of the economy and society. By reduction of regulation and effective regulators, market forces would be unleashed and would self-regulate, with their own commercial interests preventing misbehaviour. But misbehave they did, in hugely expensive, socially divisive and dangerous ways. Consider these examples of regulatory failure:

• A finance sector that lost investors and taxpayers billions of dollars through its own incompetence, irresponsibility and fraud
• A vocational training system that left us with a long term skills deficit as employers failed to take up the responsibility to train their workers
• Workplaces which, compared to fatality rates in better regulated countries like Australia and the UK, have killed 500-800 more people from fatal injury in the last decade alone, and possibly seven to ten times that number from occupational disease
• A building regulation system that has cost the country a comparable amount to the Christchurch earthquakes in leaking buildings.
• A wages system that saw wage rates fall far behind labour productivity increases.

Did this unleash the forces of growth? No. Our growth has fallen behind the rest of the OECD. Did it make us internationally competitive? No, our international liabilities have grown constantly over that period reflecting inadequate exports, speculative rather than productive investment, high levels of low quality overseas investment, and international short-term borrowing rather than domestic saving. Is the economy better balanced? No, our reliance on low value exports has grown and “the value-added content of New Zealand’s exports has been declining over the past 35 years”2

Dani Rodrik, Professor of Economics at Harvard University, has identified a pattern which fits New Zealand. In a recent study he found that structural change can reduce growth unless actions are taken to replace closed industries with more productive ones. “Structural change, like economic growth itself, is not an automatic process”, he wrote. “It needs a nudge in the appropriate direction, especially when a country has a strong comparative advantage in natural resources”.3 Many other researchers have reached similar conclusions.

During the 1980s and 1990s no nudging was done. Most of the most potent tools to do so were removed in commitments made to the WTO in the belief they would never again be needed. Some efforts were made in the 2000s, but not nearly enough. This is not a nostalgic cry for the past. It is to point out the destructive mistakes that were made and should not be repeated. We also have experienced the Global Financial Crisis (GFC), which demonstrated at huge cost to the world how destructive an insufficiently regulated market can be. In the wake of it, there is widespread re-evaluation of many of the policies that were jettisoned in the deregulatory decades in the anti-scientific belief that they would never be needed again. Previously deregulatory organisations like the International Monetary Fund (IMF) are finding some are actually very useful. We should be extremely cautious about outlawing economic policies through international agreements.

TPPA Taking Us In Precisely The Wrong Direction

Also in the wake of the GFC, even conservative organisations like the IMF and OECD are identifying supply chains, financial globalisation and imports from low income countries to those where there are weak labour rights among drivers of socially destructive income inequality. Which brings us to the TPPA. It is taking us in precisely the wrong direction. Without the balance of carefully designed industry and social policies, the supply chains it is encouraging are economically and socially high-risk, potentially draining the economy of profits, jobs, corporate taxes, and the reservoirs of knowledge needed to develop and sustain high value sectors such as manufacturing.

Yet at the same time it is taking away more tools for “nudging” our economic and social development in the right direction such as local preference and conditionality on Government procurement, and the use of our State-owned companies and operations for more than short-term commercial purposes. It is proposing so-called transparency and regulatory coherence provisions which give corporations yet more influence over the kinds of health, safety, and consumer rules that we have learned should not be left to the market.

It is inviting more corporate intrusion into economic, social and environmental rule-making through investor-state dispute processes. It is proposing further deregulation of financial markets. It threatens tools such as management of capital flows which are needed to regulate international financial markets and stabilise exchange rates. It is creating beggar-thy-neighbour rules in intellectual property rights that refuse to come to terms with the digital age, will increase medicine prices and make it more difficult for some of our most innovative companies to survive.

International markets are difficult for individual nation states to regulate. International agreements should focus on building collaboration between nation states in regulating these markets: to ensure rapid capital flows do not destabilise economies and distort exchange rates; to fight international tax evasion; to prevent environmental and social dumping. They should recognise that international supply chains can lead to either impoverishment or growth and create sufficient policy space for all countries to “nudge” their economic development so that they benefit and do not lose from these arrangements. Dani Rodrik has described models like the TPPA as “hyperglobalisation”. It is an extreme form which suits some large corporations and the financial markets. It creates winners and losers. Too many New Zealanders, and the balanced development of our economy and society, have been losers. We need a new model of international economic relationships that learns from the past.

Footnotes

1 Stillman, Steven, Trinh Le, John Gibson, Dean Hyslop, and David C Maré, “The Relationship Between Individual Labour Market Outcomes, Household Income and Expenditure, and Inequality and Poverty in New Zealand from 1983 to 2003”,  Motu Working Paper, February 2012.

2 Ralph Lattimore, Przemyslaw Kowalski, and Gary Hawke, “New Zealand’s Patterns of Comparative Advantage”, NZ Trade Consortium Working Paper, NZ Institute of Economic Research, July 2009.

3 McMillan, M., & Rodrik, D. (2012), “Globalization, Structural Change, and Productivity Growth”, (Discussion Paper No. 01160), IFPRI Discussion Papers (p. 40). Washington DC, USA: International Food Policy Research Institute. Retrieved from http://www.ifpri.org/publication/globalization-structural-change-and-productivity-growth