Friday, July 24, 2009

New Zealand and “Think Big”: Did it Ruin the Economy?

In a recent conversation with a friend, I was presented with the argument that New Zealand’s high ranking by per capita GDP collapsed in the late 20th century because of socialism and industrial policy.

Curious about this claim, I did some research.

Throughout the Bretton Woods era, New Zealand’s GDP ranking was very high: higher than the OECD average, although there was a clear downward trend as other larger economies with greater potential for growth overtook New Zealand.

But the fundamental fact is that New Zealand’s economy was mainly based on commodity exports until the mid-1970s, not manufacturing exports. New Zealand had a protected domestic manufacturing sector, but full employment during the post-WWII era.

But from the 1950s to 1966, New Zealand had growth of about 2.2% a year in per capita GDP.

This was partly caused from 1951 when New Zealand’s GDP was boosted by an extraordinary boom in wool exports caused by the Korean War. It is obvious that export earnings would fall as this boom ended, and that this would affect GDP. Thus growth was lowered from 1966 onwards when the price of wool fell.

When there was a fall in the price of commodities in the mid-1970s and oil shocks, New Zealand’s ranking by per capita GDP also fell significantly.

However, although per capita GDP fell, it remained at roughly the OECD average, as you can see in the table in this article by Brian Easton (the author of In Stormy Seas: The Post-War New Zealand Economy University of Otago Press, 1997):

Brian Easton, Output Since the War: New Zealand’s GDP Performance

The Conservative government of Robert Muldoon (1975–1984) implemented an industrial policy called “Think Big” after 1981 (Brooking 2004: 146) in response to the oil shocks.

Yet the first significant fall in New Zealand’s ranking by per capita GDP had already occurred:

significant declines [in New Zealand’s per capita GDP] occur only in the 1966 to 1969 period, … 1976 to 1978, … and 1986 to 1992 …. [The] first decline was due to the collapse of the world price of crossbred wools in late 1966 ... the second decline [was due] to this source too … If so the total decline from the wool price shock was about 20 percent, and was largely over by the mid 1970s. An alternative view is the second fall was the result of the oil price shock of late 1974. Whichever explanation is correct, the first two falls can be unequivocally attributed to external shocks over which New Zealand had little influence … .Brian Easton, Output Since the War: New Zealand’s GDP Performance,

Thus it is simply not possible to blame “Think Big” for the fall in GDP of the 1970s. Moreover, after Robert Muldoon’s “Think Big” was launched, per capita GDP actually increased slightly during its implementation, and there was no dramatic collapse.

The fact is that the really significant collapse in New Zealand’s per capita GDP occurred in the neoliberal era, under the onslaught of Rogernomics (the equivalent of Thatcherism) after the election of free market Labour government in 1984. In 1984, per capita GDP in New Zealand was at the same level as the OECD average. Then after 1984 it went into free fall:
The other big fall occurred in the late 1980s and early 1990s. There was no significant external shock ... Rather, a faulty [sc. neoliberal] macroeconomic policy … ignored the health of the tradable sector which is at the centre of the growth process … It seems likely that had there been no [sc. neoliberal] reforms – or to be more precise, had the reforms been akin to those implemented in Australia: more practical and less ideological – New Zealand would still be at the OECD average.” Brian Easton, Output Since the War: New Zealand’s GDP Performance,
 Thus New Zealand’s per capita GDP collapsed from 100% of the OECD average in 1984 to just 83% of the OECD average by 1999, before the election of the Labour government of Helen Clark that rejected some of the more extreme neoliberal policies. Growth in per capita GDP has resumed since 1999 and is now 86% of the average.

The conclusion is clear: a major collapse in New Zealand’s per capita GDP happened under neoliberalism when it fell well below the average.

External shocks to the New Zealand economy in the late 1960s and 1970s did cause the first major collapse in per capita GDP, but this happened well before the industrial policy of Robert Muldoon.

Bassett, M. 1998. The State in New Zealand, 1840–1984: Socialism Without Doctrines? Auckland University Press, Auckland.
Brooking, T. 2004. The History of New Zealand, Harcourt Education, Oxford.


  1. Lord Keynes, it is good to see that you have started a blog. This is a time for debate in economics, and the more views that are 'out there' adding to the debate, the better. Whilst not agreeing with much of your interpretation of economics, you always offer an interesting point of view.

    The greater the diversity of views, the greater the potential to engage people in debate about economics from an informed point of view.

    I will add a link from my site. Good luck with the blog!

  2. I am a New Zealander who came to the UK in 1982 and returned to New Zealand for the period of 1995 to 1998 afterthe Rogernomics period.

    The article above has definitely highlighted how NZ had a protected export market until the UK joined the EU in 1973 then over time the protected market was withdrawn. However many countries including NZ were heavily affected by the reduced oil supply and price increase in oil when OPEC reduced production circa 1973 - 1975. This is the main cause of changes in the mid to late 70's and ushered the way in for Thatcher and her other contemporaries . Productivity in goods and services increased to compete with cost. So labour demand decreased at the same time as labour supply increased. This issue has never been addressed directly except in the years following the second world war where conditions were ideal for full employment.

    In any case I saw a very different NZ that I returned to and felt like I was in a "Mad Max" movie where every person was out for themselves. Not true but that is how the change felt.

    Thanks for this blog and it may help me. The terminology and long windedness of the many economists producing many words that say little with lots of meaningless jargon is real hard work but hopefully I will find help here.