Reclaiming the Future: New Zealand and the Global Economy 9781442679054

Globalization is not inevitable, invincible or intrinsically good. Kelsey explores the impact of globalization on New Ze

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Table of contents :
Contents
List of Abbreviations
Preface to Second Edition
Preface to First Edition
Introduction
1. Putting Globalisation in Perspective
2. Putting Globalisation in Perspective
3. Leading the World
4. 'Free' Investment
5. Transnational Enterprise
6. Tree' Trade
7. The World Trade Organisation
8. Asia Pacific Economic Cooperation
9. The Multilateral Agreement on Investment
10. Reclaiming the Future
Appendix: Figures 1-6
References
Select Bibliography
Glossary
Index
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Reclaiming the Future

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New Zealand and the Global Economy

Reclaiming the Future JANE KELSEY

UNIVERSITY OF TORONTO PRESS TORONTO BUFFALO

First published in New Zealand in 1999 by Bridget Williams Books Ltd, PO Box 5482, Wellington First published in North America in 2000 by University of Toronto Press Incorporated, Toronto and Buffalo

www.utppublishing.com

© 1999 Jane Kelsey This book is copyright. Apart from fair dealing for the purpose of private study, research, criticism, or review, as permitted under the Copyright Act, no part may be reproduced by any process without the prior permission of the publishers. Acknowledgements The publisher is grateful to the following for permission to reproduce copyright material: Craig Potton Publishing, for the cover photograph, from Moment and Memory: Photography in the New Zealand Landscape, 1998. For the graphs: OECD Economic Surveys, New Zealand; S. Chatterjee and N. Podder; Statistics New Zealand. Cover photograph, 'Rising tide, Pakawau, Golden Bay' by Craig Potton Internal Design by Afineline Typeset in Sabon by Archetype Printed by Astra Print Group, Wellington Cover design by Mission Hall Design Group ISBN 0-8020-8395-1

Canadian Cataloguing in Publication Data Kelsey, Jane Reclaiming the future : New Zealand and the global economy ISBN 0-8020-8395-1 1. New Zealand - Foreign economic relations. 2. New Zealand - Economic policy. 3. New Zealand - Economic conditions - 1945- . 4. Globalization. I. Title. HC665.K44 2000

337.93

COO-931138-6

to Joy and Rua with love and thanks

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Contents

Preface to Second Edition Preface to First Edition Introduction

ix xiii 1

1

Putting Globalisation in Perspective

26

2

Constructing Orthodoxy

56

3

Leading the World

90

4

'Free' Investment

121

5

Transnational Enterprise

161

6

Tree' Trade

200

7

The World Trade Organisation

239

8

Asia Pacific Economic Cooperation.

279

9

The Multilateral Agreement on Investment

315

Reclaiming the Future

353

10

Appendix: Figures 1-6

386

References

389

Select Bibliography

417

Glossary

425

Index

429

List of Abbreviations

ABAC ADB ACT APEC APLN ASEAN CER

APEC Business Advisory Council Asian Development Bank Association of Consumers and Taxpayers Asia Pacific Economic Cooperation Asia Pacific Labour Network Association of South East Asian Nations Australia New Zealand Closer Economic Relations Trade Agreement EU European Union FDI foreign direct investment GATS General Agreement on Trade in Services GATT General Agreement on Tariffs and Trade GDP gross domestic product GST goods and services tax ICFTU International Confederation of Free Trade Unions ILO International Labour Organisation IMF International Monetary Fund MAI Multilateral Agreement on Investment MFAT Ministry of Foreign Affairs and Trade MMP mixed member proportional (representation) NAFTA North American Free Trade Agreement NBR National Business Review NGO non-government organisation NZCTU New Zealand Council of Trade Unions NZIER New Zealand Institute of Economic Research NZPD New Zealand Parliamentary Debates NZTUF New Zealand Trade Union Federation OECD Organisation for Economic Cooperation and Development OIC Overseas Investment Commission PBEC Pacific Business Economic Council PECC Pacific Economic Cooperation Council TNE transnational enterprise TWI trade weighted index UN United Nations UNCTAD United Nations Conference on Trade and Development WTO World Trade Organisation

Preface to Second Edition

For much of the 1990s, the forces of globalisation seemed almost invincible. The creation of the World Trade Organisation (WTO), the embrace of capitalism by most former Soviet regimes, the information technology revolution, mega-mergers among transnational companies, unimaginable amounts of capital flowing around the world - all signalled a process that was inevitable, unstoppable and irreversible. Or so people were encouraged to believe. That sense of omnipotence has been short-lived. Every month brings new evidence of how fragile economic globalisation really is. Memories of the 1987 stock-market crash haunt those who wait nervously for the latest Wall Street bubble to burst. Financial meltdowns in Latin America, East Asia and Eastern Europe attest to the perils of unregulated flows of global capital. Moves to expand the secretive realm of global economic policymaking, from the IMF and World Bank to the Multilateral Agreement on Investment (MAI), APEC and WTO, are being resisted with vigour and determination by countries and peoples who feel increasingly disempowered. The ascendancy of transnational enterprise faces powerful challenges at national and international levels by those who are determined to protect the rights of workers, the environment and local economies. The rapid spread of new technologies that manipulate nature for profit has galvanised indigenous peoples, environmentalists and consumers in defence of biodiversity. These trends were in evidence when Reclaiming the Future was first published in August 1999. Since then, those pressures have intensified. As anticipated, the 1999 APEC summit in Auckland failed to advance the economic goal of a regional free trade and investment regime, and was rescued from abject failure when its governments were forced to address the political crisis and genocide in East Timor. One month later, the WTO ministerial meeting in Seattle collapsed, exposing the deepening divisions between rich and poor member governments on issues of process and substance. Outside, citizens from diverse countries and sectors protested against the WTO's erosion of national autonomy and indigenous sovereignty, and the human costs of a global economic agenda that served a rich and powerful elite. The intensity of protests in Seattle and other WTO countries signalled an ongoing crisis of legitimacy in the global economic architecture.

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RECLAIMING THE FUTURE

In response, the globalisation discourse has subtly changed. There are still the evangelists who insist that a global free market is an unquestioned good, and that its critics are ill-informed or selfishly motivated. Others have read the signs. Speeches from Joseph Stiglitz, formerly the chief economist at the World Bank, and even the IMF's now-retired managing director, Michel Camdessus, have acknowledged the costs of globalisation which critics have been articulating for years. The World Economic Forum invited a panel of NGOs to speak. WTO officials talked of the need for inclusion and transparency (alongside greater efficiency), and for giving priority to the concerns of poor countries. UNCTAD X provided a forum for such countries to vent their frustration and demand a fairer deal. Yet the underlying objectives of the global economy remained the same, and most of its critics remained unconvinced. Moves to engage in dialogue with 'civil society', or more specifically with the more market-friendly trade unions and NGOs, were denounced by others as a cynical exercise in 'divide and rule'. The success of the globalisation agenda depends on people believing in its inevitability. Yet these developments and many others confirm the view that globalisation is really partial, fragile and highly contested. The mythology that has sustained true believers in the global market economy and disempowered its critics is rapidly losing its potency. This should come as no surprise to students of history - a similar fate befell the last attempt to construct a self-regulating global economy in the late nineteenth and early twentieth centuries. This book contributes to the demystification process by examining the rationale for and effects of the explicit globalisation agenda that has operated in New Zealand over the past fifteen years. While the focus is on New Zealand's experience, the analysis will resonate with those who encounter the same rhetoric and policy agenda anywhere in the world. Why is the New Zealand experience particularly relevant? For a remote set of islands located on the edge of most world maps, New Zealand has enjoyed a disproportionate influence during the twentieth century: first with its landmark social welfare policies in the 1930s, then by declaring itself nuclear free in the 1980s, and more recently as a vanguard for global neo-liberalism. From 1984 to 1999, successive New Zealand governments took the 'Washington consensus' agenda of liberalisation, deregulation, privatisation and fiscal austerity to an extreme. New Zealand became the darling of the world's free-marketeers. The government dismantled virtually all barriers to finance capital, foreign direct investment and international trade. Extensive commitments under a range of international economic agreements were intended to embed that regime. Most of the country's financial, productive and physical infrastructure became foreign owned,

PREFACE TO SECOND EDITION

xi

while its state entities were commercialised and privatised. The quest for near-zero inflation was pursued by (indirectly) manipulating interest and exchange rates, irrespective of the effect on the real economy. State support for domestic agriculture and manufacturing was removed almost overnight. Light-handed, market-driven regulation and private contract law came to govern labour markets, corporate activities and the rights of consumers. Tax redistribution coupled with fiscal restraint saw a shift in the ethos of government from a universal welfare state to one based on individual responsibility with a minimal safety net. As the new century dawned, all but the most diehard supporters of this radical experiment recognised that it had failed. New Zealand's economy faces a sustained external current account deficit and trade imbalance, huge foreign debt, and a net outflow of investment funds. Comparative growth figures show that countries who followed more benign policy regimes have fared much better. Meanwhile, New Zealand's social and physical infrastructure continues to deteriorate, as does affordable access to many public services and privatised utilities. Poverty and inequality continue to grow, especially among indigenous Maori. The economic and social costs of this experiment to New Zealand and its peoples have become unsustainable. Growing resistance to any deeper integration of New Zealand into the global free market has brought strong pressure on the government to reassert national interests, values and priorities. In December 1999, a coalition of the centrist Labour Party and centreleft Alliance, supported informally by the Greens, became the government. The change of government offers new opportunities to face these challenges and substantially change direction. There have been many positive signs in a very short time. A number of the measures advocated in this book are now being implemented or at least explored. However, the government - or more specifically its Labour majority - remains committed to economic globalisation through free trade and investment agreements that potentially threaten the nation-building focus of its policy agenda. Tensions have already arisen over plans to introduce quotas for local content in broadcasting, which officials argue is in breach of New Zealand's commitments under the General Agreement on Trade in Services and the Closer Economic Relations agreement with Australia. Supporters of globalisation (and some of its critics) argue that the liberalisation of the past fifteen years has been so radical and irreversible that future governments can only offer variations on the free market theme. This book insists on the need to challenge such claims, and not take them at face value. The policy alternatives it proposes are very modest - reflecting the extremity of what it seeks to change and the need to convince politicians, the policy community and New Zealanders generally that there

xii

RECLAIMING THE FUTURE

are practical and achievable alternatives. Logically, the arguments lead to a more radical reconsideration of where New Zealand wishes to go, and how to get there in the medium term. Parallel debates are taking place across the world. How people's movements, national governments, international economic institutions, and corporate and finance capital respond to these challenges is anything but inevitable. Jane Kelsey 2000

Preface to First Edition

This book sets out to test the orthodoxy of the 1990s - that globalisation is irresistible, inevitable and desirable. It challenges the policies, laws and international agreements that have deeply exposed New Zealand to the global economy, and the belief that New Zealand is leading the world towards some global free market nirvana. The book was started in 1993, but writing The New Zealand Experiment intervened. The delay proved fortuitous. I had a strong sense that the nature and benefits of globalisation were being overplayed, but it was difficult to prove at that time. By the end of the 1990s, the same belief was being expressed by commentators in many countries, backed by substantial statistical and empirical evidence. This is not a book about the global economy. It is about the choice. that have been made on behalf of New Zealanders since 1984, some. times without our knowledge and often without our consent. It also set/ out some of the issues that confront us as we seek alternative ways for ward. Its conclusions are optimistic: they celebrate the emergence of Ne.. Zealanders from a state of grumbling acquiescence to the point wher. economic and social policies are (belatedly) subject to a contest of ideas Many people have contributed to this project along the way. Group. such as Corso, GATT Watchdog, Campaign Against Foreign Control of Aotearoa (CAFCA), Christian World Service, the Aotearoa New Zealan.. APEC Monitoring Group and the Trade Union Federation have raised awareness of international economic issues, and created a pool of alternative information and analysis on which I have drawn. Bill Rosenberg has been especially generous in sharing his time and knowledge of foreign investment issues. I am also indebted to my friend Bruce Jesson for his intellectual inspiration and personal friendship over the years. As always, my mother and my friends have been quietly supportive - especially Joy and Rua Rakena, to whom this book is dedicated, and without whose love and care it and much else could not have been achieved. Further thanks go to the University of Auckland for its ongoing support, and to the University of Warwick School of Law which provided a space in which to write. Professor Upendra Baxi generously shared his home and his insights during my stay, and along with other colleagues around the world helped to stimulate the ideas that comprise the book's central theme.

xiv

RECLAIMING THE FUTURE

Numerous officials at the World Bank, IMF, OECD, World Trade Organisation and Commonwealth Secretariat, diplomats at various embassies, and staff of think-tanks have provided frank and insightful interviews. Most have not been identified by name, but I trust I have faithfully represented their views. New Zealand government officials have provided detailed responses to requests under the Official Information Act on a wide range of subjects. The Ministry of Foreign Affairs and Trade also arranged for me to access the early files on APEC, which was of major assistance. This is my fourth book in which Bridget Williams has invested her valued time, energy and friendship, and her consummate professionalism. Bridget, editor Alison Carew and a team of others have worked hard to make a detailed script accessible to readers, and to produce the book on a very tight schedule. Special thanks to my research assistant, Alison Greenaway, for her generous support, and for checking of innumerable footnotes in the later stages of production. A number of other people have read and commented on aspects of the book at various stages. I am grateful to them all for their corrections, criticisms and suggestions. While I have tried to address the issues they raised, the responsibility for whatever errors or omissions remain is solely mine. jane Kelsey July 1999

Introduction

'Globalisation' has been the buzz-word of the 1990s. Some commentators eagerly predicted the advent of a 'borderless world'.1 US sociologist Frank Fukuyama talked of 'the end of history' as we know it. The global integration of technology and production was opening the door to a limitless accumulation of wealth and the satisfaction of people's everexpanding desires - and to the embrace of liberal democracy throughout the world. 'This process guarantees an increasing homogenisation of all human societies, regardless of their historical origins of cultural heritages.'2 Others, such as David Korten, warned that the voracious expansion of global capital would see corporations come to 'rule the world'.3 'Healthy societies depend on healthy, empowered local communities that build caring relationships among people and help to connect to a particular piece of the living earth with which our lives are intertwined. ... Yet we have created an institutional and cultural context that disempowers the local and makes such action difficult, if not impossible.'4 Robert Reich, brought to New Zealand by the Labour Party in 1998, foresaw a twenty-first century devoid of national products, corporations and industries: 'There will no longer be national economies, at least as we have come to understand that concept. All that will remain within national borders are the people who comprise a nation ... .'5 State-centred economies, governance and regulation would, it seemed, be transcended by a new global order. For most of the decade, the vision of a global economy built on 'free' markets and 'free' trade and investment seemed invincible. Enthusiasts sought to advance the process more swiftly. 'Realistic' critics suggested ways to mitigate the adverse effects of globalisation, especially on labour and the environment. 'Unrealistic' critics denounced the growing inequalities and poverty, and warned of the erosion of democracy and the potential for unregulated capitalism to implode.

2

I N T R O D U C T I O N.

Free-marketeers have a vested interest in promoting the belief that globalisation is invincible. Critics can be summarily dismissed; there are no alternatives; resistance is futile. This book tells a different story. It insists that globalisation is neither inevitable nor irresistible; instead, it is complex, contradictory and open to contest. 'Globalisation' is used in this book in two different senses. Globalisation as ideology is the grand vision, a meta-narrative that imagines an interdependent and self-regulating global economy where goods, capital and ideas flow freely, irrespective of national borders, social formations, cultures or politics. Globalisation in practice describes a highly contested process where the competing interests of people, companies, tribes, governments and other groupings overlap and collide; alliances form; accommodations and more drastic revisions are made; and new contradictions arise. The process is dynamic, and the outcome is far from certain. Globalisation as ideology should not be confused with globalisation as a description of economic, social or cultural life. Since 1984, however, true believers in the vision of an unfettered global market-place have sought to make that a reality in New Zealand. Partly as a consequence, New Zealanders' perceptions of the world, and our relationship to it, have changed. There is a sense of being more connected to the world. McDonald's and KFC now vie for custom with the ubiquitous fish and chips and meat pie. The difference goes beyond the food - New Zealanders have a more cosmopolitan self-image. Mum's hand-knitted jumpers have been replaced by sweatshirts with the 'Nike swoosh', and canvas sandshoes by Reeboks. Video recorders and pay-TV bring us blockbuster movies in the comfort of our living-rooms. Sky TV beams in sport from anywhere in the world - even the All Blacks have become a trade-marked commodity. New Zealanders fly to Sydney for the weekend or to Fiji for the week, and draw foreign money out of their home account through an automatic teller machine. Letters are almost passe for the computer-literate PC-owner. Corner hardware shops, greengrocers and bakeries have been replaced by foreign-owned supermarket chains which sell almost anything at almost any time of the day. Franchised retail stores sell cheap clothes from China or Fiji to families struggling to make ends meet, while local textile factories are forced to close and lay off their staff. Cars are cheaper too, thanks to Japanese imports, even if their odometers are wound back. All the local car assembly plants have gone. Telecommunications, buses, trains, planes, electricity companies, radio and television, newspapers, banks, forests and who-knows-what-else are owned by faceless transnational corporations, most of whose shareholders live offshore. The nightly television news carries the latest shifts in 'the market', assuming that ordinary viewers understand what they mean. Ministers hail the latest international trade

INTRODUCTION

3

agreement as the key to prosperity. Economic recovery is proverbially 'just around the corner'. The 'national interest' has been redefined to mean making business more competitive in the international market-place. For people with money, all this can be liberating. For many ordinary New Zealanders it represents a threat to identity, jobs, communities, and the right to control their own lives. 'Free' markets may make perfect sense in economic theory, although many economists would dispute that.6 But as the philosophical foundation for human society, such markets are fundamentally flawed. The economy is not some self-regulating market-place detached from the society in which it operates. Pretending that economic and social reality can be reconstructed to fit the free market model creates practical problems for the productive economy, and social costs that become unacceptable. People, faced with governance by the market, demand an effective voice in the decisions that affect them, and new forms of intervention, regulation and support that re-embed economic policy in social life. After a decade of radical, theory-driven change, it is hardly surprising that New Zealanders in the 1990s began to reassert the relevance of their social and political world in government decisions. It was clear that New Zealand could not simply go back to what existed prior to 1984, even if people wanted to. Society had changed; the new generation of 'children of the market' has known nothing else. Agriculture, industry and services have been restructured to reflect the free market economy. The capacity and functions of the state have been fundamentally altered. Different groups have become empowered, and there are new communities of poor and dispossessed. Maori have reasserted their role in political and economic life, variously supporting aspects of deregulation, suffering disproportionately from its impacts, and continuing to confront Pakeha (or non-Maori) society with its failure to redress the wrongs of the colonial past. The free market revolution began in 1984 with a clear blueprint and a committed team of politicians, officials and private players who shared some common goals. In 1999 there are growing signs of resistance, but demands for a new direction have been, by contrast, unsystematic and unorganised. There is no alternative template, no coherent vision of the kind of society in which people want to live, or the kind of state they wish to empower. These challenges have been resisted by those in business, politics, the public service, academia and the media who have an economic interest in, and/or an ideological commitment to, the free market agenda. They reassert the inherent validity of their economic model, and blame the failures on a refusal to 'finish the business'. But the model of a self-regulating economy and society has become politically untenable. The

4

INTRODUCTIO.N

state cannot permanently abdicate its responsibility for the country's economic and social well-being by leaving those outcomes to be determined by competitive markets. Just as governments are the vehicles through which deregulation is pursued, they also retain the authority to reassert some control. As New Zealand enters a new millennium, thenduidd. critical questions are: how much room do New Zealanders, and future governments, have to choose a different path? And have the policies implemented since 1984 so foreclosed the options that change can take place only within the existing market-driven paradigm?

LESSONS FROM HISTORY

In treating globalisation as inevitable, its champions in New Zealand and elsewhere have ignored the lessons of history. The starting point for this book is Karl Polanyi's account of the rise and collapse of the laissez-faire economy in Europe in the late nineteenth and early twentieth centuries, which he called The Great Transformation. Free-marketeers of the nineteenth century insisted that they could judge social events solely from the economic viewpoint. This was a novel approach: 'Normally, the economic order is merely a function of the social, in which it is contained. ... Nineteenth century society, in which economic activity was isolated and imputed to a distinctive economic motive, was ... a singular departure.' 7 Although this new idea of a self-regulating market system tried to separate economic activity from society and politics, social relations did not disappear. Unregulated markets produced socially unacceptable outcomes, which in turn had political consequences. This created pressures to re-regulate. A determined attempt to revive free markets following the First World War failed. The economy became embedded in social relations once more, although the new society that emerged in the 1930s was quite different from the one that existed before. Polanyi distinguished the idea that markets are self-regulating (in the sense that they tend to reach a price equilibrium) from 'a self-regulating market system', which 'implies markets for the elements of production labor, land, and money', operating through free trade, a free labour market and a freely exchangeable currency.8 In such a system, nature and human society were transformed into mere commodities. Social relations between families, communities, workers and businesses existed only within markets. The backlash this created intensified from the time of the First World War and 'was more than the usual defensive behaviour of a society faced with change; it was a reaction against a dislocation which attacked the fabric of society'.9 It occurred in all three markets ('labor,

I N T R O D U C T I O N..

5

land, and money'): 'Paradoxically enough, not human beings and natural resources only but also the organization of capitalistic production itself had to be sheltered from the devastating effects of a self-regulating market'.10 Polanyi described this as a 'double movement': 'The market expanded continuously but this movement was met by a countermovement checking the expansion in definite directions. Vital though such a countermovement was for the protection of society, in the last analysis it was incompatible with the self-regulation of the market, and thus with the market system itself.'11 Polanyi described the breakdown of the market system from 1916 on. Pressures to re-regulate reflected ad hoc responses to specific situations faced by workers, farmers and manufacturers and were supported by pragmatic alliances of those affected in each instance. Opposition to the free market was not based on ideology, but on practicality. Significant new players had emerged, especially workers and women. Those whose ideological, political or economic interests were challenged insisted, unsuccessfully, that the interventions had caused the problem, and that the answer lay in further deregulation.12 In time, and against the backdrop of the 1929 Wall Street crash and the Depression, new forms of regulation, policy and law were introduced. Economies were rebuilt from within, nurtured by governments through financial assistance and active regulation, and protected from external competition through border controls. New social structures emerged. In some countries, these embodied a crude form of national interest and identity that laid the foundations for fascism. In other places, social reconstruction created new roles for working classes and women who had previously been excluded, new political dynamics and parties, and a more interventionist role for the state. The rise of extreme forms of economic protectionism and nationalism erupted as a collision of national political and economic interests in the Second World War. Out of this turmoil and transformation emerged the era of welfare interventionism, in different forms across the countries of industrial capitalism. States secured their legitimacy through a domestic compromise: capitalism required an environment conducive to profitability, while people demanded policies of redistribution and welfare to mitigate the harshest effects of capitalism, and democratic participation in determining those policies.13 Over time, this compromise created new contradictions. The expanding menu of government services, state support for the domestic economy and social welfare provision meant that the size of public administration and demands on government revenue continued to grow. But domestic capital had a limited capacity to absorb these costs, especially when it could expand only within its borders.

6

INTRODUCTIO.N

While governments intervened to build their domestic economy and deliver full employment, they also moved internationally to restore stability. Following the Bretton Woods Conference in 1944, the International Monetary Fund (IMF) was established to restore stability to the international monetary system and the General Agreement on Tariffs and Trade (GATT) to re-open the world's trading system. Both were subject to manipulation by the major powers. They also reflected the tension between the state's sovereign authority to set its national priorities and the requirements of international capital. The IMF had the power to disallow currency devaluation above a certain level and impose policy conditions on countries seeking balance of payments support. The GATT sought to balance multilateral trade rules and the need to maintain domestic stability. The compromise was an international trade regime that was multilateral in character, but predicated on domestic interventionism and a shared commitment by member countries to a set of social objectives (the most important of which was full employment). The rise of protectionism during the 1970s was a move by governments to minimise the social costs that resulted from making domestic adjustments to changing international economic conditions. Writing in 1982, international relations specialist John Gerard Ruggie argued that this rebalancing of international and domestic goals was consistent with the original GATT compromise, and predicted that the greatest threat to the compromise regime came not from protectionism, but from 'the resurgent ethos of neo-laissez-faire'.14 From the 1970s, capital in North America, Europe and Japan (and to a lesser extent in countries such as New Zealand and Australia) actively searched beyond its national boundaries for new markets, lower production costs and new synergies. Economic activity focused increasingly on regional and other international markets. Corporations restructured their production and distribution on a transnational basis. Financiers created new opportunities for investment in this more fluid and complex environment. To facilitate these developments, barriers to the efficient international operation of capital needed to be reduced, and preferably removed. Demands from business and supportive governments for economic liberalisation at a global level saw the rapid expansion of international agreements and agencies such as the World Trade Organisation (WTO), the North American Free Trade Agreement (NAFTA), Asia Pacific Economic Cooperation (APEC), and the ill-fated Multilateral Agreement on Investment (MAI). Intergovernmental financial institutions, notably the IMF and World Bank, promoted structural adjustment of poor countries, often as conditions attached to loans. At the domestic level, the promotion of the global free market meant rolling back the size, cost and regulatory role of the nation-state. Gaining the consent of the populace to do so was

INTRODUCTION

7

difficult; hence the opening of markets tended to coincide with 'strong government', which circumvented the democratic process and sought to insulate key economic activities from political intervention. In the 1990s, these changes were implemented in the name of 'globalisation'. Neo-liberal economists, business media, international economic agencies and think-tanks hailed the progression towards a self-regulating global market-place as irresistible and irreversible. Yet this vision contained all the contradictions Polanyi had identified in the previous century. Its economic landscape was devoid of social and political relations, and of cultural and national identity. The social consequences of free markets in labour, natural resources and capital were therefore ignored, creating social conditions and political pressures that made the vision unsustainable at the national level. The self-regulating market began to fail. The institutional vehicles for global economic policy-making, driven by the same neo-liberal theories, were equally detached from the requirements of real economies; they too experienced challenges, from both member governments and popular unrest. Governments who turned their back on these realities and imposed a pure free market agenda without popular consent put the legitimacy of their political systems at risk. For most Western industrialised countries, the Keynesian era had fostered a deep integration of economic, social and political life. Few governments could put the ideology of global free markets into practice for a sustained period of time, even if they wanted to. Some governments did make radical moves to deregulate, notably those of Margaret Thatcher in the UK and Ronald Reagan in the US although their rhetoric was often purer than their practice. But these moves were superseded by a new compromise. It remains to be seen how successfully these compromises will defuse the pressures that brought them about. 'Globalisation' posed different challenges for non-OECD countries. Many were former colonies with fragile economies, heavy debt burdens, thin constitutional systems and often corrupt leadership. This left their governments vulnerable to pressure from foreign investors and international agencies such as the IMF to deregulate. Yet these governments already confronted the domestic realities of poverty, social disorder and political survival. Radical deregulation carried enormous additional social and political costs, and met with diverse forms of resistance from governments and their peoples.

8

INTRODUCTION

NEW Z E A L A N D AT THE

CROSSROADS

Against this background, New Zealand appears an enigma. The aim of successive governments and their supporters was to put 'globalisation as ideology' into practice. 'The New Zealand experiment'15 - the relentless pursuit of free market principles that began in 1984 - exposed a small, remote country of 3.8 million people to the full impact of international market forces. The theoretical template on which it was based treated the country's colonial history and the contemporary reality of its social and political life as irrelevant. New Zealand never experienced the 'great transformation' described by Polanyi. Government intervention had driven the New Zealand economy from the earliest days of colonisation, and was deeply embedded in its social structure well before the emergence of the Keynesian welfare state. In 1984, agricultural production still depended on a system of family farms. Industry was supported by domestic intervention and border protection, while training was subsidised through apprenticeships in government departments and free education. Government commitments to regional development, social welfare and universal provision of core public services, such as health and education, had shaped the structure and values of the society. Most people were complacent and conservative. Party politics largely reflected those attitudes. There was little inclination to recognise the limited capacity of the domestic economy to carry the burden of a large interventionist welfare state, or to respond to the international reorganisation of capital and the need to find new markets as Britain abandoned its former colonies. Change was slow. Something had to give. But the decision to embark on a radical neo-liberal restructuring of New Zealand's economy in 1984 was based on a serious long-term miscalculation. Reconceptualising the society in terms of markets, and subjecting them to rapid deregulation, would not make the social, cultural and political foundations of the society disappear. The contradictions this created were bound to emerge as challenges to the new regime. Architects of New Zealand's experiment behaved like their nineteenth century counterparts - described by Polanyi as 'the secular spokesmen of the divine providence which governed the economic world as a separate entity'.16 Pre-eminent among them was the New Zealand Treasury, whose briefing paper to the incoming government in 1984, Economic Manage-madjd ment, set the agenda for the market-driven economy. It began with an unexceptional survey of the international economic situation and outlook, painting a picture of uncertainty and change which could have drawn a range of responses. However, Part Two blamed the country's 'lacklustre' economic performance on two main factors: 'serious structural difficulties',

I N T R O D U C T I O N.

9

which impeded international competitiveness; and an unwillingness to adjust to changing external conditions.17 These problems were exemplified by a heavy reliance on government intervention, including industry subsidies and border protections such as tariffs; price restrictions on services; state monopolies on communications and energy; the protected position of the public service and of state sector activities such as health and education; the under-pricing of state-supplied goods and services; and the protected position of unions. Treasury argued for policies that allowed the market to adjust faster, so that changes in international prices would be reflected in the domestic economy. This would ensure that the country's resources were continually reallocated to achieve the highest national income possible.18 Treasury's answer to New Zealand's 'serious macroeconomic policy imbalances' was a textbook application of neo-liberal economic theory. Government should adopt a monetarist approach to controlling inflation, and float the currency. The labour market had to be deregulated, and protections removed from industry and agriculture. Tighter controls on government spending were required, accompanied by a shift towards indirect taxation and commercialisation of the public sector and social policy. The international economy was little more than a backdrop to this domestic policy agenda. This was even more apparent in Treasury's 1987 briefing paper, Government Management, a 470-page ideological treatise on the need to limit the size and role of the state; the international outlook was confined to three pages in an appendix.19 By contrast, Treasury's 1990 briefing papers invoked the spectre of globalisation to justify taking these policies further. We cannot escape the effects of changes taking place elsewhere in the world. We need to adapt and exploit the opportunities offered by these changes. Government policies should encourage New Zealand firms to adopt this international focus. Policies should avoid creating insular attitudes or imposing unnecessary risks or costs on activities that compete with the rest of the world.20

Barriers to international competitiveness had to be removed. For a relatively insignificant economy to attract investment and compete internationally, the overall stability and quality of its policies was critical: 'In an increasingly interdependent world poor policies can be quickly "punished" as investors shift their funds and their managerial skills elsewhere. This underlines the importance of New Zealand establishing policies broadly in line with or better than those in other countries.'21 Treasury insisted that New Zealand had to be more than a passive bystander in the globalisation process; it was in the 'national interest' that

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globalisation be positively embraced. New Zealand could and should adopt policies that other countries eschewed, and present itself as a model for the world. Successive New Zealand governments implemented this agenda almost without demur. The fourth Labour government of 1984-1990 was committed to 'opening up' the economy. It lifted exchange controls, deregulated the financial markets, and floated the dollar. Price stability was made the Reserve Bank's sole objective. Foreign investment rules were relaxed, and state assets (notably telecommunications, forests, and the Post Office Savings Bank) were sold to foreign companies. Domestic subsidies were withdrawn and domestic markets deregulated. Tariffs were reduced, and other trade protections were removed. Internationally, the Labour government pursued a vigorous free trade position in the Uruguay Round negotiations on the GATT, the extension of the Closer Economic Relations Trade Agreement with Australia (CER), and the birth of APEC. The National government displayed equal fervour when it came to power in late 1990. International competitiveness became a justification for changing labour laws and imposing fiscal restraint. More central and local government assets were sold offshore. Public and social services were contracted out, with foreign suppliers and insurers claiming their share of the business. Rules governing foreign investment were further relaxed. Commitments to the new World Trade Organisation and APEC promised that future governments would continue to liberalise international trade and investment, or at least not reinstate restrictions. Accolades from the Organisation for Economic Cooperation and Development (OECD), credit rating agencies, the financial media and well-connected international think-tanks allowed the cheer-leaders to claim that the New Zealand experiment was both internationally orthodox and leading the world. During the early 1990s, the justification for free market policies shifted from the need to address domestic inefficiencies to meeting the challenges of globalisation. While this was consistent with international trends, it was also politically expedient. Globalisation and domestic restructuring were flip sides of the same coin. TINA - 'there is no alternative' - applied to both. During the 1980s the ascendancy of neo-liberal economics, often described as the New Right, in a number of OECD countries also had a largely domestic focus. By the early 1990s there was evidence of unease, verging on a backlash, in many countries including New Zealand, although other governments, such as Ontario and Alberta in Canada, were only just heading down the neo-liberal path. While globalisation had the same policy agenda, it was portrayed as an inescapable development rather than a domestic policy choice. Once the Cold War ended, global capitalism assumed an almost complete hegemony. The process of international

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economic policy-making gained further momentum through the conclusion of multilateral negotiations in the GATT Uruguay Round (1993), agreements to extend regional economic integration through NAFTA (1992) and the European Union (1992), and the commitment to free trade and investment in APEC (1994). These arrangements provided new political mechanisms for committing current and future governments to global free market policies, external to - and in New Zealand's case completely bypassing - the domestic polity. Globalisation assumed an aura of virtual omnipotence. It was unfashionable, almost unpatriotic, for New Zealanders to question the benefits it might bring. Its advocacy by corporate leaders, politicians and officials went largely unchallenged, despite a paucity of empirical evidence to support their arguments. Dissenting voices struggled to be heard. Critics drew parallels between the economic and social consequences of the global agenda and the New Zealand experiment, both of which sacrificed the well-being of poor people (and poor countries) to the self-interest of big business and wealthy elites. Globalisation was challenged as a second wave of colonisation, with transnational capital playing the role of imperial powers. A network of non-government groups and individuals, including the Campaign Against Foreign Control of Aotearoa (CAFCA), Christian World Service, CORSO and GATT Watchdog, worked to build an information and education base on international economic issues. Conservation groups focused more specifically on resource laws, the operations of transnational corporations, and international initiatives on environmental issues from global warming to toxic waste. In 1993 the New Zealand Trade Union Federation (TUF), set up as the alternative union body to the Council of Trade Unions, began to raise the concerns of workers they represented in industries most directly affected by trade liberalisation, including clothing, textiles, footwear and forestry. We hear a lot about 'globalisation' these days, being told that we live in a global world, that the global economy offers us the way forward. ... Throughout these claims, there is very little that tells us what is being globalised, what effects it might have or where the changes are being felt. Tariff cuts and other moves to free trade are one aspect of policies that encourage 'globalisation'. The New Zealand government is continuing to liberalise trade and investment restrictions at the expense of New Zealand workers and New Zealand jobs. We are the losers while the winners are the members of the global elite.22

The Federation, which had strong links with activist workers' organisations in Asia, condemned the globalisation agenda as having 'introduced a new morality where the new god is the dollar and a failure to maximise

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INTRODUCTION

profit is a mortal sin. Concepts of love, fairness, equality and social justice are given no value ... .'23 Among the few economists who took a critical stance were those working with the Alliance,24 and members of the 'old school' such as retired academic Wolfgang Rosenberg, an economic nationalist of the post-war era.25 In other disciplines, the author's own work linked global economic policy-making to New Zealand's neo-liberalism, and highlighted attempts to embed the new regime through foreign investment and international agreements.26 This included a warning that anti-globalisation rhetoric tended to reinforce the TINA syndrome, and advised New Zealanders to 'maintain a healthy scepticism about claims that transnational capital, international institutions and agencies now control our lives and there's nothing we can do'.27 The dissenters had their own international networks - overlapping groups of activists in many countries who exchanged information and analysis, either in person or via the Internet, and sometimes coordinated their campaigns. Within these networks there were difficult debates over whether to engage with the international economic policy-making machine: some sought to influence it from within, while others saw no prospect of change, and the serious risk of co-option. At the parliamentary level, NewLabour (and later the Alliance) actively campaigned against the globalisation package, especially the reduction of tariffs and industry support, the absence of any requirement for major foreign investment (except in land) to meet a 'national interest' test, and the sale of state assets into foreign hands. The party identified the Reserve Bank's monetary strategy as increasing New Zealand's exposure to speculative foreign capital and external financial crises; attempts to tie future governments to the free market agenda through international agreements such as the WTO and APEC were condemned. From 1992, Winston Peters and his New Zealand First party also campaigned on 'economic sovereignty', often appealing to nationalist and sometimes racist - sentiment. Peters tapped into an undercurrent of unease among many New Zealanders who remained deeply insecure about their colonial-based identity in a world that was rapidly changing around them. Opinion surveys, political polls and radio talkback shows recorded fears that the country's sovereignty was under threat from foreign companies and their parent governments. These fears were manifest in an outbreak of populist racism directed at Asian immigrants and investors from 1993 to 1996, and (rather ironically) in ongoing hostility to the settlement of Maori land claims by the Waitangi Tribunal. By the mid-1990s, these critiques had gained more currency and the vision of a self-regulating 'free' economy was becoming socially and

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politically unsustainable. The New Zealand experiment had not delivered the promised prosperity, with only three years of significant growth since 1984. Successive governments had adopted a Darwinist attitude to the real economy. There was minimal investment in local production, and no positive government support for struggling industries. The export sector was now burdened by a grossly overvalued exchange rate. Unemployment was rising. Short-term speculators were cashing in on excessively high real interest rates, driven up by the Reserve Bank's monetary policy, and foreign owners were milking privatised assets. The balance of payments was deteriorating rapidly, and overseas debt continued to rise. The credibility of the neo-liberal model declined further in 1998, as unemployment, foreign debt and the current account deficit worsened and the economy moved into recession. These problems pre-dated the 'Asian crisis', which contributed to the severity of the economic downturn, but did not cause it. Equally, there was no sign of improvement in the quality of life, for which many New Zealanders had endured considerable hardship. Inequalities continued to grow, and the gap between Maori and non-Maori on key indicators such as health, education and income had widened.28 For many New Zealanders, short-term pain had become permanent. Core public services, especially health and education, were severely run down. Basic infrastructure such as reading had deteriorated; the electricity suppl. to Auckland's central business district collapsed; and the fire and ambulance services suffered sometimes life-threatening breakdowns. The political legitimacy of the system of government was also damaged. There was a st