KEY POINTS:
Each Sunday I traipse up to Pak'N Save to do the shopping. What cost me $130 last year for basic grocery items now costs $185 for a household of two. There are few luxuries.
The other night I caught a taxi home. The driver said he was returning with his family to Pakistan. He believed the opportunities were better, particularly the prospect of owning their own home.
He felt the cost of living in New Zealand was too high for a low-wage economy. The economic reforms of the past 25 years were aimed at achieving economic prosperity. So what has gone wrong?
In the past few decades New Zealand has embraced the global marketplace with an enthusiasm matched by few other countries. We are often mentioned in economic literature as a laboratory of free market capitalism.
We rank with Chile as the poster boy of this doctrine. So why, after almost 25 years of privatisation, deregulation and free trade are many Kiwis struggling to own their own homes and pay the weekly bills?
We have applied a textbook economic model of capitalism to a real society. The model provides no allowance for the context in which it is applied. For example it assumes competitive markets to achieve efficient outcomes for consumers.
In reality the small size of New Zealand means truly competitive markets are rare. The model assumes that people base economic decisions on full information. Many investors in finance companies would dispute this assumption.
The model prescribed privatisation so we sold Telecom, BNZ, Air New Zealand, the railways and large parts of the electricity sector. The rationale was that private ownership and competition encouraged efficiency and benefited consumers.
The reality has been Telecom acting like a monopoly and stonewalling broadband access and other telecommunications technology. It has meant significant under-investment in infrastructure such as electricity generation and rail facilities .
It has led to the partial buy-back of Air New Zealand and the repurchase of the railways in the belated realisation that these are strategic assets that cannot be allowed to fail. Throughout this process there has been a huge transfer of general public wealth to limited private hands.
The model prescribed deregulation to remove laws restricting competition and foreign ownership. This would encourage more competition and efficiency.
As a result our banking system is now largely foreign owned. A recent report points out that New Zealand's credit rating is now dependent on the decisions of its foreign-owned banks.
The deregulation of the finance sector has been a key factor in the lending splurge in recent years that is unravelling. Under deregulation banks operating in New Zealand have been able to access funds from abroad with no direct controls on their lending activities.
Our finance sector has few regulatory controls. This has contributed to the finance company debacle. Unwary and naive investors are very vulnerable. It is assumed that market discipline will ensure that lending is prudent and above board. The credit crisis abroad and local finance company collapses illustrate the absurdity of this assumption.
Unfettered financial markets usually end in disaster. Examples from history include the Wall Street Crash, the US savings and loan scandals of the 1980s and the 1997 Asian crisis.
Unwise bank lending also contributed to our sharemarket meltdown in 1987. The financial sector has always been the Achilles heel of free markets.
The model prescribed free trade as the avenue to economic prosperity. New Zealand lowered its trade barriers with a vengeance. After almost 20 years of free trade we are back to a heavy reliance on dairy exports circa 1972. No country has become wealthy through a reliance on agricultural exports alone.
Free trade is based on the concept of specialisation yet it is possible for a country to specialise in activities that ensure it remains relatively poor. A country producing bananas is never going to enjoy the same standard of living as a country specialising in IT.
Agricultural and service based economies tend to be lower wage societies. Most developed nations got rich through industrialisation policies based on selective protectionism. This has allowed them to produce high valued added products ensuring a higher standard of living.
The recent failure of the WTO trade negotiations highlights the hypocrisy of developed nations in preaching free trade but practising the opposite.
The free market model prescribed controlling inflation. In the past few years the Reserve Bank has maintained high interest rates to reduce inflationary pressures.
This has led to a bizarre circular process where high interest rates attract funds from overseas which have been pumped into our housing market.
This led to further inflationary pressures requiring higher interest rates. We have been using overseas money to bid up our own house prices. So we now live in expensive houses but struggle to pay the bills.
High interest rates resulted in an overvalued exchange rate. This, coupled with a blind adherence to free trade, has acted as a scorched earth policy to our manufacturing sector.
The real miracle is that any of these firms have survived. The survivors are the real heroes of our economy.
New Zealand's experiences over the past few decades should be a warning that a pure free market economy exists only in textbook models and the mathematical imaginings of academic economists.
* Peter Lyons teaches Economics at St Peters College in Epsom and has authored several economics texts.
