John Gascoigne: NZ is rich with resources but poor on economic nous

The discovery of the North Sea oilfields in the 1970s resulted in immense windfalls for Great Britain and Norway. Photo / Kristian Helgesen, File

OPINION

As a tiny, resource-rich nation, New Zealand should be right up there with Iceland, Singapore and the Nordic nations with a per capita income or living standards among the highest in the world.

Instead, our per capita income is now one of the lowest in the developed world.

This paradox between abundant resources and low per capita income can be explained by the resource-curse thesis.

In economics, this thesis holds resource-rich nations are apt to make bad policy choices; resulting in inferior economic performance. Conversely, nations with few resources tend to outperform resource-rich countries. This doctrine is not an iron law but an observed trend across a broad sample of nations.

The best example of the resource-curse thesis came with the discovery of the North Sea oilfields in the 1970′s. Their development resulted in immense windfalls for Great Britain and Norway.

Unfortunately for Britain, these windfalls came on stream during Margaret Thatcher’s neoliberal era.

Thatcher’s prescription of small government, low taxes and individual choice would prove tragic for Britain.

Suggestions that these windfalls be channelled into a state-run investment fund were anathema. The Iron Lady would have none of it. Better, she argued, to cut taxes, put more money in people’s pockets and make their own choices.

The North Sea oil revenues were not widely distributed in Great Britain. In fact, public sector net investment plunged from 2.5 per cent of GDP at the start of the Thatcher era to just 0.4 per cent by 2000. And public sector spending remained constant at around 40 per cent of GDP from Thatcher to the 2008 GFC.

The bulk of Great Britain’s oil money went into tax cuts for the wealthy (the 1 per cent). Thatcher’s Chancellor, Nigel Lawson, slashed income and other taxes from 60p in the pound to just 44p by 1988 for Britain’s high-income earners. The result was a massive real estate bubble accompanied by a splurge in luxury consumption.

At the same time, low and middle-income earners (the 99 per cent) were walloped with increased VAT (their equivalent of GST) which left them substantially worse off.

As a result of Thatcher’s policies, Britain now has absolutely nothing to show for its immense North Sea oil windfalls. That opportunity has gone forever. Not surprisingly, Thatcher remained totally unrepentant to the end of her life.

Norway, by contrast, took a very different approach. In 1974, the Norwegian government laid down the principle that the nation’s new oil wealth should be used to develop what it called a “quantitively better society”, defined by one of Norway’s historians to mean “greater equality”.

John Gascoigne. Photo / Supplied

Norway’s petroleum industry was put under democratic ownership with the public owning 70 per cent of Statoil, the state-owned petroleum company, and the nation’s vast oilfields. Hence the benefits of Norway’s petroleum sector are spread across its entire population (the 99 per cent) and, through the State Petroleum Fund (now the world’s largest sovereign wealth fund), future generations as well.

Compare New Zealand’s approach with Norway’s. The huge Motonui synthetic fuel plant was the star of New Zealand’s “Think Big” development programme in the 1980′s.

Slammed as hopelessly uneconomic, the Fourth Labour Government paid Fletcher-Challenge $112 million to take the plant off the government’s books. After due diligence Canada’s Methanex Corporation paid $1.1 billion for the plant. It now produces one-third of Methanex’s global production as its most profitable operation. Canada’s gain, New Zealand’s loss.

In keeping with the resource-curse thesis, this fire-sale of a highly profitable public asset was just one in a series of bad policy choices since 1984 that have got New Zealand nowhere.

John Gascoigne is a Cambridge-based economic commentator.