Julian Wood

By Julian Wood - 29/03/2017

Julian Wood

By Julian Wood -

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A brief history of New Zealand’s regional policy initiatives

SUCCESSES AND FAILURES 1950s-1984

Earlier on in New Zealand’s history the focus of regional policy aligned well with the OECD’s “Old Paradigm.” This was partly because New Zealand like many OECD countries through the 1950’s and early 60’s experienced a long economic boom and full employment. Regional development in this environment was subsumed within overall national development. The problem was not a lack of growth but that the spatial location of this growth was unevenly spread. More specifically in New Zealand this was tied to the establishment of medium to heavy industry, which was seen as part of a typical economic development pathway for developing countries. Often debated within the press was the growing regional disparity in industrial development and electrical generation between the North and South Islands.[1] It was in this environment that the Tiwai Point Aluminium smelter and the required Manapouri power station were approved in the late 1960s.

However, two economic shocks soon changed the economic landscape of New Zealand. The first was the collapse of the price of wool in the late 60s and then the oil shocks of the 1970s. In response, the Muldoon Government in effect doubled down on protectionist economic policy, deepening even the previous Labour Government’s interventionist style of regional policy as a way of addressing persistent regional unemployment and poor economic performance. This broad set of interventions was aimed at ensuring that “all regions should be able to share in the fruits of National Development.”[2]

A key part of this was to become known in New Zealand as “Think Big.” In 1971 the National Development Council developed four criteria for determining which regions required intervention. These were: situations where there was substantial out-migration from a region, underutilisation of existing infrastructure of a region, low density causing an inability for the region to achieve economies of scale in the provision of non-tradables, and situations where “a case could be made for government to kick-start the exploitation of underutilised resources.”[3] While these criteria at one level are sound they were highly debated as focusing on the “characteristics and performance of regions rather than on their implications for people within the regions.”[4]

“Think Big” [5] heavily on the fourth criteria as justification for a number of large-scale energy projects being developed over the regions.[6] While the primary goal of “Think Big” was to reduce New Zealand’s dependence on the costly import of overseas energy (and to utilise the new supply of gas), the projects were also designed to boost New Zealand’s economy in a time of economic downturn. To fund the infrastructure investment and to maintain the ever- widening range of subsidies, exchange rate controls, and employment programs, the Government borrowed heavily.[7] Unfortunately, as the high price of oil fell many of the projects became financially burdensome and almost all were sold into private ownership.

During this period earlier import substitution policies (aimed at encouraging growth along industrial and regional lines) that were first introduced in 1938 by the Bureau of Industry[8] were extended “to include key export industries including farming using production and export incentives.”[9] However, rather than rebalancing growth across the country these policies often meant that “import substituting industries congregated near the main port and largest market of Auckland, distorting the regional balance of the country”[10] as most of the assembling or manufacturing took place near the largest port.

Alongside the heavy industry “Think Big” interventions there was widespread use of industrial subsidies that aimed to deepen New Zealand’s manufacturing base. For a while many light industries and regionally located “manufacturers” flourished but the financial costs of these policies to the Government accumulated quickly. When protection was phased out over the late 80s and 90s in response to the desire to reduce Government debt the majority of these firms closed. For example, in 1980 there were 16 car assembly plants spanning 6 regions in New Zealand.[11] By 1990 all had closed.[12] Similarly, in 1977 PYE NZ Ltd—a name synonymous with television sets in New Zealand throughout the early 1980s—employed around 630 people in Waihi and Hamilton and Paeroa. By 1982 PYE’s employment was down to 460 employees, and had all but disappeared by 1986.[13]

It can be argued that the very interventions that were designed to deepen the manufacturing base of the country and support local business served to create or deepen a form of regional “lock-in” that still exists today due to regional path dependence. This came about as whole communities became unemployed as import substitution and industrial subsidies were peeled back.[14]

Not only did the “Think Big” energy projects largely misfire but attempts to solve “market failure” in the lending market that started in the 60’s with the creation of the Development Finance Corporation (DFC) also ended in economic failure. The DFC operated like a Development Bank for New Zealand and had a mandate to fund business ventures that were higher in risk than traditional lending institutions were able to lend to. It promoted regional development and new industrial projects and could “grant up to 40 per cent of the capital cost of plant and machinery for projects designed to achieve a high export performance.”[15] This relied on the DFC’s ability to assess risk and “pick regional and industrial winners” that traditional lending institutions had overlooked because of their more conservative funding criteria. The eventual collapse of the DFC, at great financial cost to New Zealand, reflected on a number of internal issues at the DFC not the least of which was funding a significant number of high risk ventures that turned out to be to high risk and eventually failed. Once again having a sound policy rational for intervention failed to guarantee success over and above what the market could reasonably predict.


This is an extract from Julian’s research paper “Growth Beyond Growth | Rethinking the Goals of Regional Development in New Zealand” Discussion Paper. (Released 2017) 

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ENDNOTES

[1] Philip McCann, The Regional and Urban Policy of the European Union: Cohesion, Results-Orientation and Smart Specialisation (2016): 88-89.
[2] “At a meeting of the Southland Progress League on 5 February 1953, Brian Wilfred Hewat, the Mayor of Invercargill, criticised the government for constructing expensive geothermal power schemes in the North Island, when hydro-electric potential remained undeveloped in the lower South Island. The editorial in The Southland Daily News the following day supported Hewat’s comments, and concluded that New Zealand’s future demanded “… the development of the hydro- electric resources of Otago and Southland, and the location of industry close by the source of power.” ”Editorial, The Southland Daily News, 6 May 1953, cited in Aaron P. Fox, The Power Game: The development of the Manapouri-Tiwai Point electro-industrial complex 1904-1969 (Phd Diss, University of Otago, 2001), 143-144. See also D. O. W. Hall, Portrait of New Zealand (A. H. and A. W. Reed, Wellington: 1955), 144-145, cited in Fox, The Power Game: The development of the Manapouri-Tiwai Point electro- industrial complex 1904-1969.
[3] The case for interventionist regional policy was defended by the National Development Council, while opponents included the NZIER. See: National Development Council, Report of the Subcommittee on Regional Development, Wellington, (1971) and Kerry McDonald, Regional Development in New Zealand, New Zealand Institute of Economic Research, Wellington, (1969).
[4] National Development Council, Report of the Subcommittee on Regional Development, Wellington, (1971).
[5] Kerry McDonald, Regional Development Rejoined, New Zealand Institute of Economic Research, Wellington, (1972) cited in Dennis Rose, “Reflections on My time as Director” in The Evolving Institute, 50 Years of the NZ Institute of Economic Research (New Zealand Institute of Economic Research, 2008), 25, accessed on 21 October 2016, https://nzier.org.nz/publication/the-evolving-institute-nzier-1958-2008.
[6] In addition to the energy projects outlined, policy included signing the Closer Economic Relations (CER) free trade agreement with Australia. This built on earlier efforts by previous Labour and National governments included the establishment of a number of diplomatic posts in Asia, including Hong Kong, Indonesia and Laos as well as America in Los Angeles and San Francisco as well as the New Zealand Australia Free Trade Agreement (NAFTA).
[7] A breakdown of the “Think Big” activities by region is as follows: Two large-scale energy projects were developed in Taranaki: a methanol plant in Waitara and the Motuni methanal plant. The Marsden Point Oil Refinery in Northland was expanded. In Otago the Clyde Dam was built on the Clutha River. Taranaki saw the development of the Kapuni hydrocarbon field. The Tiwai Point Aluminium Smelter was upgraded in Southland and Auckland saw the development of New Zealand Steel in Waiuku. In addition, the North Island main trunk line was also electrified.
[8] Between 1975 and 1984 the Government Debt rose from $4.2 billion to $21.9 billion. The economy continued to struggle with not only widespread unemployment but also high inflation as wages and prices spiralled higher through wage and price accords. Owen Hembry, “In the Shadow of Think Big”, New Zealand Herald, 31 January 2011, accessed on 2 November 2016, http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10703096.
[9] “NZ commercial policy turned sharply inwards and essentially prohibited imports of goods which were substitutes for goods produced (or likely to be produced) in New Zealand.” Ralph Lattimore, Longrun Trends in New Zealand Industry Assistance, Motu Working Paper, 03-11 (Motu Economic and Public Policy Research , 2003), 1.
[10] Lattimore, Longrun Trends in New Zealand Industry Assistance, 2.
[11] Brian Easton, National Development Strategy – Where do the regions fit in (1983), 1.
[12] Plants existed in Auckland, Waikato, Taranaki, Manawatu-Whanganui, Wellington, Nelson and Christchurch.
[13] Interestingly in 1898 the producers and exporters of carriages in New Zealand were the first industry to receive economic protection against the importation of cars. This was in the form of licence fees for the importation of cars which could be up to 50% higher than licence fees for a similar locally made horse drawn carriage. Section 12 of the McLean Motor-car Act 1898 (Private) (62 VICT 1898 No2) sets out that in regard to licence fees that “If the weight of the motor-car exceeds two tons unladen, half more” than the fees that apply for carriages of a like class.
[14] For an overview of PYE in New Zealand, see “The PYE Story”, Waihi.org.nz, accessed on 1 March 2016, http://www.waihi.org.nz/about-us/history-and-heritage/the- pye-story/.
[15] See endnote 72 for a brief overview and discussion of regional “lock in” theory.

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