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War Economy

Economic Development

Economic Development

Adequate power for industry is of paramount importance for economic development; a fact which has been brought home forcibly to governments in New Zealand by wartime and post-war power shortages and, more recently, by the estimated requirements of such bulk users of power as the projected iron sands industry and aluminium smelting plant.

In New Zealand, particularly, with its labour force now fully employed, there is no way to achieve lasting increases in living standards unless more is produced by each worker. This requires that workers have the use of more power, better equipment, and improved methods. A reasonable amount of attention has always been given to these requirements; they have had increasing emphasis in recent years; and they need more still.

Taking a long view, the New Zealand economy, subject to year to year fluctuations in production which are comparatively small by international standards, increases its output in real terms by 4 per page 570 cent a year. This is done with a labour force which increases at about 2 per cent a year, so that, on average, the volume of production per unit of labour increases 2 per cent each year. In spite of periods when supply has lagged behind demand, the power available increases rapidly. Electric power supplies for all purposes increase by 8 per cent a year. Equipment and methods are steadily improved, and New Zealand annually sets aside between a fifth and a quarter of everything she produces to be used for capital purposes.

In the 1960s some economists have suggested that the rate of growth of the New Zealand economy is too slow. Certainly spectacular rates of growth have been achieved since the war in countries such as Japan and Western Germany. These are partly, but by no means entirely, post-war recoveries aided by large injections of foreign capital. They have occurred in countries whose economies were much more seriously affected by the war than was New Zealand's. However, it seems that post-war recovery efforts may have given an increase in momentum to the rate of growth of these countries, whereas New Zealand's rate of growth emerges from the recovery period at about the same as it was before the war. On the other hand, one can say that New Zealand's 4 per cent a year increase in volume of production, though quite slow by comparison, has been sustained with comparatively little change for a very much longer period.

Since the war, Governments have given increasing attention to the direction which economic development should take. Their thinking has, however, been considerably influenced by the tendency for the country to be in almost continual balance of payments difficulties. Because the causes of this tendency have been expressed alternatively as over-importing or under-exporting,1 too much attention has been devoted to finding ways to encourage those who export or those who can produce in substitution for imports. Insufficient care has been taken to ensure that the industries concerned are in other respects suitable for economic preference.

Far too little attention has been given to other more fundamental causes of over-importing: the too-eager desire of the people to increase their current living standards, or alternatively, the failure of the domestic economy to increase its production fast enough.

In spite of the considerable attention given to the direction of development, no clear-cut public statement of government policy for economic development, or for the very closely related subject of import control, has ever emerged. The vague outline of import policy in the 1958 budget statement was not untypical:2

1 Of course export prices have had a full share of the blame too.

2 Parliamentary Paper B–6, p. 9.

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‘The new licensing schedule was designed to give priority to imports of essential foodstuffs, raw materials, machinery, and medical requirements and to allocate the balance of the available funds on the most reasonable possible basis…. A paramount objective of Government policy in this field will be to maintain the supply of those imports which are essential and on which employment depends.’

In 1963 the Tariff and Development Board was required to examine criteria for industrial development. After hearing evidence, it produced and discussed a list of sixteen criteria, but failed to recommend any order of priority. Without an indication of the relative importance of the criteria, they are thought-provoking, but of very limited use as a guide to administration.

Important new industries established since the war have been the rapidly expanding manufactures of pulp, paper, and cardboard from New Zealand's exotic pine plantations. Exports of forest products, including logs, increased in value from £250,000 in 1946 to £10 million a year in the early 1960s, a most welcome boost to export earnings.

An oil refinery started operations in 1964 and will come into full production by 1967, and an aluminium-smelting works is proposed, based on the power potential of the Lake Manapouri – Te Anau area. Both these industries will use imported raw materials. It is also hoped to have an iron and steel industry, using large quantities of electric power, to produce iron and steel from New Zealand iron sand.

The rapid expansion of manufacturing is illustrated in Chart 87, on page 560. What was this doing to New Zealand's dependence on overseas trade? Condliffe wrote:1 ‘Behind the shelter of exchange controls and war shortages, a great number of local manufacturing industries were developed. They increased the need for imported equipment and materials.’ But Sinclair saw a change developing. He wrote:2 ‘Twenty years of State encouragement of industry has produced a more “balanced” economy, but it has not produced a single important export nor reduced the country's dependence on imports. The bulk of imports, today, however, consist not of manufactured goods but of equipment and raw materials for local industry.’

Condliffe went on to point up the change more precisely; he wrote:3 ‘The proceeds of … exports were used at first to buy imported goods for direct consumption, but in the last two

1 J. B. Condliffe, The Welfare State in New Zealand (published 1958), p. 105.

2 Keith Sinclair, A History of New Zealand (published 1959), p. 292.

3 Op. cit., p. 354.

page 572 decades they have been used mainly for purchases of equipment, fuel and materials to supply a rapidly developing complex of manufacturing and servicing industries. The economic structure became increasingly diversified but still depended fundamentally on the export industries producing the purchasing power in foreign markets adequate to supply equipment and materials needed for the expanding needs of an increasing population, which demanded constant improvement in already high living standards.’

Equipment is expensive, but raw materials are often cheap compared with the value of finished products. The tendency has been to increase the value added to overseas materials by New Zealand manufacturers and to decrease the value added in exporting countries. This seems to have had significant effects on the relationship between the cost of imports and the value added in New Zealand, as Chart 89 shows.

chart of manufacturing statistics

Chart 89

(1) Imports valued at c.d.v.

Customarily value added in manufacturing in New Zealand has been smaller than the value of imports. During the war this situation was reversed for the first time. In the last five years value added has consistently been higher than imports.1

1 Much higher, if imports are valued c.d.v. (current domestic value in country of origin), but still true if c.i.f. (landed cost, including insurance and freight) values are used. Chart 89 uses c.d.v. values, as c.i.f. values are not available for the earlier years.

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As a recent paper said,1 ‘Efforts are being made to change the pattern of industrial development by encouraging those industries carrying production through from the earliest to the finished stage; and important projects to develop new industries based on indigenous raw materials and other resources are in progress.’ In the early 1960s, also, extra encouragement has been given to development expenditures on farms, so as to increase their export earning capacity.

These policies, if pursued steadfastly, must have an effect on New Zealand's ability to pay her way overseas. Whether they assist her overall rate of economic growth is another question.

The long-term average rate of growth, since World War I, has been about 4 per cent a year. In the period up to World War II, which included the depression of the 1930s, a fractionally higher growth rate was achieved.2 Under stress of war the rate of growth averaged 2¼ per cent,3 but since World War II it has again averaged very close to 4 per cent a year. At this rate of growth output volumes double every 18 years.

World War II, by forcing New Zealand to depend much more heavily on her own manufactures, accelerated the tendency towards industrial development. Since the war, import controls and economic policy generally have further encouraged this tendency. The question still remains, whether, given a more carefully ordered set of criteria for development and a longer-range approach to economic policy formation, the same amount of effort would, without damage to the economy, have produced a much faster rate of growth.

1 Commonwealth Development and Its Financing. 4. New Zealand, p. 9.

2 Estimates for this period are necessarily very rough. This is the author's estimate based on all available volume indicators. All growth rates in this paragraph measure changes in volume, not in money values, of outputs.

3 See also p. 441.