New Zealand’s economy in World War Two

I’ve been reading, in quick succession, the three non-military books in the New Zealand official war history series:

F.L.W. Wood’s The New Zealand People at War: Political and External Affairs

J.V.T. Baker’s War Economy, and, in two volumes,

Nancy Taylor’s The Home Front

The books emerged quite slowly. Michael Bassett records that the 1950s Holland government wanted the history series to stick to military matters, and it was not until the Nash government that Baker and Taylor were commissioned.  Even then, Taylor’s work wasn’t published until 1986.

Read together they are a fascinating set of accounts of the civilian side of New Zealand’s involvement in the war.  My prime interest is the economics volume, but I was also struck by, for example, how far-reaching press censorship was in New Zealand –  often apparently to avoid political embarrassment, more than to safeguard military secrets.

War Economy is full of details –  perhaps too many in places, but it is detail that is hard to find elsewhere.  What it lacks is much of an analytical framework, not supplied in other economic histories of New Zealand (or, as far as I can tell, in scholarly articles).  If our universities were not now almost entirely devoid of economic historians, a modern analytical history of the period, drawing in more cross-country comparative analysis, would be a great opportunity for someone.

Two things from the period did stand out.

The first is that, while New Zealand, devoted almost as much of its GDP to the war effort as any of the major combatants (at peak similar to that in the UK, although the UK held the peak for longer), material living standards for the civilian population seemed to remain relatively high –  notably the quality of the diet, access to petrol etc.  Perhaps that partly reflects just what a rich country New Zealand then was.  Using Angus Maddison’s data:

Featured image

New Zealand’s GDP per capita in 1939 was second highest of those countries shown.  It may have been easier to devote a larger share of GDP to the war in a rich country like New Zealand than in a relatively poor one like the USSR, where a larger share of resources would have to have been devoted to subsistence.

And the second point is the dramatic transition, from New Zealand being on the brink of default in 1939, to New Zealand being, in effect, defaulted on just after the war.  In 1939, in the wake of the imposition of exchange controls, Walter Nash emerged from a humiliating mission to London, with a very onerous schedule of overseas debt repayments.  If the war had not been looming –  which made the British government keen on maintaining good relations with the Dominions –  it is quite possible that New Zealand would have been unable to rollover maturing debt at all, probably ending in a default to external creditors.  By just after the war, New Zealand  –  having markedly reduced its external debt ratios during the war – made a substantial gift to the UK: in reality, Britain was quite unable to meet all its obligations and needed some of them written down.

In a paper a couple of years ago, some IMF economists looked at examples of countries that had markedly reduced their overseas debt.  The New Zealand experience during WWII was as stark as any of those reversals, but is too little studied.  It seems to have mainly resulted from a determination to pay for as much of the war as possible from taxation, together with the controls and rationing that limited private sector consumption and investment.  What it was not down to was any strength in New Zealand’s terms of trade:

Terms of trade (3)

The terms of trade fell during the war years –  our import costs rose as global inflation increased, but there was little adjustment in the prices of the agricultural/pastoral products New Zealand sold to Britain.

A  fascinating phase in New Zealand’s economic history, to which I may return.

Why New Zealand languishes

New Zealand’s long-term economic underperformance, and what can be done about remedying it, should be one of the most keenly-debated topics in New Zealand public life.  Sadly, it isn’t.  Too many of our political and economic elites seem to view it as something for the too-hard basket, or perhaps are simply reconciled to declinism, or implicitly take the view that “New Zealand is still a nice place to live, and me and my children will be fine –  after all, they can always leave”.

I don’t think that is good enough.

To the credit of The Treasury, they have sometimes sought to engage with these issues.  A couple of years ago, they ran a series of lunchtime presentations for staff, inviting in various people to offer their views.  I was one of those invited –  and the invitation encouraged me to be a little provocative.  As it happens, the presentation itself never happened, but I took the opportunity to write down what I would have said, in pretty much the style I would have said it.  I’ve distributed copies to a wide range of people, then and subsequently.

The very short version of the story: New Zealand had an abundance of productive land, made valuable by the urbanisation of Britain and the emergence of refrigerated shipping in the late 19th century.  That natural endowment, and the associated technological innovation, was  –  and is – enough to support very high living standards for a quite limited population.  Since World War Two, New Zealand has had no big new opportunities –  unlike, say, Australia’s mines or Norway’s oil – and our governments haves repeatedly handicapped the country’s prospects by pursuing large programmes of inward migration.  Particularly in the last 25 years, governments have been actively hindering adjustment  –  more than replacing the many New Zealanders who have responded to market opportunities and left.  Growing population has rarely, if ever, been a basis for successfully lifting per capita income.

I’d write some things a bit differently now, and I will flesh out many of the points in later papers and entries on this blog, but for now here is one hypothesis for

Why New Zealand languishes

As ever, I will welcome comment and debate.

An introduction

I’m starting this blog to offer my thoughts and perspectives on a range of issues around economics, economic history, and public policy.

I’m a New Zealander.  That means I have a particular interest in New Zealand issues and institutions, and the decades-long disappointing performance of the New Zealand economy, but I will also be commenting on a range of global issues.

My primary expertise is in macroeconomic policy and related institutional design, but I will range wider.  Policy, by its nature, involves choices and judgements.  Most of those are, or should be, made by elected politicians.  That means that in discussing policy it is futile to think that one can avoid politics. But if there is advocacy here, it will be for my own views, and for the analysis of others that I find persuasive, not for any one or other of New Zealand’s political parties.