the reserve bank and new zealand's economic … reserve bank and new zealand’s economic...

The ReseRve Bank and new Zealand’s economic hisToRy �

and new Zealand’s economic hisToRy

The ReseRve Bank

Introduction 3

Maorieconomypre–1840 4

Colonialeconomy1840–1890 5 The‘longdepression’

Thesettlereconomybynumbers

Britain’sfarm1890–1932 8 Thetradingbanksandtheeconomy

Theearlytwentiethcenturybynumbers

Nationaldevelopment1933–1973 12 Plannedrecovery

Pastoralprosperity

Endofpastoralprosperity

Themid-twentiethcenturybynumbers

Turbulenttransition1973–1993 19 NewZealand’sproblems

Inflationbusting

Thelatetwentiethcenturybynumbers

Openeconomy1993– 25 Renewedgrowth

Glossary 27

conTenTs

� The ReseRve Bank and new Zealand’s economic hisToRy

Front cover images, clockwise from left top: Reserve Bank dealing room, early 1990s (RBNZ); Reserve Bank building (right), (RBNZ, photography Stephen A’Court); One pound note issued by the Otago Banking Com-pany, circa 1860s (RBNZ); underlay, Wellington buildings (RBNZ); “Economy House”, token issued by a Dunedin merchant, circa 1860s (RBNZ). Back cover: Reserve Bank of New Zealand building (RBNZ, photography by Stephen A’Court).

ISBN978-0-9582675-5-7(print)

ISBN978-0-9582675-6-4(online)

Copyright©2007ReserveBankofNewZealand

Illustrations:ReserveBankofNewZealandexceptwherenoted.

ATL:AlexanderTurnbullLibrary,Wellington.


TheReserveBankplaysa

significantroleintheNewZealand

economy,andhasdonesosince

theBank’sformationin1934.

TodaytheBankisresponsible

formaintainingpricestability,

promotingthemaintenanceof

asoundandefficientfinancial

system,andmeetingthecurrencyneedsofthepublic.

However,thisrolehaschangedovertheyears.Thisbookletoutlines

thebroadhistoryoftheNewZealandeconomysincethe1840s,and

detailstheroletheReserveBankhasplayedinitsincethemid-1930s.

inTRoducTion


Polynesiansestablishedpermanent

settlementsinNewZealand,andinitial

exploitationofnaturalresourcesgaveway,

probablyduringthefifteenthcentury,

toamoresettledworldofgardening

andresourcemanagement.TheMaori

economyproducedenoughsurplusto

supportasignificantcycleofpabuilding

fromthemid-fifteenthcenturyonwards.

WhenEuropeansfirstarrivedin

numbersintheearlynineteenthcentury,

Maoriwereeagertotrade.Potatoes,corn

andflaxgrownbyMaoriwereusually

barteredforweapons,rum,tobacco,

blanketsandEuropeantoolsandproducts.

Bythelate1830s,settlersandMaoriwere

usingmoneyinever-increasingquantities.

maoRi economy

pRe-1840

Top right: A lithograph by George Angas showing everyday items from the Maori domestic economy, around 1847.

Right: John Williams is usually credited with this ink-and-wash sketch of Maori bargaining with pakeha, mid-1840s. Pigs, potatoes and flax were usually exchanged for tobacco, blankets, tools, guns and powder.

John Williams, ATL, A-079-017.

George French Angas, ATL,PUBL-0014-55


colonial economy

1840-1890

Banksmadeanearlyappearance.

TheUnionBankofAustraliaopeneda

branchinBritannia(Petone)in1840,but

atfirsttherewasnocentralauthorityto

issueoradministercurrency.In1851the

governmentopenedtheColonialBankof

Issue,withauthoritytoissuebanknotes.

However,thisexperimentdidnotlast

long,andthebankclosedin1856.

Theinfantcolonyhadagreatneed

forinfrastructure.Everythingrequired

tosupportsocietyandeconomyhadto

bebuiltfromscratch–includingroads,

railways,schools,hospitals,sewerage

systems,ports,andfactories–and

somebodyhadtopayforit.Private

enterpriseplayedaroleinbuilding

businesses,butthemainweightof

responsibilityforfinancinginfrastructure

fellonthegovernment.

Aneconomyinthewestern

senseemergedacrossNew

Zealandinthe1840s.

Onehistorianhascalledthis

earlyphaseour‘quarrying’

period.Exportswerebasedon

exploitationofexistingresources,

notablyflax,timber,gum,gold,

andtheavailablefertilityofthe

soil.

Photographer unidentified, ATL,F-594-1/1

Top right: Bank of New Zealand branch at either Arthur’s Point or Maori Point, Otago, opened by George Ross in 1863.

Above: Dunedin, 1870s.

Photographer unidentified, ATL, F-48814-1/2


Thisposedotherproblems.Atthetime

therewasnoincometax,andthemain

governmentincomewastradelevies.

OthersourcesofCrownrevenueincluded

thesaleofCrownlands–whichwere

purchasedwholesalefromMaoriduring

theperiod–andlicensingfees.

Earlygrowthfocussedonthepastoral

sector,butthemainenginebehindNew

Zealand’seconomybytheearly1860s

wasgold.Dunedininparticularboomed

onthebackofthepreciousmetal.Many

tradingbankswereestablishedorset

upbranchesaroundthegoldfields,and

between1861and1870goldmade

upmorethanhalfNewZealand’stotal

exports.In1863,thepeakyear,it

comprised70percent.Woolandtimber

tookdistantsecondandthirdplaces.

The ‘long depRession’Manysettlersenvisagedacolonythat

wouldbecomeabiggerandbetter

Britain.Infact,oncegoldhadrundown,

thedevelopingNewZealandeconomy

hadlittletosellbeyondwool.Gum,

flax,timber,grainandtallowmadeup

lessthantenpercentoftotalexports.

Evengolddidnotpreventmassivetrade

deficits.Typicallytheeconomyimported

twicewhatitexportedbyvalueduring

Left: Gold digging in Otago, probably on the Clutha, early 1860s.

Below: Panning for gold, probably during the 1880s.

Artist unidentified, ATL, A-253-035

Photographer unidentified, ATL, F-3053-1/2


The seTTleR economy By

numBeRs

Settler-erastatisticsarepatchy.However,

wecangetageneralpictureofwhatwas

happeningfromexportfiguresandprice

changes.

thisperiod,andthedifferencewas

madeupbyimportedcapital,someofit

accompanyingthemigrantsthemselves.

Tradedeficitsofthissort,financedby

capitalinflowstosupportdevelopment,

weretypicalfeaturesofcolonialsettler

societiesofthetime.

Withoutgoodinternalcommunications,

theNewZealandeconomywasacluster

ofseparateregionaleconomies.Colonial

TreasurerJuliusVogelinitiatedaloan-

fundedpublicspendingprogrammeto

rectifythisintheearly1870s,intending

tobuildinternalinfrastructureandbring

newsettlerstoopenupthehinterlandof

theNorthIsland.

Forafewyearseverythingboomed,

butfrom1879arecessioninBritain

flowedintothecolonies.Estimatesshow

thatNewZealand’slevelofrealGDPwas

flatduringthe1880s,andforthefirst

timetherewasanetflowofmigrants

outofthecolony.However,industrial

andrailwaydevelopmentwassignificant

andithasbeenarguedthatalthough

pricesfellandthebankingsectorwas

understrain,theeconomywasgenerally

goingthroughaperiodofdevelopment,

includinggrowthoflocalsmallindustries,

madepossiblebyVogel’sinfrastructure

whichhelpedspuranationaleconomy.

Theadventofrefrigeratedmeatexports

fromtheearly1880screateda£1million

exportindustryby1890,bywhichtime

thetradebalancewasshowingamodest

regularsurplus.

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

1860 1865 1870 1875 1880 1885 1890 1895

%

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10%

‘Vog

el’b

oom

Gol

dru

sh

‘Lon

gde

pres

sion

’

Graph 1

Inflation 1860–1900

(estimated)

Source: J. W. McIlraith (1911), Statistics New Zealand.

Graph 2

Export prices 1853–1914

0

50

100

150

200

250

1850 1860 1870 1880 1890 1900 1910

Index

0

50

100

150

200

250Index

ExportpriceindexFarmexportspriceindexFarmproductspriceindex

Source: J. W. McIlraith (1911), Brian Easton (1984), as republished in Phil Briggs (2003).


Oneofthemostsignificanteconomic

developmentsoftheperiodwasnew

tradeinmeatanddairyproducts,

supplementingthewoolmarket.This

industrywasdrivenbythedevelopment

ofrefrigeratedshippinginthe1880s.By

theeveoftheFirstWorldWar,meatand

dairyexportsmadeup35percentoftotal

goodsexports.Exportcommodityprices

boomedduringthewar,whenBritainwas

keentobuywhatevercouldbesupplied.

However,althoughtheboomlasted

forafewyearsafterthewar,fromthe

early1920stheNewZealandeconomy

performedquitepoorly,withonlybrief

upturns.

Muchofthedifficultycamefromthe

externalsector.Asaprimaryproducer

sellingprincipallytothe‘homecountry’,

NewZealandwasparticularlyvulnerable

toeconomicfluctuationsinBritain.In

1928,forexample,Britaintook£41

millionofNewZealand’stotalexports,

byvalue,outofatotalof£56million.

However,Britishfortunes,aftertheFirst

WorldWarandintothe1920s,werenot

good,andthiswasreflectedintoNew

Zealand’seconomicsituation.

BRiTain’s FaRm

1890-1932

Thesecondmainphase

ofNewZealand’seconomic

historybeganinthe1890s

andlastedintotheearly

1930s.Duringthistime

NewZealandbecamea

primaryproducerforBritain,

exportinglargelypastoral

productsintothissingle

market.

Edward Thomas Robson, ATL, F-1541-1/2-MNZ.


The TRading Banks and The

economy

Inthe1920s,NewZealandstilllackeda

centralbank,despiteencouragementfrom

Britaintoestablishone.Banknoteswere

issuedbythesixmaintradingbanks.Until

1914theywererequiredtoholdenough

goldandsecuritiestobackthevalueof

thecurrency,butthisrequirementwas

suspendedforthewaremergencyand

neverreinstated.Inpractisethischange

madelittledifference:thekeyquestion

forthebanksremainedtheirability

tomeetcustomerdemandforsterling

balances–thefundsinBritainthatpaid

forimports.Thebanksmanagedtheir

locallendinginordertokeepthevalueof

theNewZealandpoundroughlyequalto

thatoftheBritish.Thisinturninfluenced

Opposite: Meat from the Longburn freezing works being taken aboard ship in Wellington, early 1930s.

Above: Railway construction workers on the Main Trunk Line near Waiouru, Ruapehu and Ngauruhoe in the background, probably between 1901-10. Railway played a key role in New Zealand’s internal communications and economy for many years.

Top: Gear Meat label, circa 1880s.

Frederick Nelson Jones, ATL, F. N. Jones Collection, G-7689-1/1

Colour print label, ATL, Eph-F-MEAT-Gear-002-3

�0 The ReseRve Bank and new Zealand’s economic hisToRy

thelevelofspendingandeconomic

activityinthedomesticeconomy.

Fourofthesixtradingbankswere

Australianowned.Theirsterlingbalances

inLondonactuallyreflectedAustralasian

activity,notjustthatofNewZealand,

withtheresultthatthestateofAustralia’s

foreigntradealsoaffectedtheavailability

ofcreditandforeignexchangeinNew

Zealand.Thisarrangementworkedwell

whentheAustralianandNewZealand

economieswereinmuchthesamestate,

butleftNewZealandexposedwhenever

theAustralianeconomywasweakerthan

ours.

Thegovernmenthadfewtoolsto

addressthisandothereconomicissues

–allthatcouldbedonewastoadjust

governmentrevenueandexpenditure,

throughfiscalpolicy.Governmentsinthe

mid-to-late1920sthereforesoughttouse

Top: Bank of New South Wales, Wanganui branch, 1910.

Above: Bank of New Zealand five pound note, 1920s.

Left: Timber workers in the Kaitaki ranges, log hauler on the left. Although the economy was pastorally dominated, timber was a significant local industry for New Zealand.

Opposite top: Depression relief work on the Akatarawa road, early 1932.

Frank J. Denton, ATL, Tesla Studios Collection, G-17399-1/1

Arthur James Northwood, ATL, Northwood Collection, G-6214-1/1

The ReseRve Bank and new Zealand’s economic hisToRy ��

fiscalpolicytostimulatetheeconomy,but

theseeffortswereoverwhelmedbythe

GreatDepression,intowhichtheworld

economyfellin1930.

NewZealandwasparticularlyhard-

hitbythecollapseofprimary-sector

prices.Atatimewhenbothproduction

andexportmarketswereundiversified,

thecrashoftheBritishmarkethaddire

effects.Unemploymentrosesharply,and

theeconomycontinuedtorundown

into1932-33.Estimatessuggestthat

grossdomesticproductfellby17percent

between1929and1931.Inflationturned

substantiallynegative.Realincomesfor

thoseinworkactuallyrose–pricesfell

fasterthanwages–butfortheincreasing

numberwhowereoutofwork,hardship

wasoftensevere.Asinmanycountries,

therewasconsiderablepressuretocut

governmentexpenditure.

The eaRly TwenTieTh

cenTuRy By numBeRs

0

2

4

6

8

10

12

14

16

18

20

1890 1895 1900 1905 1910 1915 1920 1925 1930 1935 19400

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18

20$95/96bill$95/96bill

Firs

tW

orld

War Se

ccon

dW

orld

War

‘Gre

atD

epre

ssio

n’

Graph 4

Estimated GDP 1890–1940

Source: K. Rankin (1991), Brian Easton (1990), as republished in Phil Briggs (2003).

Graph 5

Exports by value 1920–1940

30

35

40

45

50

55

60

65

70

1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 194030

35

40

45

50

55

60

65

70

Valueofexports(£m)

Valueofexports(£m)

‘Gre

atd

epre

ssio

n’

Source: M. F. Lloyd-Prichard (1970), Statistics New Zealand.

Graph 3

CPI inflation 1890–1940

Source: Statistics New Zealand.

Photographer unidentified, ATL, Evening Post Collection, G-84131-1/2

-12-10-8-6-4-202468

1012141618

1890 1895 1900 1905 1910 1915 1920 1925 1930 1935 1940

%

-12-10-8-6-4-2024681012141618

%

War

time

com

man

deer

‘Gre

atd

epre

ssio

n’

�� The ReseRve Bank and new Zealand’s economic hisToRy

TheReserveBankwasinitiallysetup

asanindependententity,butthisquickly

changed,andtheLabourgovernmentthat

cametopowerinlate1935broughtthe

Bankundergovernmentcontrol–oneof

itsfirstacts–andgavetheBankcapacity

toactasanagentfortheimplementation

ofitseconomicagenda.

TheReserveBankthusbecamean

integralpartofthewiderinterventionist

regimethatthefirstLabourgovernment

introduced,designedtobetterinsulate

theeconomyandpeoplefromfluctuations

inworldcommodityprices.Thisreflected

naTional developmenT

1932-1973Policy-makersinchedtowards

solutionsfortheproblems

NewZealandfacedduringthe

depression.Theexchangerate

wasdevaluedby25percentin

1933,andin1934theReserve

Bankopenedforbusiness.

Establishingacentralbank,

althoughnotsolelyaresponse

tothedepression,gaveNew

Zealandauthoritiesmoretools

tomanagefuturedownturnsin

theNewZealandeconomy.An

importantaspectoftheReserve

Bank’srole,fromitsfounding,

wasthesolerighttoissue

banknotesinNewZealand.

Leslie Lefeaux, first Governor of the Reserve Bank.

How cartoonist J. C. Hill (d. 1957) saw the arrival of the Reserve Bank.

Auckland Star


–andtosomeextentanticipated

–ageneralinternationaltrendtowards

controlsandinterventionatthattime.

planned RecoveRy

Thenewgovernment’sagendainvolved

significantincreasesinspending,putting

severepressureontheforeignexchange

reservesofthenewcentralbank,and

threateningtheviabilityofthefixed

exchangerate.In1938,comprehensive

foreignexchangecontrolswereputin

place;thesewereadministeredbythe

ReserveBankuntilcontrolsoncapital

flowswerefinallyliftedin1984.Import

licensingbecameadominantfeature

oftheeconomy,withanemphasison

developinglocalmanufacturingand

assemblyindustries.

TheSecondWorldWarwasahuman

tragedy,butitwasalsoeconomically

beneficialforNewZealand–demandfor

ourcommodityexportswasstrong.The

waremergencypromptedgovernmentto

takenear-totalcontroloftheeconomy,

butwartimemadeiteasierforthe

publictoacceptausteritymeasures.The

Government’sexternaldebtwaspaidoff,

andtheeconomywasperformingsowell

post-warthatthegovernmentfeltable

toreversetheexchangeratedevaluation

of1933,puttingtheNewZealandpound

backonparwiththeBritish.

Thepost-warerasawtheworldreturn

tofixedexchangerates,underthenew

InternationalMonetaryFund(IMF),though

Top: J. G. Coates, 1878-1943, Reform party leader and a key mover behind the founding of the Reserve Bank – seen here probably around 1938.

Above: The Reserve Bank Board, Governor Lefeaux sitting centre, 1935. Silver platters in the back-ground were a gift from the Bank of England.

Below: First series ten shilling note issued in 1934.

S. P. Andrew Collection, ATL, F-19049-1/1


NewZealanddidnotfinallyjointhisuntil

1961.However,extensivecontrolson

privatecapitalflowswereinplaceinmost

countriesandprotectivebarrierstotrade

werehigh,inNewZealandandelsewhere.

pasToRal pRospeRiTy

The1950sopenedupaneweconomic

worldforNewZealand.Termsoftrade

soaredduringtheearlypartofthe

decade,andwhileexportvolumesdid

notgrowspectacularly,pricessoared.

Thesehighprices–andthefactthat

NewZealandhadn’tbeenbadlyaffected

bythewar–meantthatNewZealand

rodehighintheinternationalincome

rankingsduringtheseyears.Inthe1950s,

NewZealand’sper-capitaincomewas88

percentthatoftheUnitedStates.

Oneoftheoutcomesofthisgrowth,

duringthe1950sand1960sinparticular,

wasanumberofsignificantgovernment-

fundedpublicworksprojects.Most

nationalroadsweresealedandnew

bridgeswereputin.Amajorhydro-

electricsystemwasbuiltintheSouth

Island,ofsuchscalethatitstoodNew

Zealandingoodsteadtwogenerations

later.Amajorstatehousinginitiativewas

maintainedintothe1960s.

Theeconomywashighlyregulated

throughoutthisperiod,whicharguably

contributedtostallinnovationandthe

developmentofnewinternationally

competitiveindustries,inturn

Top: Wartime poster celebrating New Zealand’s pastoral production.Above: Buyers appraising wool in a Canterbury woolstore, around 1939.

Photolithograph on sheet, ATL, Eph-E-TRADE-1940s-01

Green and Hahn, ATL, Making New Zealand Collection, PAColl-3060-010, F-1651-1/4-MNZ


underminingNewZealand’slonger-term

growthprospects.Thefinancialsector

wasalsoheavilyregulated–bankinterest

ratesweretightlycontrolled.Capital

issuescontrols,administeredbythe

ReserveBank,affectedtheabilityofnon-

bankborrowersandbusinessestoraise

capitaldirectly.Onlyfromaroundthe

Above: Mustering sheep at Oran Gorge Station, Geraldine county, May 1943.

John Dobree Pascoe, ATL, John Pascoe Collection, F-399-1/4

late1960sdidmaterialliberalisationbegin

inthefinancialsector.

TheReserveBank’smainrolethrough

thisperiodinvolvedimplementing

governmentpolicy,andmanaging

theeconomiceffectsofswingsinthe

externaltradepositionandfluctuationsin

governmentspending.Inflationremained


relativelylow,hereandabroad,until

aroundtheendofthe1960s.

end oF pasToRal pRospeRiTy

Althoughthe1950swereprosperousfor

NewZealand,thewritingwasnonetheless

onthewallforthissecondphaseof

NewZealand’s‘Britain’sfarm’era.The

countrywas,asoneeconomistremarked,

effectivelyamonoculture–heclassified

allourexportsas‘processedgrass’,

andmostofitwasgoingtoasingle

market,Britain.Britisheffortstolookto

Europeastradingpartner,ratherthanits

formerempire,meantthatNewZealand

increasinglyhadtofightforaccessto

itstraditionalmarkets,particularlyonce

theUKjoinedtheEuropeanEconomic

Community(EEC)in1973.

Evenbeforethen,however,New

Zealandwasineconomicdifficulties.Wool

pricescollapsedinDecember1966,and

in1967theexchangeratewasdevalued

sharply–thefirstadjustmentsince1948.

Commoditypricesweretemporarily

strongagainintheearly1970s,before

theaftermathofthefirstoilshock,in

Top: Edward C. Fussell, Governor of the Reserve Bank 1948-62.Above: Walter Godfrey Bowen, world champion shearer, February 1953.

Artwork Sir William Dargie, photo Stephen A’Court, RBNZ.

Photographer unidentified, New Zealand Free Lance Collection, ATL, PAColl-6303-05


1973-74,confirmedthesharpturnfor

theworseinNewZealand’sfortunes.New

Zealand’sslidedowntheinternational

OECDrankingsacceleratedfrom1966-67;

andalthoughNewZealandersoftheday

didnotrecogniseit,theywereattheend

ofanera.

Gordon Onslow Hilbury Burt, Gordon Burt Collection, ATL, F-36542-1/2

Top: HRH Prince Philip talks to a freezing worker on the chain at the Gear Meat Works, Petone, Decem-ber 1956.Left: The Waipa Forest Service sawmill near Rotorua, air seasoning yards visible in the background, November 1955.Below: Tomoana freezing works, near Hastings, 1940s.Photographer unidentified, ATL, New Zealand Free Lance

Collection, PAColl-8602-45.

Morris James Hill, ATL, Morrie Hill Collection, F-177219-1/2


The mid-TwenTieTh

cenTuRy By numBeRs

Above: New Zealand changed to decimal currency in 1967, bringing the third series of banknotes into circulation.

Below: Series Three one dollar note.

Graph 6

Real GDP 1940–1973

Source: Brian Easton (1990), Statistics New Zealand, as republished in Phil Briggs (2003).

0

10

20

30

40

50

60

70

1940 1944 1948 1952 1956 1960 1964 1968 19720

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30

40

50

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70$95/96bill$95/96bill

Kor

ean

war

Seco

ndw

orld

war

Woo

lcris

is

Graph 7

Inflation, 1940–1973

0

2

4

6

8

10

12

14

16

18

20

1940 1950 1960 1970

%

0

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18

20%

Kor

ean

war

Firs

toi

lsho

ck

Seco

ndw

orld

war

Source: Statistics New Zealand


InpartNewZealand’sfortunes

reflectedtheinternationalsituation.

Duringthe1960sand1970s,thecost

oftheVietnamWarandtheoilshocks

helpedcreateconditionsintheUnited

Statesandotherwesterneconomiesthat

combinedweakergrowththanhadbeen

seeninmuchofthepost-warperiod,and

muchhigherinflation.NewZealandwas

noexception–indeed,ourinflationrate

onaveragewasoneofthehighestofany

oftheOECDcountries.Unemployment,

however,remainedverylowinNew

Zealanduntilthemid-late1970s.

TuRBulenT TRansiTion

1973-1993

Thechangesthatmarkedthe

lastquarterofthetwentieth

centuryintheNewZealand

economywerefar-reaching

and,attimes,controversial.

Althoughoftencouchedinpurely

philosophicorpoliticalterms,

thesechangesalsoreflected

long-termeconomicissuesthat

canbetracedbackwellbefore

the‘reformperiod’.

Photographer unidentified, ATL, New Zealand Free Lance Collection, PAColl-5936-55, F-125016-1/2

Above: Benmore hydro-electric scheme under construction on the Waitaki river, central Otago, early 1960s.

Above: Series Three ten dollar note.

�0 The ReseRve Bank and new Zealand’s economic hisToRy

new Zealand’s pRoBlems

NewZealandhadanumberofspecific

localeconomicproblemsbythelate

1970s.Despitegrowingtrendsto

deregulateelsewherearoundthewestern

world,theNewZealandeconomy

remainedquiteheavilyregulated–the

liberalisationprocesslaggedbehind

thatofcountriessuchastheUK,US

andAustralia.Therewassomeprogress

towardseconomicdiversification.State

forests,plantedduringthe1930s

depressionandlater,werecomingto

maturity.Tradeinlogsandassociated

woodproductscontinuedtogrowduring

the1970s.Fisheriesexpanded,andabase

ofmanufacturingexportersdeveloped.

Thegovernmentofthedayundertook

someimportantmeasures,including

theCloserEconomicRelations(CER)

agreementwithAustralia,andextensive

liberalisationofthefinancialsector.

However,politiciansandthepublic

founditdifficulttograpplewithboththe

realityandthelonger-termimplicationsof

NewZealand’srelativeeconomicdecline,

andwerereluctanttotakestepsthat

wouldhavehadsubstantialshort-run

employmentcosts.Oneresponse,partly

promptedbythesecondoilshockin1979,

wasthe‘ThinkBig’economicstrategyof

1981,designedtocreate400,000jobs

andmoveNewZealandtowardsenergy

self-sufficiency.Inpractise,‘ThinkBig’did

notwork–fallingoilpricesundermined

K. E. Niven & Co, ATL, K.E.Niven & Co Collection, F-64235-35mm.

Top: Wellington motorway under construction, August 1969.

Above: Hiller UH-12E of Alexander Helicopters transports building material 1973.

Photographer unidentified, ATL, Dominion Post Collection, EP/1969/3580/33.


theeconomicsoftheenergypolicy,and

thepromisedjobsdidnoteventuate.

Extensiveforeignborrowingtosupport

livingstandardscreatedincreasing

pressureonthegovernment’sfinances.

Inattemptingtocombatinflation

withoutundueshort-termemployment

costs,thegovernmentthenturned

toincreasinglydraconianeconomic

regulation.Thisincludedapriceandwage

freezein1982-84,andextensivecontrols

overinterestrateswerealsoputinplace.

Anewgovernmentthatcameto

powerafterasnapelectioninmid-1984

introducedsweepingreforms,cuttingthe

scaleofbothregulationandgovernment

service,andopeningtheeconomyupto

internationalcompetitionandmarkets.

Thesereformsweredesignedtoliberalise

anddiversifytheNewZealandeconomy,

openingituptoglobalcompetition;

andtostemandeventuallyreverseNew

Zealand’srelativeeconomicdecline.

Toachievethistheexchangeratewas

floated,tradeprotectionwasreduced,

stateenterpriseswereputonamore

commercialfooting,andstepsweretaken

torestoretheCrown’sfiscalposition.The

mainthrustofthesereformscontinued

undertwodifferentgovernmentsuntil

1993,encompassingawiderangeof

economicpoliciesandgovernment

activities,producingsignificant

socialchangeaswellasaneconomic

restructuring.

Ross Giblin, ATL, Dominion Post Collection, EP/1987/5979/26.

Above: Brokers amid the stock market crash on 25 October 1987.


Inthetransitionperiod,thecosts

ofthesechangesprovedquitehigh.

RealGDPgrowthwasflatinthesecond

halfofthe1980s,andrecoverydidnot

beginuntil1992.Unemploymentsoared,

driveninpartbyrestructuringacrossthe

publicsector,andinpartbythesharp

fallintraditionalsectoralemployment,

notablymanufacturing.Liberalised

firmsandfinancialmarketstooktime

tosettledown.The1987sharemarket

crash,whichhitmany‘MumandDad’

investorshard,precipitatedashakeout.

Manycorporatescollapsed,somebanks

werepushedtotheedge,andonemajor

financialinstitution–DFC–collapsed.

Theseexperienceshighlightedanother

aspectoftheReserveBank’srolein

theeconomy.Untilthemid-late1980s,

therehadbeenextensivecontrolof

financialinstitutions,includingbanks,

andthosecontrolswereusedastoolsin

macroeconomicmanagement.Thishad

theeffectofconstrainingtherisksthat

mainstreamfinancialinstitutionscould

take.Oncethetightcontrolshadbeen

removed,aframeworkforprudential

supervisionofbankswasdeveloped

andputinplace.Thissupervision,

designedtoreducerisksandmanage

theconsequencesofanybankfailures,

becameamajorcomponentoftheReserve

Bank’sroleintothetwenty-firstcentury.

Asoundandefficientfinancialsystemisa

vitalcomponentofamarketeconomy.

inFlaTion BusTing

Conqueringinflationbecameaparticular

priorityduringthelate1980s,bywhich

timeNewZealandhadbeensuffering

highanderraticinflation(averaging10-15

percentperannum)forovertwodecades.

Bythelate1980s,theReserveBank

wasactivelyworkingtoquashinflation,

broadlyenvisagingpricestabilitybythe

early1990s.

Theeffortwasformalisedinthe

ReserveBankAct1989.ThisActwas

pioneeringinanumberofways.Itgave

theReserveBanktheindependencetoset

monetarypolicy,butwithinthecontext

ofatransparentagreementbetweenthe

Above: Sixth series five and fifty dollar notes. New-design notes featuring significant New Zealanders were released by the Reserve Bank in 1993, and in 1999 paper was replaced with polymer, introducing new security features such as transparent windows.


GovernoroftheReserveBankandthe

MinisterofFinanceonwhatgoaltheBank

wouldpursue.NewZealandwasthe

firstcountryinthemoderneratoadopt

aformalinflationtarget.Thetargeted

approachtopricestabilitywasalso

pickeduparoundtheworldbyarangeof

significanteconomies.

Gettingontopofinflationproved

neithereasynorcostless;thefloating

exchangeratetendedtobebothhighand

volatile,asdidinterestrates.However,

bytheearly1990slowinflationhad

beenachieved,andhassincebecomea

well-entrenchedfeatureoftheeconomic

landscapehereandabroad.Inmany

othercountries,similareffortsataround

thesametimealsosawinflationlowered.

Lowerinflationprovidesamorestable

climateforfirmsandhouseholds,and

thismorestablebackdropmayhave

contributedtothegenerallymorestable

economy,hereandabroad,ofthelast15

yearsorso.

Above: A Reserve Bank office, 1992.

Below: Operational independence under the Reserve Bank Act 1989 included a requirement for full transparency of monetary policy, implemented through regular Monetary Policy Statements, and by parliamentary review. Here, Reserve Bank Governor Dr Alan Bollard (far end of table, centre) meets the Finance and Expenditure Committee in 2003.

Below left: The Reserve Bank issued one and two dollar coins in 1991.

Stephen A’Court, RBNZ.


The laTe TwenTieTh cenTuRy By numBeRs

Graph 8

Real GDP 1973–2007


0

20

40

60

80

100

120

140

1972 1976 1980 1984 1988 1992 1996 2000 20040

20

40

60

80

100

120

140$95/96bill$95/96bill

Graph 10

Exchange rate 1973–2007

Graph 9

Unemployment, 1973–2007

1000

1200

1400

1600

1800

2000

2200

2400

73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07

000s

0

2

4

6

8

10

12%

EmploymentUnemploymentrate(RHS)

0

20

40

60

80

100

120

140

73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07

Index

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6NZD/USD

TWINZD/USD

Source: Statistics New Zealand, Chapple (1994).

Source: RBNZ.

Graph 11

Inflation 1970–2007


Firs

toi

lsho

ck

0

2

4

6

8

10

12

14

16

18

20

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006

%

0

2

4

6

8

10

12

14

16

18

20%

Seco

ndo

ilsh

ock

Wageandpricefreeze

GSTeffect(1)

GST

eff

ect

(2)

Infla

tion

targ

etin

gim

plem

ente

d


ByinternationalstandardsNewZealand’s

exportswerestilldominatedbyprimary

products.Buttherewasagreaterrange

ofsuchproductsandasignificantly

greaterrangeofmarkets;Britain,which

hadtaken90percentormoreofNew

Zealand’sproductioninthemid-twentieth

century,nowtooklessthan6percent.

Tourismbecamethelargestsingle

exportindustry.High-techindustriesand

manufacturingwerealsoprominent.

Renewed gRowTh

In1998theNewZealandeconomy

enteredaperiodofsignificantgrowth,

whichby2006hadbecomeoneofthe

longestandstrongestgrowthperiods

thecountryhadseen.Italsooccurredin

thecontextofasignificantlydiversified

andderegulatedlow-inflationeconomy.

Unemploymentfelltorecordlowlevels,

andNewZealandbecamethefirstcountry

intheOECDtorunlong-termfiscal

surpluses.

However,althoughNewZealand’s

relativedeclinewashalted,therewas

open economy

1993-

Bythelate1990sthedifficult

periodoftransitionfroma

regulated,inflationaryand

largelyundiversifiedeconomy

toamoreliberalanddiversified

environmentwaslargely

achieved.TheNewZealand

economyoftheearly21st

centurywasverydifferentfrom

thatofagenerationearlier.

Openandcompetitivemarkets

scoredhighlyininternational

comparisonsoftheeaseofdoing

business.

In 2006 the Reserve Bank introduced plated-steel ten, twenty and fifty cent coins; this is the twenty, featuring the ‘Pukaki’ design and ‘spanish flower’ edging.


littleprogressinmovingbackupthe

internationalincomerankings.Ahigh

appetitefordebtandareluctanceto

savemeantthatinterestratesinNew

Zealandstayedpersistentlyhigherthan

thoseincomparablecountries,holding

backinvestment.Andalthoughthe

government’sownexternalposition

wasstrong,theprivatesectorhad

becomehighlyindebtedandrelianton

thecontinuingflowofforeigndebtand

equityfinance.

Theseissues,whichunfoldedduring

thefirstyearsofthetwenty-firstcentury,

highlightedthepointthattheNew

Zealandeconomyremainedadynamic

productofpeople,placeandtime,each

newgenerationofferingasuccessionof

freshchallengesforpolicy-makers,people

andgovernmentstomeet.

Stephen A’Court, RBNZ.

The Reserve Bank building, right; The Treasury and other government buildings on the left.

Graph 12

Destinations of goods exports

1860–2000

0

10

20

30

40

50

60

70

80

90

100

1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

UK Australia US EU(exUK) Japan Other

Shareoftotal%

Source: G. T. Bloomfield (1984), Statistics New Zealand, in Phil Briggs (2003).


glossaRy

Business cycle–thecyclicmovement

ofaneconomybetweenperiodsofhigh

andlowgrowth.

CPI–ConsumersPriceIndex,a

statisticalmeasureofprices,calculatedby

StatisticsNewZealandonthebasisofa

‘basket’ofgoods.

Current account deficit–theamount

towhichnationalexpenditureexceeds

incomeoveraparticularperiod.

Deflation–adecreaseinaverage

pricesovertime,inNewZealandusually

measuredbytheall-groupsCPIpublished

byStatisticsNewZealand.

GDP–GrossDomesticProduct,the

totalmarketvalueofallfinalgoodsand

servicesproducedinNewZealandovera

specifiedtimeperiod.

Growth–intheeconomicsense,

usuallymeasuredasGDPgrowthovera

period,typicallyperannum.

Inflation–anincreaseinaverage

pricesovertime,inNewZealandusually

measuredbytheall-groupsCPIpublished

byStatisticsNewZealand.

Keynesianism–theeconomictheory

developedbyJohnMaynardKeynes,

followedbymostwesternnationsduring

themid-twentiethcentury.

Labour force participation–the

percentageofthepotentiallabourforce

actuallyworking.

OCR–OfficialCashRate,the

wholesaleinterestrate,setbytheReserve

Bank

OECD–OrganisationforEconomic

Co-operationandDevelopment.

Output gap–the‘gap’between

demandinaneconomy,andtheabilityof

theeconomytosupply.

Price shock–asuddenorunexpected

shiftinthepriceofacommodity.

Price stability–forpracticalpurposes,

pricesheldwithinaspecificbandof

change.

PTA–PolicyTargetsAgreement,the

documentsignedbytheMinisterof

FinanceandGovernoroftheReserveBank

thatdefinestheinflationtarget.

Real GDP–nominalGDP,deflated

relativetoabaseyear.

Real interest rate–therateof

interest,deflatedbytheexpectedor

actualCPI.

Terms of trade–theratiobetween

thepriceofexportedcommoditiesandthe

priceofimportedcommodities.


FurtherinformationonNewZealand’s

economy,itshistory,andtheroleofthe

ReserveBankisavailableintheReserve

BankMuseum,openweekdays9.00

a.m.–4.00p.m.,exceptwhenrequiredfor

privatefunctions;andonourwebsiteat

www.rbnz.govt.nzWealsorecommend

thefollowingbooks,articlesand

pamphlets:

Briggs,PhilLooking At The Numbers: a

view of New Zealand’s economic history,

NZIERResearchMonograph69,NZIER,

Wellington2003.

Lloyd-Prichard,M.F.,An economic

history of New Zealand to 1939,Collins,

Auckland1970.

Hawke,Gary,Between Governments

and Banks: a History of the Reserve

Bank of New Zealand,GovernmentPrint,

Wellington1973.

FuRTheR

inFoRmaTion

ReserveBankofNewZealand,

Explaining Monetary Policy,ReserveBank

ofNewZealand,Wellington,2007.

ReserveBankofNewZealand,

Explaining Currency,ReserveBankofNew

Zealand,Wellington,2006.

Singleton,John,Innovation +

Independence: The Reserve Bank of New

Zealand 1973-2002,AucklandUniversity

Press,Auckland2006.

Wright,Matthew‘ThePolicyOrigins

oftheReserveBankofNewZealand’,

ReserveBankofNewZealandBulletin,

Vol.69,No.3,September2006.

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