David Skilling: New Zealand Globalization Divide

2017-10-09 IMI

This article appeared in OMFIF Commentary on September 25, 2017. David Skilling is founding director of Landfall Strategy Group, an economic advisory firm based in Singapore. In Saturday's New Zealand election, the incumbent National-led coalition government looks to have won a fourth term, in a stronger than expected showing. But the make-up of the next government will – as in Germany – be decided in intricate coalition-building, with Winston Peters, a 72-year-old populist, in king-maker position. National's Bill English, incumbent prime minister and former finance minister, who during the campaign promised tight fiscal policies, said discussions with Peters – a former deputy prime minister and foreign minister – would begin in the next few days. In a potential coalition between the National Party and Peters' New Zealand First, policies may have to move towards the anti-immigration, pro-elderly stance propounded in Peters' campaign. There is a small chance NZ First could do a deal with Labour and the Greens, which could presage changes in the mandate of the Reserve Bank of New Zealand. But those parties would find it difficult to find common ground for a sustainable coalition. The National party won 58 seats in a 120-seat parliament, while the centre-left Labour party – which until recently had looked like retaking power – took 45. Peters' party won nine seats. The New Zealand election debate illustrates some emerging political pressures, mirroring controversies in other countries around the world. New Zealand has grown strongly through the post-crisis decade, with low unemployment, a fiscal surplus, and soaring asset markets – including house prices. But this has coincided with a rise in social divisions and a new debate over immigration. The National party's strong showing is a notable success. New Zealand governments have lasted for a maximum of three terms (a total of nine years); winning a fourth term has proved elusive. In a last-minute move, Labour appointed Jacinda Ardern, a young, charismatic leader who attracted significant support. However, National's record of economic management since 2008 appears to have won the day. Although the New Zealand economy has performed well, social polarisation has increased. Even in a contest between two relatively centrist parties, there were clear differences on issues such as migration, housing and tax, and a strong generational split. The rapid rise in house prices and a changing labour market have had major distributional effects (even though youth unemployment remains relatively low). Changing preferences on international engagement also played a role. New Zealand has a long history pioneering trade liberalisation. But this support has been fraying. Last year, the Labour Party broke with tradition to vote in parliament against the Trans-Pacific Partnership. Restricting foreign purchases of residential real estate is a key issue. NZ First is also opposed to the TPP. There were election debates about imposing tighter controls on migration – new territory for New Zealand, a response to the magnitude of these flows, and a sign that, even in small open economies, attitudes on globalisation are changing. Questions are being asked of the macro policy framework. From the late 1980s, New Zealand pioneered the introduction of new monetary and fiscal policy institutions. The Reserve Bank became independent in 1989 with a mandate focused on policy stability, a model followed by other countries. On fiscal policy, a legislative framework was established that committed governments to fiscal sustainability and established high levels of transparency. There is bipartisan support for the fiscal framework, with the major political parties committed to fiscal discipline. This has worked well, and is a core reason that New Zealand is in fiscal surplus with net debt below 20% of GDP. But changes to the Reserve Bank's mandate have been proposed to introduce a greater focus on employment as well as price stability. This debate is likely to continue.

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David Skilling: New Zealand Globalization Divide

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