The Press TUESDAY, JANUARY 2, 1940. New Zealand in 1939

Press, Volume LXXVI, Issue 22907, 2 January 1940, Page 6

The Press TUESDAY, JANUARY 2, 1940. New Zealand in 1939

In no year since the Great War has economic life in New Zealand shown more varied trends or been subjected to severer shocks than in 1939. The closing months of 1938 were marked by two events of first importance: the Labour Government's overwhelming success in a General Election and the imposition of the system of exchange and import control. The election -was, like most elections, fought on issues vhich were unrelated to economic realities. Both parties put forward programmes based on "the . assumption that the prosperity of the previous three years would continue indefinitely, although, as the Prime Minister has admitted, the responsible leaders of the Government were well enough aware that serious difficulties lay immediately ahead. At the time of the election the overseas funds of the New Zealand banks amounted to about £11,000,000, having been halved during 1938 by capital exports and an adverse balance of payments; New Zealand securities on the London market were bringing as much as 5 i per cent.; and in the coming year a loan of £ 22,000,000 fell due for conversion in London. Indeed, it had been apparent since early in 1938 that the Government had to choose between drastic reductions in public expenditure and exchange control. To postpone its decision till after the election may have been sound political strategy; but it had two consequences to which can be attributed most of the economic misfortunes of 1939. In the > first place, it meant that New Zealand began a difficult year with a government committed to a policy which was dangerously unrealistic; in the second place, it meant that the problem of external payments was not tackled until sterling reserves had almost disappeared and there Was no option but to impose drastic controls if default was to be avoided. The evil effects of this delay were accentuated by the Government's failure to set up in advance the intricate , administrative organisation necessary to carry out a policy of import and exchange control. Mainly because the activities of the Customs Department, the Reserve Bank, and the Treasury were imperfectly co-ordinated, import and exchange control was, in the first six-monthly period, a disastrous failure: importers and retailers were subjected to expensive and irritating restrictions, while the value of imports; actually increased. It was soon apparent that, if default on overseas payments was to be avoided and if the manufacturing industries were not to go short of essential materials and equipment, it would be necessary to seek accommodation on the London market; and in May Mr Nash left for London to seek the assistance of the British Treasury and banks in arranging commercial credits and in converting the maturing loan. It thus happened that a government which had loudly condemned its predecessors for borrowing overseas and had proclaimed that its own policy. of import and exchange control was the alternative to such borrowing, was .compelled to. borrow in Lon- • don on perhaps the most humiliating terms ever accepted by a New . Zealand government. Import and exchange control, though loudly denounced by the minority interested in the import trade, was accepted and even welcomed by the trade, unions and the manufacturing interests because the Government astutely proclaimed that its emergency measures to restore the balance of payments were the beginning of a long-term policy of developing secondary production. No amount of political astuteness could, however, disguise the nature of the bargain struck by Mr Nash; and in August and September it seemed that the Labour Party was moving rapidly towards an. internal crisis. From this difficult situation the Government , was extricated, temporarily at any rate, by the - outbreak of war in Europe. The problem of external payments receded from the foreground of the political scene; while the commandeer schemes and the increased demand for New Zealand exports" held out the promise of increased export revenue' and a recovery in the London funds. To some extent, this promise has been fulfilled. Since the outbreak of war, the Reserve Bank's sterling has risen from '£5,000,000 to £8,000,000, mainly on account of " payments for dairy produce and meat; and at the same time the balance of commodity trade has improved appreciably. Nevertheless, it is clear that the process of adjustment must go further before the export surplus is large enough tosmeet debt payments overseas. The economic vista before New Zealand at the beginning of 1940 is thus a curious patchwork of sunlight and shadow. As to. markets and the physical conditions of production, the prospects for the farming industries are fairly good. Stock and pastures, in spite of a bad winter, are in better condition than a year ago; while the war seems to have removed the bogy of quota restrictions in Great Britain. Nevertheless, there, is much unrest among farmers, particularly in the dairy industry, the principal cause being that mounting costs threaten to offset the advantages of the commandeer schemes and the favourable season. Here, indeed, is the real weakness of the New Zealand economy. Although imports are being severely restricted, and although there is already a shortage of certain consumption goods, the note circulation continues to increase and is now £19,000,000 gross compared with £ 13,000,000 at the beginning of 1937. Fear of inflation has become one of the most important factors in the economic situation; and price regulation is not enough to remove that fear. The position of the secondary industries at the beginning of the new year can only be guessed at, since statistics of secondary production are normally at least a year late. Early in 1939, manufacturers were justifiably optimistic. Import restrictions afforded them the protection on the home market for which . they had so long been agitating; while it seemed certain that the Government was making increased secondary production the principal objective of its economic policy. But the import restrictions have latterly been so severe that what the manufacturers have gained through a.sheltered home market they, have to a large extent lost through the shortage of materials and equipment. Moreover, the war appears to be throwing the emphasis back upon primary production. There are many salutary lessons to be drawn ,-„« from New Zealand's economic history during but the most important of them is that F.tliig machinery of government, from the Cabinet ;. is in need of overhaul. The worst

mistakes made by the Government in 1939 were due, not to errors of policy, b,ut to blunders of administration. Whether, for instance, the policy of import and exchange control is intrinsically good or bad is perhaps an open question; what is certain is that, as applied in New Zealand, the policy has been an expensive failure because the organisation for applying it was hopelessly inefficient. Import and exchange control, the social security scheme, and the extension of State control over both primary and secondary industry have seriously overburdened the public service, as witness the unwholesome growth in the number of tern-, porary State employees and the many examples of imperfect co-ordination among State departments. Administrative reform has become New Zealand's most urgent political need.