Economics: Pragmatic state intervention

China was good place for Weta Workshops founder Sir Richard Taylor to applaud John Key’s Government for helping his industry. Since 1949, under China’s socialist political and economic system, the government has been responsible for planning and managing the national economy. Large state-owned enterprises produce more than 50 percent of the country’s goods and services and employ over half its workers, and 65 of the Chinese companies in the 2012 Fortune Global 500 list were state-owned.
Our Government believes state-owned companies are less efficient than privately owned ones, although our Prime Minister perhaps resisted the impulse to advise his Chinese hosts on the economic boost they could expect if they partly privatised the businesses that form the backbone of their economy.
Mr Key’s Government has become interesting – for those who study state interventions – because its interventions are apt to be pitched at helping favoured few private-sector industries (films) or companies (Sky City, which was given the inside running in bid to build conference centre in Auckland). Help to make The Hobbit movie, for example, was partly financial ($67 million of subsidies) and partly legislative. Our labour laws were changed under urgency to mollify movie moguls who otherwise might have taken The Hobbit elsewhere.
A grateful Sir Richard was reported to have hailed John Key at gala dinner in Beijing, acknowledging The Hobbit movie “was made possible, in no small part” by our government. Key “came and helped facilitate the realising of this film for all of the film industry in our country”, he said. Making films needed “understanding”.
It’s not so easy trying to understand the rules that apply when the Key Government decides to help and when it decides to keep out. It wasn’t disposed to save the jobs of Spring Creek and Huntly miners, when closures and redundancies were announced last year, although it owns the company (Solid Energy) which owns the mines. Around 30 miners marched on Parliament only to be instructed in market realities: State-Owned Enterprises Minister Tony Ryall told them the job losses had “everything to do with the collapse of international coal prices”.
The Government was disinclined to step in, similarly, when KiwiRail’s decision to have wagons made overseas resulted in layoffs at the Hillside Engineering workshops in Dunedin. In an article in the Otago Daily Times, Government MP Michael Woodhouse said cost, quality and ability to deliver volume had been what counted. He differentiated the decision not to intervene from help for The Hobbit, saying New Zealand effectively is exporting its movie-production capability and the Government had removed regulatory red tape and ambiguity to help that industry compete. More fundamentally, “the Government is prevented by the State-Owned Enterprises Act from interfering in operational decisions of this nature”.
So how come the Government became directly involved in negotiations over electricity supply between state-owned Meridian Energy and Rio Tinto, the majority owner of the Tiwai Point aluminium smelter?
The Government was not interested in subsidising foreign multinational “in the long term”, Ryall told Parliament when taunted in Parliament about intervening in Meridian’s protracted negotiations for electricity supply to the smelter. It directly employs some 750 people in Southland. Perhaps more important, it accounts for around seventh of the country’s electricity output. Because of the significance of the smelter to the national economy, the Government had been willing to look at short-term bridging assistance (which was rejected).
Fair enough. As the TransTasman newsletter noted, interventions can be justified for an array of reasons, including market failure and the need to counter the impacts of prolonged recessions and reduce unemployment. Free market economists, in contrast, say intervention should be strictly limited and carefully applied because it tends to cause inefficient allocations of resources. The market is best at deciding how and when to produce, they say, and state support of industries may encourage the survival of inefficient firms.
But every society has some form of government intervention. In our case, understanding the guiding principles is the challenge. M

Bob Edlin is leading economic commentator and NZ Management’s regular economics columnist.

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