Context

In the course of the interviews, seven participants spoke frankly of the period 1978 to 1983 as a time of ‘awakening’ to some new realities. For example, one informant active at the time recalls the newfound prominence of SMEs and the lack of knowledge about them:

Given that our work tended to be more with the smaller companies, what did we know [about them]? (Participant B)

This was also a period where it was difficult to get public policy engagement on SMEs and convincing policymakers that SMEs were a vital part of the economy remained a challenge:

[This was a] period where it was very hard to convince government, and the bureaucracy in particular, that this was a vital part of the economy and needed support. (Participant B)

And yet, at the close of this period,

It was fashionable to think that small businesses were very important for the economy and that’s what we thought, that was the received truth at the time. (Participant A)

Indeed, the period 1978 to 1983 is at the tail end of what in hindsight could now be considered a period of transition for the country as a whole. There was belated recognition that New Zealand’s export dependency on the United Kingdom was not sustainable given the latter’s various attempts, in the end successfully, to join the then European Economic Community (EEC). It was during this time that concerted efforts were made to essentially re-invent the New Zealand economy and move it away from being so dependent on the agricultural sector and on the United Kingdom, its key market (Nixon & Yeabsley 2002). Extensive efforts were made to develop a more multi-faceted and independent economy (Easton, 1997; Evans, Grimes, Wilkinson & Teece, 1996; Hawke & Lattimore, 2007; McAloon, 2010). The New Zealand economy in the early 1970s was shaped by the international economic context and this too affected New Zealand SMEs. Three specific events have been identified as having a particularly lasting impact on New Zealand policymakers over the period under review: the wool price crisis

in 1966 (Easton, 1997); the double oil shocks of the early 1970s; and the fact that the United Kingdom joined the EEC in 1973 (Nixon & Yeabsley, 2002).

One interview participant singles out the oil shocks as representing a significant historical moment. She described them as “one of the big things that woke people up” (Participant E) and made them aware that there was a need to find a way to diminish the impact that these global economic events had on the domestic economy. Participant E’s views are borne out by other historical evidence. Taken together, these events exerted renewed pressure on the government and the private sector to intensify efforts to diversify the destination for New Zealand exports. Increasingly too there was a sense that the existing macroeconomic settings were no longer fit for purpose (Easton, 1997). The sharp and largely unexpected (in New Zealand at least) drop in the price of wool had already exposed New Zealand as being overly dependent on agriculture:

There certainly was a focus on exporting and trying to diversify the economy away from our traditional commodity base and diversify our markets. (Participant C)

The twin oil crises of the 1970s further compounded a sense of the vulnerability of the domestic economy to global economic fluctuations and the emerging trends did not make for comfortable reading. New Zealand had been the sixth richest country8 in the world in 1965, for instance, but by 1980 it had fallen to 19th place,

with no signals that this could be easily reversed (Ministry for Culture and Heritage, 2013).

To counteract the poor economic performance, the government responded with a series of protectionist economic policies, known collectively as ‘fortress New Zealand’ (Easton, 1997). Participants refer to this as a period that was “highly regulated” (Participant C) characterized by a“heavy handed government” (Participant A) that clung to a particular approach that no longer worked:

The dominant sort of political thinking at the time, and I suppose the dominant political person was Robert Muldoon as Finance Minister then Prime Minister, … was to build economic walls around New Zealand to insulate New Zealand … and eventually that didn’t work. (Participant H)

It was realised … from the early eighties that the policies that New Zealand had had from the time of the Depression, which was protection of industries and encouragement of manufacturing barriers, weren’t working very well anymore. (Participant G)

Among others, manufacturing industries were heavily protected from external competition through both high tariffs and subsidies in place since the post-war period. There were also significant limitations placed on competition from importing finished products, including an import licensing regime and a range of non-tariff barriers designed to favour New Zealand’s production base. The detrimental effect on the economy was not lost on a key participant in this study who recalled discussions about the need “to get rid of the old import substitution arrangements” (Participant E).

Participants recalled the focus of government on big enterprises in an attempt to diminish New Zealand’s vulnerability to further energy crises, a series of state- funded ‘Think Big’ projects were put in place:

Partly as a reaction to the energy crisis, you did have to Think Big. (Participant C)

In conjunction with these policies the prevalence of an industrial policy, which emphasized the “injection of taxpayers’ money into selected firms or industries” (Burton, 1983, p. 7) sat comfortably with the broader protectionist economic approach of the government of the day. Key areas of the economy, such as agriculture, were also heavily subsidized. Between 1982 and 1984 price and wage controls were set in place, tariffs were high and tax incentives were increased (Easton, 1997).

Participant H recalls that this targeted, ‘Think Big’ protectionist approach resulted in widespread disenchantment amongst senior policymaking circles:

There’d been 10 years when officials in New Zealand, senior officials, who had been involved in all these big interventionist projects and attempts to cut New Zealand off from some of the world economic prices. And in doing that they’d become very cynical about how successful that could ever be. (Participant H)

The ‘fortress New Zealand’ mentality extended to an expectation about the role of government to provide ‘cradle to the grave’ support in all aspects of an individual’s life, from health care and education, to social services and retirement schemes. These expectations were also present in one way or another, in the private sector in general, in terms of their expectations of government policy and

If you wanted to get some significant product – white ware, something like that - there’d be somebody who would have the import license and you could only import through that person. And actually a number of the people who are quite rich in New Zealand today trace their earnings back to that sort of period. (Participant H)

One participant was critical of this tendency, commenting that protectionist policies made it very difficult to enter an established market:

Trying to get insurance or guarantees for exporting was impossible. (Participant B)

While business leaders may have become increasingly interested in diversifying the economy, the assumption was that the government would nevertheless ease that transition and provide a safety net for business to develop, including to protect SMEs from external competition. As described by Participant H, this level of protection was primarily managed for the manufacturing sector through import licensing schemes and an external tariff that acted to keep competitors out of New Zealand (Organisation for Economic Co-operation and Development, 1983). Another participant described how some firms were protected to the extent that their overall aim was to receive government subsidy, rather than increase exports:

[Firms before 1984] had all been cosseted before, they’d been given support. The idea of giving people support to enter the export markets is all very good, but what happens is that people go into the export market to get the government’s subsidy. (Participant A)

However participants also recognized that this support made exporting possible for firms who previously would not have had access at all:

At the same time because trying to get insurance or guarantees for exporting was impossible so the government set up this operation but

According to one respondent, protectionism was so extreme, economic indicators were such that:

You had an unusual convergence of political and economic opinion in New Zealand at that time and things had to change and they had to change in a big hurry. (Participant H)

By 1983 it had become clear that the protectionist approach was not helping the economy to deal with unprecedented levels of inflation and unemployment (Organisation for Economic Co-operation and Development, 1983), and this signaled the end of the first historical period of SME policy development identified in this study.

The harbinger of the economic changes that would follow was the Closer Economic Relations (CER) free trade agreement with Australia, which came into force in 1983:

[CER] was a precursor to the big unilateral tariff reduction programme that we later started. (Participant E)

This began the process of opening up the New Zealand market to external competition, albeit in a very limited form, as it was only open to Australian firms:

Australian imports were nothing in terms of competitive forces with what was to come from the Chinese imports. (Participant H)

This first step had, however, an important influence on how SMEs operated from this point on. According to one participant, existing assumptions about protection from external competitors were shattered with the reduction and eventual elimination of many barriers to trade, including tariffs and, over time, import

Of actually deciding that the economy had to be opened up and opened up to global competition there was no way we were going to make it if we couldn’t actually drive efficiency system and seek to compete on the global sector. (Participant E)

CER was a first step in this direction, which compelled local manufacturers to compete directly with Australian manufacturers. Furthermore, competition from Australia, which was similarly undergoing an overhaul of its own, began to intensify. In line with Nixon’s (2000) observation, and Dent’s description of CER as a “cornerstone” for the development of New Zealand’s economy in general and its external trade policy in particular (Dent, 2006, p. 88) participants in this study emphasised CER’s role as a the first step in the “exposing New Zealand business to external competition” (Participant D) and this had an impact on how “business was done” (Participant A).