Looking through Iraq

Speech by Colin James to Microsoft partners function, 27 March 2003

Iraq is the excitement of the moment. It is part of something rather big that is likely over time to change the economic and geopolitical environment.

President George Bush calls that “rather big something” a “war on terror”, which began with the invasion of Afghanistan and, if he is serious about eliminating terror of the Al Qaeda sort, will have to involve many more campaigns than the Iraq one. Iran, Palestine and North Korea have been cited; in a less combative, but nonetheless important, sense, Saudia Arabia, Syria, Egypt and on and on. Terror won’t stop until the funds and weapons supplies and supplies of recruits dry up — and that won’t happen until the societies which supply the recruits and funds and arms are enriched and liberalised to the degree that fighting and fundamentalism are unattractive.

This is most unlikely to happen for a very, very long time. An American victory in Iraq won’t deliver it by itself. Though it will cut off one source of funds (to Palestinian suicide bombers at least) and maybe a source of arms, it will also drive more recruits into the arms of terror groups.

In fact, it is possible that United States occupation of Iraq heightens anti-Americanism and destabilises both the Middle East and the world order. War always has unintended consequences and we have no way of knowing yet what those will be. They could be benign and they could be malign. Over-investment in one campaign can lose sight of the long-term war objective.

Even if the outcome of this campaign is benign, my guess is that the United States will tire of its self-appointed task of eliminating terror long before the job is finished. It will settle for a temporary dampening of terror. My reason for saying this is that the impetus for this war is the twin towers attack of 11 September 2001. Had that attack been in London, would Bush be in Iraq? Go back to 1940, when the United States left Britain to fight tyranny alone. Only when attacked did the United States come in. When Bush said “you are with us or you are with the terrorists”, he meant by “us” the United States.

From time to time Bush has also said the war on terror is for a higher cause: freedom and democracy. If so, then it is a cause of all liberal-democratic countries, including this one. But, while Afghanistan was seen by all liberal-democratic countries as their cause, too many of them, including this one, see the Iraq adventure as having failed the test of liberal-democracy by failing to garner United Nations support. Too many liberal-democratic countries see the Iraq invasion as an American enterprise, not a liberal-democratic one.

Nevertheless, the United States is in Iraq. It has heaped scorn on “old Europe” and said it doesn’t need the clapped-out armies of Europe to fix Iraq. The United States rules the world and its takeover of Iraq is making that point to all of us.

Richard Prebble is therefore correct to say we need to pay obeisance at the imperial court of Washington if we want consideration there. That is because the United States, in running the world, will also run the world’s trading system for a time. If you are in, all to the good, as Australia is finding. If you are out, too bad. We are mostly out, though with a toe in the door.

If Bush was genuine about his higher cause for the war on terror, he would be driving world free trade. He says he is. But should we believe him? My guess is that we are heading, not towards a successful Doha round of world economic liberalisation (the Europeans will in any case make sure of that round’s failure) but towards an intensified period of bilateral free trade negotiations. Bilateral free trade agreements fall far short of genuine free trade. If we get an FTA with the United States, it will at best have a very long phase-in for dairy products and will require us to give up Pharmac, parallel importing and some other desirable domestic economic freedoms and discretions and change our intellectual property laws.

So we are probably heading into a period of what economists call mercantilism — bargaining for advantage. That bargaining will be most importantly be with the United States and will be essentially on its terms. We have few bargaining chips other than that we stand for free trade and that cuts very little ice in Washington.

Of course, China will in due course contest the United States’ dominance. But that is a long way off. For the next decade, the United States rules.

So we need to look through Iraq. Ignore the fizz on Wall Street. The economic fundamentals in both the United States and Europe have been weak for two years and when the Iraq war ends they will remain weak. Economists, as distinct from financial market analysts, have for many months been growing gloomier about this year and continually postpone their date for the coming upturn (though it is a fair bet there will be an upturn). The 1990s bubble was too big, the debt overhang too massive, for a quick return to strong growth.

So this country is likely to face a soggy international trading environment for some time yet. That is not disaster because this economy is now flexible and resilient. But it is not the stuff of 4% growth. The government has been right to push that ambition out into an indeterminate future.

There are also, however some internal constraints. Household debt is very high and savings low, as far as can be told from inadequate statistics. We are on the edge of a drought and if that happens it can take between 1% and 2% off GDP growth. We are still heavily dependent on commodity products and commodity tourism, though the diversification of the past 30 years, and particularly the last 10 or 12, is an impressive story.

That’s the economic backdrop as I see it to the political story, which is my specialist area and to which I will now turn.

Again, I want to ask you to look through the fizz to the big picture.

The big battle going on is over which party, Labour or National, will predominate through the first quarter of this century. National dominated the second half of the twentieth century — 38-12 against Labour. In fact, conservative forces won the twentieth century as a whole 62-38, an impressive performance. This Labour government is determined to reverse that score in this century.

To do that, Helen Clark has to provide government the majority finds comfortable — that is, small-c conservative government. She has to establish pre-eminence for a left-of-centre version of small-c conservative government in contradistinction to a right-of centre version which National could be expected to supply.

She has in fact been pretty much doing that by taking some of the rough edges off the 1990s market policies but otherwise consolidating the policy environment and making a virtue of incrementalism and largely avoiding policy shocks. That has been very well received by the electorate. Even adjusting for the benign economic circumstances, her approval ratings are very high and the government-supporting parties have an enormous lead over the opposition parties.

In fact, though consumer confidence has plummeted, belief that the country is going in the right direction hasn’t. This suggests people think the economy is going to slide but they are not blaming it on the government.

Helen Clark also has backing from the left. Though there are some mumblings in some union circles and from some on the left of her party about slow progress on their pet programmes, both the unions and the left generally have as their top priority keeping Labour in power. This is unlikely materially to change this term.

Helen Clark has also been given an opening to set up the parliamentary arithmetic so that there is a long-run Labour-led government on the Swedish model.

The logic of MMP is the German model — one large party on each side of politics, with one or two smaller parties in support and power alternating from side to side just as it did between Labour and National from 1936 to 1993.

But for the moment Parliament is like a Swedish model: Labour large, flanked by the Greens mopping up votes to its left and United Future picking up centrist and some right-of-centre votes. That gives the government-supporting grouping reach across the centre line. In that picture National is weak and can form only a weak government at best.

Moreover, Peter Dunne has said United Future will continue to support Labour after the next election unless the electorate clearly demonstrates it wants a change of government. So there is every likelihood Labour will lead the next government after 2005.

That is underscored by the job National has to do to become a credible claimant on the Treasury benches.

* It must first recover its core vote: after failing to comprehend this last term, it is now attempting to do that. I think that will take the rest of this term and to the extent that it succeeds, it will take votes mainly from ACT and New Zealand First, though possibly also from United Future’s evangelical wing and even, on the Treaty, from Labour.

* Only when it has recovered its core vote can National build out again towards its centre. It will want to do this before the 2005 election but if it does try to do that it will risk leaving uncompleted the core vote reconnection, which would leave itself still with relatively low vote and potentially give Labour another three years to bed in the Swedish model.

There is another player in this game: United Future. This is an interesting mixture of liberal-centrists and evangelicals. The evangelicals are moral conservatives.

For a time the moral conservatives and Labour will be able to agree on quite a lot: the Family Commission, for example. Strengthening families is not the preserve of moral conservatives; large numbers of core Labour voters yearn for a more stable society because they are the ones upon whom most of the burglary and mayhem is committed — so if Labour presents what it is doing with families as an attempt to reduce mayhem, that is likely to go down moderately well.

But over the longer term moral conservatives will be more comfortable alongside a National government than a Labour government. If United Future’s evangelical MPs don’t desert, its moral conservative voters will. United Future can support Labour governments long-term only if its liberal-centrist wing becomes the majority and it draws principally on centrist voters, not moral conservative voters. Peter Dunne is in fact building up the liberal-centrist wing and if enough of that wing are high on the list next time round, they may be the majority in the smaller United Future parliamentary contingent that is likely to emerge from the 2005 election.

That is Labour’s ideal result in 2005: a Labour government still able to call on United Future or the Greens for a majority and a United Future whose centre of gravity is the centre or slightly right of centre. That’s the Swedish model. Almost anything else, however, will likely lead us back to the German model — and that will especially be the case if United Future can’t supply a majority on its own and Labour needs the Greens for that. Such a Labour-Green government would likely open up space for National.

That’s the big picture. What about the smaller picture: policy through the next three years?

I don’t propose to give you a detailed rundown. That would take us way past the main course. Instead I want to set policy in the context of three pervasive policy questions — issues that run right through this society and infuse all government policy and will decide the longer-term success or otherwise of this government. These are the economy, social assistance and the Treaty of Waitangi.

First, the easy one: the economy.

Essentially, this is a fiscally careful government which knows macroeconomic stability is vital and which has concluded that a certain degree of re-regulation is needed in utilities and believes that more government activity is economically useful in

* the infrastructure, particularly energy, roads, water and education,

* research and development and translating ideas into commercial realty,

* attracting foreign investment,

* developing international connectedness through joint ventures with big foreign firms and linking with the Kiwi diaspora and

* trying to do something about compliance costs.

It will not cut taxes, except by way of an increased family tax credit. It will increase income tax through fiscal creep — someone on average earnings this year has gone into the 33% bracket — a health tax (initially merely a designated part of income tax but eventually open to being raised) and a carbon tax to come as part of the Kyoto protocol implementation.

It will run central government spending up to around 35% of GDP and run gross government debt around 30% of GDP.

The second pervasive policy poser is social assistance. This government is not concerned with economic growth per se. It sees economic growth as a necessary means to achieving its ambition which is an equitable society.

First, social assistance affects economic performance. Labour market regulation — with protection of workers in redundancy, sale of enterprises and contracting out still to come — is a social consideration. Environmental regulation is also, for this government, an important ingredient of a socially just and qualitatively rich society. So this is a greenish government, even without the Greens. Expect more of that, too: marine reserves, energy conservation, waste management, limits to logging and mining, plus the Kyoto paraphernalia.

Second social assistance is the core of Labour philosophy. But the high level of benefit dependency limits what it can put into housing, health and education, which is where its heart really lies. I have begun to hear even left ministers say, “We must do something about dependency.”

Moreover, Labour is caught between its instinct for centralised government policy and delivery — in the interests, it believes, of equity — and the hard fact that the factory state won’t work well in a society which — especially among the young — has become accustomed to highly differentiated products and services in the private sector. The mass production techniques of the early twentieth century which led naturally on to the monolithic, one-size-fits-all state no longer work in the private sector and won’t work in the public sector.

That requires governments to work with local governments, not-for-profit organisations and social entrepreneurs both to devise better programmes and to deliver them. It requires outcomes-based funding — making children healthy, for instance, in Plunket’s case — rather than tight contracts for outputs — paying Plunket to do x number of visits to households with newborns. That involves big risks in monitoring and accountability entails a lot of political risk. Steve Maharey is edging down this route but the cabinet is only warily following.

Bill English is much better attuned to this way of thinking. But his party, too, is generally way behind reality and is struggling to emerge from the 1990s — many of its young senior MPs are old politically. National does have room to move, however, on voter discomfort with the size of the benefit roll and both the discomfort and the roll are likely to grow if the economy falters.

Where National is on the wrong side of history on this is in devolution to local government. This won’t happen fast but, come 2020, at least some of what the central government now does is likely to be done at city level.

And finally there is the Treaty. Beside this, the economy is a breeze and social assistance fairly straightforward.

The Treaty is about biculturalism and biculturalism is about power. It is not about kapa haka and speaking a bit of Maori. It is about how much say Maori should have in public policy and activities, who should exercise that say and under what rules it should be done.

Uncertainty is the political outgrowth of this. Where will it all end? No one knows and the government is not setting clear boundaries, though some senior ministers think it should. Bill English may well get some traction on this issue, if none other, just by arguing that if the Treaty is being redefined — as it is — both “partners” should be staking positions and bargaining. Most of the voices we have heard redefining the Treaty over the past 20 years have been Maori.

For most countries indigenous rights are an indulgence or a harmless sideshow because the numbers don’t matter. Here the numbers matter — for economic success, social cohesion and political stability. Maori have re-established the Treaty and it won’t go away. If we get it right, we will lead the world. If we get it wrong, forget petty arguments about whether we can get back into the top half of the OECD. That will be a peripheral matter.