Government strategy in a world of economic nationalists

Caralee McLiesh:

[speaking in te reo Māori] ... Ngaire. Nau mai, haere mai ki Te Tai Ōhanga. Ko Caralee McLiesh tōku ingoa. Ko te tūmā whakerai mo Te Tai Ōhanga. Tēnā koutou, tēnā koutou, tēnā koutou katoa.

Welcome everybody. My name is Caralee McLiesh, I'm the Secretary of the Treasury and it's really wonderful to see you all here at the Treasury and also online. Welcome to those online for today's Treasury guest lecture. Very warm, special warm welcome to our presenter today, Professor Ngaire Woods. It's wonderful to have you here, Ngaire. Thank you for coming to talk to us about government strategy in a world of economic nationalists.

Just a couple of words of a housekeeping before I introduce Ngaire more formally and kick off. We have a few health and safety items. In the event of a fire alarm, please follow a Treasury staff to the nearest exit and progress down the stairwell. Don't use a lift. In the event of an earthquake, please drop, cover and hold and stay in the building until instructed by a warden. Bathrooms are through past the kitchenette and to the left.

So, I'm delighted to welcome Ngaire Woods to the Treasury once again for this guest lecture. Ngaire is the founding Dean of the Blavatnik School of Government and Professor of Global Economic Governance at Oxford University. It really is great to have you back in Wellington and I really appreciate you being here at the Treasury for your one day in New Zealand. Looking forward to the no doubt rich insights that you'll give us and the discussion afterwards.

Ngaire's research focuses on how to enhance the governance of organisations, the challenges of globalisation, global development, and the role of international institutions and global economic governance. She has published extensively on international institutions, the global economy, globalisation and governance. She has a distinguished educational background at Auckland University and Oxford and Harvard University. She has received numerous distinguished awards for her services to higher education and public policy. She's a fellow of the Academy of Social Sciences and International Honorary Member of the American Academy of Arts and Sciences.

Ngaire cares deeply about and contributes enormously to New Zealand and one of the things that I've really appreciated is how she has developed and established relationships with the public service here in New Zealand. Is committed to developing and strengthening our capabilities and connecting us internationally and also taking the time with younger members of the Treasury staff, people who study in Oxford and that is really noted and appreciated and valued. So, thank you, Ngaire.

So today, Ngaire is going to discuss evolving trade rules in major global markets and how geopolitical tensions and economic challenges are reshaping international norms. She's going to highlight some of the strategies of major powers and provide insights on the implications for small economies such as ours. New Zealand is small, we're remote and we are buffeted by the changing tides of shifting geopolitics, international trade and diplomacy. Improving our economic productivity performance is dependent on strengthening international connections through trade, through ideas, through investment. But it is increasingly challenging in this changing global landscape.

And faced with this challenging environment, we're increasingly focused on policy that can build our economic security. It's been a big focus for the Treasury and indeed for economic institutions worldwide. So really looking forward to hearing from Ngaire today about how small nations like New Zealand can navigate these really big global shifts and particularly the link with economic policy. So, I'll hand over to Ngaire to deliver her presentation. We've got about 45 minutes and then we'll have around half an hour of discussion, taking questions from within the room and also online. So please think about the comments and questions that you would like to bring to the conversation. Over to you, Ngaire. Thank you. Welcome.

Ngaire Woods:

Thank you. Thank you, Caralee. Thank you, Hugo, your colleague Hugo van Dyke, for who I met at an Asian Infrastructure Investment Bank meeting, doing, he was doing a fabulous job representing New Zealand. And to the many brilliant public servants in this room and outside of this room who are helping keep New Zealand going, innovating and doing a terrific job every day. It's public servants of the unsung heroes in almost every country of the world. And that's why I like to come back and come here and speak with you. I think what I'd like to do this morning is to talk about the change... Most of us think about fiscal policy, which has been what this series has been about. And we think about the effects of a country's fiscal policy in a world which has for some 30, some would say 60 years had some stable elements to it.

And two of those elements which stand out are a stable system of security alliances within which you've had a fairly stable set of rules creating a rules-based order. A rules-based order, which at the end of the Cold War became a global rules-based order. And it's very difficult for policymakers, for economists, for businesses not to default back to a presumption that the world will always be like that and that when it deviates from that it will quite soon spring back to that which we're used to. So, in the end, the rules-based order and globalisation will continue and there'll be some bumps on the road. And today I'm going to put to you something different to that which is what the world looks like if we don't believe that and what that means for small countries.

And it's particularly important because when we think about the challenges that all countries in the world are trying to face with greater or lesser enthusiasm, the challenge of getting to net zero or containing climate change, the challenge of navigating public services after COVID, after the energy food and food price crises and in a period where conflict is creating havoc in global capital markets as well as in global markets in goods and services, the challenge of adapting and staying at the leading edge of new technologies. These are really big challenges.

And as all the economists in the room know by far the most efficient way to solve each of those challenges and get ahead is a market one. It's a market-based one. We've seen that with the food crisis across Africa after the Russian invasion of Ukraine, where actually your best way of bringing food prices down was market mechanisms. So, we do know this all of us, but the trouble is that we now live in a world where the political drivers which are setting the rules are taking us very far away from what looks like a rational solution. And if we don't take that into account in thinking about our economic policy, then we're going to end up with some serious unintended consequences from our economic policy.

So let me take you to the heart of this. The rules-based order that I mentioned depended upon a United States that was both willing and able to uphold that rules-based order. More or less with certain privileges to itself to break the rules occasionally or even more than occasionally but coming back to that more or less rules-based order. So, six years ago when President Trump had first been elected to the United States presidency, the very distinguished American economist and head of the Peterson Institute, Adam Posen, wrote an article in Foreign Affairs which warned of what at the time he thought were the extremes of a Trump presidency for economic policy. And he warned of the huge damage to the global economy and to the chances of other countries if the United States did any one of the following six things. So, this was very much speaking to the Trump presidency and saying, "If you do any of these six things, you will create havoc."

So, the first was restricting access to the United States market in arbitrary ways. The second was blocking investment into the United States. The third was withdrawing from trade agreements or unilaterally changing them. The fourth was imposing by America criteria in the American economy. The fifth was politicising financial supervision and access to the international payments system. So, using SWIFT for example, and pressure on SWIFT for political purposes. And the sixth was blocking or continuing to block appointments to the WTO appellate body. Now those of you who follow US policy will know not just that all six of those things were done under President Trump's administration, but that all six have continued under President Biden's administration. In other words, it's become a bipartisan orthodoxy that you do all six of these things. And that's just to tell us how far the ground has shifted in six quite short years.

And then we've got the reverberations of that across the rest of the world. So just in the last 12 months, we've heard America's National Security Advisor, Jake Sullivan, arguing that economic integration does not make nations more responsible or open. That integration into the global economy does not incentivize abiding by international rules”. We've got President Macron in France, quote in his speech at the Sorbonne at the beginning of this year saying, "Everything has changed," speaking about the world economy, "Everything has changed. We now need to seek strategic autonomy," and laying out a very ambitious agenda for Europe on industrial policy on what we would call protectionism and changing the rules, changing the way that Europe applies rules in the face of what he argued was everybody else changing the rules.

We've seen Xi Jinping in China shifting so dramatically from the aspiration four years ago to continue to maximise China's role in the global economy to now a focus on self-reliance and what Chinese self-reliance means. We've got Prime Minister Narendra Modi in India pushing the make in India strategy and again, taking up the precepts of the others. In other words, we've got the emergence of quite a full-blown case for economic nationalism which cuts completely against the rules of the road that we all default to and it makes it dangerous for us to keep defaulting to those rules.

So, what I'd like to do today is rather than to say therefore we must all hysterically gnash our teeth and say, this is terrible, these are politicians smashing globalisation. So, let's historically scream and hope that our screams will get through and soon they'll come back to the wise path that every economist would show them. And then we can all use our business as usual methods to frame our government's economic strategies. I think that's foolish because it's not looking at the political drivers behind this shift to economic nationalism or what others might call populism. It's not looking at why that has become a far greater priority for governments around the world than the economic precepts of the last 30 years.

So let me just touch on the three drivers that are shifting governments to this approach. The serious problems that they are actually trying to address so that instead of us saying... Well, they're all populists and what they need is a doctorate in economics. What we should be doing is saying, "Actually, they're trying to address problems that governments across the world are struggling to solve and therefore they're reaching for different tools to the ones that we've seen in the last 30 years."

So, the first driver is the domestic political one. It's what the American right describe as the problem of American carnage. It's the cities of Detroit, Flint, Cleveland, and Dayton. The American Conservative Journal describes the carnage in these cities as a carnage of unemployment, opioid abuse and suicides created by free trade, free capital movements and free immigration. So those are the arguments that traditionally people associated with a far-left view that are now dominating on the right as well as on the left in major democracies around the world. So, we do have to ask where did that carnage come from and why is it so visible in so many industrialised countries? And of course, the Global Financial Crisis played a huge role, not just in the carnage itself, but in the political response to it. Why? And here I'm citing the work of two different groups of European economists who have been looking at this.

And what they highlight is that the global financial crisis plunged middle classes in industrialised countries into an economic insecurity that they hadn't had previously. And it was that plunge into economic insecurity that created waves of political effect. And in particular, three arguments came to the fore in the backlash that ensued after the Global Financial Crisis. One was the argument to restrict trade and restrict immigration. Two was the argument to subsidise industries in left behind places to do something about the left behind. And third was to prioritise political and social objectives and to do all these things even if it meant inflation, the collapse of your currency and, or financial crisis. So that's pretty hard for every sound economist in the world to say, "What? You're just going to rip up those key economic health indicators in order to pursue these political goals." And the answer was, well, any politician that wanted to survive in politics, the answer has become yes manifestly.

But what does that mean? Does it mean that economic nationalism as... Another group of economists are writing very eloquently at the moment to say this dive towards economic nationalism will necessarily take us towards war and anarchy and smash economic cooperation. That economic nationalism is the opposite to economic cooperation. And the thought I want to leave you with today as I go through each of these three forces is that that's actually false reasoning and that what we should be doing is looking closely at what kind of cooperation even the rampant economic nationalists need if they want not just to be an economic nationalist, but to be a winning economic nationalist.

So, if we take this first driver, which is all about jobs, and we look at what the offer is at the moment, which is the insanely popular, certainly in the United States and Europe and India and Brazil and other emerging economies, the insane popularity of tariffs as a way to protect jobs. When actually as the economists in the room know tariffs are actually not a very effective way to protect jobs. They're doing all kinds of other things. They're diverting trade. They're diverting production. They're not actually a great way to protect jobs. And there is an alternative to them, which is not just an economical alternative, but it's a political alternative. So, think back to FDR in the 1930s and how he took an America that had wholeheartedly embraced tariffs and politically persuaded them to relinquish the tariffs. How? By instead moving on workers' rights on trade unions, on helping ensure that working people had stable and decent livelihoods.

To the corporate sector, this is a really interesting dilemma. If you say to the corporate sector, "Do you want tariffs or workers' rights?" They'll say, "Neither, thank you." But if you say, "Okay. But if you've got to have one or the other, which one do you want?" And the answer is almost always workers' rights because actually for companies that need high performing employees, workers' rights can, if they're done well be a way towards a high performing workforce. Whereas tariffs put you really at the mercy of the whims and caprices of governments who either increase or decrease tariffs on a day-by-day basis in some parts of the world at the moment.

And of course, we can go to one of President Trump's measures to see evidence of this. One of his signature international agreements was the Canada-Mexico-US Agreement. Actually, it's the other way around, US- Mexico-Canada agreement of 2018, which perhaps astonishingly for those that didn't follow it has the strongest most far-reaching labour standards of any trade agreement that the United States has ever come to. And I think understanding the politics of how that came about and what that did to pressures on to put tariffs on Canadian and Mexican goods is really important for other countries thinking about tariffs.

So, the first thing I'm going to say that I'm putting in front of you today is the first driver to economic nationalism is what others would call the populist backlash at home and in particular the cry for jobs at home to be protected. The easiest politically solution to that is tariffs, but they're not very effective. And a better solution, workers' rights, does require international cooperation such as President Trump's US, Canada, Mexico Trade Treaty, so that you can start levelling the playing field across countries on labour rights. So that's the first argument for why economic nationalism is emerging and why a response to it needs to include some international cooperation.

Let's move to a second driver behind economic nationalism. And that's the age-old concern of countries to ensure that they are succeeding in the most profitable industries. That they are moving up the value chain in their industrialization, which today means in the technology sector or at least in biotech space, quantum computing, AI. So, the question for all countries, whether you are India, Brazil, Germany, China or New Zealand, is how do you stay at the leading edge in those highest, most profitable sectors? Not actually the sectors which generate the highest employment, but certainly the sectors which generate the greatest profits, the greatest value. And here what we're seeing countries do is launch industrial policy when they can.

So, Macron’s vision, which is supported by most of his colleagues in the European Union by the other presidents and prime ministers across the union is industrial policy. A massive investment in human resources, in computing capacity to compete across those areas listed by the EU as AI, quantum computing space, biotech and new energy technologies. What's planned is a huge public spending on R&D. Using government procurement to support those industries. In other words, some quite traditional tools of industrial policy which were thoroughly ripped up and burned in the 1980s with some specific exceptions like Britain's development of its defence industry or Airbus in Europe.

The question then is if countries do advance successful industrial policy, can they astute international cooperation? Does it matter what their international relations look like? And here to say something that is perhaps very obvious, but I think still needs underlining, it's that even the two largest economies in the world, even China and the United States are still very interdependent, not just on each other but on third countries for their technology industries. And even though both are trying to move at speed to de-risk from each other, it's going to take a decade to do that. Why? If you just take the United States, 89% of its chips that are being used in US industry are imported. It relies on platinum from South Africa. It relies on graphite from China. 35% of its inputs in the tech industry are from emerging economies. A total of 11% on top of that are from China.

What that's telling us is that to secure the advances being made in the technology industry, the United States has to have agreements in place that assure stable cooperative relations with its allies. And this becomes important as we move towards the November election in the United States where economic nationalism has become such a new set of precepts, as I said earlier, among both Democrats and Republicans, that reminders of these elements of interdependence are becoming fainter and fainter in Washington DC.

So, the second driver in summary of the new economic nationalism is the thinking about what it takes to be at the leading edge of the most profitable sectors in the economy. And the lessons there from technology, the United States own history in technology, which was a story of combining massive government investment with consumer markets and global markets and defence markets. In other words, to really think about the size of the market when you're trying to generate the most successful, competitive, profitable business. And it did it in technology starting in the '50s and '60s by putting those three different markets together, its own defence industry, its own consumer industry and global markets. It then fragmented, the government withdrew, marketized those industries and China picked up and used exactly the US playbook, which it's done for the last 20 years.

So, China didn't invent a playbook for becoming dominant in technology. It simply picked up the US playbook and used it. And the rest of the world now are trying to learn from that and think about how do they adapt and compete in these ferociously competitive sectors where either you compete or you risk having to choose between one or other superpower. And that's the third driver that I'm going to move to now, which is the competition for allies and suppliers across the world.

So, the United States, we've seen both on jobs and on technology, but across all supply chain issues and to sustain growth that the United States and China and all other countries are going to need to sustain good relations with at least some other countries. So, what are their options here? So, the first set of options are to forge alliances where alliances involve you signing countries up to an unconditional loyalty to you. So, if you're part of an alliance, you are a partner that says, "No matter what you do, we are with you. We are in your camp." And we saw that in the Cold War where the Soviet Alliance, the United States Alliance were unconditional alliances. And that is always the preference of superpowers because it enhances their power whether they're using the alliance or not. It means when they deal with any third country, they can say to that third country, "Look what force we've got behind us. We have 30 countries behind us, so do our bidding."

What's changed in the world is that more and more countries are unwilling to become the unconditional allies of the superpowers. And those emerging economies or the so-called rest who are non-aligned with either superpower now account for half of global trade. So, there are really sizable group, a non-aligned, let me just underline, does not mean not siding with either superpower. It means not being part of an alliance, an unconditional pledge always to support one of the superpowers. Being non-aligned means you side with whichever superpower on a particular issue represents your country's national interests and preferences. So, it might be one side on one issue and a different country on another issue.

So, the emergence of the rest is really important for both China and the United States to consider. Why? And I'm just going to give five quick examples looking at the US, but we could similarly draw out examples for China where either one of them has tried to use a combination of coercion, unilateralism and isolationism to get their own way with other countries and why this is an unlikely to succeed strategy. So, let's start with the WTO, Hunter will have views on this, but in the WTO, the United States has for the 75th time, I think vetoed the appointment of new members to the appellate body of the WTO, which paralyses the organization's appellate adjudication capacity. But what other countries have done as a response to this is create a multi-party interim agreement. Now the multiparty interim agreement is nowhere near as powerful as the appellate body. And that's not my point.

My point is that they've created a voluntary mechanism which has now attracted 52 countries, and which demonstrates an intent where countries can to sidestep US vetoes or manoeuvres. And that's the important point here. It's that played back the other way this is underlining to the United States that they can risk losing influence if their strategies are so unilateral. A second example is the Asia Infrastructure Investment Bank I mentioned earlier. When China announced the creation of it, the United States did global diplomacy to get all of its allies not to join, and it failed. The only country it successfully persuaded was Japan. The United Kingdom quite extraordinarily was one of the first countries to join the AIIB. Again, it means that there are now meetings of that organisation at which the US is simply not present. A third example, the Trans-Pacific Partnership agreement, which the US catalysed and began, but then of course withdrew from. And it was very shocking and surprising to the US negotiators to then watch all the other countries proceed with the agreement at speed and make it their own. Again, leaving the United States sidelined.

A fourth, we can go right back to the East Asian financial crisis in '97 where the US overplayed its hand in the Korean IMF agreement and suffered a huge backlash by all Asian countries with them proposing, although not as it turned out so seriously an Asian monetary fund. But it catalysed the United States to realise that instead of unilateral imposition, it needed to do the opposite and create the G20. And that's what caused it to create the G20 and to double down on diplomacy. It's a lesson today's administrations in the United States need to remember.

And finally, the SWIFT system, which I mentioned earlier where Adam Posen said in 2016, "Don't mess with this, don't politicise this, it'll ricochet back on you." And sure enough, with Russia's invasion of Ukraine, SWIFT has been used as part of a G7 set of sanctions and economic state craft. And what has come of that and earlier manoeuvres using it is that Russia's created its own SPFS and China has created its own CIPS. These aren't taking the place of SWIFT, but certainly China's system is now accounting for some 13% of the transactions of SWIFT. So, it is actually growing and those alternatives are useful to show to the United States, look, your choice set is not force other countries to do what you want them to do or stick to your own. It's there is a third, which is they then do what they want to do without you. And I think that's a really important lesson for us to recall.

On this third driver, which is a world in which China, Russia and other countries are becoming more active in their own right in which the G7 has found itself wrong-footed. When the G7 announced sanctions after Russia's invasion into Ukraine, the sherpas that I know from that G7 summit were absolutely shocked when they showed up at the G20 subsequently and discovered that most of the G20 were not going to follow them. And it wasn't because those other G20 members disagreed with the condemnation of Russia's invasion. It's because first they didn't believe that the G7 would fully carry the costs of the sanctions regime that they were applying, which was true. Germany continued to import Russian gas for some time after that. And second that the G7 had not consulted them nor spent even a minute asking what did their choice set look like? So, you saw major countries, Brazil, India, South Africa, all democracies. So, this couldn't be argued to be authoritarians versus democracies. Some of the largest democracies of the world saying, "No, we're not going to join you in your sanctions' regime."

And that geopolitical fragmentation necessarily affects the rules-based order that we started out with today. It necessarily affects what economic state craft is going to look like in this new world order. It also underlines the crucial role that diplomacy and cooperation are going to play in the order that we are moving into. So, my argument to you today is that economic nationalists can make the case that the best way to protect the jobs of their people, their chances of competing in technology industries and their chances of national security in a fragmenting world, that their best chance is to build a wall, whether it's a wall of tariffs or literally a wall along their border.

But the alternative, and I think I am not sure where the saying originally comes from, but the saying is, "As the world becomes more conflictual, instead of building higher walls, we should build larger negotiating tables." And that alternative to build larger negotiating tables, I think has a longer history of success. If we think about the Maginot Line, if we think about the Berlin Wall, they seemed like good ideas at the time, but in the end they came down and they didn't achieve their purpose. And I think they're a metaphor for economic nationalists to pay heed to. So, I'll close just by saying, and more recently, by the way, on walls, of course, President Trump found that with his border wall with Mexico, that quite quickly after he embarked on building the wall, he also embarked on diplomacy with Mexico to come up with an immigration agreement with Mexico.

Similarly, in Britain, the same government that wanted Brexit and to exit from the European Union and to launch a completely nationally owned take back control immigration policy very quickly found itself forced to negotiate agreements with France. So, the 2023 agreement on immigration with France. So economic nationalists, first, they really are trying to respond to serious problems that you have to, that everybody, every public policymaker has to take seriously. And those problems are the problems of economic precarity, of diminishing and reducing incomes for most households in most industrialised countries, and therefore the resort to tariffs that countries are taking, the resort to protectionism.

The second being the challenge of competing in tech industries, which our economies have not been geared up to compete in. And the third being in a fragmenting geopolitical world, what should your strategies be? Those are three serious problems. And economic nationalists have solutions as they see it to those three problems. What I think we need to do is to then look at their solutions and ask, "Where is it that economic cooperation across countries is necessary to make those solutions work?"

So, in a way, the case I'm putting to you is that if you want to be an economic nationalist, that can be a good thing. It means you're trying to address serious problems. Don't make the mistake of thinking that you can therefore put up the walls and stop cooperation with other countries and get rid of international rules because the history of treating your agreements with other countries as here today and gone tomorrow is a terrible one. The post-war growth of economies was due to institutionalise commitments to NATO, to the Warsaw Pact, to a predictability in relations with other countries that we've seen in the last five years in the case of the United States get ripped up. And that is not a winning strategy for economic nationalists. And I'll stop there, so we can move to questions. Thank you.

Caralee McLiesh:

How our environment has changed, but also the why, and I'm particularly struck by how you've drawn the link between the politics and the economics, those political drivers of what some [inaudible 00:40:48] much rather irrational. [inaudible 00:40:53]. So really fascinating. And I particularly love also your challenge for us to build larger negotiating tables and not larger walls. So, we have about half an hour, maybe a little bit more for questions and discussion. I know we will be getting some questions from online and welcome you putting those into the chat and open up to the room here as well. Would anybody like to kick us off?

Speaker 3:

Without wanting to get into the gnashing of teeth, climate change and probable three degrees Celsius. I was very interested to note that your first big challenge that you mentioned was climate change. I'd be interested in your thoughts about how we try to deal with... I suppose really the idea that we're going to technologize ourselves out of this problem with new inventions. We seem to be having a lot of that thinking happening in New Zealand at the moment, and it might be happening a number of other places. So, my question is how does three degrees fit into your thinking about instability?

Ngaire Woods:

Yeah. So, I think the political drivers that I'm mentioning are so important for everyone involved in climate policies to think about. One of the reasons why we're seeing countries go backwards on their net zero commitments is because of the bad politics. So, if you take Germany and the boiler policy in Germany. Or France, the Macron's effort to reduce fuel subsidies in France or increase fuel taxes, two well-intended efforts to push towards climate containing policies, both of which resulted in a massive backlash of people saying, "Climate is the concern of the wealthy elite because guess what? They can afford it." And that political movement I think is a real challenge to policy makers to really think hard about the not just good policy on climate, but good politics on climate and what that looks like.

How do you marry good politics and good policy? And that means really listening to what's happening in the politics. And I do think that there are green policies that respond to the three challenges that I've put in front of you today that really are job creating, that are technology enhancing and that do generate and drive international cooperation. We have to look at that choice set. And I suspect if we could live the last decade again, those policies that have created a backlash would've been differently done.

Speaker 4:

Hello. Thank you very much. I am Libuth Leon. I'm public servant in parliament of Indonesia. Thank you. I am interesting for your presentation. I've one question, how about you'll talk about IMF agreement of impact for development countries. How about impact for IMF agreement for the Indonesian development countries? Thank you.

Ngaire Woods:

Thank you for the question. It's an incredibly important question for the world. When you look at the list of countries that post COVID, post Russia's invasion of Ukraine, which massively increased energy and food prices for all developing countries. So, the COVID expenditures, the post Ukraine, and now the conflicts that we're seeing erupt around the world that are creating... Every time you see conflicts that reverberate around the world, the price of borrowing for developing countries skyrockets as capital resorts to safe havens and to quality, as the markets would put it. That means that developing countries, all of them are facing these exogenous shocks that have nothing to do with their own policies. They're like ships at sea that are suddenly facing a terrible, terrible storm and they're sinking.

So, there's more than 75 countries in deep severe debt distress. And the international system, the bad news is, has been extraordinarily slow to try to fashion a solution to this. And there are all kinds of reasons. There's a plethora of different kind of creditors in every country. So, there's bilateral creditors, there's the multilateral creditors, there's bond markets, there's private investment, there is a rift between China and the United States and G7 on debt resolution. And almost all countries have debts to both. And both sides have some legitimacy to their position.

The G7 say, "Why should we give debt relief to countries who are just using that debt relief to pay off their debts to China?" China says, "Well, hold on. Some of our debts are project-based financing where we lent wisely to projects that are actually working. So, we built this port, it's functioning, it's paying back. Why should we be paying for debt relief on your foolish profligate lending that couldn't be repaid?" So that's the debate between the two sides and it has resulted in a bit of an impasse. So, what we're seeing are countries who have suffered these exogenous shocks, who are now looking at a world with fewer and fewer resources available to do debt relief and who are thinking, "Now, why should we care about that?"

So, for some people, the most important thing is that those countries that made two decades of progress towards the sustainable development goals have now lost almost all the benefits of those two decades. So, they've literally, they're now going backwards. So that's for those who actually care about the human beings in those countries, that's quite important because for two decades the world saw real progress is possible and now that progress is going backwards. But a second reason for those not that interested in the lives of people in other countries is that we're living in a period where, and I don't know for this part of the world so well, but certainly in the Northern Hemisphere, every country is in a state of semi hysteria about immigration. These debt crises that we are watching explode across developing countries. We know from history create waves of desperate migrants. So, I happen to be somebody that looks at the evidence of countries that have waves of immigration and notice that they inevitably lead to growth spurts. So, for countries that want to grow their economies, immigration is actually economically a pretty good effect.

But politically, it can be incredibly toxic unless you are making the political provision for the immigrants that you're accepting. What we saw in Europe is a toxic combination of a financial crisis that caused a 40% in Britain decrease in local government budgets, which are the budgets that are funding schools and health and social housing at the same time as immigrant flows from Syria imploding into civil war, Afghanistan imploding, et cetera. So, the response of politicians was not very brave actually. It wasn't to say, "The reason you can't get your kids into school, you can't get a doctor's appointment is because we have slashed the budget by 40%." The easier, crack cocaine for politicians was to say, "It's all about immigration and we'll control immigration. It's the immigrants that are taking your school places." And the evidence of that is really lousy. The evidence correlating popular reactions to where you actually saw immigrants using more places.

But what that's telling us is that whether you are on the side of national interest and the need to contain conflict and forge alliances or whether you are on the side of a concern for all people in the world to have some minimum of decent opportunity in life, whichever argument you take, the debt crisis which is exploding across some three quarters of the world's countries you cannot ignore. So, Indonesia is really important because Indonesia's always been a powerful driver of debt strategies. Indonesia, as all of you know has some brilliant economists inside the country, is the largest Muslim country in the world and has huge development and growth opportunities ahead of it. But has a very colourful and public history of its engagement with the IMF, which led to a whole rewriting of the way in which the IMF did agreements earlier.

But I would say that as with Indonesia, as with all other countries, the need to start doing debt agreements. We've seen what happens with Zambia and Ghana. The need to get the G20 to now build on their debt suspension initiative. The need for the G20 to drive change in the IMF and World Bank and the need for all other countries, whether they're economic nationalists or not, the biggest bang for your buck if you're trying to resolve debt crises, which have come about because of exogenous shocks to countries, is to do it through the multilateral system. That's how you get a real bang for your buck. It's not a popular argument to make in a world of economic nationalism, but it's one that interestingly to me, even when you make that argument to the economic nationalists in the countries I've mentioned today, when you show them what the value for money is of these debt settlement agreements, they actually get the argument. So, I've got my fingers crossed for Indonesia. Sorry to take so long to answer the question.

Caralee McLiesh:

I'm online and so I might just go to those now. One is to really build on this previous discussion, how do you think that the role of the Bretton Woods Institutions will need to change? How will they need to reconfigure themselves in light of growth in economic nationalism? Questions also, looking back to some of the lessons of history, one of the ways that the post-war economic order was challenged was in the crisis of the 1970s and the breakdown of Bretton Woods Exchange System. Arguably it was due to a similar assertion of nationalism by the US in choosing to end their role underpinning the gold standard. And are there any lessons from that period and how it was navigated and in particular thinking about the role of the IMF and the World Bank and then how might that apply to the need for the Bretton Woods Institutions to reconfigure to change in light of shifting geopolitics, the rise of economic nationalism?

Ngaire Woods:

So, I think the Bretton Woods Institutions, if reconfigured are a very important part of navigating a world of economic nationalism. And I say that because the implication of the argument I made this morning about economic nationalists needing cooperation, we've seen play out already on a number of events. So, every US administration where the Democrats or Republicans comes to power and immediately does not want to be constrained by the IMF, immediately, nor the World Bank typically, and certainly not the UN. So, they tend to come to power and immediately say, "We're not going to be constrained by the IMF. We're going to go straight to Argentina, say, and announce the bailout that we think is right for Argentina. We'll do it bilaterally."

And then within about 12 hours, the advisors to the president have been called by the Federal Reserve, by the IMF, by the Treasury. And it's been explained to them that if the United States does it on its own, A, it's going to be very costly economically, and B, it's going to be very costly politically because it's going to look like the United States bullying its southern neighbour. I've seen this happen three times with Argentina, with different parties, different visions, but always this impulse, "If you're big and strong, why not use it?" And in every case they have very quickly stepped back and gone, "Yeah. If we do this through the IMF, A, we only have to pay a very small percentage of the cost of it, and B, we don't take the political hit because it's the IMF that's actually doing the deal." So, it underlines the importance of having these international institutions to do a couple of basic things.

One, to pull information. You might think that the United States has a huge capacity and China as well to generate information about every other economy in the world. But think about it, how much time does New Zealand spend generating information about Zambia? Probably not a huge amount, but New Zealand is a member of the IMF, and the IMF has the time and the access to that government's data to collate not just the data on Zambia, but the data on every other economy in the world. So, A, the information, B, the mutual win sets. You need international organisations to do what no individual country can do on its own, which to say there is a mutually advantageous solution here and we can get to it because we can set up an international rule and an international organisation to monitor that nobody's cheating on the rule.

Of course, it's always imperfect. Countries don't just give up their sovereignty easily. But what we've seen for 60 years is that those rules can actually create a predictable order and the fact that they're being monitored by all other members, which is why you have the IMF and World Bank actually brings importance to it. And third, to quote Keynes, what's the expression? The logic of averages to create the magic of millions. Is it the logic of averages, Roman? Yeah. To create the magic of millions. In other words, when countries pull their credit ratings... You going to correct... What were Keynes exact words? I've forgotten. He was of course so eloquent.

So, whether you are big or small, if you pull countries credit ratings, you get a better credit rating. So, if you take the Andean countries who all have credit ratings of B or less, when they pull those in the Andean Fund, they get a collective credit rating, which is much higher and that makes it much cheaper for them to access credit. That's the magic of the millions that comes from the law of averages. And we see that at global scale in the IMF and World Bank. So, the World Bank issues A plus bonds, which makes it possible for it to generate resources to use to deal with some of the world's great development challenges.

The wealthy countries are not actually contributing anything other than a guarantee behind the World Bank's bonds and in a separate concessional lending arm of the World Bank, they do actually contribute funds and those funds are mixed and have this huge leveraged power. So even in a world of economic nationalists because walls don't work, you can't just build the biggest wall around the United States and say, "We're going to be safe and prosperous behind the wall." Partly because you rely on external markets to stay prosperous. Partly because you rely on critical minerals, metals and other things from other countries to supply those. And partly because there is a civil war within the United States that you're simply building a wall around that we're seeing sharpen the polarisation within the country. So, the walls are not going to work, and if the walls aren't going to work, then your only option is to find international strategies that do. And the Bretton Woods Institutions, in my view are a key part. Can I say one last thing? Sorry. I'll try and be shorter in my answers.

But that's to say, and I hesitated to say this at first, because you know the old rule about civil servants, no matter what question you ask them, they pull the proposal they've had and they draw for 20 years and reheat it up and make it the answer to your question. So, I've been arguing for 30 years that you've got to reform the governance of the IMF and World Bank and you've got to give more voice to emerging countries and developing countries. And you could just say, "Well, there she goes, reheating out the same argument like a civil servant pulling the solution out of the draw, presenting it to the new minister." But actually, they do need to change for the reasons I said.

If half the world's trade is now coming from the countries that the great powers call the rest, you are not going to be able to govern those countries unless you give them a real say and a real voice in those multilateral institutions. The multilateral institutions will either become irrelevant if they're used as pawns of the great powers. If the United States just decides to use the IMF and the World Bank as its instrument of economic statecraft, they will become irrelevant to other countries. So, the option there is you've got to accept more constraints, but in return for the more constraints, you get more agreement and more predictability. Hundreds of years of diplomacy tell us that.

Speaker 5:

Thank you, Ngaire, for discussing this topic, which is a significant area of focus for a number of government agencies. And the question relates to the potential economic opportunities from this rapidly changing context. So, you talked about Jake Sullivan, the National Security Advisor, this remarkable speech on renewing American economic leadership, it leads you into the Inflation Reduction Act, a 391 billion dollar investment in the technology sectors, green technologies, the CHIPS Act, semiconductor sector. Close to New Zealand, we have the future made in Australia policies. And you talked about the European policies. So, what we are thinking about as economic agencies and the country is what are the opportunities potentially to plug into this rapidly changing context because those drivers you talked about are in small countries as well. We want to have those thriving economies, we want those great jobs. We want the technology sectors, but we don't have the deep pockets of those other countries. Do you have any reflections on that?

Ngaire Woods:

Sure, great question. I think the change that I'm describing means that your checklist, there's five things that should be on your checklist that haven't been. So, until now, your checklist might be how do we produce the most competitively with the cheapest workforce, the cheapest inputs, and the most reliable delivery. That checklist has changed to five things in my view. And they're certainly on the corporate agenda for multinationals. They're now asking themselves that they're looking at these five new elements on their supply list and they're just the political effects I've been talking about. So, the first is onshoring. So, what are countries doing to onshore jobs? The second is friendshoring. What are the new security of supply elements mean? So, if you're a small country, what does that mean? Whether it's the jobs act in the United States or Europe and New Zealand's trying to export into those, what are the agreements you need to make that possible? And who are the third-party countries you can move through if you can't do it directly?

On friendshoring, same thing. On green shoring where there's a huge opportunity for this country if it gets it right to do green shoring, to be part of a world that's going to lift the floor on what's required. The European CBAM is being copied around the world. This country could do very well in a trading system that sets that floor high. The fourth is what others call actually techno nationalism. So, between China and the United States, the techno nationalism which we are seeing emerge on both sides, where do you sit within that? That is a piece that this country and all small countries, and I think, I'm sure this country is allying with other small countries who are thinking hard about this. But those alliances are going to be really important because the big countries will try to force every small country to choose, "You must now either procure all your technology from us or from them," and that's not in the interest of any other country in the system. So how you play that is going to have to be the collective endeavour of the smaller and emerging countries around the world.

And then finally, the sanctions regimes and economic statecraft. So, the sanctions regimes, they produced these really perverse effects across emerging economies, perverse from the G7 perspective, what they genuinely never thought... So, when they did the sanctions regime against Russia, what they were not imagining was that policymakers and politicians in India, Brazil, and South Africa would certain think, "Gosh, what if they move like that against us for a different reason? We're not going to invade Ukraine, but what if they don't like what we're doing on our make an India policy or on our indigenous policy or our climate policy or whatever policy. What if the G7 just gang up on us and put sanctions regimes on us?" That very basic primaeval instinct against that politics.

So, the sanctions regimes worth really tracking, but thinking not just about the countries imposing them, but about the countries opposing them because there are market opportunities there as well. So that would be my checklist of five things for any small country to think about. How do you navigate those five forces intelligently? What does your strategy look like to navigate those five forces?

Caralee McLiesh:

Thanks. I'm going to just go to one online and then come back to the room. We have a question about the extent to which addressing some of these challenges that you've outlined in, Ngaire, is about more about domestic policy solutions rather than looking to the international ones. And just a highlight of Martin Wolf's arguments about the erosion of global rules-based order being grounded more in common domestic problems. And you spoke to some of that with the jobs challenge, especially as well as competing on new technologies. But Martin Wolf defines populism as politics based on an anti-elite sentiment. Suggests that sentiment has justified given the recent pattern of socioeconomic elites capturing states and providing themselves with prosperity, dignity, and security at the expense of those things for the non-elites.

So, it does suggest that domestic solutions are going to be critical, including the workers' rights as you say. But also, a question about looking more fundamentally about the split of the state revenue between capital and labour, about progressivity of tax schemes, electoral funding, competition policy to prevent rent extraction. And I guess I'd extend that to your views on what you think good quality policy advice is in this space. So, understanding distributional impacts, understanding the impacts of policy beyond just traditional measures so that we can better anticipate some of the longer-term consequences of decisions.

Ngaire Woods:

Yeah. It's a really great question. The headline is that government is more important now in facing the challenges that we face than it has been for a very long time. And that's a huge thing. In other words, navigating the five forces I just mentioned, no individual, small or medium-sized company can do. They rely on governments to create the ecosystem, which makes that navigation possible. To do the kind of energy and infrastructure transition, to cope with the changes in climate that are already upon us. Look at the flooding, the fires, the heat, this is going to require massive infrastructure renewal, which is going to mean that governments have to create an ecosystem for the private sector to build that new infrastructure. The kind of entrenched inequalities that have emerged post COVID, et cetera, restoring opportunity, genuine opportunity to succeed to people within countries but across the geography within countries.

In every country, we've seen an entrenchment of unequal opportunities in different regions among different groupings. To actually break that, you need really good effective government to harness the new technologies to do clever government. Nothing more ridiculous than watching governments in the world during COVID trying to work out how to get some minimal benefits to the poorest people in each society. And having these clumsy, awkward government systems aimed at trying to avert corruption with an absence of information operating to try to deliver those benefits when in almost every country, even some of the poorest countries of the world. But let's take New Zealand and Britain for example.

Every supermarket can pretty much tell you what are the poorest 50 families within 10 miles of that supermarket. They've got the data on what every single person is buying every week. They can tell you these are the 30 families that have halved their grocery expenditure in the last month. They can give you that information and that information can then give you a really accurate reading of where emergency support is most necessary. How was it that the West African very poor country of Togo was able to use digital means to direct benefits to its poorest within weeks of COVID starting when industrialised countries were what sending checks in the mail to everybody because they couldn't work out who was poorest and who needed it.

So, my point here is that the renewal of infrastructure, the restoration of opportunities across societies who these exogenous forces have created barriers across, the deployment of new technologies to do smarter, better government. This all means we need the smartest, brightest, most innovative, resilient, experienced people in the public service because they've got a really big job to do. And the countries that are going to succeed in the next decade because of the emergence of the forces I've described today, are the countries that are going to succeed in attracting their smartest, best people into government and persuading them to take risks, do a great job, and stay the course. That's really difficult because in most democracies in the world, the politicians are trying to respond to huge waves of populism. And their easiest response is a set of ever more dizzying announcables about what they're going to do, let alone anything deliverable, let alone anything sustainably possible over the long term.

So, the politics that goes with good policy is a politics which the politicians need for their part to learn, which is how to take the really big, long-term problems and create alliances across society and not make it a winner take all system. Where we'll do it this way and then they'll do it that way. Where we'll do all these measures and then the next we'll undo all those measures. And we're seeing that in most countries in the world. And it means that societies populations are more and more disaffected. In Europe, we are seeing the rise of really extremist parties. Why? Because the population at large has completely lost faith in a political class that they see playing a tennis match with each other. The ball's at their end of the court, the ball's at their end of the court, and we're just losing while the politicians are playing tennis.

David:

Thanks, Professor Woods. Almost 40 years ago to this month in this building was launched economic management. It was the Bible for the neoliberal and neoclassical economic revolution in New Zealand. So here we are today. Have I interpreted your remarks correctly to say that starting with the GFC and possibly crystallising with a Trump election and the rise of economic nationalism, we're seeing the breakdown of that Washington consensus and that neoliberal consensus? And does it therefore follow that good public policy must take that as a precondition and then ask the question, so what next?

Ngaire Woods:

Absolutely. And it's great to give it that depth, John. No, it's David. Sorry. It's lovely to see you, David. Yes. Look, if you're going to put a rugby team on the field, they need to know what rules they're playing by. And if you put a rugby team on a field and they think they're playing by one set of rules, but the opposite team are playing by a completely different set of rules, which are much more permissive or different, you're unlikely to win. So, it's not about which ideology you personally would love to believe in. For a small country, it's about what are the big player, the rule setters in the global economy doing? Because like it or not, if you're a small country, you're a rule taker.

So, you've got to constantly keep your finger on the pulse of who is setting the rules and adjust your strategy to what those rules are. I think that's the lesson I would draw. And I think too often these are played out as ideological battles within countries as though you can afford the luxury of going with your ideologically predilection, whichever way it goes, when actually you need to look at the world and that's the world we're playing. These are the rules we're being forced to play by now. So, what's our smart strategy within those rules?

In my experience at the moment, the world's largest companies are adapting much faster. They've got that checklist of five right in front of them as they make their procurement decisions, as they decide where to place factories. And their matrix of decision-making is already being applied very differently and governments have been slower to adapt.

Caralee McLiesh:

Thank you. So, question on the role of the private sector in responding to a lot of these big shifts and reflecting on your own role in private sector boards, how do you see some of the risks being considered and managed within private sector boards and leadership? Do you think there's enough effort to manage some of those risks? And how can we as policy makers or advisors on policy try and influence that and encourage the private sector to address some of the changes more directly.

Ngaire Woods:

So, I think the gap between the public and private sector, the gap in understanding is really important to recognise and consider. A couple of examples. So yes, at the moment I sit as a non-executive director on the board of Rio Tinto. And I used to sit on the board of Arup, the global engineering company, and I learned hugely sitting on those boards about how differently the world looks, not just the world looks, but how different the presumptions are on each side. So, take climate actions. Some of the world's largest companies are begging governments to stop shifting the goalposts every year, to set down a set of rules which makes it possible for large multinationals to do the right thing and to do it knowing that they're not going to be punished by the markets or governments the day after.

So, ministers look at me perplexed and they say, "Well, if they want to do the right thing, they should just do the right thing." You are like, "Well, no, if you're a publicly listed company and you start taking actions which reduce the profits that you are returning to your shareholders, activists, investors or activists will come after you get rid of the management and put in place people that better deliver back to shareholders." Simple logic. So, what's the role of government? The role of government in my view, shouldn't be to do the things that government is least best placed to do, like raising funding. What governments should be doing is what their best place to do, which is regulating in a permanent and predictable way and having the courage to regulate in a permanent and predictable way.

So, I did an exercise in the United Kingdom during COVID of putting together the voices of some 50 or so CEOs of Britain's large companies about what they thought building back better after COVID would mean. The reason I did that was because I was aware that the government at the time who was a government made up mostly of former journalists or career politicians, had the most negative view of business. Their presumption was that all business is necessarily corrupt, atavistic, rent seeking. And of course there's a good reason why lots of public servants and politicians have that view, and that's because governments set up their procurement procedures so as to use companies that are all those things. If you have a tendering procedure, and I don't know New Zealand's procurement system, I'm speaking here about the United Kingdom. The government passed a social procurement act saying that when companies procure, they should make sure they're procuring from companies that are really good at all these things.

But only 10% of the government's own procurement is compliant with that. 90% of it is not. 90% is just the cheapest tender gets the bid and it's the worst form of contracting. I remember learning from a very wise contract law professor at the University of Auckland Law School that the best contracts are the ones you come to, that you would've come to without any written contract. And think about what that means. If you weren't allowed to have a written contract for your department to contract certain services, you would have to ask the right questions of who you contracting from. Do they have the expertise? Do they have the track record? Do they have the intent? Do they have the social pressure to deliver on all these things? If instead of doing all that, you just take the cheapest bid, the experience of most governments is that you end up procuring all the time from companies who are truly outstanding at only one thing, which is extracting value from government contracts.

What they're not very good at is delivering on any of the things they're supposed to deliver on in the contract. So, it's a continual frustration for really great companies. And really great companies can do awesome things. And I think we all just have to keep working at how you bring together intelligent government action, which requires politicians sometimes to put their partisanship aside and ask their political adversaries as well as their political partners, what's the right thing to do so that our best companies can contribute to the best possible solution for this country? And the countries that manage to do that are the countries that are going to win.

Speaker 7:

Ngaire, thanks for a wonderful, comprehensive, global perspective on the issues we face. Can I just follow up with a couple of thoughts that resonate with your presentation? You've talked about the challenges in relation to climate change. You've talked about the problems that are now afflicting the rules-based order, you've mentioned technological change and so on. As we look into the future in an increasingly climate impacted world with all the implications that that will have for migration, for example, for food insecurity, for the cost of damage and so on, as we think about the enormous and uncertain implications of technological change, seems to me we're moving into an era of ever-increasing unpredictability, uncertainty, and risk, and that's nationally and globally.

And I suppose my question would be in this context, how can a small country faced with that kind of challenge, an ever-increasing risks to democratic governance internationally and potentially domestically, how can a small country like New Zealand endeavour, if you like to flourish in that environment? And I'm not trying to be unduly negative, I'm just trying to think realistically what I've just indicated appears to be the world we're moving into.

Ngaire Woods:

So, I think as a small country, you have to keep your eyes all the time on what the most fiercely successful small countries are doing to ensure that their public and private sectors are working together to address the challenges. And some people say, "Well..." I mean people always cite Singapore. And then the response is always, "Well, we shouldn't look at Singapore. It's not a democracy, et cetera." I don't take the view that you should just pluck one country out of the cupboard and say, let's try and be like them. But I do think, and this is what in my day job at the Blavatnik School we're just trying to do all the time, is say, "What can we learn from other countries?" And most countries, almost all countries don't do that. There's just not time. The civil servants, the public sector, the politicians, in the end it's like, "Yeah. I'm sure there are other countries doing stuff and it would be a nice luxury to, like sort of, know, but we really don't have time."

And then you get the horrible conveyor belt of PowerPoint decks that tell you this is how to do it. This is how this other country did it, which nobody would ever either in the private... No private sector company would say, "Good. Here's a what works brief. We'll do exactly this." They wouldn't trust it for a minute. They'd say, "Well, no, we are a very different kind of place. We're not going to do that." The easy off the shelf solution is not going to work. But a constant engagement in learning what others are doing and then selectively applying and experimenting with what they're doing, I think is really smart. And learning from the private sector as well.

The world's very large companies are actually quite similar. When I say very large companies, I mean companies that work across multiple geographies are very similar to governments. They have big bureaucracies. They're constantly worrying about how to reduce the red tape. They're constantly worrying about how to create a culture of innovation and risk taking. The larger the organisation in my experience, whether you're an international organisation, a government, or a large company, all those problems keep pertaining. So, you're constantly in search of how to reduce those problems. So, there's a lot of learning that you can do across sectors and across countries, and I think that's what smart countries do.

Caralee McLiesh:

Fantastic point at which to wrap up this guest lecture. Ngaire, thank you so much for what has been a wonderful presentation and discussion. Really a tour of the big issues, these massive global challenges that we face in New Zealand that the world faces. And you've given us some really rich insights and a number of challenges for us to work through. I think the challenge of building larger negotiating tables and not larger walls. Also really focusing in on some of those domestic challenges. How do we get those policies that are job creating, that are about embracing the new technologies, building our competitiveness? And this last one, as a small country, that we are not able to have some of the responses that some of the larger powers have. How do we be nimble? How do we monitor? How do we learn from others? How do we constantly adapt?

And I think that has been one of the great strengths of the New Zealand system, the quality of institutions, the ability to adapt. We saw that during COVID, and we will need to bring all of those strengths to bear to face the challenges that you have outlined. But thank you so much for being here, for sharing all of your rich insights, your perspectives with us. Thank you to everybody who has participated today for a lively discussion as well. And we wish you all the best for the rest of your day in New Zealand. And then we hope that you come and visit us again soon.

Thank you everybody for attending. Our next guest lecture will be on the 19th of August when we'll have Danielle Wood from the Australian Productivity Commission with us. And please keep an eye out for more information on this guest lecture series, which will be available soon.

So I'll finish with the karakia.

[speaking in te reo Māori 01:28:15] Piki te kaha. Piki te Ora. Piki te Wairua. Hui e, tāiki e! Kia ora tātou.

Thank you.