Breaking up is hard to do: Lessons from the strange case of New Zealand

Abstract

AbstractObjectiveTo investigate historical antecedents for the likely effects of Brexit, the “breaking up” of the Commonwealth is considered. In particular, the effects on New Zealand in the period following “Brentry,” or the entry of the UK into the EU, are measured and used to forecast the pattern of impacts the UK may encounter.MethodsThe technique of Synthetic Control. This quasi‐experimental method takes conscious advantage of features of endogenous selection that enable the comparison of predicted growth against an explicit counterfactual, allowing for dynamic changes in each.ResultsWe find that NZ's loss of preferential trade status after “Brentry” in 1973 created a lost decade for NZ. Using the synthetic control model, we find that current estimates understate, perhaps substantially, the negative effect of a hard Brexit on the U.K. economy.ConclusionNZ's famous “liberal” reforms in the 1980s did put the country back on a path parallel to its pre‐1973 path. But contrary to the conventional wisdom, these reforms did not come close to restoring NZ's income to its level had Brentry not occurred. In fact, NZ is still almost 20 percent poorer even post reforms, compared to its synthetic control.