November 11, 2010


New Zealand’s Great Regression: New Zealand was once a beacon to the Western world for classical liberal reform. No longer. Where did it all go wrong? (Luke Malpass, October 20, 2010 , The American)

For followers of global politics and supporters of liberalizing reforms, New Zealand served as a shining example of brisk change. If the nation upset the non-communist world with its antinuclear policy in the 1980s, it also provided fertile ground for many of the ideas of Milton Friedman, Friedrich Hayek and, in the latter stages of reform, Joseph Schumpeter.

To understand the liberalizing period of 1984 to 1993, which was essentially an aberration in the modern political history of New Zealand, it is important to know just how out of character these reforms were for New Zealand. It is also important to understand the moribund state of the economy prior to the changes. It was, in popular language, considered a “Polish shipyard.” One of New Zealand’s most ardent reformers and successful entrepreneurs, Alan Gibbs, has called it a “feudal economy” and a “nonsense economy.” And nonsense it was. [...]

It has been argued quite persuasively that New Zealand’s history, especially since World War I, was marked by its search for security. New Zealand lost more soldiers per capita than any other nation in World War I—and this shaped its society and the way it viewed the world for a long time. The legacy of the Great War was exacerbated by the emasculating experience of the Great Depression and the subsequent trauma of World War II. Protectionist walls were erected—security of living, certainty about life, and a “fair go” were given priority over dynamism, change, and international engagement. The 1950s and ’60s were New Zealand’s “golden years”—it had the highest living standards in the world in the 1950s, largely due to postwar export industries, particularly sheep products to the United Kingdom. But hidden behind this prosperity were the seeds of a long period of decline and a slow process of the stultification of society. The nation was complacent during the good times, and successive governments combined a “she’ll be right” attitude with a misguided belief in the long-term viability of protectionist policies. It took 40 years for the consequences to hit home.

When they did, the nation responded with radical reforms in 1984. From being one of the most closed-off economies in the world, New Zealand became one of the most liberalized. When the Fourth Labour Government was elected in 1984, almost every area of the economy except the stock market was heavily regulated with tariff and quota protection import licenses and the granting of monopolies. As part of its protectionist policies, government imposed a total wage and price freeze for almost two years in 1982. The government owned about half of the economy and provided cradle-to-the-grave welfare.

Education, healthcare, welfare, and risk insurance were all (and still largely are) free and public. Many industries had some form of protection through quotas, tariffs, monopolies, import licensing, or subsidies. The top rate of income tax was 66 cents in the dollar. Inflation and unemployment were in the double digits and the overvalued dollar on a fixed exchange rate.

By 1989, the Labour government, led by Prime Minister David Lange and Finance Minister Roger Douglas, had halved the top rate of tax to 33 cents in the dollar and introduced a universal goods and services tax (GST or consumption tax). It removed all support for agriculture, removed or began dismantling the tariff wall, floated the dollar, and turned many loss-making government departments into profit-driven, state-owned enterprises (SOEs) and then privatized a swag of them. The principle of “user pays” was applied across the state sector to efficiently price government-provided goods and services. The Lange government set up an independent reserve bank with the sole responsibility of meeting inflation targets agreed upon with the government of the day.

In 1990, the conservative National government, led by Prime Minister Jim Bolger and Finance Minister Ruth Richardson, curtailed the welfare state and deregulated the labor market through the Employment Contracts Act. This ended a hundred years of centralized wage arbitration and conciliation, which was essentially centralized wage fixing facilitated by government and applicable for a set time period across whole industries, regardless of local conditions. To put an end to post-election budgetary surprises, the government introduced the Fiscal Responsibility Act. “Ruthanasia,” as these economic reforms came to be called, imposed a legal requirement to balance the budget and make full fiscal disclosure.

These reforms were substantial and remarkable for the fact that a social democratic Labour government did much of it and in a short period of time. But had history been different, Labour’s reforms might have gone much further. The government’s modus operandi was to operate a dovish foreign policy, with implied anti-Americanism, while simultaneously implementing the most extensive free-market reforms in the Western world. But this trade-off could only last for so long. Eventually, internal Labour Party divisions broke into open warfare. The government acrimoniously fell to pieces and replaced the prime minister twice before being trounced in the 1990 election. Had this not occurred, New Zealand may have had a flat tax of around 23 cents on the dollar and a wholly privatized economy.

Since then, three major factors have affected the impetus for liberal reform in New Zealand.

1) The pace of the original reforms. Both Douglas and Richardson subscribed to a “crash through or crash” philosophy, relying on an extremely quick pace of change to get through key reforms before opposition could be effectively organized. Although probably politically necessary, their liberalizing reforms substantially changed the political market by removing life’s certainties (at least those provided by government). The rapid societal changes gave an impetus to an electoral reform movement and changed New Zealand’s electoral system from a British-style, First Past the Post system to one of proportional representation. This has made it far more difficult to introduce coherent reform. These changes also made the population wary of reform, mainly because many of these painful changes included large-scale redundancies in state trading departments (government departments that owned whole businesses or industries such as forestry, railways, postal services, etc., and did not operate under a profit motive).

2) Nine years of Clark Labour government. Because the reforming Fourth Labour government collapsed so spectacularly, the reformers are regarded by some as the perpetrators of great class betrayal. Clark was able to paint the reforms of the 1980s as “the failed policies of the past.” This played into a narrative vilifying Rogernomics and the social democratic reformers of the 1980s as a bunch of free-market ratbags captured by the New Right and implementing an anti-democratic “big business” agenda.

3) Reform goes against the natural conservatism of New Zealanders, the National Party (which heads the current government), and natural inclinations of most politicians. It is perceived by the political class that a market for reform no longer exists, and reforming, conviction-based politicians are as rare in New Zealand as everywhere in the world.

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Posted by Orrin Judd at November 11, 2010 5:55 AM
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