September 23rd 2000


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Cover Story: Singapore’s changing direction

Editorial: Free trade: it’s time to fight back

National Affairs: East Timor: Whitlam was the culprit

Agriculture: Deregulation cuts a swathe through dairy industry

Law: Why Coalition will keep UN Committees at arms length

Eyewitness Report: S11 protests win few friends

Globalism: Australia out in the cold as three economic blocs form

South Australia: Hindmarsh Island bridge saga continues

Canberra Observed: ALP heads back to the future

National Affairs: Manufacturers, farmers: a natural alliance

Straws in the Wind

New Zealand: From basket case to “case study” ... and back to basket case

The Media

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New Zealand: From basket case to “case study” ... and back to basket case


by News Weekly

News Weekly, September 23, 2000
The recent moves towards an Australian-New Zealand currency union would drag the Australian dollar down and pose a serious threat to Australian agriculture. Once touted as the way forward for countries such as Australia, a liberalised, deregulated New Zealand is now a basket case.

Historian and commentator, Robert Manne, suggested some years ago that economic rationalism would destine Australia to become a new Argentina — a once rich state now divided by extremes of wealth and poverty.

According to leading British economist, John Kay, New Zealand has beat us to the bottom.

Kay has been a professor at the London School of Business and at Oxford University. His interests encompass both business strategy and public policy. He has a fortnightly column in London’s Financial Times and is the author of numerous books.

In a recent controversial piece, Kay issued a stinging report card on 15 years of economic rationalist experiment on the New Zealand economy.

He said that conventional wisdom has it that New Zealand has done everything right in its economic policies: rolling back the state in industry and welfare, establishing an independent central bank, repaying its public debt.

“If ever a country has been run by economists, it is New Zealand. In 1984, the colourful Roger Douglas became Finance Minister. He began the most comprehensive program of economic reform seen in a developed country.

“According to current orthodoxy, New Zealand has done everything right. The central bank is independent and its governor’s pay is linked to the inflation rate. State industries have been comprehensively restructured and privatised, with none of the regulatory supervision found elsewhere.

“What was one of the world’s most comprehensive welfare states has been dismantled. The Employment Contracts Act insists that conditions of work are a private matter between employer and employee. In surveys of the ‘economic freedom of the world’, New Zealand is ranked with Hong Kong and Singapore, ahead of Britain and the United States, and well ahead of continental Europe.

“After 15 years, the electorate delivered its own verdict on the reforms by returning an old-style Labour government, led by Helen Clark. If we look coldly at New Zealand economic data, the voters are right.

“Since the experiment began, economic growth in New Zealand has been much slower than in the rest of the developed world. Productivity and living standards have barely risen while almost all other rich countries have enjoyed sustained expansion. The past 15 years have completed New Zealand’s transition into a very select group of states: those that were once rich but are rich no longer.

“The standard of living has fallen from 1.25 times the average standard of living in high-income countries in 1965 to 0.62 last year. New Zealand is the Argentina of the second half of the 20th Century. What went wrong?”

Kay believes New Zealand’s agricultural industries did get a poor deal from the rest of the world between 1965 and 1976, when the UK entered the European Union, and world-wide there was a rise in agricultural protection. But since 1976, New Zealand’s problems have been of its own making.

He argues that from that year until 1984, Premier Robert Muldoon urged his compatriots to ‘think big’ and gave the country expensive aluminium smelters and petrochemical plants. Economic rationalism was a reaction to the fact that most of these big schemes failed, but the liberal economic polices that followed were no more successful.

Kay says that “the program is still widely admired outside New Zealand. As was true of Margaret Thatcher’s Britain, the success of reform is often measured by the extent to which it has occurred rather than the benefits which have flowed from it.

“The US Central Intelligence Agency claims in its 1999 Factbook that the reforms have boosted growth and moved incomes towards the levels of the big Western European economies, but its statistics show the opposite.

“The more serious challenge is to those international economic agencies — World Bank, International Monetary Fund and Organisation for Economic Co-operation and Development — which have advocated everywhere the reform programme that New Zealand adopted so enthusiastically. Unable to ignore the evidence, the OECD waffles.” (The Organisation for Economic Co-operation and Development is made up of the 29 most developed nations.)

No improvement

Kay cites the 1999 OECD Economic Survey of New Zealand, which said: “It is difficult to reach definite conclusions about why economic performance has not improved to a greater extent in the light of the substantial policy changes that have taken place, not least because it is hard to be precise about the counterfactual to be used for comparison.”

Kay says this is economic code for saying “things have been bad, but they might have been worse” if liberal economic policies had not been adopted.

The OECD report went on to say: “The reforms are on balance, commendable for the application of a broad set of consistent principles and the extent to which announced measures were actually implemented”. Kay retorts, “You might equally congratulate a man jumping off a cliff for his firmness of purpose.”

The OECD conclusion was that the patient has not believed strongly enough: “Despite the enormous strides made to date, there is unfinished business as to structural policies.” But Kay points out that after 15 years or experimentation, “it cannot seriously be argued that more time or more reform is needed before benefits emerge.

“The New Zealand experiment was a test of the claim that government is the source of most economic ills and the withdrawal of government is a solution to them. The New Zealand Treasury adopted that argument with almost obsessive zeal. And it is clear now that the experiment failed.”

Kay points to the failure of Auckland’s electricity supply in 1998 and the rise in unemployment as further evidence of the failure of the economic experiment. The electricity failure was the result of a sequence of managerial and technical failures that might have happened anywhere. “But the place where they did happen is the only advanced country in the world where electricity distribution is neither owned nor regulated by government.”

Unemployment

Likewise, New Zealand had effectively no unemployment before the economic reform period. “The price was that many people were employed in not very productive jobs. But perhaps that was a better answer, economically as well as socially, than putting them out of work.”

He said that there has been a significant increase in the proportion of the workforce in part-time work.

While in other countries this has largely been associated with more women entering the workforce and only wanting part-time work, this is not the case in New Zealand: “There has been a small increase in female participation, more or less offset by a decline in male participation. These facts, the overall rise in unemployment, and other developments in the New Zealand economy over the period, point to discouragement rather than choice in the form of labour force participation.”

Kay cites Tim Hazledine’s book, Taking New Zealand Seriously, which shows that New Zealand’s reforms have not been cheap.

Hazledine said that there has been a substantial increase in the numbers and earnings of managers and in financial and business services. He said that this is not wrong in itself, but it has to be justified by a corresponding rise in the productivity of those they manage, advise, and finance. And this has simply not happened.

Kay concludes: “Russia was not the place to have tested socialism. And New Zealand — an isolated easy-going country with impressive social cohesion — was the wrong place to try out economic libertarianism.

Economists must be grateful for such experiments. But it is usually better not to live in the countries where they take place.”

John Kay’s full analysis can be found at www.johnkay.com




























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