New Zealand Today

David Hillary

[A critical response to the article, "New Zealand's Privatization Push Devastated the Country, Rather Than Saving It," by Murray Dobbin, September 2000]

Murray Dobbin is a freelance writer and author based in Vancouver.

Most of what Murry Dobin's claims are false and his reasoning flawed. I will attepmt to separate myth from reality and refute arguments piece by piece below.

It has been so long since anyone in the business press has praised the New Zealand "miracle," it's almost as if we imagined the whole thing. But, of course, the current silence is really no mystery. The 15-year free market experiment has been an unmitigated disaster. The suffering caused among ordinary New Zealanders is well known: the highest youth suicide rate in the developed world; the proliferation of food banks; huge increases in violent and other crime; the bankruptcy of half the farms in the country; the economic disruption of hundreds of thousands of lives; health care, education and other social services devastated by the mad marketplace scientists.

Firstly, it is necessary to appreciate how protected and regulated the New Zealand economy and society were before 1984. nz was the most protected and regulated in the OECD. it was also, not surprisingly, delivering the slowest productivity growth (or near to) in the OECD (especially in the 1960s 1970s and early 80s). Evaluation of the results of the "experiment" must be seen in this context.

The reforms 1984-1999 (but mostly 1984-1988 and 1991) were radical and made New Zealand the OECD's most free market economy. They were radical, they were implemented with unparalleled even-handedness and consistency. They involved:

1. Liberalisation of the capital account, floating the currency, liberalisation of banking, autonomy of the central bank with explicit inflation targeting (1984, 1985 and 1989). included deregulation of interest rates, abolition of subsidised credit to interest groups/borrowers, removal of state guarantees for all private credit etc. (Heritage Foundation now rates New Zealand as a '1' for its banking (most liberalised/best) score.

2. Liberalisation of foreign investment to the effect that there are now virtually no restrictions on foreign investment (Heritage Foundation rates New Zealand as a '1' (best/most open) score for foreign investment (1984 to 1988).

3. Liberalisation of international goods and services trade (abolition ot import licensing, export incentives and agricultural subsidies, rationalisation of tariff structure, unilateral progressive tariff elimination program (maximum tariff rates act passed in about 1998 fast-tracked tariff reduction to eliminate all tariffs by 2006, however the new government repealed this act and froze tariffs) (mainly 1984/5). 4. Corporatisation and privatisation of state trading departments, government department restructuring (activities corporatised and privatised include telecommunications (corp 1987, prv 1990), ministry of (public) works (80s), interests in gas/gasoline/petroleum (80s), banks (80s), railways (corp 1987(?), pri 1991), airlines (80s), electricity generation (corp 1987, privatisation of minor stations in 90s, privatisation of electricity corp of New Zealand breakoff contact energy (approx 20% market share 1999), seaports and airports (corp 80s, some privatisations 90s), and more I can't think of right now. Activities corporatised but not privatised include television broadcasting, postal service, weather forecasting service, workplace accident insurance, electricity transmission (the national grid), (corporatised and opened to competition 1998, closed to competition 2000 by new government) and many others.

5. Deregulation of product markets (includes virtually everything). Government trading activities that were corporatised were also deregulated, statutory monopolies removed etc.. deregulation included, as examples only (a full list would be too long), taxi services, transport, agricultural markets, tertiary education and insurance services.

6. Rationalisation of competition policy (all competition policy falls under the Commerce Act 1986, and the commerce commission, industry specific bodies and legislation being repealed).

7. Deregulation of the labour market (abolition of compulsory unionism, freedom of association, free choice of bargaining agents, free choice of bargaining methods, freedom of contract, a single national minimum wage rather than industry awards). this occurred in the Employment Contracts Act 1991 now repealed by the new government and replaced with the Employment Relations Act 2000, encouraging unionism and collective bargaining.

8. Natural resource and environmental regulation reform, in the form of the Resource Management Act 1991 (the RMA). part of the general deregulation of the New Zealand economy, effects based policy, rule rather than discretion policy, freedom to act unless explicitly forbidden by regulation (previously you needed to show the regulation allowed actions). Applied the same rules to government developments and use of environment as to private enterprise. The focus is on efficient use of natural and physical resources and on sustainable development rather than on socialisation of natural resource rents, although this was introduced (pioneered actually) in electromagnetic spectrum resources. economic instruments are possible but not explicitly encouraged by the legislation.

9. Reform of local government. Rationalisation of the various localised authorities into territorial authorities (i.e. city councils and district councils) and regional authorities ( dealing with emissions to air and water and regional environmental and conservation matters under the Resource Management Act 1991). Rationalisation of local government structures, accounting and governance. Required privatisation/contracting out of many services including road-building and public works, beautification, street cleaning, etc. Required explicit asset management plans and funding policies based on user-pays principles. Each year consumers should meet the opportunity cost of capital, the consumption of the capital employed (i.e. depreciation) and the operational costs, the funding of costs should be efficient with respect to the nature and distribution of the benefits and the available and efficient cost recovery methods. The rating powers act allows councils to determine their base for rates, including general uniform charges, improved capital value rating, unimproved capital value rating, annual value rating, and other types of taxes/rates and charges. Local government can set its own level of rates without restraint (i.e. unlike the UK and Australia where there are quantitative limits (e.g., price controls, which are profoundly inefficient in political markets as well as in private markets).

10. Tax Reform. Top income tax rate reduced from 66% to 33%, wholesales sales tax system abolished, a Goods and Services Tax (GST) imposed on all goods and services as a general consumption tax. Company tax rate reduced from about 45% to 33%. Tax breaks for businesses and farmers and interest groups abolished, tax policy rationalised (rational depreciation schedules etc.)

11. Public Finance Reform. Improved accountability for appropriations, accounting reforms including the introduction of accrual accounting (1991). Fiscal policy accountability via the Fiscal Responsibility Act 1994, requiring statements of short term intentions and long term goals for expenditure, net debt, gross debt, net worth, and statements explaining any deviations from targets, what is being done, or is proposed to be done to remedy the deviation, how long it will take to reach the target etc.

12. Welfare and Social Services Reform. State houses rents at market rates (and substantial sales of public housing at market rates by the Housing New Zealand ( a commercial company). Health services corporatised, public health services purchased on open market terms with providers (whether public or privately owned). Education reforms increasing freedom of public schools to accept and decline students and charge fees, increasing freedom of parents to select schools, funding on a per student basis to allow funding to expand and contract along with the rolls. Many welfare benefits were cut in 1991 to reduce replacement ratios. Universal child benefit was abolished and Family Support, a cash payment targeted to low income families was introduced. Efforts were also made to ensure working people received more than those on benefits. Attempts were also made to coordinate social services and improve welfare administration. A form of work for the dole was finally introduced in 1997 or 1998; however, the attempt was not particularly ambitious.

13. Tertiary Education Was Deregulated. Institutions were free to charge fees and students could access credit for public as well as private courses.

14. Public Sector Reforms. The public sector was reformed in the State Sector Act 1986, based on agency theory, managerialism and so forth. The result was a corporatised public sector, and standardisation of public sector structures and accounting and so forth.

15. Deregulation of Prices. The price freeze imposed 1981-1984 on all prices, wages, interest rates etc. was lifted by the new government asap.

16. There were other reforms in the direction of efficiency and deregulation, but also some changes that increased the level of control of government over citizen's lives, mainly in the areas of discrimination/human rights and first-people's claims on land and other natural resources.

The results of the reforms included:

1. A large increase in the sustainable economic growth rate. "I estimate that the 'natural rate of economic growth' -- i.e. the medium term growth rate beyond the cycle and beyond the unsettling effects of institutional transition -- was at least doubled by the institutional improvements of the early 1990s, say from a potential of 1.5 to 2% p.a. top at least 4%." (Wolfgang Kasper, 2000, Gambles with the Economic Constitution: the re-regulation of Labour in New Zealand. Kasper is Professor Emeritus and the University of New South Wales). The pre-reform potential economic growth rate was pathetic in a heavily protected and regulated economy. The reforms made it respectable at the very least. The misallocation of resources was extreme before the reforms and the costs of change were large. This depressed the actual growth rate in the last 15 years, making it difficult to judge the results on growth achieved during a time of radical reform. Therefore, the actual improvement in growth after the bulk of the reforms (i.e. 1993-1999 would underestimate the benefits of the reforms).

2. The natural rate of unemployment was reduced substantially by the labour market reforms of 1991. The Labour Government 1984-1990 actually increased regulation of the labour market and introduced compulsory unionism. This resulted in an increase of unemployment from 4% in 1984 to 11% in 1991. "On the basis of employment, wage and productivity data in the mid 1990s (Kasper, 1996a: 47-54) I estimate that New Zealand's 'natural rate of unemployment' was reduced to about 5% by the mid-1990s." (Kasper, 2000, Gambles with the economic constitution: the reregulation of labour in New Zealand). For New Zealanders looking for work, the reformed environment provided better chances of finding it, despite transitional unemployment occasioned by restructuring.

3. Price stability was obtained in the 1990s, after roaring inflation in the 70s and 80s. New Zealand has the best price stability in the OECD (was worst before the reforms.

4. Service quality in most sectors improved immeasurably. The impacts of the reforms on ordinary people must include these very real and substantial benefits. There is much greater choice, freedom and quality of goods and services available in the deregulated environment. Telecommunications, postal services, rail services, sea port services, airport services, airline services all experiences dramatic improvements in quality and value, as can be seen from statistics such as lost/damaged postal items, late postal deliveries, average time for a telephone connection to be done, lost containers, late containers and so on.

5. Improvements to Equity and Fairness. The new environment is fairer and more equitable, with the interests of ordinary people having much greater influence the interests of rent-seekers being declined. For example, getting assistance with housing before the housing reforms would involve waiting a long time in a queue for a state house. Those in state houses had it lucky, paying heavily discounted rents; those who missed out suffered a disadvantage. The reforms charged everyone market rents (whether public sector or private sector) and provided a housing assistance cash payment on the basis of more objective claims of need and/or desert, so that people in similar circumstances were treated equally. The level of inequality increased in the 80s when the labour market was not deregulated and other markets were being deregulated, but when the labour market was deregulated inequality did not increase further. The more competitive economy results in a less even distribution of income over the lifecycle and individual incomes are subject to greater fluctuation over time, hence consumption (or whole of life income) inequality would appear to have declined. Poverty did not increase between the 1991 and the 1996 census.

6. Public finances were bolstered by balancing the budget in 1994 to the present, and halving the problematically large net public debt/GDP.

Claims about the youth suicide rate are difficult to evaluate. The rate is high. The causes are likely to be more related to the failure of the welfare system, family breakup and so on, rather than structural economic reforms.

The proliferation of food banks is a healthy sign of the growth of civil society, and this, in my book, is a good thing. Poverty did not increase between 1991 and 1996, so it can't be taken as a sign of worsening social outcomes.

Crime rates rose and peaked at about 1994 then declined. The rate was rising before the reforms. It is hard to read much into this as far as the impact of the reforms on crime go.

Economic disruption is par for the course when structural reform is occurring. Farmers and manufacturers had to meet economic reality and the only way to reduce the quantities of labour in these sectors to the efficient level, given that they were inefficiently large, is for people to leave. There is an adequate system of income support in New Zealand for the unemployed etc., and people were therefore protected from destitution. They were not, however, protected from economic reality, and they were required to cease unviable activities and relocate to viable ones.

Social services and health, education, were not "devastated" by market mad scientists. Health reforms improved the production of health services by making them contestable, but failed to allocate them efficiently or provide efficient incentives for good health because the allocation method remained the same (i.e., its free, wait at the end of the line). However, the deregulated health insurance market worked very well, with 40% of the population covered -- I was covered for just $17 a month, about a third of what it would cost me in OZ. Education services were not devastated; they were improved, albeit slowly, by half-hearted reforms. The mad-scientist type of free-marketeers have been complaining since about 1992 that the reforms had been stalled. Hon. Sir Roger Douglas (Finance Minister, 1984-1988, architect and driver of the reforms) in his book Unfinished Business (1993) argues mainly for market orientated reform of health, education and superannuation (besides the abolition of income tax and tariffs and completion of deregulation) involving actual privatisation of service delivery and competition in the context of compulsory insurance/savings/vouchers and top ups for those on too low incomes. The ACT New Zealand party (of which I am a member) is the home of the Rogergnomes and the book (Unfinished Business) is the founding document of the party (the party was founded by Roger himself, and National party freemarket ideologue). The main focus of the party, besides eliminating tariffs and income tax and completing deregulation, is the proper reform of social services and welfare. So the free marketeers have not been properly let loose in this area, and they desperately want to be.

But, of course, neo-liberal ideologues don't hold much truck with the human consequences of their experiments.

An untrue and ad hominem argument.

So let's examine those things they do care about. The revolutionaries promised to tear down the "debt wall," unleash spectacular economic growth, spur foreign investment and productivity, create enormous new wealth and new and better jobs.

They failed on every count. Instead of a brave new economy, they delivered an economic version of Frankenstein's monster. The initial wave of changes -- deregulation, privatization, tariff elimination -- was justified by the infamous debt crisis. This was a ruse all along. Even Sir Roger Douglas admitted this when I interviewed him in 1992. The "crisis" New Zealand faced post-election in 1984 was a currency crisis brought on by Mr. Douglas himself.

This is untrue. The crisis occurred because of the government had been running huge (6-10% GDP) and rising deficits in an attempt to wind up the economy that was structurally [hampered] from a long period of rigidity creating policies that sought to protect the nation from economic forces. Resources remained where they were while the world moved on. This leads to stagnation and eventual collapse. The reserve bank of New Zealand (New Zealand Central Bank) could no longer maintain its exchange rate policy and the new government was forced to devalue by 20% after the RBNZ has wasted enormous resources on propping up the currency (the currency was floated soon after). The crisis was caused by the Muldoon National Party government's extreme-Keynesian policies of a blanket three year wage/price/interest rate freeze, massive borrowing from international markets to fund the "think big" scheme of public investments, and a longtime rigid economy.

As for the debt in 1984, it was NZ$22-billion, but after 10 years of experimenting, it had doubled to NZ$45-billion -- in spite of the sell-off of NZ$16-billion in state enterprises. Today, it has finally returned to 1984 levels, but only through more Crown asset sales.

The Labour government was ultimately unable to be fiscally responsible, especially in its second term when Roger Douglas was sacked and the reform program stopped for a 'cup of tea.' However, some deficits may be efficient policy when structural reform is occurring, in order to match the benefits and the costs of reform in time (i.e., its alright to borrow when transitional costs are being incurred in exchange for future benefits). The incoming National government cut public expenditure by cutting welfare benefits, health expenditure, education expenditure and brought the public finances into balance, and brought net public debt close to prudent levels (20% of GDP cf. USA about 60% GDP). Public finances are unrecognisably better as a result of the reforms.

And economic growth? In the years 1985-92, average economic growth in the OECD countries totalled 20%, while in New Zealand it was negative, at -1%. The promised creation of enormous new wealth went into reverse: Real GDP in 1992, at 5%, was below the 1985-86 level. A burst of growth from 1993 to 1995 petered out, and the economy steadily declined until it dipped into negative territory in 1998, posting the fourth-worst growth in the OECD.

The transformation of the economy was supposed to spur foreign investment, but it mostly meant a feeding frenzy on domestic corporate assets. In 1993, the proportion of GDP in investments was just 70% of what it was in 1984.

The growth issue has been previously covered. There were two recessions in the period he refers to (1985-1992). Growth in the 60s, 70s and 80s was pathetic; in the 1990s it was respectable. Had there been confidence that the institutional framework would be maintained, it would have delivered growth of 6% p.a. that confidence was not there (justifiably so, it turns out now that the new government is taking New Zealand back to the past). The lack of confidence in the life expectancy of the 'economic constitution', and the transitional costs of reform hide the potential of the institutional framework.

The restructuring of the economy failed most dramatically on the unemployment front, and the country has never managed to get back to anywhere near the 1984 level of 4%. The "workless and wanting work" figure peaked at more than 18% in 1993. In 1999, that figure had been reduced only to 11.2%.

Unemployment can be low in a stagnant economy, and massive public investment financed by deficits can tighten labour markets. New Zealand's current unemployment rate of just over 6% is lower than OZ, which has more regulated labour market. Free labour markets such as Hong Kong, Singapore, U.S.A., United Kingdom can and do (eventually if coming from substantial unemployment) deliver unemployment rates of between 2 and 5%. current unemployment rates in free labour markets are:

United Kingdom - 5.9%
United States - 4.0%
New Zealand - 6.1%
Hong Kong - 4.0%*
Singapore - 4.6%
* (NB HK is currently suffering deflation of 4% p.a. and the construction sector is weak, normal rate is 2-3%)

Rates for not free labour markets include:

France - 10.5%
Germany - 10.1%
Italy - 11.1%
Spain - 15.1%

However, some not free labour markets can have low unemployment, i.e.

Netherlands - 2.7%
Austria - 4.2%
Denmark - 5.4%
Sweeden - 5.7%
Switzerland - 2.6%

This may be due to wage restraint, a booming economy or some combination. I think it is clear that free labour markets deliver low unemployment, but it takes a lot of time (10 years plus) for newly freed labour markets to adjust if they have high unemployment. Look at Hong Kong and Singapore labour markets which have been free for long periods of time. they maintain low rates consistently. Free labour markets really do work, given enough time.

The radicals also promised increases in productivity, but again, they failed to deliver. After eight years of restructuring and massive labour deregulation, New Zealand's productivity began a steady decline in comparison with its neighbour, Australia. From 1978 to 1990, the rates had been similar. The gap steadily increased between 1990 and 1998, with Australia posting a 21.9% increase and New Zealand just 5.2%. Only the wealthy in New Zealand could see any benefit from this destructive exercise in social engineering.

Productivity growth has been disappointing, I admit. However there are a number of confounding factors, including the employment of lower quality marginal labour that was previously unemployed, transitional costs of restructuring and Australia's stunning productivity performance in the 1990s.

Australia has made very substantial reforms but did them more slowly and more messily but more consistently than New Zealand. The greater market size and faith in the economic constitution advantage australia. Australia is the world's eight freest economy (the OECD's fourth freest) and its stellar performance in the 1990s partly reflects lower transitional costs of reform due to a more healthy starting position.

Between 1984 and 1996, the top 10% of income earners measurably increased their share of total income. The lowest 10% lost 21.6% of their 1984 income. More than 50% of the total working population had lower real income in 1996 than in 1984.

Annual gross income inequality increased, whole of life net income inequality I think remained the same or decreased. The liberalisation increased individual annual income volatility and thereby annual income inequality. Also student loan financed tertiary education increases apparent inequality by reducing income while studying, increasing it later on. The high annual income of the graduate must be offset against the private costs of obtaining the education, and the low annual income of the student must be offset against the future gains in income. Changes to tertiary education make it look like there is more inequality than there is. Similar factors make inequality look like it is worsening, but its just an artifact of the data. Any increase in real inequality in New Zealand during the reforms reflects problems of family breakup, solo parenthood and benefit dependence brought about by the sexual revolution of the 60s and the welfare policies of the 70s, not structural reforms. The structural reforms make for greater social mobility, and lower whole of life income inequality.

There are lessons from New Zealand, but they do not involve adopting that tortured country as a model. The first lesson is that the unfettered application of ideology is inevitably destructive -- not just to democracy, social peace and equality but to the economy. Even as the revolution continued to deliver disastrous results, its promoters claimed it was because it had not gone far enough.

The main flaw in the reforms was that they were not certain enough to inspire confidence that they would remain, and some timing problems (mainly deregulating product markets before deregulating labour markets). The reforms did not go far enough. Further reforms are needed, especially to welfare and social services, and the overall level of government expenditure (which is two thirds social expenditure).

The second lesson is that parliamentary democracy Anglo-Saxon style has proven extremely vulnerable to the ravages of ideology. A virtual executive dictatorship can implement policies that are never even debated during elections -- as happened in New Zealand in 1984. The only thing that stopped the zealots from going even further was the introduction of proportional representation in the early 1990s and the subsequent election of minority governments.

I will let Kasper respond to this legitimate criticism:

"In New Zealand, the overriding constitutional rules are, by and large, implicit and weak. ... New Zealand only has one chamber of Parliament. No provision is made for the review of new legislation. And there is no written constitution. In practice, a small resolute group can shape the rules of constitutional quality. If that group gains influence in key parliamentary [committees], it can probably determine how a parliamentary majority of 50.5% on the day rewrites the fundamental rules of social and economic interaction. This constellation enabled the Lange-Douglas [labour] and Bolger-Richardson [National] waves of reform to overturn the interventionist-welfarist rule set with surprising ease. Now it is enabling another majority -- or rather the minority government -- to overturn the liberal economic constitution. Such constitutional stop go is easier in common law regimes without written constitutions, without constitutional courts committed to constitutional continuity (the Westminster system) and with an overwhelming dominance of political parties. ... In New Zealand's unanchored constitutional framework, there is little need to explain changes and to win allies among the wider public, so as to ensure society's belief systems, attitudes and internal institutions are adapted. ... This is the underlying reason for New Zealand's relatively poor initial growth response when world class liberalisation was imposed from above (Kasper 1996c). It will now facilitate a new series of experiments whose impacts few are able to comprehend and many dread."

And that leads to the last lesson: Globalization is not inevitable, nor is it irreversible. The current New Zealand government (a coalition of a chastened Labour party and the left-wing Alliance) is unfortunately still committed to signing free trade and investment agreements. But it is reversing many of the most destructive policies. Included in this rethink are a reversal of the privatization of Accident Compensation Insurance; an immediate rise in pensions; a halt to the sale of public housing and a commitment to rebuilding the public housing stock; the appointment of a review committee on electricity pricing; the freezing of tariffs on clothing and footwear; and the re-recognition of unions. The pity is that New Zealanders had to suffer through so much in the first place.

Renationalising workplace accident insurance will reduce efficiency and add costs to hiring labour. the re-regulation of the labour market and encouraging collective bargaining will encourage wage hikes. The fall in business confidence to recession levels and the fall in the exchange rate to record lows seem to indicate that individuals in capital markets no longer consider New Zealand a productive place to park their capital. Risks and costs have increased, net emigration has increased. The result will be, I would think, a sharp fall in foreign investment, and total investment, leading to a recession. Both point to higher unemployment in the next two years. The wealth lost in the recession, and worse than budgeted operating balance will cost the government credibility and the next election. Globalisation is inevitable and irreversible.