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.
MURRAY DOBBIN:
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.
MURRAY DOBBIN:
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.
MURRAY DOBBIN:
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.
MURRAY DOBBIN:
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.
MURRAY DOBBIN:
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.
MURRAY DOBBIN:
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.
MURRAY DOBBIN:
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.
MURRAY DOBBIN:
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).
MURRAY DOBBIN:
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."
MURRAY DOBBIN:
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.
|