NZ experiment

Michael Pollak mpollak at
Thu Aug 31 23:38:15 PDT 2000

On Mon, 28 Aug 2000, Bill Cochrane wrote:

> G'dday A while back Doug posted a denouncement of the NZ economic
> reforms. In the same vein though of a more academic nature I might
> recommend the following,

Here's another article in the same vein from the FT, yet. Is NZ becoming the anti-model?

Financial Times ; 30-Aug-2000

Downfall of an economic experiment: New Zealand's textbook programme of liberalisation has left it poorer than before, argues John Kay:


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 programme of economic reform ever 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 economic freedom, New Zealand ranks with Hong Kong and Singapore, ahead of Britain and the US, and well ahead of continental Europe.

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

The world has certainly treated New Zealand badly. Its economy was oriented towards Australia and Europe, especially Britain. It was, and is, the most efficient producer anywhere of lamb, wool and milk. The rise of agricultural protection, and the UK's accession to the European Union, was deeply damaging.

But this happened some time ago. Between 1965 and 1976 the price New Zealand received for its exports, relative to what it paid for imports, fell by more than one third. Since then, the country's terms of trade with the rest of the world have improved slightly. Economic performance since 1976 is the responsibility of New Zealanders themselves.

Between 1976 and 1984, Premier Robert Muldoon urged his compatriots to think big, and gave them aluminium smelters and petrochemical plants. Most of these schemes failed, at large cost to the taxpayer. The liberalisation that followed was an understandable reaction but it was no more successful.

The programme 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 that 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 West European economies but its statistics show the opposite.

The more serious challenge is to those international economic agencies - the World Bank, International Monetary Fund and Organisation for Economic Co-operation and Development - that have advocated elsewhere the reform programme that New Zealand adopted so enthusiastically. Unable to ignore the evidence, the OECD waffles.

"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," (OECD Economic Survey, New Zealand, 1999). That means things have been bad but they might have been worse. "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." You might equally congratulate a man jumping off a cliff for his firmness of purpose.

Still, like all peddlers of panaceas, the OECD's conclusion is that the patient has not believed strongly enough. "Despite the enormous strides made to date, there is unfinished business as to structural policies," it says. After 15 years, 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 that the experiment failed.

The electricity supply disruptions that blacked out much of central Auckland for five weeks in 1998 resulted from a sequence of managerial and technical failures that might have happened elsewhere. But the place it did happen is the only advanced country where electricity distribution is neither owned nor regulated by government.

Before economic reform, New Zealand had virtually no unemployment. 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.

As Tim Hazledine* has shown, New Zealand's reforms have not been cheap. There has been a substantial increase in the numbers and earnings of managers, and in financial and business services. 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.

If socialism was to be tested, it should not have been in Russia. 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.

Taking New Zealand Seriously by Tim Hazledine; Harper Collins New Zealand

Further analysis can be found at

Copyright © The Financial Times Limited

__________________________________________________________________________ Michael Pollak................New York City..............mpollak at

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