[Once again, leading economic minds display their creativity in staving off an obvious conclusion]
Financial Times; Nov 30, 2000
Editorial: Economics lesson
New Zealand was the testing-ground for some of the most radically liberal economic ideas of the past two decades. Successive governments privatised, deregulated and introduced strict codes governing monetary and fiscal policy. there would be a neat conclusion if the result had been a spectacular economic success. Unfortunately, the reality has been economic stagnation.
The country's relative standard of living has been slipping against its rivals since the mid-1980s, when the reform process began: annual labour productivity growth over the 1990s averaged a dismal 0.5 per cent. Even the fervently pro-reform Organisation for Economic Co-operation and Development, in a report published yesterday, admitted that "identifying the positive benefits that have arisen from the reform process has . . . proved difficult".
So what went wrong? Perhaps the whole approach was fundamentally flawed. But to come to such a conclusion would be to ignore the success of free-market economies such as the US and to overturn some of the most basic tenets of economic theory.
Another possibility is that the reforms were implemented ineptly. For instance, a much too strict inflation target range of 0-2 per cent led to devastatingly tight monetary policy in the mid-1990s. By contrast, inflation at the top of the target range is now being tolerated by the Reserve Bank, in light of the weakness of the economy. And privatisation of the utilities was not accompanied by appropriate regulation, leading to a lack of real competition and complaints about pricing and services.
But even these failings are not enough to explain the extent of New Zealand's problems. In the end it may be that, quite independently of economic policy, the country faces deeper problems that are depressing growth. Foremost among these may be its geographical isolation.
New Zealand, like Ireland, is a small, open economy but, unlike Ireland, it does not enjoy ready access to large nearby markets. Even trade with Australia is hampered by currency fluctuations. And, again unlike Ireland, the country has failed to find a profitable niche to exploit. Instead, it still has a relatively high reliance on the volatile agriculture business.
If it is true that these special factors play a large part in New Zealand's problems, few lessons, positive or negative, can be drawn for the rest of the world from the country's great experiment. This will not be much comfort to disgruntled New Zealanders but it may give some relief to the economists fearing that the country was living proof that their theories are bunk.
© Copyright The Financial Times Limited 2000.