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Page : One Two Three Four Five Six Seven Speech to India States' Reform Forum 2000 Delivered in New Delhi on 24th November 2000
The New Zealand economy was transformed after 1984. We used to have a complex interconnecting set of economic prohibitions, levies and subsidies. These were supposed to protect domestic activity and to maintain local incomes. However, the result was a stagnant economy with economic growth and trade at much lower levels than almost all other OECD countries. The overall thrust of the programme of economic reforms in New Zealand was to remove those controls that made if difficult for business to act in a market sensitive and efficient way, while maintaining those social programmes politicians and others believed were needed to defend a fair society. The changes made between 1984 and 1988 were comprehensive and complex. In total they added up to a new approach to economic management in New Zealand. After 1988 reform largely stopped in New Zealand except for a brief period in 1990 and since 1996 has been going backward in a policy sense. The areas I would to cover in this lecture – Where New Zealand was in 1984 How New Zealand got into the economic mess it did Policies we put in place to rectify the problems we found Results that flowed from those policies Lessons to be learned both economic and political from the New Zealand experience, which I believe to be universal. I am going to largely ignore what is happening in New Zealand currently which is likely to unwind a lot of what was achieved. Past economic problems of New Zealand in a nutshell – In the decade to 1984: New Zealand’s economic growth rate averaged half the OECD average. Our inflation rate was 1½ times the OECD average rate. Government expenditure rose from 28% of GDP to 39% with additional costs hidden in various Government business agencies. Net public debt multiplied six times over and debt servicing mushroomed from 6½% to 19½% of total Government spending. Unemployment rose from 5,000 to 132,000 with no sign of stopping there. In the 25 years to 1984: New Zealand’s average annual increase in productivity was the lowest in the OECD. New Zealand’s relative standard of living fell from third highest in the world to a mid-twenties ranking. To put it another way, had New Zealand succeeded in growing at the OECD average rate, the standard of living of New Zealanders by 1990 would have been double what it, in fact, was. Main elements of regime of economic controls as at 1984 Regulations freezing all wages, prices, dividends, rents, interest All prices and charges for Government supplied services frozen Exchange controls restricting all foreign exchange transactions to items approved by the Reserve Bank - the criteria largely prohibited capital transactions, restricted remittances for current transactions and ensured export earnings were repatriated Quantitative licensing of imports to preserve the domestic market for local manufacturers Extensive subsidies for all major export sectors Tariffs that were very high on items for which there were domestic substitutes and low or zero for intermediate inputs to industry Requirements on financial institutions to hold Government bonds at below-market interest rates Prohibitions in public sector pension funds investing other than in Government stock Extensive regulatory protection and/or Government ownership of the non-tradeable sectors - transport, energy, communications, finance, construction and others. Government policies distorted price signals from the world economy about the best use of resources - particularly tariffs and imports controls Macroeconomic policies focused on stability at the expense of growth through efficient resource use Regulatory policies (labour, trade and commercial laws) biased against efficiency and innovation and used for protection and stabilisation. Inflation and tax policies channelled resources into risky and low productivity activities. Financial controls brought about an inefficient capital market. Social policies resulted in high marginal tax rates and unaffordable universal benefits - still a major problem for New Zealand. Government businesses were badly managed, protected, subsidised and influenced a large share of the country’s resources Government administrative activities were unresponsive to changing priorities and performing inadequately in terms of effectiveness and efficiency Low skill levels in the workforce and poor management Policies to Address New Zealand’s Economic Situation Devaluation followed by floating the exchange rate Remove regulations on financial markets. Remove subsidies to industry Tax reform to lower rates and broader bases Cut fiscal deficit by both revenue and expenditure measures Raise government revenue through user-pays Remove regulations on prices and incomes Remove quantitative restrictions on imports Cut tariffs and even up the levels Reform commercial regulations and laws to promote efficiency and innovation Corporatise and privatise government businesses Guaranteed minimum incomes for the poor Training schemes for unemployed Target welfare state support on those in need Reform social service delivery by government agencies in a search for greater equity and efficiency Labour market reform Reform commercial regulations and laws to promote efficiency and innovation Reform government management to achieve greater effectiveness and efficiency Firm monetary policy focused on medium term |