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The transition of New Zealand from an economy in the 1980s which the Australian Government security advisers told Prime Minister Malcolm Fraser in the late 1970s was headed into decline and therefore a security risk to Australia to one today where New Zealand is enjoying its most sustained economic recovery and makes New Zealand one of the highest performing economies in the OECD, is an interesting story.

Prime Minister David Lange in the mid 1980s described the economic policy regime New Zealand had been following as comparable to the management of a Polish shipyard at the time.

Past economic problems in a nutshell -

• New Zealand’s economic growth rate had 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.

• 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.

• 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.

After the 1930s depression, New Zealand aimed to insulate itself from international economic shocks and boost urban employment by raising substantial barriers to international competition.

Manufacturing subsequently developed a high cost structure which precluded it, in large degree, from export activity. The costs thus imposed on the economy, over time, reduced the competitiveness of our agricultural exporters.

Those problems were intensified by British entry into the EC and the oil shocks of the 1970s. Balance of payments problems became endemic. Instead of facing the real problems, the Government began to subsidise farmers to compensate for those costs, and subsidised uncompetitive manufacturers into the export business.

Public money was used to underwrite multi-billion-dollar energy projects which the private sector had correctly rejected as bad commercial risks. Returns proved to be zero or negative.

In 1982, as the imbalances worsened, prices, wages, interest rates and rents were all subjected to direct controls by a conservative Government, in a vain attempt to tell the tide to turn back.

The distortions in New Zealand’s resource allocation, which had caused our problems in the first place, were thus compounded. By 1984, the situation was no longer sustainable, and a run on the New Zealand dollar brought it to crisis point.

• 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

New Zealand is a trading nation. We earn our living standard by selling for commercial profit against competition on the world market.

To achieve that, our producers had to be just as efficient and innovative as their competitors. New Zealand needed economy wide reforms designed to:

• Take short term adjustment costs on the chin for the sake of medium term benefits for all New Zealanders

• Institute a firm anti-inflationary monetary policy

• Deregulate the finance sector

• Open over protected industries to international competition

• Improve the quality of Government spending, thereby reducing the cost burden placed on private sector initiative

• Increase the transparency of Government decisions so that the real costs were available to the community

• Remove subsidies, incentives and concessions so that exporters were forced to live or die in the market place

• Make our labour market more responsive to market opportunity

• Lower marginal tax rates across the board to provide all our citizens with more effective incentives

• Improve resource allocation by creating a level playing field for everyone, so that resources would flow into the areas offering the best returns to investors and the nation

• Devaluation followed by floating the exchange rate

• Remove regulations on financial markets

• Remove subsidies to industry

• Tax reform to lower rates and broaden tax base

• 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 a medium term inflation target by creating an independent central bank

• Government expenditure ratio to GDP peaked in 1991-92 at 44% and is now 33% and Government plans to reduce it to 20-30%

• The Government ran its first surplus for 17 years in 1995

• Net public debt 30% GDP after peaking at 51% in 1992 (40% at the beginning of the reform period)

• Ratio of debt service to Government revenue 11% down from 20%

• Surpluses to be used to lower public debt from 42% GDP to half that

• The net worth in the Government balance sheet is now positive

• Interest rates peaked in 1987 (90 day 25%, 5 year 18%) and reached a trough in 1992-3 (90 day 7%, 5 year 6%)

The country risk premium in interest rates has fallen.

The OECD says the tax system is the least distortionary in the OECD

• Costs are down for key infrastructure as a result of reform:

  • Port handling charges down 60%

  • Rail freight down 50%

• Government businesses contribute 5% of GDP down from 12% and the remainder are very much more efficient and profitable

• Government administration is smaller (staff numbers down from 88,000 to 34,000) and more effective.

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