"National Policy-Makers' Experience: New Zealand"

1990 International Privatisation Congress

Thank you for the opportunity to talk about New Zealand's experience in corporatising and privatising state business enterprises, in order to improve the contribution they make to the well-being of New Zealanders.

It is clear that privatisation can serve a variety of different purposes. Some are complementary; others conflict with each other. The objectives, explicit or implicit, of governments engaged in privatisation programmes around the world have, for example, included improved economic performance; improved management and control; improved consumer choice; more flexible labour markets; improved productivity; generating more revenue for government; reducing government debt; promoting popular capitalism; and promoting employee shareholding.

You get a much better price if you privatise a protected monopoly, provide a tax holiday to get it off to a good start, and guarantee government purchases of the output at favourable prices. On the other hand, that approach produces nothing whatsoever by way of efficiency benefits. On the contrary, it can lock existing avoidable costs into the economy as a whole.

The objective of reform in New Zealand has, at every stage, been to maximise net benefit to the consuming public. It has been our aim to obtain the highest sale price achievable--but subject always to that objective. Deregulation and the encouragement of competition have been seen throughout as fundamental to the public good. We have sacrificed sales revenue without question where necessary, rather than privatise a monopoly.

State businesses in New Zealand have been going through a two-stage reform process since 1985. Most state businesses have been converted from their original departmental structure into state-owned limited-liability companies or corporations, in the first instance. Subsequently, once the business has improved its performance, and after the government has tidied up the regulatory environment, reform moves on to the second stage of full privatisation.

This mode of development has not occurred as a result of any particular philosophical position adopted a priori by the Government. Traditionally, the New Zealand Labour Party has, for 50 years, been opposed on general philosophical grounds to most of the reforms implemented by the present Labour Government since it took office in 1984.

We had a situation in New Zealand where the attitudes, policies and philosophies adopted by both our major parties for 30-50 years have been seriously out of touch with reality--and a liability to the nation.

From the early 1980s onwards, however, a rapid evolution occurred in the thinking of the present Labour Cabinet and Caucus, as a practical response to the profound economic and social problems that had emerged over time as an outcome of our traditional approaches to policy.

Back in the early 1950s, New Zealand used to have a dynamic, innovative land-based economy that was earning us the 3rd highest living standard in the world. But ever since the 1930s depression, we had been steadily raising barriers against international competition.

The goals of protectionist policy were increased urban employment, and increased protection against international economic shocks. But it also caused our manufacturing to develop high cost structures that, in large degree, precluded those industries from exporting. Over time, the costs thus imposed on the economy gradually reduced the competitiveness of our agricultural exporters.

These problems were further intensified by Britain's entry into the EEC, and by the oil shocks of the 1970s. Balance of payments problems became endemic.

The then Government, instead of facing up to the real problems sought to compensate farmers for those costs by subsidising them to boost export production. Public money was also used to persuade uncompetitive manufacturers to enter the export business and improve our foreign exchange earnings.

With the same objective, the Government underwrote multi-billion dollar energy projects that had been rejected by the private sector as a bad commercial risk. 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. The distortions in resource allocation that were the underlying cause of our problems were compounded.

Our inflation, in the 10 years to 1984, was 1½ times the OECD average; our economic growth rate was half the OECD average; net public debt multiplied six times over; and debt servicing mushroomed from 6.5% to 19.5% of total government spending. Unemployment rose from 5000 to 132,000 with no sign of stopping.

The damage done by excessive protection is even clearer if a longer perspective is taken. In the 25 years to 1984, our average annual increase in productivity was, at 1.2%, the lowest in the OECD. Japan averaged 5.8% and the EEC 3.3%. By the early 1980s, our living standard was thirty-second in the world - not third. It had been falling by an average of one place a year for 30 years.

When do you call a halt and think again?

On the other hand, it would also be fair to say that, for a generation, most New Zealanders had seen high protection, not as a problem, but as the main safeguard of both employment and prosperity. Whenever problems arose, the normal government response in New Zealand was to lift protection a notch or two higher, to comfort those most affected.

By 1984, that whole approach was no longer sustainable. A run on the dollar occurred during the 1984 election campaign. By the time we took over, the banks had been forced to close their doors to all foreign exchange transactions. This was, then, in brief, the broad economic environment within which state sector business activity had been evolving for 30 years or so.

State-owned businesses in 1984 accounted for 12½% of GDP and 20% of total investment. (Our whole agricultural sector amounts to only 8% of GDP.) Those businesses included, for example:

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