BRIEFING: N E W ZEALAND’S EXPERIMENT

BRIEFING PETER HARRIS

129

New Zealand’s experiment Many claim New Zealand’s deregulation is

something to be copied but there is a darker side too

ew Zealand’s economic experiment is widely credited with having si- N multaneously achieved price stabil-

ity, a structural reduction in the fiscal deficit, falling net public debt, strong economic growth and falling unemployment. Growth emerged without the fiscal stimulus, expan- sion of household expenditure or economic expansion seen in other OECD nations. “All this gives comfort about the sus- tainability of the faster growth New Zealand is now experiencing.” (OECD)

There is a fascination not only with the technical detail of New Zealmd’s economic

tional social democratic party, but a broad coalition of economic liberals, peace activists, feminists, environmentalists, unionists and socialists. Its policies were ideologically in- consistent. Union and worker rights were strengthened while finance and trade were deregulated; government activity against dis- crimination was increased but large sections

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“Austerity has been accompanied by

deteriorating social conditions and a

widening gap between rich and poor.”

reforms, but also because they were imple- mented within a democracy, initiated by a Labour government and continued by the conservative National Party that replaced it. They are deemed thereby to be apolitical, technical, and acceptable means of achieving progressive social goals.

But to assess the New Zealand model prop- erly, we need to put it in its political and his- torical context as well as look at ’economistic’ criteria.

From 1975 to 1984, the ultra-conservative National Party governed. The Labour Party that won the 1984 election was not a tradi-

of its commercial activities privatised; economic inter- nationalism was embraced alongside isolationist nu- clear and defence strategies. Ideological differences even- tually led the ’left’ of the La- bour Party to split away dur- ing its tenure in government,

and the party’s ’right’ formed an ultra-liber- tarian organisation after Labour lost office.

The New Zealand ’experiment’ had two distinct phases. The first, under Labour, maintained some social protection from the excesses of market forces, notably by reinforc- ing worker rights, and by maintaining a fairly robust welfare system. The second phase, un- der the National Party government, involved almost total deregulation of the labour market and massive cuts to welfare entitlements.

Although the reforms have been imple- mented in a democracy, there was never a political mandate for them. The electoral sys-

lQ7Q-3535l95IQ2Q129 + 05 508.0010 Q 1995 THE DRYDEN PRESS

130 NEW ECONOMY

tem delivered parliamentary power with mi- nority electoral support. Labour in 1984, and National in 1990, both won office on the basis of election manifestos and campaign prom- ises directly opposite to the programmes they subsequently implemented. Tfus has had po- litical side-effects, culminating in splits in both parties, public disaffection with the po- litical process and a populist movement that secured the introduction of proportional rep- resentation.

Reform under Labour The structural adjustment programme since 1985 has been extensive. In five years, the Labour government: 0 decontrolled the finance sector, floated the

NZ dollar and removed most restrictions on investment flows

0 massively reduced protection from im- ports eliminated a web of income and produc- tion supports cut company tax and the top income tax rate to among the lowest in the OECD introduced one of the world’s most com- prehensive single rate consumption taxes converted a government deficit of roughly 7 per cent of GDP to a fiscal surplus

0 carried out sweeping privatisation.

There were enormous job losses in manufac- turing and the public sector, huge capital losses in agriculture, great instability in prop- erty and share markets and unprecedented personal insecurity. But the economy was reconstructed from a protected and regu- lated market to a virtually ‘free market’ base in an incredibly short period of time.

Although the unpopularity of these meas- ures resulted in a landslide defeat of the La- bour government in 1990, the new govem- ment, contrary to election promises, finished the job.

Unions under the National Party Labour market deregulation was achieved via the Employment Contracts Act (ECA), whose intention was to shift employment rights away from collective bargaining and towards individualised commercial con- tracting (see box).

The act is massively anti-worker and anti- union and has led to contrived instability, ri- valry, fragmentation and bureaucratic ob- struction of unions. Freedom of association has been implemented in a form that tries to limit the amount of actual unionisation, nar- row the role of unions, and keep the unit of organisation as small as possible.

The impact of these measures has been un-

BREAMNG T H E UNIONS - THEEMPLOYMENTCOZVRZACTSACT ‘Unione’ haae been removed from the statutes. There i s no process for registering or recognisiny them, and no specification of their rights, role or obligations. Neither is there is any process through which bargaining is directed, and there i s no obligation on the employer even to ncgotiate.

Legally, workers do not join unions, but instead authorise them for specified purposes - such as negotiattng andlor enforcing their employment contracts. There is no stubilify in rppresmtution, The agency does not emhrare the concept of nn areu of work, rather tire individuals who are doing it.

It is illegal to make membership of a union a compulsory ekment of any industrial ngreement. Closed shops and union shops aw also banned.

There are barriers to effective union action, such as requiring workers individually to authorise the union to act on their behalf and to specify the scope of representation. T h i s has absorbed huge resources. Before each ttegotiation, ratification procedures must be agreed by members. Again, this looks like drmocracy, but its e f f c t is to drain union resources.

Strikes to secure an agreement binding more than one employe are illegal. So Pmployers can choose to bargain on an individual compnny basis, even if the workers choose an industry, a regional, an occupational, or a national basis of agreement.

BRIEFING: NEW ZEALAND’S EXPERIMENT 131

even. There has been an almost universal col- lapse of the focus of bargaining to the level of the enterprise. Union membership and the number of workers covered by collective bar- gaining have shrunk - the former by about one-third and the latter by nearer a half.

Changes in workers’ real incomes have been determined by the level of unemploy- ment, the degree of skills shortage and the form of work organisation. Unskilled work- ers in small scale service sector establishments have absorbed the largest cuts.

The ECA, though, does not produce a new labour market equilibrium. Rather, it has em- powered management with a variety of la- bour-cost responses to use as the degree of crisis demands. Its operations are inherently discretionary, idiosyncratic and unpre- dictable.

The package of measures finalised by the welfare cuts and labour market reforms has essentially remained in place since early 1991, accompanied by a substantial easing of mone- tary settings (which lowered both interest and exchange rates) in late 1991, and continued fiscal austerity.

Miracle or mirage? The New Zealand model has been praised variously for producing a ’turnaround econ- omy’, an ‘economic miracle’ and the like. But it is valid to question the success of this eco- nomic experiment on one or more of four grounds:

it is largely illusory it is more a result of good luck than good management most recent growth is a result of the ma- turing of investments made before the structural adjustment process started the social costs of achieving it do not jus- tify the economic benefits claimed.

There is certainly an element of ’growth arithmetic’ exaggerating the strength of re- covery. Real GDP stagnated from mid 1985 to mid 1991. The upturn in the latest recovery phase has seen aggregate growth of 17 per

cent in a little over three years. But part of the ’strength’ of that recovery is explained by the low base from which it is calculated. Over the period of the ’experiment’ itself, growth has averaged a miserable 1.8 per cent a year.

The 1994 OECD country survey of New Zealand acknowledges that ”the recent ex- pansion in economic activity has just sufficed to bring real GDP back to its long-term trend level”. Even that conclusion is regarded as generous, however. Keith Rankin of Aukland University (1995) claims that, despite the re- covery, real GDP is still below trend level (NZ Independent 3 / 2 / 95).

Quiggin (1995) argues that because of the low base point for recovery, New Zealand is simultaneously achieving a higher growth rate and falling behind Australia in absolute per capita GDP terms. “The inappropriate use of percentage growth rate criteria,” he writes, “should not be permitted to disguise the fail- ures of microeconomic policy.”

Doubts are also emerging about the effec- tiveness of monetary policy in controlling infla- tion. Consumer price inflation is forecast to be 4.2 per cent a year by mid 1995. Yet the central bank discounts from the consumer price index anything that will help generate a so-called ’un- derlying’ rate of inflation within the 2 per cent ceiling it is charged with maintaining.

Lucky three People who argue that the recovery owes as much to good luck as to good management identify three things that contributed to a cyclical upswing from late 1991.

In New Zealand, there are four ‘prices’ critical to economic well-being: petrol prices, interest rates, the terms of trade, and wages. With the first three, international events be- yond the control of policy makers combined to produce ’lucky times’. Oil prices fell, inter- national interest rates plunged, and the terms of trade rose to very high levels by recent historical standards. Plus, unemployment had more than doubled, creating a workforce lacking in job security; and deregulating the

NEW ECONOMY _ _ _ ~ ~ ~ ~ 132

labour market froze labour costs. The terms of trade combined with lower nominal world interest rates and static labour costs to gener- ate strong cash flows to the private sector - reinforced by an easing of monetary settings that produced a double digit deche in the exchange rate in late 1991.

The first three factors cannot be expected to endure, and if the economy continues to grow, a deregulated labour market is likely to generate wage pressures in areas of skill shortage. The cyclical upswing diverted at- tention from structural defects that emerged during deregulation and disinflation.

Hollow victory? Bayliss (1994) raises serious questions about how robust the economic structure is now. He argues that most of the indicators of growth use 1991 or 1992 base figures. How- ever, he says, by then the mechanisms of restructuring had resulted in a 54 per cent decline in real farm investment, a 55 per cent drop in real investment in manufacturing, a collapse of net non residential investment from 12.6 to 3.9 per cent of GDP, a fall in the savings ratio, and export and economic growth rates of less than half the OECD av- erages for 1984-93.

The New Zealand economy cut costs by shedding labour and making it cheaper. It did not improve the sophistication of its labour, its capital or its infrastructure. The economic recovery is based on weak fundamentals, and is extremely brittle. Many of the economic fundamentals that would sustain growth (sound infrastructure, a deepening skills base, strong research and development pro- grammes) are lacking.

Phdpott (1994) says the increase in aggre- gate GDP in 1985-92 was a result of a similar increase in agricultural output, which stemmed from expansion in horticultural production. The increases there had ”little to do with restructuring policies, [but] much to do with the lagged effect of horticultural in- vestment in the pre-1985 period”. Ironically,

growth in the 1990s was largely a conse- quence of what had happened in the tax-dis- torted years of incentives that the ESAP was meant to eradicate.

So did any economic benefits justify their social costs? True, the government‘s fiscal po- sition is stronger. But if debt was the primary concern of the adjustment programme, the government would not have slashed tax rates as it did.

Almost every social indicator has wors- ened during the past decade. Real income of beneficiaries has declined, income inequali- ties have widened, crime, mental illness and teenage suicides have risen, housing stand- ards have declined and so on. Even the Econo- mist notes that income inequality in New Zea- land is the third highest of all rich nations (5 November 1994). Austerity has been accom- panied by deteriorating social conditions and a widening gap between rich and poor. The pain of economic transformation has not been shared equitably.

No other way? Was there any alternative? In the absence of a ‘control’ for New Zealand’s experiment, Australia is the next best thing. As Bayliss points out, New Zealand and Australia are both high income countries, both are among the smaller OECD nations in terms of popu- lation and GDP, they are the most geographi- cally isolated developed nations, the most heavily dependent on commodity exports and both have high international and domes- tic transport costs.

The countries also have similar institu- tional structures and commercial cultures, trade between them is substantial, there is a free flow of labour and they have recently established a common market. The form of structural adjustment was determined when both had Labour governments, which adopted a more outward looking trade stance and reduced regulation and protection.

In 1984, the New Zealand Labour Party was divided over economic policy direction.

BRIEFING: NEW ZEALAND’S EXPERIMENT 133

One camp preferred a ’corporatist’ and gradualist programme of reform, the other a more radica.1 agenda. In Australia, a pro- gramme of reform that was similarly outward looking and less interventionist did follow the ’corporatist’ road.

Both economies are now experiencing similar growth rates, both have low inflation, rising employment and similar levels of un- employment. The programmes have achieved remarkably similar results.

Unlucky three The key dimensions of New Zealand’s ad- justment processes are summarised in the Table. The country experienced substantial employment losses and, by comparison, ex- tremely weak growth performance to get to roughly the same place as Australia.

The more sophisti- cated part of manufac- turing - production and export across the Tas- man of elaborately trans- formed manufactures (ETM) - saw Australian production displacing New Zealand output at a greater rate than the re- verse process.

Even where output was expanding, it

it. What is not known is how much more stress the social infrastructure can stand.

The democratic process has been another victim of the economic programme, which has generated unstoppable public demand for proportional representation. Economic re- structuring forced through without backing from a broader social consensus probably cannot last.

A third casualty of the process has been workers and worker organisations. Many wage earners have done well out of the new regime, with lower taxes and access to a wider range of cheaper imports, and with fewer re- strictions on consumption. Against that, though, employment has become more pre- carious. Although unemployment has de-

Was the experiment worthwhile? The comparative Performance of Australia and New Zealand,)une I984 to Dec I993

AUS NZ

Real GDP growth (7‘0) 32 12

manufacturing (%) Exports of Elaborately Transformed 258 11 0 Manufactures, ETMs (“/or

(“/. change)”’ Exports of ETMs to the 167 100 other country (% growth)’

Notes: ’Annual 1984-1992; **Annual, 1984-1993 Source: Bureau of lndusby Economics, Department of Indusby, Science and Technology, Canberra

Growth of 26 -3

Employment levels 18 -1

seemed to be in the area of commodity trade, which tends to be low in value-added and employment generation, and vulnerable to price fickleness. New Zealand’s adjustment programme seems to have had high transition costs compared to the alternative.

Yet the defenders of New Zealand‘s cur- rent policy regime argue that it has been so- cially sustainable because problems of home- lessness, poverty and urban violence are far below levels in most other countries. True, but a modicum of social cohesion has been main- tained in spite ofrestructuring, not because of

clined from its 1991 peak to about 7.5 per cent, it is still high by New Zea- land standards.

More and more work- ers are on individualised contracts, on casual terms, vulnerable to re- dundancy and obligated to work longer and more erratic hours.

The economy is grow- ing and public debt is falling. But the first is from an unnecessarily low base and the second from an avoidably high

peak. There are doubts about the stability a d durability of the recovery, not least because it has been accompanied by a reversion to a short-term, commodity trade base of produc- tion.

The New Zealand experiment was a classic case of 1980s thinking. It exhibits all the fea- tures that have led economists, even in more conservative and conventional agencies, to look for something that might allow the 1990s to be navigated with greater confidence 0