----- Original Message -----
From: Michael Pollak <[EMAIL PROTECTED]>
To: <[EMAIL PROTECTED]>
Sent: Thursday, August 31, 2000 11:38 PM
Subject: Re: NZ experiment
On Mon, 28 Aug 2000, Bill Cochrane wrote:
> G'dday A while back Doug posted a denouncement of the NZ economic
> reforms. In the same vein though of a more academic nature I might
> recommend the following,
Here's another article in the same vein from the FT, yet. Is NZ
becoming the anti-model?
Financial Times ; 30-Aug-2000
Downfall of an economic experiment: New Zealand's textbook programme of
liberalisation has left it poorer than before, argues John Kay:
By JOHN KAY
If ever a country has been run by economists, it is New Zealand. In 1984,
the colourful Roger Douglas became finance minister. He began the most
comprehensive programme of economic reform ever seen in a developed
country.
According to current orthodoxy, New Zealand has done everything right. The
central bank is independent and its governor's pay is linked to the
inflation rate. State industries have been comprehensively restructured
and privatised, with none of the regulatory supervision found elsewhere.
What was one of the world's most comprehensive welfare states has been
dismantled. The Employment Contracts Act insists that conditions of work
are a private matter between employer and employee. In surveys of economic
freedom, New Zealand ranks with Hong Kong and Singapore, ahead of Britain
and the US, and well ahead of continental Europe.
After 15 years, the electorate delivered its own verdict on the reforms by
returning an old Labour-style government, led by Helen Clark. If we look
coldly at New Zealand economic data, the voters are right. Since the
experiment began, economic growth has been much slower than in the rest of
the developed world. Productivity and living standards have barely risen,
while almost all other rich countries have enjoyed sustained expansion.
The last 15 years have completed New Zealand's transition into a very
select group of states: those that were once rich but are rich no longer.
The standard of living has fallen from 1.25 times the average standard of
living in high-income countries in 1965 to 0.62 last year. New Zealand is
the Argentina of the second half of the 20th century. What went wrong?
The world has certainly treated New Zealand badly. Its economy was
oriented towards Australia and Europe, especially Britain. It was, and is,
the most efficient producer anywhere of lamb, wool and milk. The rise of
agricultural protection, and the UK's accession to the European Union, was
deeply damaging.
But this happened some time ago. Between 1965 and 1976 the price New
Zealand received for its exports, relative to what it paid for imports,
fell by more than one third. Since then, the country's terms of trade with
the rest of the world have improved slightly. Economic performance since
1976 is the responsibility of New Zealanders themselves.
Between 1976 and 1984, Premier Robert Muldoon urged his compatriots to
think big, and gave them aluminium smelters and petrochemical plants. Most
of these schemes failed, at large cost to the taxpayer. The liberalisation
that followed was an understandable reaction but it was no more
successful.
The programme is still widely admired outside New Zealand. As was true of
Margaret Thatcher's Britain, the success of reform is often measured by
the extent to which it has occurred, rather than the benefits that flowed
from it. The US Central Intelligence Agency claims in its 1999 factbook
that the reforms have boosted growth and moved incomes towards the levels
of the big West European economies but its statistics show the opposite.
The more serious challenge is to those international economic agencies -
the World Bank, International Monetary Fund and Organisation for Economic
Co-operation and Development - that have advocated elsewhere the reform
programme that New Zealand adopted so enthusiastically. Unable to ignore
the evidence, the OECD waffles.
"It is difficult to reach definite conclusions about why economic
performance has not improved to a greater extent in the light of the
substantial policy changes that have taken place, not least because it is
hard to be precise about the counterfactual to be used for comparison,"
(OECD Economic Survey, New Zealand, 1999). That means things have been bad
but they might have been worse. "The reforms are, on balance, commendable
for the application of a broad set of consistent principles and the extent
to which announced measures were actually implemented." You might equally
congratulate a man jumping off a cliff for his firmness of purpose.
Still, like all peddlers of panaceas, the OECD's conclusion is that the
patient has not believed strongly enough. "Despite the enormous strides
made to date, there is unfinished business as to structural policies," it
says. After 15 years, it cannot seriously be argued that more time, or
more reform, is needed before benefits emerge. The New Zealand experiment
was a test of the claim that government is the source of most economic
ills and the withdrawal of government is a solution to them. The New
Zealand Treasury adopted that argument with almost obsessive zeal. And it
is clear that the experiment failed.
The electricity supply disruptions that blacked out much of central
Auckland for five weeks in 1998 resulted from a sequence of managerial and
technical failures that might have happened elsewhere. But the place it
did happen is the only advanced country where electricity distribution is
neither owned nor regulated by government.
Before economic reform, New Zealand had virtually no unemployment. The
price was that many people were employed in not very productive jobs. But
perhaps that was a better answer, economically as well as socially, than
putting them out of work.
As Tim Hazledine* has shown, New Zealand's reforms have not been cheap.
There has been a substantial increase in the numbers and earnings of
managers, and in financial and business services. This is not wrong in
itself but it has to be justified by a corresponding rise in the
productivity of those they manage, advise, and finance. And this has
simply not happened.
If socialism was to be tested, it should not have been in Russia. And New
Zealand - an isolated, easy-going country with impressive social cohesion
- was the wrong place to try out economic libertarianism. Economists must
be grateful for such experiments. But it is usually better not to live in
the countries where they take place.
Taking New Zealand Seriously by Tim Hazledine; Harper Collins New Zealand
Further analysis can be found at www.johnkay.com
Copyright © The Financial Times Limited
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Michael Pollak................New York [EMAIL PROTECTED]
