B3.2 New Zealand Economy: Looking Back To 1984
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This article is from the New Zealand FAQ, by Phil Stuart-Jones and Lin Nah with numerous contributions by others.
B3.2 New Zealand Economy: Looking Back To 1984
Kindly submitted by Paul Walker. Published in the Christchruch
Press on September 13th and 14th, 1995.
LOOKING BACK TO 1984
Michael Carter
Senior Lecturer in Economics
University of Canterbury
Eleven years ago, the Fourth Labour Government came to power in a snap
election. They inherited control of country whose economy had been
devastated by years of mismanagement. Aided by a willing and able
bureaucracy, they set about implementing an ambitious programme of
economic reform. As New Zealand approaches its first MMP election, it is
instructive to look back over these reforms, and to recall the way we
were in 1984.
One of the first changes was the freeing of the financial system from
obstructive regulation and the floating of the New Zealand dollar. This
has promoted a healthy, competitive and innovative financial system.
People may rue market interest rates, but at least it possible to borrow
when required. Remember the old days when obtaining a mortgage required
appropriate obsequiousness before the bank manager, who exercised a
patronizing and crucial power over investment decisions. Since it was
floated, the Kiwi dollar has shown a remarkable stability in a world of
stormy change. So stable has it been, that international bankers use it
has a short term safe haven, and temporary resting place for funds. Why
should we be alarmed at that vote of confidence? A strong currency is a
manifestation of a strong economy. No country has every got rich by
debasing its currency.
One consequence of a floating currency is that New Zealander's are
enabled to convert their currency at will. Remember the days when foreign
exchange had to be squirreled away, carefully collected to finance meagre
purchases. Funds for overseas travel were limited. Obtaining funds for
small purchases such as magazine subscriptions required hoarding post
office money orders.
Similarly, ten years ago, there were an enormous range of import controls
and prohibitive tariffs. Overseas trips where often shopping trips.
Travelers would return laden with booty which was too expensive to
purchase in New Zealand. The main beneficiaries were foreign distributors
and retailers. It was a very inefficient way of restricting consumption
of luxury goods to the rich.
Exchange and import controls spawned a variety of ingenious rackets.
Under one scheme, those with access to foreign currency could go to the
top of the queue for a new car, while ordinary people had to spend three
or four years on a waiting list. Consequently, the favoured few were
enabled to buy a new car every year, and then sell it to the less
fortunate for more than they paid for it. Such rorts are almost inevitable
under a system of controls.
The most spectacular result of the abolition of import controls was the
flood of second-hand Japanese cars. The quality of the New Zealand vehicle
fleet improved dramatically, and the cost of transportation declined. Of
course, there has been a down side. Traffic congestion has also increased
dramatically. But at least congestion is egalitarian. Vehicle ownership
is widespread and not restricted to the rich and powerful.
The relaxation of import controls and tariffs has also had a dramatic
impact on clothing, footwear and consumer goods. The range of clothing
readily available in New Zealand has increased dramatically, and prices
have fallen. Since families spend a higher proportion of their budgets on
clothing and transport, freer trade has been especially valuable to the
less well off. This makes the Alliance's wish to reverse this change all
the more imponderable.
In 1984, New Zealand's production was guided by a system of subsidies,
through which New Zealand taxpayers funded the lifestyles of those with
political clout. Most pernicious were the agricultural subsidies such as
SMPs. Naturally, farmers produced were the subsidies were highest, which
tended to be were demand was lowest. The subsidies became capitalized in
land values, another windfall gain for those of means. When the
government abolished subsidies in 1984, land prices halved. For many
individual farmers, this was devastating. But farmers as a whole soon
recognised that the subsidy system was untenable. They soon became the
most vocal advocates of deregulation, and New Zealand could mount a
credible campaign against protection in world agricultural markets.
Much political flak was attracted by the privatization of public owned
businesses. Yet, this was part of world-wide trend. A recent book on
privatization which I reviewed for the Press cited 120 countries.
Privatization in New Zealand seems to have been handled more sensibly
than in some other countries. This is because serious thought was given to
post-sale market structure, which it is more important than ownership.
For example, Ansett was permitted to fly in New Zealand before Air New
Zealand was floated. Similarly, competition was permitted in
telecommunications before Telecom was sold. The benefits in these cases
are clear. New Zealand enjoys one of the best and cheapest telephone
systems in the world. Competition in transport has certainly improved the
quality of service.
It is plausible to argue that current impasse between Telecom and Clear
stems primarily from the Kiwi share obligation imposed on Telecom, which
was explicitly designed to impede the consequences of competition in the
residential market. The Kiwi share may have been one of the less fortunate
ideas.
A keystone of economic reform has been the Reserve Bank Act, which has
succeeded in controlling inflation in New Zealand. Inflation adds to the
uncertainty of investment decisions, and leads to arbitrary
redistributions of wealth. Admittedly, the rapid reduction in inflation
was achieved at considerable cost. However, nothing would be gained now
by loosening the controls on inflation embodied in the Reserve Bank Act.
Reform of the tax system was also important.
In 1984, the top marginal tax rate was 66%, which left little incentive
for additional effort. It provided ample incentive for avoidance and
evasion which were widespread. The imposition of GST had two major
advantages: avoidance was almost impossible and the tax fell on
consumption and not saving. By cutting the rates but broadening the base,
tax receipts have actually increased, which is why New Zealand is now
repaying debt rather than accumulating it. The reformed system is also
much fairer, since the opportunities for avoidance under the former system
were very unevenly distributed.
Reform reached beyond market institutions. "Tomorrow's Schools"
revolutionized the ways our schools are run. There have been some hiccups,
but by and large this seems to have been a successful and welcome reform.
A recent review in the Press could find no one who wanted to return to the
former system of centralized Ministry control. Similar decentralization
in the health system has provoked more debate. However, it is notable that
a recent careful survey by Consumer magazine detected widespread
satisfaction with the health system. Much of the criticism comes from
those working in the system, with a vested interest in protecting their
working conditions.
As in similar countries, the process of immigration was changed, from a
system of regional quotas to a points system. Points are awarded to
prospective immigrants for various criteria, and those with the highest
points are admitted. The advantage of this system is its openness and
transparency. On the whole, it is much fairer to immigrants. Other
changes which come to mind include deregulation of shopping hours, the
huge change in planning process embodied in the Environmental Protection
Act, the auctioning of property rights in spectrum and fisheries and of
course the Employment Contracts Acts.
The changes which have been wrought have been massive. They have been
guided by the desire to introduce openness, accountability and rationality
into public decision making. It would be silly to pretend that all the
changes and their implementation have been beyond criticism. We live in an
uncertain world characterized by imperfect information and human frailty.
Mistakes have been made and improvements are available. Inevitably, there
have been winners and losers from change.
Nevertheless, we need to look at the larger picture. Those with nostalgia
for a lost past need to colour their memories with a degree of realism. Do
we really want to return to the days of import and exchange controls,
inefficient state monopolies, old broken-down cars, a gray, dull
uniformity of relative poverty and quaint backwardness. That is the
direction in which some politicians wish to lead.
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