Will New Zealand reform any further?

by on August 16, 2005 at 4:01 am in Political Science | Permalink

The core outlines of the New Zealand story are well-known: in 1980 the country was arguably the most socialized OECD country and stood on the verge of bankruptcy.  By the early 1990s New Zealand was one of the freest economies and had produced a solid if not spectacular economic performance.  The reforms included near free trade, substantial privatization, elimination of agricultural subsidies, free labor markets based on contract, free capital markets, 0-2 percent inflation as a formal regime, a relatively flat tax, and greater transparency in policymaking.  But the New Zealand economy has not seen major reforms in over a decade and in a few areas, such as labor markets, there has been backsliding.  Will reforms return?  I see a few hypotheses:

1. New Zealand reformed everything short of social welfare spending, education, and health care, which few voters wish or wished to reform.  In fact the point of previous reforms was to preserve (and perhaps extend) previous levels of social welfare spending.

2. Further reforms were thwarted by a move to proportional representation in the early 1990s, which gave minority parties undue influence and weakened threads of accountability.

3. Asset privatizations in particular were oversold — remember the Auckland blackout? — and New Zealanders lost their appetite for further changes.

4. New Zealand policymakers were well ahead of public attitudes, and managed so many reforms only because the country’s (previous) Parliamentary system had few checks and balances.  It is taking public opinion an entire generation to catch up to where policy stands.  Only then might current reforms continue.

5. New Zealanders can once again sit content, since they are no longer in danger of being blown out of the water by Australia.  If they start falling behind again, reforms will resume.

6. Donald Brash will be elected Prime Minister in September, and reforms will resume then.

I’ll give the greatest weight to #1 and #4, and say no to #6, comments are open, Kiwi commentators are especially welcome.

1 Kiwi Dean August 16, 2005 at 12:15 pm

On #1: Actually there were significant attempts to reform social welfare spending, education and health care. Benefit levels for the unemployed were cut substantially in the 1991 Mother of All Budgets (after which protesters burned effigies of the social welfare minister in the street).

The Labour government introduced significant reforms in governance in the education sector, with locally-elected, parent-dominated Boards of Trustees given some governing power instead of the prior centralized approach. Some Boards adopted the so-called bulk funding option which gave them greater flexibility over salaries they paid to teachers. (The policy of bulk funding was strenuously opposed by teacher unions and was never made compulsory.) At tertiary level (ie, universities and other post-secondary education) major cuts were made to state subsidies. (Woodfield and Gunby have a paper in the Journal of Economic Literature in 2003 about these and other changes in education policy in New Zealand.)

In health there were also reforms, though I am less familiar with these. It was the National government that devolved management to local hospitals in a manner similar to the devolution of decision making authority in the education sector. I believe there has been a retreat from some of the 1990s policies since the current Labour government came to power in 1999.

One thing these policies (and others) show is the dissatisfaction (among reformers at least) with the quality of decisions being made by public sector institutions. Much of the reform effort was aimed at giving people incentives to make good decisions, through market discipline or clearer accountability to the political realm.

On #’s 2 and 4: it’s hard to tell how much the move to proportional representation affected things. To some extent it has made what used to be intra-party disputes into inter-party disputes. So it isn’t clear that the level of disagreement between parliamentarians changed. However, it may be that environmentalists (Greens), nationalists (NZ First), classical liberals (ACT) and nutcases (Alliance) were not powerful enough within their own parties to be elected to parliament prior to the implementation of the MMP electoral system.

#3 is similar to the reform fatigue hypothesis. Many sectors were reformed and everyone got tired of it and so voted for a relatively conservative government in 1999 that emphasized stability. (Reform oversell, by contrast, would predict reform roll-back.) I think there is some merit to both these ideas.

On the overall aims of the reforms, recently deceased David Lange (prime minister from 1984 to 1989) once said something like “you can’t have social justice if you don’t have an economy”.

2 wkwillis August 16, 2005 at 2:42 pm

New Zealand exported large numbers of highschool educated graduates to Australia over the last generation at the same time as it imported large numbers of nonhighschool educated Pacific Islanders. It traded a better educated group for a lower educated group as a byproduct of it’s economic policies sort of the way that California did, but because Australia was a relatively desirable destination the wage gap widening was not a great as in California because Australia soaked up so much New Zealand population.
The exporting of population that was New Zealand’s policy or consequence of policy had the effect of lessening competition for New Zealand real estate. The Pacific Islanders were able to come in to New Zealand without crowding because New Zealanders made way for them by moving to Australia. California had a significant population increase because California did not have a desirable location to export it’s population to in the way that New Zealand did.
Now that Australia will no longer allow unlimited immigration of New Zealanders this strategy is no longer low cost to New Zealand in that the only New Zealanders that will be moving to Australia will be the educated ones that Australia will accept. Wage gap increases are to be expected as the less educated New Zealanders will be trapped in New Zealand.
There is another consequence of this over the long term. Some adventurous people make trouble if they are restricted in movement. These troublemakers could just move to Australia if they didn’t like the way that New Zealand was being run. They may become politically active if they aren’t allowed to blow off steam by moving to Australia or some other desirable location.
But this is a long term problem for New Zealand.

3 MichaelH August 16, 2005 at 5:41 pm

As a NZ voter, I think the most unsettling thing is how hard it is to identify which reforms would really matter (and hence would be worth anyone spending much political capital on). This is especially so when one does a comparative analysis with Australia (the most similar economy/society there is) and one with much higher GDP per head than our own. Research results suggests that under-investment is much of the explanation, but why has investment been so low? Real interest rates here are higher (consistently) and domestic savings scarcer (which may mean household credit demand has crowded out business investment), but what policy measures would realistically be likely to change that picture very much? One can play around with tax rates at the margin, but nothing suggests that NZ’s tax or expenditure ratios are particularly high by world standards. Maybe there is something in welfare reform, but that would presumably only further skew growth towards labour-intensive forms

4 Eric Crampton August 16, 2005 at 5:59 pm

I agree with KiwiDean that it’s difficult to tell how much the shift to MMP has affected things. However, it isn’t as simple as moving intraparty disputes into interparty ones. Strict party discipline under FPP means that the nutjobs are sent to the backbenches and don’t have much effect on policy. Under MMP, they have to be bought off. Anderton got Kiwibank as payoff for bringing his Progressive Alliance into coalition with Labour; this would not have happened under FPP. Persson and Tabellini’s empirics seem to suggest real policy effects with the shift in electoral system; the threat of the government falling on a non-confidence vote gives the minor parties inordinate sway.

5 icehawk August 16, 2005 at 8:31 pm


Your claim that the education sector was “not reformed” is really very, very funny.

Consider tertiary education.

1980: approx 100% govt funded, with strict central control of courses and student numbers. Strict central control of courses proving to be a problem.

2005: approx 70% govt funding, with basically a voucher system (ie students pick courses, very little central control of courses or cours numbers). Lack of any central control of courses proving to be a problem.

Lets look in more detail at one example of tertiary education: teacher training.

1980: No fees. Students considered employees of Dept Ed and paid salaries to attend teacher’s college (lousy salaries, but still…). Student guaranteed 2 years teaching work if they passed. Student numbers set annually for each Teachers College by Dept Ed to ensure the number of graduates will approximate the number of teaching jobs.

2005: Fees of $3000+. A minority of students eligible for student allowances. Over 30% of primary teaching graduates from teacher’s college last year failed to find a teaching job for their first year.

Wanna another example of radical educational reform? Look at apprenticeships. Or polytechs. Or ECE. Or administration of schools. Or… the list goes on, and on.

We’ve reformed the tertiary education sector to hell and back. What we need to do is back off from some of these reforms and get a bit more central control in place (to stop funding so many scuba diving courses, etc).

6 Tiberias August 16, 2005 at 9:59 pm

Hmmm, good point Icehawk.

I guess the big question for me is when does _change_ get to be counted as _reform_? Is it a question of ideology, so reform is when something goes the way you think it should, or is it a question of results, where if something suceeds it was a reform and if it doesn’t then it was a booboo?

My opinion? You can’t really claim to be a reformer unless you can reasonably claim that the thing you are changing is currently broken.

Essentially under Muldoon we had too much of a command economy and it was very broken. But we know that economies that focus too much on market-based solutions also break. So Labour, having moved to a point somewhere in the middle that has given us an average 4% growth over the last 6 years while the OECD average was 2.5%, and allowed us to pay off a pile of debt while still putting some aside for the superann problem, seems to be doing well. There are little problems that they make little solutions for. But on the big stuff, its going sweet. I simply don’t think there’s _room_ for a lot of reform, because unless you belong to the “tax is evil by definition” crowd, there’s not a lot that’s really broken, and arguably, outperforming the OECD economic growth average by an average of 1.5% for 6 years is evidence that we are sitting in a sweetspot that is serving us very nicely right now.

7 Idiot/Savant August 16, 2005 at 10:20 pm

I think that the human and social cost of the reforms cannot be overstated. We went from a society with a high degree of equality to one with skyrocketing inequality, homelessness, beggars on the streets, and where pawnshops and foodbanks became growth industries. We went from a society where the government assisted those in need to one where it abandoned them. We had people living in garages because they could not afford to pay the new market rents on state housing, and third world diseases in the poorer areas because people could not afford user fees on doctor’s visits and prescriptions. We had a government which deliberately and knowingly cut benefits to below starvation levels (yes, really; they did a study on the cost of living, took the amount where people could barely afford to stay alive, and cut it by 10%) – at the same time as the government pursued strategic unemployment to keep wages down. And then, having put the boot in to those on benefits, the Employment Contracts Act did the same to workers, leading to pay cuts of up to 30%. And all of this was done over people’s heads, with policies rammed through sometimes overnight to prevent public opposition from forming.

This was justified in terms of “no pain, no gain”. But strangely, the pain always seemed to be suffered by those on the bottom, and the gain seemed to go to those on the top. And no, it didn’t “trickle down”. For a society with a deep-seated sense of egalitarianism, this was anathema.

You can argue that the reforms were necessary. But the fact is that we didn’t like them, and we don’t want to go through anything like that again. We hated it so much, we changed our political system to ensure permanant minority government, so that no-one could ever blitzkrieg us again. The upshot is that any future reform will be much slower and more cautious. Radical reform (in either direction) is impossible under MMP.

As for Brash, IMHO he is a radical reformer at heart – but he will find it impossible to actually implement his dreams. In order to govern, his National party will have to rely on New Zealand First, a party deeply hostile to the reforms, and led by a man who left National because of them. He might get some moderate tax cuts, but further privatisations, opening of markets, or even budget cuts in key areas are likely to be stymied. You may call this “undue influence”, but I call it democracy in action. If 60% of voters support parties opposing reform, then there simply is no mandate for change.

8 Idiot/Savant August 17, 2005 at 7:49 am

FM: Also a lot of subsidies from the EU. New Zealand doesn’t have that sort of sugardaddy.

9 fm August 17, 2005 at 9:32 pm

True enough, but then NZ does also enjoy some advantages due to its proximity to Asia and access to the Australian market with no tariff barriers. One has to ask, why exactly doesn’t New Zealand enjoy the same standard of living as say, Tasmania? I just think it’s foolish to keep thinking up ways to write-off NZ’s prospects simply because NZ does not enjoy the same comparative advantages as other countries.

10 fm August 17, 2005 at 11:46 pm

Great. So NZ possibly has comparative advantages to Tasmania. Next stop, South Australia (and what reforms could achieve that?). That’s really the question, isn’t it? It’s either that or continually watch great swathes of the NZ population get up and leave. It shouldn’t need to come to that.

11 Tiberias August 18, 2005 at 9:47 am

*lot* faster than the OECD average (4% vs 2.5%) over the last 6 years. We seem to have the right recipie for excellent growth *already*, or since the recipie always requires a bit of tweaking each year, at least the right stewards in charge. Essentially, it’s pretty difficult to argue with results.

I think “standard of living” is an interesting one. Who gets to define this? Arguably we have a much better median-point in our standard of living than say, the USA, so why should we “reform” our policies to be more like the Americans?

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