Have New Zealand market reforms failed?

New Zealand moved from being perhaps the most socialized OECD economy to the freest.  The country now has free trade, 0-2 percent inflation, no agricultural subsidies, free labor markets, free capital markets, low marginal tax rates, a reasonable fiscal position, and it conducted substantial privatizations, mostly with success.  The reforms started about twenty years ago, but the country is not sweeping the world; here are detailed dataMartin Wolf ($) points out some salient facts:

1. From 1982 to 2002, New Zealand grew at an average rate of about 3.6 percent.  That is not bad, but most of the other figures do not massively impress.

2. In 1970, NZ incomes were about 71 percent of the OECD average; now the figure is about 76 percent; these calculations exclude Turkey and a few other outlier countries in the OECD.  Remember, those OECD averages include the slow-growing European economies. 

3. The rate of productivity growth is now about 2 percent.  Multifactor productivity is growing at about 1.2 percent.

4. Investment remains at a relatively low 10 percent of gdp; in Australia for instance it is 16 percent.  The rate of adoption for information technology is not overwhelming.

What gives?

First, New Zealand without the reforms would have fallen apart and become insolvent; that is the relevant counterfactual.  Second, the country is small.  The population is just a bit over 4 million; for purposes of comparison the Philadelphia metropolitan area is over six million.

Michael Porter nailed it over ten years ago.  New Zealanders have few if any industries where they control market conditions or lead with innovations.  For the most part they are at the mercy of world prices and broader conditions.  The country’s earlier crisis was precipitated in the early 1970s, when the UK ended "imperial preference" for New Zealand agricultural exports.  Another shock will come if Australia passes its free trade agreement with the U.S.; New Zealand exports will face a new and tough competitor. 

Finally, the brain drain has not gone away, here are some ruminations on the topic from Nick Gillespie.

Freedom and good policy are no doubt beneficial, but there are fewer guarantees in this world than we might like to think.


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