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.