New Zealand. Market Liberalization in a Developed Economy. Patrick Massey. MSt. Martin's Press

Transcription

1 New Zealand Market Liberalization in a Developed Economy Patrick Massey MSt. Martin's Press

2 NEW ZEALAND

3 Patriek Massey 1995 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmilled save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the termsof any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London WIP 9HE. Any person who does any unauthorised act in relation to this publication may be liable to crimina) prosecution and civil claims for damages. First published in Great Britain 1995 by MACMILLAN PRESS L TD Houndmills, Basingstoke, Hampshire RG21 2XS and L1mdon Companies and representatives throughout the world A catalogue record for this book is available from the British Library. ISBN ISBN (ebook) DOI / I OI First publisbed in the United Stales of America 1995 by Scholarly and Reference Division, ST. MARTIN'S PRESS, INC., 175 Fifth Avenue, New York, N.Y ISBN Library of Congress Cataloging-in-Publication Data Massey, Patrick. New Zealand : market liberalization in a developed economy I Patriek Massey. p. cm. Includes bibliographical references and index. ISBN I. New Zealand-Economic policy. 2. New Zealand-Economic conditions I. Title. HC665.M dc CJP

4 To Anne, Aidan, Ciara and Shane

5 Contents List offigures and Tables Preface Acknowledgements List of Abbreviations viii xi XIV xvi Insulationism and Decline 2 The Muldoon Legacy 31 3 Rogernomics - The Neoclassical Revolution 55 4 Macroeconomic Policy since Letting the Market Rule Public-Sector Reform The Economy after A Brave New World 183 Chronology ofevents 205 Notes and References 217 Bibliography 229 Index 237 vii

6 List of Figures and Tables Figures 1.1 Composition of New Zealand's exports Exports to the UK as percentage of total, % composition ofoutput and employment, Government revenue and expenditure as percentage of GDP, Registered unemployment rate, The relationship between inflation and unemployment Comparisons ofgnp per capita, 1955 and 1982 II 1.8 GDP annual growth rates, Annual inflation rates, Terms of trade Investment as percentage of GDP, Total trade as percentage of GDP, selected OEeD countries, Percentage distribution of firms by numbers employed, Percentage distribution of private-sector credit, Fiscal deficit as percentage of GDP, Cyclically adjusted fiscal deficit as percentage of GDP, Public debt as percentage of GDP, Domestic credit expansion, NZ$ real exchange rate, Real GDP, Balance of payments, Registered unemployment and assisted employment, Interest rates, Annual inflation rate, Fiscal deficit as a percentage of GDP, viii

7 List of Figures and Tables ix 4.4 Central government revenue and expenditure as percentage of GOP, Government financial deficit, cyclically adjusted, Producer subsidy equivalents for agriculture, selected countries Traffic on domestic air services Income tax as percentage of total tax receipts, 1980/1-90/ Estimated replacement rates for beneficiaries in New Zealand Index ofgop at constant prices, Company insolvencies, Employment by sector, Unemployment rate, Annual inflation rate, Wage inflation, NZ$ effective exchange-rate index, NZ$ real exchange rate, Interest rates and inflation, Inflationary expectations New Zealand share price index Composition of GOP New Zealand exports by destination, 1982 and Balance of payments deficit, Barriers to New Zealand exports 196 Tables 1.1 Summary of economic performance, Marginal productivity of investment, Annual percentage change in GDP per employee, Levels of effective protection in selected industries, Change in structural budget balance as percentage of GOP, Composition of OCE, History of exchange-rate developments 46

8 x List of Figures and Tables 4.1 Percentage distribution of government expenditure, Effective rates of assistance to pastoral agriculture, 1980/1-87/ Effective rates of assistance, Personal and corporate tax rates Income from state asset sales New Zealand government statement of financial position as at 30 June Indicators of economic performance 187

9 Preface In October 1990 I left Auckland airport having spent almost two years working at the New Zealand Treasury. I had initially been attracted to travel half way round the world to work by reports of the radical economic reform programme being implemented by the then Labour government. The experience was to prove a fascinating one. Until the mid-1980s New Zealand was something of a sleepy backwater, insulated by high levels of protectionism and with a degree ofstate intervention and regulation unparalleled in any other developed Western economy. Over the past decade, however, New Zealand has undertaken the most radical economic reform programme of any OECD member country. Farm subsidies have been abolished, import protection has been greatly reduced, the public sector has been radically overhauled as have the labour market and welfare systems, to give but a few examples. The purpose of this book is primarily to analyse the reform programme and its effects. It seeks to explain why a Labour government not only embarked upon the sort of reform programme normally considered the preserve of right-wing administrations, but in fact surpassed them in terms of the zeal with which it embraced marketoriented policies. This book describes the effects of the reform programme and attempts to highlight the important lessons it offers. In the immediate postwar period New Zealanders enjoyed one of the highest standards of living in the world. Until the late 1970s government demand-management policies kept unemployment at a very low level. Thus New Zealand came to be seen as something of a Pacific Island paradise, dubbed 'God's own country ' (Godzone), by its inhabitants. The colloquial greeting of 'she'll be right' adequately captured the essential carefree approach of most New Zealanders. In truth the position was rather different. New Zealand's economic performance for most of the period since the Second World War has been relatively poor. As a result living standards gradually fell behind those of most other developed countries. The reforms initiated by the fourth Labour government - which came to power in and carried through by its National Party successor, were designed to reverse the country's long-term economic decline. xi

10 xii Preface Although New Zealand is a relatively small, geographically isolated country, the radical reform programme implemented during the past decade offers useful lessons for economists and policy makers elsewhere. For example, New Zealand's experience of combining a macroeconomic stabilization programme with moves to a more market-oriented system contains some important lessons for Eastern European economies and the independent states of the former Soviet Union which are engaged in a similar exercise. Admittedly pre-1984 New Zealand was not a centrally planned economy. It had, nevertheless, a long history of state intervention that suppressed market mechanisms in many sectors of the economy. The pace and extent of the reforms undertaken in New Zealand and their results give some indication of the difficulties facing former centrally planned economies, which, after all, are embarking on such a process from an even worse starting point. Policy makers in many other countries may also learn a great deal from an examination of New Zealand's reforms. It is certainly true that many other western economies liberalized their markets to a significant degree during the 1980s. There is, however, simply no other example ofa developed Western economy that has undertaken a reform programme as far reaching as that implemented in New Zealand. As a result New Zealand can provide useful insights into the likely impact of microeconomic reforms, which other countries have thus far been unwilling to adopt. Indeed such insights may be particularly useful at a time when policy makers, in some countries at least, appear to be returning to a more interventionist approach to economic management. Apart from the overall reform programme, many specific aspects of the reforms undertaken in New Zealand since 1984 are of interest in themselves. Governments in many countries have focused considerable attention on improving the efficiency of their public sectors. In this context New Zealand's public-sector reforms offer a useful blueprint for consideration. Similarly the establishment by the New Zealand authorities of an independent central bank charged solely with the maintenance of price stability has also attracted considerable interest from overseas. The reform programme initiated in 1984 by the fourth Labour government represented one of the most radical market liberalization programmes initiated anywhere in the world. Assessing the impact of such a radical economic experiment is a difficult task. New Zealand has undoubtedly been changed dramatically by the

11 Preface xiii developments of the past decade. This book attempts to describe those changes, explain the factors that brought them about and analyse their effects. Underlying the reform programme was a desire to transform the New Zealand economy into a thriving dynamic economy capable of providing a sustained improvement in the living standard of its people. Whether it can be said to have achieved that objective is an important issue that is considered in the concluding chapters. Nevertheless, embarking upon such a reform programme, and adhering to it in the face of short-term setbacks, required a considerable degree of political courage. For this reason also it merits a considered analysis. Hopefully the present text is up to that demanding task. Looking to the future, the long-term effects of the reform programme will only become clear over time. But then, as New Zealanders themselves are apt to say, 'she'll be right'. In this instance their underlying optimism may prove to be justified. PATRICK MASSEY

12 Acknowledgements I would like to express my gratitude to a number of people who have helped in the preparation of this book. Firstly particular thanks are due to Joe Durkan of UCD, who encouraged me to write it after reading a draft paper of mine on economic reform in New Zealand and who also offered helpful comments on the draft. Thanks are due also to Tony Leddin of the University of Limerick and Paddy McNutt of the University of Ulster and to Geoff Connor, Phil Barry, Maitland MacFarlane, Howard Fancy and some of my other former colleagues in Wellington who read and offered comments on the various draft chapters. Responsibility for the final contents is, however, mine alone. Thanks also to the library staffat the Central Statistics Office and the Central Bank of Ireland who helped me track down statistical publications from their New Zealand counterparts. Finally a special thanks to my wife Anne who helped with typing, proof reading and generally for her patience. This book would not have been possible without the assistance of all those listed here. If I have overlooked anyone I apologise. The author and publishers wish to thank the following, who have kindly given permission for the use of copyright material: Cambridge University Press for a table and extracts from G. Hawke (1985), The Making of New Zealand; The National Bank of New Zealand for an extract from National Bank Business Outlook, May 1990; Hodder & Stoughton for extracts from J. Gould (1982), The Rake's Progress: The New Zealand Economy since 1945; and J. Gould (1985), The Muldoon Years: An Essay on New Zealand's Recent Economic Growth; The IMF for data contained in various issues of Government Financial Statistics and International Financial Statistics; The Institute for International Economy for extracts from J. Williamson (ed.) (1994), The Political Economy ofpolicy Reform; The Institute of Economic Affairs for extracts from Keynes' General Theory - Fifty Years On: Its Relevance and Irrelevance to Modern Times; OECD for statistical data and extracts from various issues of XIV

13 Acknowledgements xv OECD New Zealand Economic Survey; Economic Studies, Economic Outlook; Historical Statistics; Main Economic Indicators and National Accounts Statistics; Oxford University Press for extracts from N. Kaldor (1986), The Scourge of Monetarism, and D.J. Morris et al. (1986), Strategic Behaviour and Industrial Competition; Random House New Zealand for extracts from R. Douglas (1993), Unfinished Business; The Reserve Bank of New Zealand for statistical data and extracts from articles contained in various issues of The Reserve Bank Bulletin; and for extracts from External Economic Structure and Policy; Monetary Policy and the New Zealand Financial System; Financial Policy Reform; G. Hawke (1973), Between Governments and Banks: A History of the Reserve Bank of New Zealand; along with extracts from certain Reserve Bank Discussion Papers; Statistics New Zealand for data contained in various issues of The New Zealand Official Yearbook and Key Statistics; The Treasury for extracts from Economic Management Post Election Briefing 1984; Government Management: Briefing to the Incoming Government 1987; Briefing to the Incoming Government 1990; New Zealand's Adjustment Experience , Briefingon the Reserve Bank Bill; Budget Statements, various years; for the inclusion of tables from Financial Statement of the Government of New Zealandfor the year ended 30 June 1993; The World Bank for extracts from The World Bank Report on the New Zealand Economy Every effort has been made to contact all the copyright-holders, but if any have been inadvertently omitted the publishers will be pleased to made the necessary arrangements at the earliest opportunity.

14 List of Abbreviations ANZCERTA ANZUS APEC ASEAN BI BNZ CER DCE DFC DMO EMG ESC FBT GATT GMFI GST IMF MMP MPI MTFS NBFI NZAE NZPC OECD PTA RBNZ SMP SOE SSC Australian and New Zealand Closer Economic Relations Trade Agreement Australia, New Zealand, United States Asia Pacific Economic Cooperation Forum Association of South-East Asian Nations Basic Income Bank of New Zealand Closer Economic Relations Domestic Credit Expansion Development Finance Corporation Dedt Management Office Economic Monitoring Group Economic Summit Conference Fringe Benefit Tax General Agreement on Tariffs and Trade Guaranteed Minimum Family Income Goods and Services Tax International Monetary Fund Mixed Member Proportional Representation Marginal Productivity of Investment Medium Term Financial Strategy Non-bank Financial Institution New Zealand Association of Economists New Zealand Planning Council Organisation for Econom ic Cooperation and Development Policy Targets Agreement Reserve Bank of New Zealand Supplementary Minimum Payment State Owned Enterprise State Services Commission XVI