[Congressional Record Volume 140, Number 43 (Tuesday, April 19, 1994)]
[Senate]
[Page S]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: April 19, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                         ADDITIONAL STATEMENTS

                                 ______


                         NEW ZEALAND'S ECONOMY

 Mr. GRASSLEY. Mr. President, I commend to my colleagues for 
their reading two pieces regarding New Zealand's economy. We can do 
well by learning from New Zealand's economy, which over the past few 
years has successfully reduced the Government's deficit, lowered taxes, 
deregulated industry, and opened New Zealand markets to trade.
  The people of New Zealand are now realizing the benefits of these 
decisions through solid economic growth and greater competitiveness.
  The first piece is a speech by my good friend His Excellency Denis 
B.G. McLean, Ambassador from New Zealand. I first became acquainted 
with Ambassador McLean and his wife Anne when they toured Iowa with me 
last year. I am sorry to say that Ambassador McLean will be leaving his 
post this May. His fine work has gone far in strengthening United 
States-New Zealand ties. His departure is a loss to both countries.
  The second, is an article by John McMillan, professor at the 
University of California, San Diego. I believe my colleagues will find 
it well worth their time to read these two pieces.
  The material follows:

                Pradise Restructured: A Cautionary Tale

                   (By Ambassador Denis B.G. McLean)

       John Milton wrote of losing and regaining paradise. The New 
     Zealanders have had more or less the same thing in mind as 
     they have turned their paradise inside-out.
       New Zealand is known around the world for its great natural 
     beauty. But New Zealand these days is much more than a pretty 
     place. It has become a work-out centre for radical new ideas 
     how best to get fit for the tough economic competition out 
     there. A quiet social welfare society has been put on a 
     rigorous regime so that the country can be up there with the 
     winners in the vigorous Asian-Pacific world.
       Once upon a time all New Zealanders had jobs, there was 
     modest prosperity all round, the material things of life were 
     well distributed, nobody was too rich and nobody too poor. 
     The country did well on the back of an efficient farming 
     industry with guaranteed markets on the other side of the 
     world in Britain.
       What happened next is in many ways a familiar story. 
     Expenditure on social welfare and other well-meaning 
     programmes together with grand public sector projects 
     mounted--seemingly inexorably. The debt accumulated.
       Charles Dickens once observed: ``Annual income twenty 
     pounds, annual expenditure nineteen pounds nineteen shillings 
     and sixpence, result-happiness. Annual income twenty pounds, 
     annual expenditure twenty pounds and sixpence, result--
     misery: We are at last realizing that it is the same with 
     nations as with individuals. In New Zealand's case an 
     enviable standard of living declined as a heavily protected 
     domestic industry became uncompetitive. Prices rose and 
     inflation seemed to be endemic. There was little cause to 
     diversify and pursue new market opportunities abroad. 
     Competition was stifled. Expenditure in the vital areas of 
     education and research fell away. New Zealand was at the same 
     time hard-hit by external factors--the oil price shock and 
     agricultural protectionism in the major industrial countries, 
     including the United States. The economy was almost static. 
     The country seemed to be headed for third world status, a 
     charming but irrelevant rural arcadia.
       The New Zealanders' response, beginning about eight years 
     ago, was to bite the proverbial bullet. It has not been easy. 
     There is a good deal of discontent around. As in all other 
     mature Western democracies public esteem for the political 
     process is less than total. Unemployment has risen to 
     unacceptable levels. Social problems have accumulated. But 
     the success of the restructuring of New Zealand has now begun 
     to attract foreign investment, to renew the confidence of the 
     business community and to draw favorable interest from around 
     the world.
       New Zealand is among the smaller powers. We are not thereby 
     dismayed. In fact New Zealanders believe that size confers a 
     certain quickness of foot and a readiness to adjust. This is 
     a strength in this day of rapid and increasing change.
       In particular the size and character of New Zealand has 
     made it possible to embark on a process of comprehensive 
     reform. The question is not so much ``what have these New 
     Zealanders done?'', but rather ``what haven't they done?''
       The key objective was to restore national competitiveness. 
     To do what it was necessary to put all national income to 
     work to best advantage. The first aim was to get rid of 
     inflation and begin to bring down the debt. This meant 
     getting control of the money supply, opening up to 
     competition; paring back protectionism and giving market 
     forces free reign in an economy which had for decades been 
     heavily oriented around the role of the State.
       Government expenditures had to be brought under control and 
     economic performance made more efficient--by the introduction 
     of competition. Where previously State-owned enterprises had 
     operated as monopolies, a far-reaching programme of reform of 
     the whole structure of the public sector removed the 
     regulatory constraints and the controls to expose those 
     Government enterprises to market forces. Finally the social 
     welfare, health and education systems were reformed to bring 
     greater efficiency to their operations and to direct 
     Government assistance to those most in need. Labour laws have 
     been restructured to remove the monopolistic hold on the 
     collective bargaining process formerly held by business and 
     Trade Unions.
       Devolution of responsibility has been a central objective. 
     Miraculously, two successive Governments in New Zealand, of 
     opposite political stripe, came to the same conclusion: Big 
     Daddy Government doesn't know best. Give the people their 
     heads. Release their creative energies.
       Let's get a little closer to the detail: the New Zealand 
     programme of reform has had the following main features:
       At the microeconomic level the Reserve Bank has been set 
     free of Government direction and control. The Governor of the 
     Reserve Bank has been made accountable for reducing the rate 
     of inflation to between 0% and 2% and is left free to do it.
       A large number of microeconomic reforms have been 
     instituted, with the overall aim of making our businesses 
     more internationally competitive. For example: regulations on 
     land transport, air transport, shop trading hours, 
     telecommunications, transfers of foreign exchange, and many 
     other facets of New Zealand commercial life have largely been 
     stripped away.
       Controls on prices, interest rates and wages have been 
     removed.
       Exchange controls were lifted and the New Zealand dollar 
     allowed to ``float''.
       Capital markets were deregulated, allowing more competition 
     among banks and the free flow of currency into and out of the 
     country.
       Income tax rates were lowered, and the range of activities 
     subject to tax was increased; and across-the-board Goods and 
     Services tax was introduced.
       We have had comprehensive reform of our public sector, with 
     commercial operations turned into publicly owned 
     corporations, and sometimes sold. I'll talk about that later.
       The rest of the Government has undergone big changes to its 
     structures and rules.
       Subsidies have been removed from the New Zealand 
     agricultural sector and from industries such as steel.
       Quantity restrictions on imports have been eliminated and 
     most tariffs significantly reduced, with more falls to come.
       More recently, the labour laws have been changed so that 
     the management and workers in individual businesses may enter 
     into individual contracts giving the workers more control 
     over conditions of work, pay rates, and the like. This is a 
     big change from the former system where groups of monopoly 
     employers and monopoly unions made rules for whole 
     industries, leaving relatively little scope for individual 
     enterprises to define their own terms.
       What has happened? Now we find farmers who have been 
     deprived of their subsidies rejoicing in their new found 
     freedom to run their properties as businesses free of 
     artificial incentives. Thanks to reform of education 
     administration the School Committees now have their hands on 
     the money and can direct and guide their schools without 
     reference to the bureaucracy. In the work force individuals, 
     formerly salaried employees, are able to bid for their own 
     contracts and determine their own conditions of employment 
     free of the collective bargaining process.
       When strict rules governing the operation of our ports were 
     taken away, cargo-handling costs fell by up to two-thirds, 
     and the time ships spend in port fell by as much as half.
       When the telecommunications industry was deregulated--our 
     telecommunications market is now said to be the least 
     regulated in the OECD, and possibly the world--prices fell by 
     21% in the first year, and the time to wait for phone to be 
     installed fell from six weeks to less than two days. Another 
     benefit has been that Telecom has invested huge sums in New 
     Zealand's telecommunications infrastructure without any tax-
     payer money being involved. Now we have a very modern 
     telephone system based largely on fibre-optic cable and 
     digital switching.
       At the smelter in the south of New Zealand, the time taken 
     to produce a tonne of aluminum has fallen by 31% as a result 
     of more flexible labour arrangements. In exchange, the 
     workers have received much improved benefits and significant 
     wage increases.
       The OECD has said that New Zealand's tax system is ``now 
     probably the least distorting'' of all its member countries. 
     By this the OECD mean we have a tax system less likely than 
     others' to divert investment away from its most productive 
     use, or to impose unnecessary costs in its collection.
       The magazine ``Canadian Business'' said in August that New 
     Zealand's reforms amount to ``a social revolution almost as 
     sweeping as anything now being attempted in Eastern Europe''.
       As you would expect, and as many other countries have 
     found, the reforms have not been easy. Most importantly, 
     unemployment has been higher than anyone in the community 
     finds acceptable, and is much higher than New Zealanders have 
     known for half a century.
       On the other hand--to accentuate the positive--New Zealand 
     now has one of the lowest inflation rates in the 
     industrialized world--a huge improvement over our performance 
     over the last 30 years. Because of our reformed monetary 
     policy arrangements--in particular the independent role of 
     the Reserve Bank--we are confident of being able to sustain 
     this performance.
       Partly as a result of our progress against inflation, our 
     interest rates are now closer to the world average than in 
     many years.
       Productivity in the labor force has improved dramatically 
     across the economy as a whole.
       As a result of improved productivity New Zealand's 
     international competitiveness is rising. This in turn has led 
     to a dramatic rise in exports.
       Manufactured exports are leading the way--a big change from 
     the days when most of our exports were agricultural 
     commodities with very little processing added before export.
       Not surprisingly in such an environment, business 
     confidence has risen sharply and is now higher than at any 
     time in the past 25 years. Investment intentions are up too.
       These early results have not yet translated into lower 
     unemployment--but the number of jobs now seems to be steadily 
     increasing, which is the first step to lower unemployment.
       Of course in the United States there is no similar heritage 
     from a comprehensive social welfare philosophy as we have had 
     in New Zealand. You have not had large-scale Government 
     involvement in business as in New Zealand. The Government in 
     New Zealand in the mid-1980's owned enterprises, some of them 
     huge for the size of our country, in a large number of 
     industries. Indeed, the number of major businesses owned by 
     the government and run by government bureaucracies was 
     striking for what was otherwise a capitalist, private-
     enterprise country.
       In 1984, at the start of our public sector reforms, the 
     public sector as a whole--its businesses and its other 
     functions--accounted for 22% of all economic activity and 
     consumed 28% of all investment.
       Each country's politics and history is different. Every 
     country's reason for government involvement in businesses, 
     and the nature of those businesses, differs. The economic 
     situation in which reform of government businesses begins is 
     also different.
       The key consideration is that in New Zealand State sector 
     reform, beginning in 1987, was an integral part of a much 
     bigger package of changes that began before then, and which 
     continue today. The reforms to our State businesses wouldn't 
     have been so successful without the other changes to our 
     economy and public sector--and vice versa.
       Let me try to give an idea of how pervasive the state 
     sector was before the changes were instituted beginning in 
     1984:
       The New Zealand Post Office ran the postal network (the 
     nation's largest transportation system), the telephone and 
     telecommunications network (by law the only telecom system 
     allowed in New Zealand), as well as a large retail bank.
       Apart from the Post Office Savings Bank, the government was 
     deeply involved in the finance sector in other ways: it owned 
     the largest bank, an investment bank, two large pension 
     funds, and a huge fund to compensate people for any losses 
     they might suffer in earthquakes.
       Most of the nation's electricity system was run by the 
     Energy Ministry: coal, gas, geothermal and hydroelectric 
     power stations; as well as the transmission wires taking 
     electricity around the country, including an undersea cable 
     connecting our two main islands.
       The Government was deeply involved in oil exploration.
       The largest farmer in New Zealand was the Government, 
     through its Lands and Survey Department.
       The largest single owner, grower and planter of forests in 
     New Zealand was also the Government, through its Forest 
     Service.
       The country's largest coal-mining company was Government-
     owned.
       So was a large civil engineering and construction business.
       The Government was also deeply involved in the transport 
     sector. It owned and operated the only railway system, the 
     nation's only international and largest internal airline, and 
     the largest fleet of passenger buses.
       The Government ran large numbers of other businesses within 
     government departments: the air traffic control system, a 
     printing office, a large computer agency, and the 
     country's largest insurance firm--to name just a few.
       In general, the performance of these businesses was not as 
     good as New Zealanders expected. This system produced what 
     the Deputy Prime Minister in 1986 called ``massive economic 
     waste''.
       For example, the time taken to get a telephone installed 
     (six weeks) was a huge disadvantage for a business trying to 
     compete in an open marketplace. This was in effect a 
     consequence of under-investment.
       There were areas of over-investment as well. We had built 
     too much capacity to generate electricity. The State coal 
     mines had made losses in 22 of the previous 20 years, and was 
     mining coal that was difficult to reach while ignoring coal 
     that was easier to exploit. At one airport, money was spent 
     to instal an air traffic control system that wasn't needed, 
     and was then dismantled. In 1986 the number of staff at the 
     Post Office Savings Bank had grown by 75% in 10 years, while 
     the bank's business had strunk in size by more than one-
     third.
       What has to be done to bring such a system into line with 
     modern economic demands? First it was necessary to begin the 
     process of getting Government out of business. Progressively 
     most of these formerly State-run enterprises were turned into 
     public corporations--run very much like private-sector 
     companies--except that Government Ministers remained the 
     shareholders.
       They were given clear commercial objectives and told to be 
     successful businesses. They were set up with competitive 
     neutrality. That is, the advantages and disadvantages of 
     being owned by the State were removed as far as possible. For 
     example, instead of getting all their money from the 
     Government, they were required to borrow from private sector 
     banks just like privately owned companies have to. The 
     Government does not guarantee the borrowing of State-owned 
     enterprises. Governments have shown themselves willing to 
     close down businesses that weren't profitable. The companies 
     are required to earn profits comparable to private firms, and 
     to pay taxes on those profits.
       Managers were given the authority and flexibility to 
     manage. Each enterprise is run by a board of directors--
     comprising experienced private sector businesspeople, not 
     public servants. Once the general business plan is agreed 
     with Government Ministers, the board and management has the 
     authority to make investments and strategic decisions, to 
     decide who to hire and fire, how much to pay the staff, where 
     to buy supplies, and where to sell the goods and services 
     produced.
       Performance monitoring held managers accountable for their 
     performance. Each business's performance is compared with 
     both their own plans and other companies in the industry. 
     Ministers have access to analysts from Treasury department, 
     analysts from the private sector, and a ``steering 
     committee'' of private sector people who report directly to 
     Ministers.
       The State businesses were given explicit grants to cover 
     non-commercial objectives. This meant an end to cross-
     subsidies like the one I mentioned before on telephone calls.
       Five/six years on, it is possible to draw some conclusions 
     from our State-owned enterprises policy. One lesson we 
     learned is that, in business terms, the policy has been very 
     successful overall. Labour productivity has increased 
     substantially; prices have tended to fall in real terms, 
     where previously they had risen steadily; service has 
     improved; profits have been made (and dividends and taxes 
     paid) where previously there was a long history of losses.
       For example, the Coal Corporation increased its level of 
     production while cutting its staff numbers in half.
       The Electricity Corporation reduced prices in real terms 
     while cutting the cost of production by over 25%. 
     Productivity per employee increased by over 75%. Accidents 
     rates fell from over 70 per million hours worked to about 
     five.
       The postal service, which used to make losses fairly 
     regularly, is now a steady profit-maker, while the price of 
     the standard letter is down in real terms, the number of 
     retail outlets where postage services are available has 
     increased, and delivery standards are improved.
       After the railway system was turned into a corporation, 
     freight rates fell by over half. Losses turned into profits 
     and worker productivity almost trebled.
       In almost every case, there are examples of these kinds of 
     efficiencies after our government businesses were turned into 
     market-oriented corporations. It is important to remember 
     that making a profit is only part of the story; improving 
     these companies has also contributed to making the whole 
     economy more efficient and work better.
       Another lesson is the importance of what the New Zealand 
     Treasury have called ``getting the regulatory regime right''. 
     I think a lot of the benefits we found would not have arisen 
     if we simply turned our government departments into 
     corporations and continued to give them monopoly protection.
       For example, the New Zealand Government took away Telecom's 
     monopoly on providing telephones, on wiring houses and 
     businesses to connect to telephones, and on long-distance 
     calls. In each of those areas, new firms have arisen to 
     compete for the business. As a result, costs are down and 
     service is improved for all customers. Productivity is up by 
     85%; the real price of telephone services is down by 20%; 
     waiting time for new services is greatly reduced; there is 
     better directly service and outdated systems have been 
     computerised.
       We then found that it made sense to sell some of these 
     businesses to private enterprise. In the last four-and-a-half 
     years, the New Zealand Government has sold all or part of 
     about 35 of its businesses, and has received around $11 
     billion for them.
       There were a number of reasons behind this move.
       The Labour Government advocated selling as a means of 
     reducing debt. The current Government emphasises its 
     expectation that the companies will be more efficient, and 
     will thus contribute more to the economy, in private hands.
       There is a more general issue about whether the Government 
     should be taking large business risks, or whether the private 
     sector is better placed to assess and accept those risks. 
     This factor was especially relevant to the decision to sell 
     the government's interests in petroleum and gas mining.
       Privatisation may not in all cases be appropriate. But sale 
     of the enterprise completes the commercialisation process. It 
     removes any expectation that the Government will guarantee 
     lending to the enterprise concerned, or otherwise protect it. 
     It places the enterprise squarely in the market--able to be 
     bought and sold. It also permits maximum flexibility of 
     operation--ie expansion into new areas of business, where 
     Government may be more cautious.
       Clearly the question of the extent of Government 
     responsibility is clouded, under the half-way house, public 
     corporation concept. Would Ministers be willing to sack 
     boards of directors who are performing badly, or will they 
     find that too politically embarrassing? Will Ministers have 
     enough time to devote to State-owned Enterprises, given that 
     they are very busy on other issues? Over time, will Ministers 
     create pressures for political or non-commercial objectives 
     to be met in businesses whose best contribution to New 
     Zealand's welfare is a commercial one?
       By moving through two stages--to a corporate structure and 
     then into private ownership--the New Zealand State-owned 
     Enterprises have been doubly invigorated. Each stage has 
     added extra efficiencies, and extra benefit to the economy.
       The New Zealand approach to realisation of state assets has 
     been very cautious. The aim has been both to maximise the 
     price received, and to make sure the business is sold in a 
     way that maximised the competitiveness of the market in which 
     it operated. Each sale was considered separately; a sales 
     process appropriate to it was designed specially; and each 
     was sold in a carefully managed process and without rush. We 
     never set deadlines for a sale to be completed, because that 
     would be used by buyers for negotiating advantage.
       Where multinational companies have purchased New Zealand 
     State enterprise the country has gained immediate and direct 
     access to some of the best technology and management 
     techniques in the industry--without having to buy it from 
     third parties, without having to wait, and without the 
     Government having to find the money and bear the risk.
       New Zealand has undergone great change. The process has 
     been invigorating and at times very unsettling. The social 
     consequences of increased unemployment have been very hard to 
     accept and the stresses involved in restructuring health, 
     social security and education programmes have been 
     politically very unpopular. But in the final result New 
     Zealand has established itself as a productive, confident and 
     competitive economy in the dynamic world of the Pacific.
                                  ____


         [From International Economic Insights, Jan.-Feb. 1994]

             Kiwis Can Fly: Reforming New Zealand's Economy

                           (By John McMillan)

       New Zealand has leapt from being the most over-regulated of 
     the world's advanced economies to one in which market 
     mechanisms have free play. New Zealand's reforms came 
     straight out of the economics journals. But their effects did 
     not. The average New Zealander had a lower standard of living 
     in 1991 than in 1984, when the reforms began. Only in 1991 
     did growth start to pick up: in 1993 it was a healthy but 
     unspectacular 3 percent.
       The reforms were innovative and well designed. Political 
     considerations contaminated the reform strategy remarkably 
     little: economic efficiency was the chief criterion. New 
     Zealand provides a model for how to deregulate an economy. 
     The sluggishness of the response, therefore, is noteworthy. 
     New Zealand adds to evidence emerging from other reforming 
     economies--Chile, Trukey, Mexico--that reforms, no matter how 
     urgently needed or how cleverly implemented, can take several 
     years to succeed.
       New Zealand is a case study in the politics as well as the 
     economics of reform. Conventional categories were overturned. 
     Deregulation--usually seen as a right-wing policy--was 
     introduced by a Labour, or left-wing, government. Changes 
     were often made against the wishes of the public: when the 
     publicly-owned telephone monopoly was sold, opinion polls 
     showed a majority of New Zealanders opposing the sale. 
     Conspiracy theories abound: some see the reforms as the work 
     of the New Right, a sinister cabal of big-business leaders, 
     Treasury officials and certain politicians.
       New Zealand's policy radicalism was not confined to 
     economic matters. There were transformations in foreign 
     affairs--the banning of nuclear ships from New Zealand ports 
     and the resulting collapse of the military alliance with the 
     US--and in social relations--the reinterpretation of the 1840 
     Treaty of Waitangi to give broad legal recognition to Maori 
     land-rights claims.
       The impetus for economic reform was anemic economic 
     performance. New Zealand had the world's fifth-highest income 
     per head in 1955; by 1984 it had dropped to 19th. Between 
     1965 and 1984, per capita income grew by 1 percent per year. 
     Low productivity growth was the cause: total factor 
     productivity grew by 0.3 percent per year in 1965-84 by one 
     estimate, or 0.6 percent by another. By the larger of these 
     estimates, this was half the productivity growth of the 
     United States, Britain and Australia--countries no one 
     regards as paragons of efficiency--and a fifth of Japan's. 
     The problem was not new. As early as 1962, Sir Frank Holme 
     said, of the period 1949 to 1961, ``the New Zealand economy 
     has earned the unfortunate distinction of having one of the 
     slowest annual rates of growth of productivity among all the 
     advanced countries of the world.''
       New Zealand's problems were partly external. Agricultural 
     exports, the source of most overseas earnings, were affected 
     by the closing of the EC market, the dumping of EC surpluses, 
     and by the decline in wool's competitive position vis-a-vis 
     synthetics. Mostly, however, New Zealand's problems were 
     self-induced. The government's response to external shocks 
     consisted of controls on imports, prices and wages, interest 
     rates and foreign exchange. Firms were subsidized and 
     regulated and large-scale investment projects (dubbed by the 
     then prime minister Robert Muldoon. ``Think Big'', but 
     relabelled by the opposition Labour Party, ``Sink Big'') were 
     led by the government.
       The bizarre workings of the old economy are illustrated by 
     an anecdote from the industrialist Alan Gibbs. For the sake 
     of employment, the government required television sets to be 
     assembled locally. Mr. Gibbs went to Japan to haggle over the 
     price of components. He was greeted with disbelief: Japanese 
     firms could supply them only by having workers unscrew 
     complete TVs. The New Zealand firm had to pay 5 percent more 
     for the parts than for the complete TV. When shipped to New 
     Zealand and assembled, the sets were then sold for twice the 
     world price.
       New Zealand's low productivity reflected irrational prices. 
     Distortions came from subsidies to firms and import controls 
     and tariffs, which were not only the highest in the OECD but 
     varied greatly, preventing the price system from allocating 
     resources to their best uses.
       Low productivity further reflected misaligned incentives. 
     The labor market was centralized: union membership was 
     compulsory and pay was based on national awards, with little 
     scope for wages to vary across firms or to be based on 
     performance. The income-tax schedule, with a top marginal 
     rate of 66 percent, inhibited effort, except in tax 
     avoidance. Import controls, together with the small 
     population, meant that in many industries only one or two 
     firms served the entire market. The lack of competition meant 
     firms had little incentive to innovate.
       Persistent refusals to face the chronic productivity 
     problem resulted in a large government deficit (7 percent of 
     GDP in 1987) and high foreign debt (46 percent of GDP, higher 
     per head than Brazil's). Prime Minister Muldoon once said the 
     New Zealand public would not know a deficit if they tripped 
     over one, but the budget deficit did have consequences: 
     inflation averaged 12.5 percent between 1970 and 1982. Like 
     the reforming former Soviet-bloc countries, New Zealand had a 
     two-pronged problem, microeconomic and macroeconomic. Market-
     oriented reforms were needed to increase productivity, by 
     reducing price distortions and introducing incentives for 
     productive effort. There was also an urgent need to reduce 
     the deficits and tame inflation.
       A remarkable minister of finance, Roger Douglas, enacted a 
     package of reforms (dubbed ``Rogernomics'') to spread the 
     pain. As Douglas explained: ``Packaging reforms into large 
     bundles is not a gimmick but political efficiency. The 
     economy operates as an organic whole, not an unrelated 
     collection of bits and pieces. When reform is packaged in 
     this way, the linkages in the system can be used to see that 
     each action effectively enhances every other action. Large 
     packages provide the flexibility to ensure that losses 
     suffered by any one group are offset by gains for the same 
     group in some other area.''
       The newly elected Labour government began by devaluing the 
     dollar 20 percent in 1984 and later floated it. It enacted 
     anti-inflationary macroeconomic policies; farm subsidies and 
     export subsidies were eliminated.
       Trade opening began with the formation of a free-trade 
     agreement with Australia (this predated the Labour 
     government). This was successful: full free trade in goods 
     was attained by 1990, five years ahead of schedule. 
     Restrictions on trade with the world at large were also 
     drastically reduced. Import quotas were auctioned, quota 
     amounts were increased until the quotas ceased to bind and 
     tariffs were reduced on a pre-announced schedule. The trade 
     reforms, as well as reduced price distortions, increased the 
     competitive pressure on New Zealand's firms, forcing them to 
     become more efficient.
       A value-added tax replaced the higgledy-piggledy sales 
     taxes. The income tax schedule was rewritten, the top 
     marginal rate dropping to 33 percent. The corporate tax rate 
     fell to 33 percent. New Zealand's tax system now is 
     ``probably the least distortionary in the OECD,'' according 
     to the OECD. Taxation remains high, however, with government 
     spending 42 percent of GDP.
       State-owned enterprises were corporatized: converted into 
     companies fully accountable for their commercial performance 
     to their owner, the state. This was successful: Telecom 
     lowered its real prices 20 percent, NZ Rail 43 percent, and 
     the Electricity Corporation 15 percent.
       Privatization followed corporatization in several cases. 
     Privatization was intended to reduce the government's debt, 
     but also to improve efficiency, by eliminating political 
     intervention in the firms' decisions. The privatized firms 
     are lightly regulated: the telecommunications industry, for 
     example, is now virtually unregulated; competition is relied 
     on to hold down prices.
       In 1990, the new National party government with another 
     reformist finance minister, Ruth Richardson, revolutionized 
     the labor market, abolishing centralized wage-setting. (This 
     was controversial: cabinet ministers' effigies were burnt in 
     protest.) Enterprise-level contracts replaced national, 
     occupation-based awards. The role of unions was downplayed, 
     with contracting now between employer and individual 
     employee. Average wages appear not to have changed much, but 
     the variance of wages has gone up and employment conditions 
     are more flexible.
       This economic-policy revolution has been painful. Although 
     the top 20 percent of full-time workers enjoyed an 8 percent 
     increase in their real income between 1981 and 1991, the 
     other 80 percent saw their real incomes fall, with the lowest 
     20 percent becoming 7 percent worse off. Unemployment rose to 
     over 10 percent, before starting to fall in 1993.
       Can the gain justify all the pain? Although it took seven 
     years for the economy to be growing, important gains have 
     been achieved. The macroeconomic imbalances have been at 
     least partially corrected, inflation is dead and the budget 
     deficit had fallen to 1.2 percent of GDP by 1992-93. The 
     microeconomic front also has some good news. Firms have 
     reorganized themselves to be more efficient and are achieving 
     impressive success: manufactured exports are rising by 15 
     percent a year. Macroeconomic balances and firm efficiency 
     are not, however, ends in themselves. The reforms will only 
     be justified if and when they generate higher living 
     standards. Why, in New Zealand as in other reforming 
     economies, has this taken so long?
       First, the economy is a system. Reforms complement each 
     other: a reform may be ineffective if implemented alone, and 
     only be beneficial if introduced together with certain other 
     reforms. The full effect of the trade reforms will come only 
     after the 1991 labor-market reforms have taken root.
       Second, the problems cannot be blamed entirely on the 
     reforms: the plight of low-income people is caused, at least 
     in part, by worldwide trends. Unemployment had been rising 
     steadily before the reforms, from zero in 1974 to 5.6 percent 
     in 1983. The shift toward labor-saving machinery and 
     increasing trade have meant that unskilled workers are having 
     a hard time in every rich country. Europe and Australia have 
     higher unemployment than New Zealand; and unskilled workers' 
     incomes have been falling in the United States.
       Because of the reforms, the next decade should be much more 
     prosperous for New Zealanders than the last. Prospects for 
     further reform have been dimmed, however, by the November 
     1993 election results. The National Party scraped in with a 
     one-seat majority; and, in a referendum on the electoral 
     system, the first-past-the-post system lost to a form of 
     proportional representation. ``Every political revolution,'' 
     as Henry Kissinger said, ``sooner or later reaches its end 
     after the public becomes exhausted from being jolted into one 
     new effort after another.''
       Note.--McMillan is a professor of the Graduate School of 
     International Relations and Pacific Studies of the University 
     of California, San Diego.

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