How did a country known for its progressive policies, its welfare state and its anti nuclear and environmental policies so quickly and emphatically embrace the tenets of Neoliberalism and the New Right?
New Zealand, in the 1980s, went from being one of the most regulated countries in the OECD to being one of the most deregulated. It underwent a very painful period of transition and adjustment during the reforms. Even now the beneficial effects are far from obvious. Market liberalisation has come at a very high social cost. Poverty and social inequality are rising. New Zealand presents a paradigmatic case of complete market liberalisation and the embrace of neoliberal doctrines.
With remarkable alacrity, the ideological and practical political infrastructure required to support the new economic regime was cemented into place. In the nation’s schools and universities; in it’s publicly and privately owned news media; in its local and national institutions, Rogerpolitics became the new orthodoxy. For the next thirty years it would not only inspire the design of the mechanisms by which political power is exercised, but also the moral justifications for their use.
Those New Zealanders born after 1984, New Zealand neoliberalism’s “Year Zero”, have absorbed the “free market” catechism practically without thinking.
Rogerpolitics does not believe that democracy is a market friendly form of government, and all Rogerpoliticians are expected to act accordingly.
New Zealand is a case study of a small country moving from strong isolationism to full fledged market liberalism. New Zealand policy makers concluded in the mid 1980s that isolationism was no longer a viable policy option. Instead, they turned their country into a laboratory of free trade and Chicago style Neoliberalism. Does this model have insights to offer to other small states?
“ROGERNOMICS” is political shorthand for the neoliberal economic policies introduced by Labour’s finance minister, Roger Douglas between 1984 and 1988. While most New Zealanders have heard of Rogernomics, nowhere near as many have heard of its inseparable companion, “Rogerpolitics”.
The term was coined by the New Zealand political scientist, Richard Mulgan, to describe the form of politics required to make sure that Rogernomics “took” in a country which, on the face of it, should have rejected neoliberalism out of hand. Had Rogerpolitics not been so successfully embedded in the key organs of the New Zealand state, then Rogernomics would not have lasted.
Critical to the success of Rogerpolitics was the widespread public disillusionment with the style of politics that preceded it. In New Zealand’s case, the principal target of the public’s hostility was the National Party Prime Minister, Rob Muldoon, and his highly interventionist economic policies – “Muldoonism”.
An additional factor in the public’s antipathy towards Muldoon was his facilitation of the extremely divisive Springbok Tour of 1981. In the eyes of younger New Zealanders, “The Tour” was proof of their elders’ unfitness to rule. The people referred to by the then prominent political journalist, Colin James, as the “RSA Generation” had, in the eyes of the “Vietnam Generation”, been confronted with a straightforward moral test, and they had failed.
Without Muldoon and Muldoonism; without the Springbok Tour; the hunger for a new way of managing the economy and running the country would not have been so acute. The proponents of neoliberalism, or “free market forces” (as the ideology was more commonly referred to thirty-five years ago) were pushing against an open door.
It was the same all over the advanced capitalist world. The interventionist economic policies that had played such a crucial role in generating the unparalleled prosperity of the post-war period had finally run up against the buffers of the capitalist system. Every attempt to reduce the rising levels of unemployment and inflation that were the primary manifestations of the system’s failure only ended up pushing them higher. Margaret Thatcher’s Conservative Party captured the growing sense of unease with its 1979 slogan: “Labour isn’t working.” The following year, in the USA, the Republican candidate for President, Ronald Reagan, summed-up the popular mood when he declared: “In this present crisis, government is not the solution to our problem, government IS the problem.”
In its essence, this is what Rogerpolitics is all about: getting government out of the way. If politicians, by interfering in the economy, only made things worse, then the obvious solution is simply to prevent them from interfering.
. . . Bowalley Road
A Model Strategy for Small States to Cope and Survive in a Globalised World Economy? An Analysis of the “New Zealand Way”.
Georg Menz, Department of Political Science, University of Pittsburgh
Can New Zealand indeed serve as a model for other small states?
A major issue of concern to contemporary social scientists is the relative decline of the autonomy of the nation state. Traditionally, the nation state served as a useful unit of analysis for scholars in international political economy. It may no longer be a useful starting point. Advocates of the globalisation thesis argue that the nation state is losing much of its room for maneuver in public policy decision making. This is a result of trade liberalisation and deregulation, particularly of the financial sector; rapid technological advances in telecommunications and data processing, and the exponential growth of international trade and foreign direct investment (FDI).
As I will argue below, two opposite arguments about the impact of globalisation on small states might be put forward.
First, it would appear that small states are particularly affected by a loss of autonomy as a result of globalisation. Smaller states face a constrained choice of responses to the impact of the world economy on their own national markets. By virtue of their economic and political power, size and strength, smaller states dispose of a relatively smaller array of policy responses than larger states. They cannot hope to set the parameters of the global economy given their relatively small economies and limited political and military clout.
Small states are usually host to only a small number of transnational corporations and, owing to the size of their own domestic market, they are commonly not only dependent on exporting their own products, but also on importing raw materials from abroad.
Alternatively, the opposite argument might be made. Small states are particularly well prepared to deal with open markets because of their economic structure. For many European small states, a protectionist trade policy was never a viable option.
Katzenstein (1985), who is often credited for his pioneering work on “small states”, points out that these states, due to their dependence on both imports and exports, are committed to the cause of international free trade. Foreign trade typically makes up a large proportion of small state Gross Domestic Product (GDP). Small states also depend on occupying market niches with relatively highly developed technology in sections of the economy where they enjoy a comparative advantage in production or a technological lead over their competitors.
In this study, I seek to analyse how one small state has responded to the challenges of globalisation. Using New Zealand (NZ) as a case study, I will examine New Zealand’s remarkable reform process as one possible policy response to dealing with a globalised world economy. “Model New Zealand” has been heralded as a successful model of structural adjustment by international observers. Regardless of whether one accepts the normative component of this judgement, New Zealand presents a paradigmatic case of complete market liberalisation and the embrace of neoliberal doctrines.
Can New Zealand indeed serve as a model for other small states? I seek to critically examine the reform process and shed light on its intellectual sources, employing some of the insights generated by the constructivist approach in international relations. Can New Zealand be properly considered a success story from which other small states can learn? The country went from being one of the most regulated countries in the OECD to being one of the most deregulated.
I argue that it underwent a very painful period of transition and adjustment during the reforms. Even now the beneficial effects are far from obvious. Market liberalisation has come at a very high social cost. Poverty and social inequality are rising.
The economic data reveals an equally mixed picture. In 1995, commentators admired the “turn around economy” and observed that the initial hardship seemed to be finally paying off. After the devastating impact of the Asian crisis in New Zealand, this assessment seems questionable and premature. New Zealand has been able to successfully fill some market niches in cutting edge agricultural engineering. At the same time, however, extreme liberalisation also means strong dependency on foreign capital, as is especially true for New Zealand with its large current account deficit and high level of foreign direct investment. Dependency on highly volatile foreign capital can become problematic rather quickly, as New Zealand’s recession in the wake of the Asian crisis vividly demonstrates.
2. Small States and Globalisation
How should we conceptualise globalisation? And how is it affecting the policy choices of small states? The purpose of this section is to arive at a working definition of globalisation and to analyse its impact on small states.
Since academic discourse on this subject is of a relatively recent nature, it is perhaps unsurprising that no single coherent definition of the phenomenon has yet emerged. However, from the writings of those authors who are willing to acknowledge globalisation as a genuinely new phenomenon a common thread can be extracted. These authors argue that the nation state is losing its autonomy, or posit, as Susan Strange has done “the retreat of the state”. The state’s sphere of control is decreasing, as an array of new actors moves in to undermine the state’s formerly comfortable command of territorially based authoritys. Among those actors are international institutions, networks and, most importantly, private transnational and multinational corporations.
While the nation-state no longer seems able to command the same array of macroeconomic tools, obvious winners are international markets. Global financial flows of gigantic proportions play an important role in shaping and curtailing governments’ choices.
Following the wave of deregulation and market liberalisation, which commenced in the late 1970s, particularly in the financial sector, the state’s macroeconomic weaponry chest looks considerably less well-stocked today. No longer can a government simply rely on monetary policy to set its economy’s parameters: If it tries to increase the interest rate so as to curtail inflationary growth, this move will simply attract mobile foreign capital.
National fiscal policy is also affected by the increased mobility of global capital. Nation states cannot freely determine corporate tax levels, because what the market deems to be an excessive rate will only cause companies to invest in regions or state more amiable to their interests. Some analysts have gone as far as positing a global “race to the bottom” in which regions and indeed nations have to compete for corporate investment by lowering their environmental, safety, health and social standards and offering tax breaks and other incentives”. Regardless of state incentives, due to the decrease in strict regulation of the financial sector, global capital is much more uninhibited to move into and out of new locales at relative ease. Large volumes of money are on the move, “free to roam the globe looking for the brightest investment opportunities”.
There are two factors contributing to the relative ease with which large scale global financial flows are occurring today at an unprecedented rate.
Firstly, deregulation of the financial markets made short term foreign investment and portfolio investment much easier than before. Secondly, technological innovation, another important factor mentioned by Strange and Drachels, has meant that such transfers of financial capital can take place at an ever accelerating pace. Rapid advances in modern computer based technology allow for rapid and easy data processing and manipulation. The progress of telecommunications technology enables global dissemination of information at unprecedented levels of speed. In fact, I would argue that innovations in technology as such undermine the feasibility of the nation state’s regulatory capacity.
The dramatic increase in foreign direct investment (FDI) should also be mentioned, which is a relatively recent development as well. Investment of a given company abroad in means of production (factories, plants, refineries, etc.) is a phenomenon unparalleled in previous economic history and ought to be distinguished from colonial patterns of raw material extraction through subsidiary companies within colonies. Foreign direct investment in production facilities either seeks to elude protectionist measures by the host country or endeavours to exploit different levels of wages or social standards for production.
Thus, global trade is to some extent no longer the exchange of goods among companies from different nation states (taking advantage of Adam Smith’s comparative advantage in the production of goods), but instead has to be re-conceptualised as the intra company exchange of goods in various stages of the production cycle”.
Closely related to the issue of establishing a concisely specified definition of globalisation are questions of distinctiveness and uniqueness. Is the current degree of global economic interdependence and growth of trade dependency indeed a genuinely new phenomenon? Is there something that distinguishes the global exchange of money, goods and services today from exchange routes and networks in the age of Cecil Rhodes’ Imperialism, Marco Polo’s Asian expeditions, trans Saharan trade routes, or Roman trade with its neighbours? Perhaps so, some authors might concede, but they are less convinced that the level of current global interdependence and international trade is more than just a return to the pre 1914 levels of global interchange.
Different scholars emphasize different policy areas, which vary in the degree to which they are affected by a globalised world economy. Obviously, there are also different normative points of view arguing about whether or not globalisation is a phenomenon worthy of appraisal or condemnation, usually depending on the author’s political persuasion .
Based on this discussion, I propose to define and conceptualise globalisation in terms of the speed and regulatory ease of worldwide flow of capital. While it is important to consider the rapid growth of international trade in recent years as well, the latter component does not constitute a genuinely new phenomenon and therefore does not really deserve a new label.
At this juncture, it is important to distinguish between globalisation as defined above and internationalisation, that is, the increasing global interdependence based on growth of international trade.
How and in what way is globalisation affecting small states? While Katzenstein contributed significantly to research on small states, his work and that of others exploring small states in the literature dates back to the mid 1980s or earlier. At that point, the imminent pressures of globalisation had not yet received the same amount of scholarly attention as is true of today, since they were not as readily apparent.
As briefly alluded to in the beginning, two arguments could be advanced here.
Based on Katzenstein’s research, one might argue that small states are actually particularly well prepared for a world of deregulated financial and trade flow. Since they have always been dependent on the international market place for the raw materials they imported and the export of the manufactured goods they exported, they had to be able to navigate the treacherous tides of the international marketplace from very early on. In fact, because of their status they had no choice other than to open up their economy. At the same time, they found ways to specialise in niche products.
On the other hand, the argument could be made that small states are but pawns in a game they cannot control nor even manipulate. The globalised economy finds small states in a particularly vulnerable position.
If we accept the premise that nation state lose some of their ability to manipulate their macroeconomic parameters, this must apply with particular vengeance to small states. They are even more vulnerable to the consequences of the rapid inflow and outflow of foreign short term investment. If governments of large countries can no longer counteract the speculative movement of the markets, this must be an even more unsurpassable challenge for small states.
Companies from small states cannot enjoy the advantages of the economies of scale, which a large domestic market offers. Small states are typically host to only a small number of transnational companies (TNCs), which are in a position to take advantage of deregulated international trade and investment opportunities. Their economies are made up by small and medium sized businesses, which run the risk of being taken over or run off the road by large foreign TNCs. The best these small and medium sized businesses can hope for is to diversify their customer base by gaining new markets abroad. However, they will cenainly be hard pressed to find products they can effectively and competitively market abroad owing to their limited resource basis for international advertising, marketing, and distribution.
New Zealand is a case study of small country moving from strong isolationism to full fledged market liberalism. New Zealand policy makers concluded in the mid 1980s that isolationism was no longer a viable policy option. Instead, they turned their country into a laboratory of free trade and Chicago style neoliberalism. Does this model have insights to offer to other small states?
3. Introducing the ‘New Zealand Way’
In 1984, the small South Pacific island nation of New Zealand gained worldwide attention by implementing the most comprehensive economic reform program of any OECD country to date. Within only a few years, New Zealand experienced a paradigmatic shift from neo Keynesiasism to New Right monetarism. It went from being one of the most regulated countries in the OECD to being the most liberalised and deregulated. In fact, neo liberalism found a much more zealous disciple in New Zealand’s Labour Party than is true for any other New Right leader. New Zealand “out Thatchered Mrs. Thatcher”.
A small remote island nation, over a thousand miles from its nearest neighbour Australia, it had previously been known for pre-empting its European cousins with progressive policies such as female suffrage in 1893, a comprehensive welfare system and a fervent environmental and anti nuclear policy. Now New Zealand stood at the forefront once again. This time, though, it overtook Western Europe on the right. It made headlines for a radical move away from Keynesian economics and the welfare state. Perhaps surprisingly, it was a Labour government, which under the stewardship of Prime Minister Lange and Minister of Treasury Roger Douglas jump started a radical programme of deregulation, market liberalisation and privatisation of state owned enterprises.
The OECD, The Economist, and other like minded apostles of the neo liberal New Right outdid themselves in praises for the blitzkrieg style economic reform programme which radically redefined the role and scope of government in New Zealand within a few years.
The reform programme included the deregulation of the financial sector, the removal of subsidies to producers, both in the manufacturing and the agricultural sector; the removal of tariffs on imports, a fundamental tax reform, a comprehensive restructuring of the public sector, a radical cut in the generous system of welfare provisions, a total remodelling of labour relations, and the corporatisation and privatisation of formerly government owned enterprises. The following table provides an outline of the reform program enacted in New Zealand between 1984 and 1994.
As can be seen above, the liberalisation programme occurred in two major waves. Under Labour Party guidance, from 1984 to 1990. the first wave of reforms was implemented. As Minister of Finance Roger Douglas played such a pivotal role in the process, the label “Rogermomics” is often applied to the reforms. These included industry deregulation, trade reform and capital market reform. Startling to many voters and academic observers, the National Party continued the reform programme, after it took over power from Labour in 1990. The second wave of reforms entailed macroeconomic stabilisation, corporatisation of state owned enterprises (SOEs), privatisation of SOEs, a comprehensive labour reform, and a fundamental restructuring of the welfare state.
As can be seen, the reform programme bears a striking resemblance with structural adjustment programmes commonly recommended for Third World countries.
The first steps of deregulation affected the financial sector. and included the removal of exchange rates and a floating of the New Zealand dollar. The government committed itself to a monetarist anti inflationary regime, by means of sustaining high interest rates and exchange rates. Price stability was enshrined as the overarching goal in the Reserve Bank Act of 1989, leading to what can be described as the “Bundesbank-sation” of the institution. Labour drastically cut down subsidies, abolished import licences, and began to phase out tariffs. It also opened up the economy to foreign direct investment. In fiscal policy, personal income tax for top earners was reduced significantly and a goods and services tax was introduced.
Government activity and the public sector as a whole were fundamentally restructured. Government departments were re-organised along corporate lines. In many cases, this meant transformation into SOEs and subsequent privatisation, in most cases to Australian or American companies. This corporatisation included government research facilities, hospitals, public housing, and universities.
As part of the second wave, the labour market was liberalised and the welfare state underwent severe cutbacks in scope and size. This translated into a full blown attack on the structural power of unions with the abandonment of collective bargaining imbedded in the 1991 Employment Contracts Act. At the same time, welfare benefits and eligibility were drastically curtailed.
This “big bang” reform program marked a revolutionary departure from the past. New Zealand has a long history of heavy state interventionism and government regulation. Barry Gustafson notes that:
“Manufacturers and wage earners were protected by import controls, and farmers were encouraged to produce and were protected from fluctuations in overseas markets by subsidies, tax incentives, and producer boards, responsible for the coordination of marketing of products. The banking system and value of the currency were tightly controlled.”
In fact, some of the economic measures pursued by its government were commonly associated with the State Socialist countries of the former Warsaw Pact such as tight controls on the circulation of currency, high tariffs, import quotas, and a central government agency co ordinating export policy. Government intervention has traditionally been regarded as beneficial and a cautiously modernising force.
Due to almost unlimited access for its agricultural products to its former motherland Britain, “England’s Garden” prospered throughout the 1950s and 1960s, boasting the third highest standard of living in the 1950s. New Zealand was able to provide its citizens a generous set of cradle to grave welfare provisions, universal health care and free access to education. Until the mid 1970s, unemployment was virtually unheard of.
Wage levels were set so as to guarantee a living wage “for a man, his wife and three children”.
The National Party government provided generous agricultural subsidies and managed the worldwide marketing of New Zealand’s agricultural products. Meanwhile, domestic manufacturing was protected from competition from abroad through high tariff barriers. The government willingly underwrote New Zealand’s continuing current account deficit by accumulating foreign debt. As delightful as life at the other end of the planet seemed, some troubling structural problems were already evident, such as the excessive dependence on the export of commodities.
In the 1970s these problems were brought to light as the global economy experienced meagre growth and high inflation. New Zealand was hard hit, exhibiting one of the lowest growth rates of any country within the OECD during the 1960s and 70s. There were a number of external shocks which New Zealand faced.
Firstly, main customer Great Britain joined the European Community, thereby becoming part of the Common Market for agricultural products. Though exceptional provisions were made to buffer some of the shocks for the New Zealand economy, this meant a sudden loss of New Zealand’s main market.
Secondly, in the wake of the oil crises of 1973 and 1979, New Zealand’s terms of trade deteriorated dramatically. Not only did oil prices rise exponentially, demand for commodities slipped. This hurt New Zealand’s economy badly, since its exports were still largely composed of wool, meat and dairy products. Notwithstanding a temporary boom in commodity prices between 1971 and 74, terms of trade deteriorated further throughout the 1970s and early 1980s. New Zealand’s unsophisticated reliance on agricultural products and its failure to diversify its export basis in time was beginning to backfire.
Thirdly, and related to this, in the wake of global stagflation, the Europeans were not alone in their hesitance to accept agricultural imports. A worldwide shift towards more protectionism occurred in the agricultural sector. This development continued to bedevil the New Zealand economy and only gradually came to an end.
Robert Muldoon, Prime Minister and Finance Minister between 1975 and 1984, attempted to address the economy’s sour performance by pseudo Keynesian methods. As part of the so called “Think Big projects”, he led an ambitious campaign to reduce New Zealand’s dependence on foreign oil imports and increase the domestic heavy manufacturing industry such as the steel industry in Northland. His macroeconomic policy was unfortunately poorly designed and inconsistent.
Though Keynes had called for state intervention to stimulate demand, this did not imply gross misallocation of funds to poorly planned projects.
Muldoon’s short sighted and ill advised course maneuvered unsteadily between heavy state interventionism, including the 1982 wage and price freeze, and cautious flirts with reforms. Essentially, this misguided lingering highlighted his lack of any real vision.
In 1984, the country underwent a severe economic crisis. Muldoon and his National Party had failed to offer anything more sophisticated than a simple wage and price freeze, while clinging on to an overvalued New Zealand dollar. Foreign debt had accumulated to a level of 40 percent of Gross Domestic Product (GDP), well in excess of what crisis ridden countries such as Mexico and Argentina had taken. In this situation, the National Party called a snap election on 14 July. Labour scored an overwhelming victory.
4. Why did it happen and why in New Zealand? Analysing the intellectual sources
“Government bad! Market good!”
Notwithstanding the economic malaise the country faced in 1983 and 1984, the dogmatic zealousness with which economic reforms were implemented by Labour Minister of Finance Roger Douglas and his small group of cohorts in the Treasury Department presents somewhat of a puzzle to the outside observer.
How did a country known for its progressive policies, its welfare state and its anti nuclear and environmental policies so quickly and emphatically embrace the tenets of neoliberalism and the New Right?
The simplest answer is usually provided by the defenders of New Zealand’s neo liberal experience. They are quick to point out that New Zealand faced with tremendous economic structural problems and facing a severe crisis and government bankruptcy had little choice. A small country cannot continue down a path of isolationism, but must accept to navigate the tides and the ups and downs of the global market.
This is, of course, hardly a satisfactory answer. The country still had other policy options, such as moving towards a more neo corporatist direction, as in Western Europe, or a much more gradual and cautious reform programme such as that in Australia.
A more satisfactory answer can be provided if we follow some of the insights generated by the constructivist literature in international relations. Scholars in this tradition have questioned the static structure-agent relation embedded in the neo realist paradigm and posit a more dynamic interrelation between the two. Since our environment is socially constructed and interpreted, actors respond to their perception of the environment. Constructivist scholars emphasise the importance of what states make of their situation. In this process of forming one’s perception, it is of obvious importance what types of intellectual frameworks inform the actor and to what extent these parameters can be manipulated as a result of the inflow and acceptance of ideas. There is now a burgeoning body of literature on the influence of ideas on policy makers. Scholars basing their work on these premises emphasise the diffusion of ideas through network channels. The results of a “cognitive evolution“ might thus disseminate worldwide.
Especially interesting is the suggestion that while ideas might be out in the open, they have to find channels of access to policy makers and are then usually adapted to circumstances and institutional configuration of individual countries.
However, we should remind ourselves, that the influence of ideas on actual policy makers, particularly those originated by academics, has been pointed out quite some time ago.
Keynes himself asserted in 1936:
“Indeed the world is ruled by little else than ideas. Practical men, who believe themselves quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.“
In the case of New Zealand, it seems fairly evident that the type of ideas and intellectual constructs embraced by Douglas and his associates at Treasury were imported from abroad, seeing that they constituted a revolutionary break with New Zealand’s state interventionist and later Keynesian tradition. Since the ideas behind the reform programmes were so alien to the New Zealand context, how can we account for this policy turn? Where, then, did these ideas originate?
In this context, the two major documents released by Treasury following the 1984 elections, Economic Management, and the 1987 elections, Government Management are informative to study. Economic Management was prepared by Treasury in a mere six weeks and provided the outline for the economic policies for the following six years. The spirit and at times even the letter of these documents betray their heavy indebtedness to the ideology of the New Right.
Most centrally, the neoclassical ideology of the Chicago School, the Public Choice writings and Austrian economics left their heavy imprints on the guidelines which were to dominate the New Zealand reform process.
A thorough summary of these intellectual sources would be well beyond the scope of this paper. However, one can adequately summarise these intellectual sources by pointing out the common themes stressed by these writers, namely a fundamental distrust in the state and a reliance on the market for the efficient allocation of resources and the greater good.
Or, to put it into slightly more acerbic terms, just as George Orwell’s pigs had chanted “Four legs good! Two legs bad!’ , so Friedman, von Hayek, Buchanan and their cohorts were chanting “Government bad! Market good!”
While New Zealanders profited over the decades from a benevolent state interventionism, Friedrich von Hayek, epitomising the Austrian school, portrayed the state as an inevitably power maximising leviathan, eager to clutch its paws around individual citizen’s liberties. Thus, the state was virtually guaranteed to intervene into an ever increasing array of individual liberties, thereby perpetuating a journey down a “road to serfdom”. The market, on the other hand, provides innovation and allows for creative discovery.
Chicago School economist Milton Friedman also strongly criticised government’s tendency to curtail an individual’s liberty. He postulated a minimalist role for the state. Only the unregulated market would provide for the most efficient price setting, send out the “right” signals, and thereby foster and encourage the activities of the utility maximising individual. Consequently, Friedman rallied against the welfare state and against any state intervention beyond a closely circumscribed array of public goods.
The sum of actions of rational, utility maximising individuals, on the other hand, would provide benefits for evelyone as the economy would move towards an equilibrium.
This semi religious belief in the invisible hand of the market in efficiently allocating resources and a general distrust in government was complimented by some of the Public Choice theorists, also originating at the University of Chicago as well as Virginia. Public choice applies some of the basic tenets of economics to political activity, arguing that bureaucrats, far from being benevolent altruistic and high spirited individuals, working in the interest of the greater public good, are really just as pettily minded profit maximising as anybody else. Thus, they attempt to maximise their department’s budget, size and scope.
How did Chicago influence New Zealand? What were the channels of influence along which these ideas travelled? And what characteristics of the domestic structure, emphasised by constructivists like Risse Kappen, nourished the implementation of the reform programme?
In this context, it is important to recognise the importance of channels of intellectual exchange with the United States. A number of Treasury officials had received their graduate training in the United States. To some extent, this mirrored the development in Latin American countries, particularly Chile and Mexico, where students trained in the US (the “Chicago Boys” in the Chilean example), applied with almost religious zealot the theories they had been indoctrinated with to restructuring the domestic structures of their home countries.
Similarly, many NZ Treasury officials had spent time at academic institutions in the US or had previous experience at such free market bastions as the World Bank or the International Monetary Fund (IMF).
We should mention in passing that many New Zealanders began to develop a negative self image of their own country as a sleepy backwater prone to old fashioned ‘boring’ Keynesian state interventionism. They were fed up with Muldoon’s heavy handed and fairly authoritarian paternalism.
In addition, we can point to at least two other intellectual sources.
First, there is the IMF. Schwartz points out that New Zealand’s reform programme bears striking similarity to the recommendations of the IMF for structural adjustment. New Zealand removed its wage, price and interest controls. deregulated financial transactions and phased out subsidies for manufacturing and agriculture. As mentioned previously, some NZ Treasury officials had professional experience at the IMF.
Secondly, it is certainly no coincidence that New Zealand launched its reform programme a mere five years after a similarly minded individual had ascended to power at 10 Downing Street. The former colonial power Great Britain still exerted an intellectual hegemony over New Zealand. Thatcher exhibited distrust towards the state and its role in the economy, initiating an expansive programme of privatisation and an extensive restructuring of the public sector. She also significantly curtailed the role of unions.
Meanwhile, in the United States, supply side economics and market liberalisation also carried the day after the election of Ronald Reagan in 1980. Reagan’s policies included measures such as deregulation, prominently in the field of telecommunications and airlines, “rolling back the state”, cutting down welfare expenditures, and enacting tax cuts, particularly at the top end of the income scale.
Following the constructivist research agenda, the particular domestic structures of a host nation also ought to deserve attention in an analysis of the impact of ideas on a given polity. In the case of New Zealand there are indeed particularities, in fact peculiarities which fostered the swift and rapid enactment of a comprehensive package of economic reforms. Two central factors merit our attention here.
First, as part of its colonial heritage, New Zealand had up until 1993 a Westminster style “first past the post” system and only two major political parties. In fact, New Zealand constituted a more perfect example of the Westminster model than the British motherland. Thus, once Labour had got hold of power in 1984, it commanded a comfortable absolute majority of seats. Political opposition thus had practically no way of manipulating the course of events. The same applies for the situation of the National Party after 1990. Because of the amount of power the executive could wield in this system, no checks and balances were in place to act as a dam against the blitzkrieg style policy making approach of Mr Douglas. Thus he and his intellectual companion in the Treasury Department were able to quickly enact their programme.
There was no second chamber of parliament, no effective opposition and no presidential veto to impede the onslaught of reforms.
Secondly, Treasury played a central role in the reform processs. In fact, it “became the principal initiator” and formed a “consistent, cohesive, intellectually convicted group” as Prime Minister Lange later recalled. It was able to do so owing to its “near monopoly position with respect to economic policy advice” within the “unitary, centralized structure” of the political system in New Zealand.
Because the reforms constituted such a radical break with the intellectual tradition hitherto pursued we must look abroad for some of the intellectual sources of the New Zealand sources. In this context it is enlightening to accept the premise of the constructivist turn in international relations and consider how ideas and norms can influence policy makers. The Treasury documents outlining the economic reform programme bear the heavy imprint of the Chicago school, the Austrian school and to some extent the insights of Public Choice. Based on the premise of a distrust of the state and placing faith in the invisible hand of the market, these theories shared in common their advocacy of relying on an unregulated market and a minimised state.
They made their way to New Zealand by way of intellectual interchange with the United States. A feeling of disdain towards Muldoon’s heavy handed authoritarianism, commonly yet falsely associated with Keynesianism helped usher in a paradigmatic intellectual change in New Zealand and a shift towards the free market ideas of Chicago. Domestic structures, such as a Westminster style political system, ensuring an absolute majority for one party, and the strong influence, which Treasury could exert, both contributed to the implementation of these ides in to practice.
5. A Model Strategy? Analysing the implementation of the “New Zealand Way”
In 1984, economic crisis mandated immediate action. Defenders of the reform programme argued that there was little choice to a comprehensive restructuring in light of the apparent failures of Muldoon’s pseudo Keynesianism. In any case, in the early 1990s “Model New Zealand” was touted in the international press as a success story and not only by the OECD. A never ending stream of international journalists, academics, and politicians descended perennially upon Wellington to explore what it was that had turned this small South Pacific nation into a “job creation machine”.
Commonly, New Zealand’s relatively low unemployment rate was mentioned along with its economic growth rate as measured by GDP. In 1993, GDP grew by 4.8 per cent, by 6.1 per cent in 1994 and by 3.3 per cent in 1995. Employment grew by 2 per cent in 1993, 4.3 per cent in 1994, and 4.7 per cent in 1995. Meanwhile, unemployment declined from 9.5 per cent in 1993 to 8.2 per cent in 1994 and again to 6.3 per cent in 1995 (see also appendix).
Government was able to record a surplus in its budget balance, allowing it to enact a tax cut in 1997. The implication was, of course, that both developing countries and the advanced industrial countries could stand to learn a lesson or two from this powerhouse in the South Pacific. Slavish adoption of an IMF style structural adjustment programme seemed to have paid off for the Kiwis. An economy, which up until the 1980s had exhibited sluggish growth and still bore uncanny resemblance to a developing country owing to its heavy reliance on a large commodity sector, was now showing signs of remarkable growth.
Meanwhile, the advanced industrial countries of Europe were suffering no or slow growth while facing a pressing structural unemployment problem. There was considerable debate about liberalising the labour market and restructuring the public sector in order to be able to successfully compete in a global economy. New Zealand had enacted all these changes and seemed to be harvesting the fruits the reform programme bore. It had gone from being extremely regulated and protectionist to being the most ardent supporter of an unregulated market environment. New Zealand’s remarkable reform programme seemed to translate into impressive economic benefits. Thus, the country seemed well suited to serve as a model for coping with the challenges of globalisation.
However, a closer look reveals a much more mixed record. Upon closer inspection, it becomes evident rather quickly that the 1993-95 economic boom constituted little more than a temporary recovery from almost a decade of recession. Throughout the 1980s, the payoffs from the reforms appeared far from evident. New Zealand went through a drawn out period of extremely painful adjustments. On many indicators, such as employment, the economy is returned to pre 1984 levels only in the late 1990s. In the following section we shall examine the economic performance in more detail.
As I will point out, the country paid a very high price for its “success”. Both the social cost is chilling and the issue of loss of national autonomy is far from a purely academic concern for many Kiwis. Privatisation and economic liberalisation has meant that many economic decisions are no longer being made in Wellington, but in corporate headquarters in Australia, Britain and the US.
Due to its reliance on foreign capital both in the form of portfolio investment and FDI the country has made itself vulnerable to the whims of the international financial markets, as became painfully obvious during the Asian crisis. A genuine success is New Zealand’s cutting edge technology in the field of agricultural engineering. But overall, a sober analysis of the costs and benefits of the reform programme cannot lead to the sameenthusiastic conclusions of the international financial media.
Let us consider the economic side flrst. Throughout the 1980s, New Zealand’s macroeconomic indicators were anything but impressive. In fact, between 1985 and 1992 total growth across OECD economies averaged 20 percent, while New Zealand’s economy shrank by one percent. In both 1989 and 1991 GDP growth was negative. Between 1987 and 1991, the unemployment rate more than doubled from 4.1 to 10.7 percent, reaching unprecedented levels and exceeding the OECD small member countries’ average (see appendix 2 for further details). While labour productivity did begin to increase in 1986, this was mainly due to massive labour cutbacks and not even a consistent trend. In fact, between 1984 and 1993 productivity growth averaged only 0.9 percent.
While Muldoon’s practice of heavy borrowing from overseas was severely criticised, Labour actually continued this practice without passing down the benefits to NZ citizens. Both total public debt and public overseas debt continued to increase, the former reaching a record 80 per cent of GDP in 1987. Inflation continued to vex the economy until 1993, averaging 9 per cent.
In the short to medium term the reforms brought about the worst recession in New Zealand since the 1930s. The “reinvention” of government and the public sector translated into a massive rise of unemployment. A country in which unemployment was virtually unheard of now saw workers laid off by the thousands. Unemployment peaked up to record levels.
Yet after eight painful years of transition, the reforms finally seemed to pay off. In December 1991, inflation dropped to below two per cent. In 1993, the balance of payment deficit moved below two per cent of GDP and the government budget showed a surplus for the first time in fiscal year 1993/94. Real GDP began to grow again in 1992 and unemployment began to sink in 1994-95. However, unemployment was still well above pre 1984 levels and so was public debt. According to the OECD, real GDP in 1992 was still 5 per cent below the 1985-86 level. The GDP growth in 1993 seemed to have brought NZ merely back into a general trend of worldwide economic recovery.
In the meantime, New Zealand had become a dramatically different society. Before analysing the more recent development and the impact of the Asian crisis, it is worth shedding some light on the social costs of “Model New Zealand”.
New Zealand has always been proud of its social cohesion. A quasi social democratic commitment to social equality, equal wages and a welfare state had meant a stable, peaceful and socially cohesive society.
Now, as the commitment to “sleepy backward” Keynesianism went flying out of the window, so too, did the commitment to social equality. The income gap rose and as unemployment grew, so did social inequality. Despite a slight increase in productivity, real wages by 1999 had slightly decreased since 1985/86.
A lot of the growth in employment can actually be traced back to the growth of part time jobs which doubled from 200,000 to 400,000 between 1984 and 1995, while the number of full time positions decreased. These part time positions typically do not entail the same amount of benefits as full time jobs.
Following the first wave of corporatisation and privatisation, which lead to massive growth in unemployment, the National party, adding insult to injury, enacted a combined programme of welfare cuts and labour market deregulation in 1990/91.
Subsequently, poverty increased markedly. By 1991, 17.8 per cent of all New Zealanders lived below the poverty line, while the median income had declined by 19.2 per cent between 1982 and 1991.
Perhaps unsurprisingly, crime rates rocketed, violent crime increasing by 50 percent between 1982 and 1991, endowing New Zealand with the dubious distinction of having the third highest violent crime rate in the world.
New Zealand today has the highest youth suicide rate in the western world. For a country which is trying to portray itself as one of the few success stories in creating a bicultural society, Aotearoa New Zealand, the disproportionate rise in poverty and unemployment among its Maori and Pacific Island population presents at the very least a severe embarrassment.
Of serious concern is the emergence a two tier social stratification of society, which parallels racial lines and mirrors the unfortunate American experience. Symptoms of this development are the growth of urban ghettos in South Auckland and the growth of criminal youth gangs among Maori and Pacific Island youths.
Following the cuts in the welfare system enacted by National in 1990, real poverty emerged in New Zealand to a degree previously unprecedented. There was a rapid growth in the number of people reliant on soup kitchens and private welfare organisations. Furthermore, corporatisation and privatisation of the Housing Corporation has obliged this former component of the welfare state to raise profits. A logical result has been the steady increase in rents and sales of a number of flats. This policy accepted the eviction of the most needy, precisely those for whose purpose the system was created. This lead to the emergence of homelessness for the first time in the history of the country.
At the same time, the corporatisation of higher education has meant the introduction of steep fees for tertiary education. Government drastically cut its spending on the education sector. While New Zealand students previously were obliged to a nominal fee of approximately NZ$100 per academic year, rates increased to between NZ$3000 and NZ$20,000 by 1999. Student loans are available, but at market level interest rates only. At the same time, student allowances were cut both in size and scope. This has contributed further to social stratification and inequality. Meanwhile, the policy of privatisation and corporatisation was extended to cover the health sector with the better off being offered the option of buying into private health insurance schemes. Meanwhile. the quality and scope of public health provision is deteriorating.
In the medium to long term, the radical privatisation programme and liberalisation of the economy has made New Zealand extremely dependent on volatile international financial markets. Such dependency became readily apparent during the Asian crisis.
As speculators withdrew their money from the overvalued Asian currencies they did not stop and discriminate, thereby excluding New Zealand. The Asian flu rapidly spread to the country, plunging it into recession and causing a fall of the NZ dollar to below 50 US cents for the first time in eleven years. New Zealand’s Top40 share index followed the dramatic decline of its Asian cousins in late 1997 and again in June 1998. In a sense this was not surprising. seeing that New Zealand suffered from similar problems as Thailand did, namely a large current account deficit, caused by the large inflow of foreign capital. While superficially speaking, the situation might be seen as different from Thailand because a large proportion of the deficit was due to large sale FDI, foreign investors in East Asia had thought exactly that to be true of countries there.
It is clear that the negative impact of the Asian crisis also had to do with the extent to which Asian countries, such as Japan and Korea, had begun to replace Britain and Europe as main outlets for New Zealand products. Owing to the persistence of trade barriers to agricultural sectors, New Zealand farmers were glad to find customers in resource poor commodity importers such as Hong Kong, Singapore and Taiwan. The rise of the New Zealand dollar versus the currencies of most of its Asian trade partners inevitably made its products more expensive and thus less attractive. This also translated into losses in revenues from the tourism sector. Furthermore, since Australia toik 20.3 percent of NZ exports, some indirect effects also came to play a role.
The exposure of New Zealand’s economy to the international financial markets is so high because of a perpetual current account deficit. The external deficit to GDP ratio hovers between 6 and 7 percent, while the foreign liabilities amounted to 80 percent of GDP in 1998. This level of foreign debt was a record high for any OECD country. It makes New Zealand dependent on the volatility of the market. To some degree, this is a result of the policy of the private sector to accrue high levels of foreign debt, in order to finance investment so as to stay internationally competitive. Another large causal factor of the problem of a current account deficit is New Zealand’s radical privatisation programme, enticing overseas investors to invest in a country with a very business friendly environment and causing profits to be repatriated. The stock of foreign direct investment more than tripled between 1989 and 1994, now making up one quarter of the GDP. Whether this level of foreign direct investment can be sustained over a long term period now that key assets of the New Zealand economy have been sold off into private hands is, however, far from certain.
Regardless of whether or not one accepts the neoliberal premise that privatisation of public enterprises results in overall efficiency gains for the economy, for a small country such policy raises the non-trivial concern over real loss of sovereignty. Foreign control over New Zealand is anything but a purely academic subject. In 1995, foreign investors owned half the stock market, 40 per cent of government bonds, while foreign ownership of companies amounted to 33.6 NZ$ billion as compared to government assets of 30 NZ$ billion. Around 90 percent of the banking sector is foreign owned, primarily by Australian companies.
US, British and Australian companies profited from the wave of privatisations, buying up companies at relatively low prices, though NZ taxpayers’ money helped create the bulk of the infrastructure of these companies in the first place.
Major examples of privatisation include the sale of Telecom, Air New Zealand, Bank of New Zealand, New Zealand Rail, and the cutting rights for the states’ forests. At the same time, Asian investors bought up large shares of NZ real estate, both commercial property and forestry land. These developments led one NZ politician to comment that “we risk being transformed into sharecroppers on our land”.
With telecommunication, transportation, the financial sector, the energy sector and increasingly the natural resource base and urban real estate being turned over to foreign owners, constraints on the array of policy measures a NZ government can undertake are quite severe. In a small country, privatisation programmes run the risk of attracting predominantly foreign investors due to the small domestic capital basis. As the case of New Zealand demonstrates this can leave the “independence as a nation substantially undermined”, with decisions affecting the economic and political life of the polity being made in boardrooms in New York, London and Sydney and no longer in Wellington.
This also implies that for the sake of marginally reducing its debt levels, the NZ government has terminally abandoned its control levers over a large section of the economy, now no longer controlled by a democratically elected government, but rather by purely profit oriented private businesses. It has also given away valuable sources of revenue which are now used to maximise private sector profits. These profits, in turn, are being quickly repatriated to overseas locales. For a small country, following the ‘New Zealand Way’ there is a very real danger of turning into a banana republic.
However, while large scale enterprises where sold off to foreign buyers, New Zealand has been fairly successful in developing cutting edge products in a number of agriculture related technologies, thereby occupying specialised market niches. Companies specialise in high tech agricultural products and services, particularly geared towards the dairy and sheep farm industries. These range from technical equipment for livestock feeding to livestock genetics services. Companies have the advantage of profiting from high quality research and development conducted at the Department of Technology at Waikato University in Hamilton and the Department of Agricultural Engineering at Massey University in Palmerston North. High quality research in agricultural sciences is also being carried out on the South Island at the Animal Division and Food Sciences Department at Lincoln University in Christchurch. There are early signs of the development of a “cluster economy” in Hamilton where the university promotes the co operation with the regional Crown Research Institute (CRI) and the emergence of spin off companies commercialising in some of the fruits of the research activity. These are encouraging signs and indicators of New Zealand taking advantage of its experience, expertise, and technical know how to develop unique globally competitive leading products.
This is an indication of acknowledging and profiting from niche markets which other, larger countries are either unaware of or incapable of penetrating. However, we might voice some concern about the fact that these products are still related to agriculture. Thus, the economy’s reliance on this sector is sustained.
6. Conclusion: A Mixed Picture
New Zealand has launched an ambitious and comprehensive series of reforms, commencing in 1984. The country chose to respond to the challenges implied by a globalising world economy in a fairly radical fashion, moving from being one of the most regulated economies in the OECD to the opposite extreme.
This paper has analysed the New Zealand reform programme in a quest to explore its feasibility as a model for other small states in coping with the pressures of globalisation. It is commonly argued that increasing interdependence, exponentially growing trade flows and expanding foreign direct investment are undermining the nation state’s level of autonomy. More precisely, the nation state loses its capability to manipulate key macroeconomic tools and thereby effectively to control key parameters of public policy making. As my analysis has shown, the ‘New Zealand way’ presents a mixed track record. The fairly limited successes of the much heralded “Model New Zealand” have come at a significant cost. Unemployment, poverty, and social inequality all stand at unprecedented levels today in New Zealand. While some macroeconomic indicators have been stabilised, the short to medium term impact of the reforms has been devastating. The short term recovery of the mid 1990s faded in the wake of the Asian crisis.
New Zealand’s high level of foreign debt combined with an extraordinary level of foreign direct investment means that the country is highly exposed to the whims of the international financial market.
Owing to large scale privatisations, initiated in the mid 1980s as a measure to reduce foreign debt and in line with the neoliberal antistatist dogma, substantial sections of the New Zealand economy are now controlled by Australian, American and British companies. This leads to the repatriation of profits from NZ operations and a huge current account deficit. It also means that the NZ government has voluntarily abandoned its capability of controlling large sectors of the economy and has given away revenue generating resources.
The NZ government thus finds the range and effectiveness of its public policy options severely curtailed, not least due to the Fiscal Responsibility Act, the Public Finance Act and the Reserve Bank Act, all of which constrain the role of government in the economy.
It will be interesting to follow the further developments of the New Zealand economy. A current assessment of the reforms, however, cannot lead to an endorsement of any such package of measures for other small states. The costs are quite considerable, while the benefits of a policy of effective capitulation to the market seem fairly limited.
Journalists, policy makers, and academics will probably continue to flock to Wellington to study this most ambitious of all public sector reform programmes.
Yet a comprehensive candid assessment about the overall results of this programme leads to the conclusion that New Zealand in liberalising its economy has overdone it.
Download this report (pdf)