Tyler Cowen links to Martin Wolf (FT, subscription) on the failure of the radical free-market reforms undertaken by New Zealand from 1984 to the mid-90s. The results are even more striking when you observe that the only sustained period of growth has come after 1999, when the newly-elected Labour government raised the top marginal tax rate, amended the most radical components of the Employment Contracts Act, and undertook some renationalisation. I’ve written about all this many times, for example in this AFR piece and this Victoria economic commentary published in NZ (PDF file).
Cowen considers a couple of possible explanations. The first is that the NZ economy was on the verge of collapse before the reforms in 1984. In fact, while there were plenty of problems, Australia faced equally severe difficulties and did better. The second is that New Zealand suffers from its remote location. As I observed in my economic commentary
If correct, this explanation of the failure of reform would contain a bitter
irony. Few governments have embraced the global free market more eagerly than the New Zealand governments of the 1980s and 1990s, and few have received more praise from the advocates of globalisation. However, sentiment counts for nothing in global markets, whereas the advantages and disadvantages of location seem to be increasingly important[1].
My reading of the New Zealand experience yields two conclusions. First, nothing in microeconomic policy can offset the impact of bad macroeconomic decisions and NZ made these in abundance[2]. Second, the beneficial bits of the reforms were largely or wholly offset by mistakes such as giveaway privatisations, and the adjustment costs caused by what Brian Easton called the market Leninist approach to reform, in which massive reforms were rammed through fast, with any opposition being crushed.
fn1. A further point which I spell out in this piece in Next American City is that, if this explanation is correct, it shouldn’t be. Communication and transport costs have declined drastically. The fact that financial markets and corporate HQs have clustered ever more closely in a few high-cost global cities is evidence that corporate cronyism is trumping economic efficiency.
fn2. Their main architect, Reserve Bank head Don Brash, subsequently went into politics, and is now Leader of the Opposition.
{ 10 comments }
Idiot/Savant 11.24.04 at 11:00 am
The post-99 growth spurt can also be seen as a return to stability and certainty. During the “reform” period, we were subjected to a policy blitzkrieg, and never really knew what mad ideas the government would next decide to inflict upon us. Massive changes were rammed through literally in the middle of the night, and in some cases the speed of policy development was so rapid that legislation went to its first reading with chunks marked “to be provided”. That insanity ended with the 1999 election, and we’re all better off for it.
Barry 11.24.04 at 11:53 am
This is easy to refute: let L=(time of good economic performance – time of initiation of reforms).
Then, clearly, there is a lag of time L.
Therefore, the good times were the fault of the previous reforms,
while the bad times after the reforms were the fault of
the Evul Librul Pinko’s who rule before the reforms.
Good enough for the Wall Street Journal, good enough for America, good enough for everybody :)
Tom T. 11.24.04 at 12:41 pm
I wonder if you may not be catching the relevant driver of recent growth. Doesn’t the 1999- period that you cite also coincide with the filming of the Lord of the Rings?
Giles 11.24.04 at 4:16 pm
“market Leninist approach to reform, in which massive reforms were rammed through fast, with any opposition being crushed.â€
Its also worth asking why this occurred. The distinguishing feature of New Zealand compared to Australia is that it has a unicameral system which allows radical policies to be rammed through without allowing the time for adequate consideration or public consultation or persuasion (this is the Kasper Wolfgang argument and also a reason why the bloody minded Australain senate is probably a good thing not a bad thing).
Perhaps more importantly this has allowed New Zealand to be a sort of academic economics experiment – for instance it was one of the leading countries to grant central bank independence, which is probably a good idea, but like most things the devil is in the detail, so for instance the original 0% inflation target turned out to be dumb.
Still, the experiment yielded some benefits, other countries learned not to make the same mistakes as the Kiwi’s.
asg 11.24.04 at 6:50 pm
Marginal Rev links a follow-up post from a NZ blogger:
http://www.marginalrevolution.com/marginalrevolution/2004/11/new_zealand_con.html
Idiot/Savant 11.24.04 at 8:08 pm
Tom T: Yes, but we’re not _that_ small an economy.
Giles: it would be nice if people would pay us for being their testbed, rather than freeloading.
Giles 11.24.04 at 9:16 pm
Indeed Idiot, but I think that he Russians get first call on any payments made to someone for being used as an experiment.
Mike Huben 11.24.04 at 10:45 pm
I have a web page for criticisms of such experiments (because they are endorsed by libertarians):
http://world.std.com/~mhuben/econexper.html
I include one by Quiggan. Am I missing any other important ones?
derrida derider 11.25.04 at 3:26 am
John is spot on about macroeconomic mistakes costing the Kiwis dearly.
Which reinforces the one really good thing about the Howeard government that offsets an awful lot of its deficiencies – they haven’t stuffed up macro policy at any stage. Looking around the world, not stuffing up macro policy is something that is “really hard” because you can get easy short term popularity by refusing to do the needful (are you listening, Dubya & Greenspan?).
Michael Mouse 11.25.04 at 11:28 am
“The fact that financial markets and corporate HQs have clustered ever more closely in a few high-cost global cities is evidence that corporate cronyism is trumping economic efficiency.”
Equally, it’s evidence that humans place a large premium on face-to-face contact. It’s only economic inefficiency if you say that this preference is in some way not an economic one, or that they are ignoring some theoretical true “value” that departs significantly from “what people are prepared to pay”.
That a market tends towards concentration is hardly shocking and unexpected news.
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