Date created: 28 November 1996

Last modified: 18 November 1997

Maintained by: John Quiggin

Reforms finally under poll spotlight

October 11, 1996

With elections approaching in the United Kingdom and New Zealand, and a significant chance that the incumbent govt in both countries will be defeated, it seems an opportune time to review the course of the reform process in these countries. The era of radical market reform began with the election of the Thatcher govt in the UK in 1979. The UK had experienced a long period of relative decline since its period of world economic leadership in the 19th Century. From being the richest country in the world, Britain in the 1970s was one of the poorer OECD countries, surpassed by most of its European neighbours.

Thatcher blamed the power of the trade unions and the growth of the 'Nanny state' for sapping the spirit of enterprise and the values of the Victorian era. The Thatcher era began with monetarist macroeconomic policies aimed at curbing the power of the unions to push through increases in wage increases. The immediate outcome of Thatcher's policies was a severe recession but the strong recovery in the mid-1980s was labelled the 'Thatcher miracle'. It was claimed that the stop-go cycle that had plagued the British economy since World War II had been broken and that the scene was set for sustained growth. Disregarding the massive contraction in industrial output, enthusiastic commentators focused the fact that since employment had fallen even further, productivity growth appeared exceptionally strong.

The Thatcher miracle was short-lived. In the late 1980s, current account problems re-emerged along with a financial boom and bust, resulting in a new recession, followed by a very weak recovery. The overall rate of growth under the Thatcher and Major govts has been less than that for the OECD as a whole, and worse than the performance recorded in the 1970s (generally regarded at the time as disastrous) let alone that of the 1950s and 1960s.

Of course, with the appropriate choice of counterfactual, it is possible to make any record look good. The Economist, a staunch supporter of Thatcherism, points out that, although Britain's relative decline continued under Thatcher, the rate of decline has slowed. In other words, Thatcher's achievement consists of cementing Britain's 20th place on the OECD 'league table'.

League tables are of limited value in assessing economic performance. Living standards are likely to be much more affected by variables such as social equality and cohesion, unemployment rates and the quality of health and education services. But in all these areas, the performance of Thatcher and Major has ranged from poor to disastrous. In particular, the rise in inequality noticeable through most of the OECD in the 1980s was greatly reinforced by Thatcher's policies.

The experience of New Zealand is strikingly similar to that of the UK. Again, a long period of relative decline set the stage for radical reforms, pursued first by Sir Roger Douglas and then by the Bolger government. The initial period of massive contraction in output and employment, accompanied by big productivity gains, was followed by a recovery characterised by strong employment growth, relatively weak output growth and very weak productivity growth. Many Australian admirers of the New Zealand experiment manage the interesting trick of crediting the reforms both for the strong productivity growth of the late 1980s and for the strong employment growth of the early 1990s. This is rather like Treasurer Keating claiming credit for reducing unemployment between 1983 and 1989 and for reducing inflation between 1989 and 1992. Unfortunately, in problems of this kind, it is easy enough to do one thing well - the problem is to do both at once.

Compared to the United Kingdom, New Zealand is an even harder case for the spin doctors, since New Zealand's relative decline has continued apace in the era of reform, with per capita income dropping by around 15 per cent relative to Australia. Furthermore, the growth in inequality and other indicators of social dislocation has been even worse than in the United Kingdom.

But, it is claimed by the advocates of reform, New Zealand was a 'basket case' in 1984. Without Douglas and Bolger, there would have been a catastrophic collapse into Third World status. Hence, appearances to the contrary, it is claimed that New Zealand has outperformed Australia. There is little that can be said in resposne to this except to observe that once this kind of argument is allowed, it is easy to prove that North Korea is a miracle economy and South Korea a disaster area.

Although the policies of radical reform in the United Kingdom in New Zealand have clearly failed to meet their objectives, their supporters continue to claim victory. In a democratic system, however, the ultimate market test of policy programs is found at the ballot box. Until now, the quirks of first-past-the-post voting have enabled reforms to be pushed through on the basis of the support of around 40 per cent of the electorate. But the decline of minor parties in the UK and the adoption of proportional representation in New Zealand mean that, for the first time, the policy of radical reform will face a genuine electoral test. The results of that test will be awaited with great interest.

Read more articles from John Quiggin's home page

Go to John Quiggin's Weblog

Read more news articles from 1996