Date created: 28 January 1998
Last modified:18 December 2002
Maintained by: John Quiggin
John Quiggin26 September 1997
As the anonymous author of the Office of National Assessment's recently leaked descriptions of foreign leaders has shown, it is easy to criticise Winston Peters, the Minister of Finance in New Zealand since the election of late 1996. His political career has been characterised by opportunism and demagogy, and his economic credentials are non-existent. These characteristics make Peters an easy scapegoat, a fact which is fortunate for advocates of New Zealand's economic reforms, who will soon be looking for scapegoats. It is safe to predict that Winston Peters will get the blame for the fact that yet again, the outcomes promised from policies of radical reform have not been delivered.
Following two years of very strong economic performance in 1993-94 and 1994-95, the New Zealand economy has slowed sharply. The rate of economic growth was only 1.5 per cent for the year to March 1997, and appears to be slowing further. The rate of unemployment, exhibited as recently as last April by the Australian Treasury as a key piece of evidence in favour of microeconomic reform, has risen to 6.7 per cent and looks set to go above 7 per cent.
It is safe to predict that the indictment of Peters will contain two main counts. First, it will be argued that, both before and after the election, he pushed the government in the direction of increasing spending, thereby forcing the Reserve Bank to raise interest rates. Second, it will be said that the existing reforms have only 'scratched the surface', and that Peters is blocking further crucial reforms, without which the benefits of the entire package cannot be delivered.
The first charge contains a limited element of truth. Although New Zealand's Budget is in surplus, a further fiscal tightening would have been preferable to the very tight monetary policy that was actually adopted. However, the government's fiscal policy was consistent with steady reductions in net debt over the medium term, and previous expenditure cuts had created an increasingly severe need for investment and repair expenditure in social infrastructure such as schools and hospitals. Moreover the abandonment of fiscal fine-tuning is generally seen as part of the New Zealand package of reforms. Thus, while Peters may have contributed to the pressure to increase spending. excessive reliance on monetary policy is an inherent feature of the reform package.
The second charge is impossible to refute, and equally impossible to prove. No matter how much free-market reform is undertaken, it is always possible to argue that more is needed, and that the truly vital reforms are precisely those that have so far been neglected. In exactly the same way, it is possible to argue that Soviet Communism was never given a fair chance. Nevertheless, it is now clear that the problems of the New Zealand experiment are much deeper than can be explained by the errors of a single politician.
The key variable in all of this is the sustainable rate of economic growth. Advocates of microeconomic reform claim that their policies will deliver, not merely a once-off improvement in the level of income per person, but an increase in the sustainable rate of long-term economic growth. In New Zealand's case, since the beginning of reform in late 1984, income per person has fallen by around 15 per cent relative to Australia and the rest of the OECD, and is currently about 20 per cent below the Australian level. Even in the absence of reform, this gap should provide substantial opportunities for 'catch-up' growth through the adoption of world-best practice techniques, improvements in education levels and the like.
In fact, the Reserve Bank of New Zealand currently estimates New Zealand's sustainable annual rate of growth at 2.75 per cent. This compares to estimates of around 3.5 per cent for Australia. Since the population in both countries is growing at about 1 per cent per year, these estimates suggest that New Zealand will fall further behind Australia and the other main OECD countries, falling back by about 7 percentage points over the next decade.
Even for those sceptical about microeconomic reform, these are startling numbers. It is easy to point to aspects of New Zealand's reforms that have reduced national income - repeated macro crises arising from financial deregulation and over-reliance on monetary policy, the sale of public assets to foreigners at low prices, the health care mess, and so on. Ideologically driven attacks on public education have no doubt reduced the rate of growth, as well as the level of income. But it is hard to believe that the cumulative damage is such as to leave New Zealand 20 per cent worse off than Australia and falling. On the other hand, arguments that blame the failures of reform on the policies of the Muldoon government (1975-84) or on earlier postwar governments are getting harder and harder to believe as we approach the year 2000.
If the economic debate were remotely rational, the failure of the New Zealand economy to achieve significant growth since 1984 would be one of the great questions under examination. Instead, the majority of Australian commentators remain under the impression that New Zealand is a proven success.
John Quiggin is Professor of Economics at James Cook University and author of Great Expectations: Microeconomic reform and Australia, published by Allen & Unwin.
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