Business Standard
Last updated 0100 Hrs IST, Tuesday, December 4, 2001
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The Kiwi god that failed
Once considered a text-book example of economic reform, New Zealand is now
jettisoning the orthodox liberal canon, says Manas Chakravarty
It's not only in Afghanistan that the Taliban is on the run. Fundamentalists
exist not only in religion but in economics as well, and "Taliban"
economists have been running riot in New Zealand ever since 1984, when the
economic reforms started.
That unfortunate country has served since then as a laboratory for economic
liberalisation, becoming in the process the Mecca for neo-liberals - an
example to be followed by the faithful all over the world. The government's
recent re-nationalisation of Air New Zealand, therefore, is a severe shock,
almost an act of apostasy.
Air New Zealand's problems stem from its acquisition of Ansett, the
Australian domestic airline that folded up under the weight of the crisis
affecting the airline industry. Faced with the imminent collapse of Air New
Zealand, the government had little alternative but to take over the company,
with a taxpayer-funded economic package to infuse much-needed capital.
The health of Air New Zealand is essential for New Zealand's lucrative
tourism industry, which provides jobs for about 10 per cent of the
population. Even if the re-nationalisation of Air New Zealand was an
isolated instance of backsliding, brought on by the famed TINA (There Is No
Alternative) virus, it would be a startlingly new way of looking at TINA,
because that argument has so far been exclusively used to push through a
programme of privatisation, and it has never been invoked to justify
nationalisation.
But New Zealand's disenchantment with neo-liberal reforms goes much deeper.
The sale of government assets has been stopped, the industrial insurance
scheme has been re-nationalised, pensions have been raised, re-unionisation
and collective bargaining are making a comeback, more money is being made
available for the public health system, and government assistance for
regional development is being boosted. Alarmingly, even the top rate of
income tax has been raised to 39 per cent.
But perhaps the most revolutionary of these changes is allowing the publicly
owned Post Office to set up a bank, aptly called the People's Bank, a name
replete with old socialist associations. Parts of the privatised railway
system are also being taken over by the government.
Is this some ghastly socialist reaction, a last desperate stand by the
forces of the old order? Nothing of the sort. The plain fact is that while
economists have gone gaga over the laboratory experiment in New Zealand, the
people of New Zealand, who performed the role of laboratory mice, have a
very different point of view.
For good reason. The New Zealand experiment was a text-book example of
neo-liberal principles at work. In terms of the orthodox liberal canon, they
did everything right. Reforms were put through at breakneck speed. All
controls on prices, wages, credit, dividends, foreign exchange and overseas
investment were lifted in 1984, and the New Zealand dollar was floated early
in 1985.
Banks were freed from reserve requirements with the central bank, and the
requirement to hold specified investments in government securities was
abolished. All the four government-owned banks were sold off. Foreign
ownership was allowed indiscriminately.
Trade liberalisation was undertaken on a unilateral basis, in strict
accordance with the theory of comparative advantage. Agricultural and
industrial subsidies were abolished at a very early stage. Domestic air and
rail services were privatised, as were the telecommunications and
electricity sectors. Even the country's forests were handed over to
multinational companies.
The Employment Contracts Act placed labour contracts on almost the same
basis as other commercial contracts and pretended that conditions of work
are a private matter between employer and employee.
Income tax rates were drastically reduced, while a broad-based value added
tax was initiated with a single rate. A Fiscal Responsibility Act was
introduced, and the proceeds from the sale of government assets used to
bring down government debt.
All this, according to the neo-liberal rules, should have resulted in an
economic miracle. Unfortunately, average GDP growth since 1984 has been less
than 1 per cent per annum, far less than growth over the period in other
OECD nations. Although inflation has come down, unemployment has remained a
stubborn problem.
While increased competition drove out inefficient producers, few new firms
took their place. Many farms declared bankruptcy. The repatriation of
profits by multinationals increased the current account deficit. Opening up
the economy led to a need to maintain high interest rates in order to
attract foreign capital, and this hurt domestic manufacturing.
New Zealand's social fabric suffered the most. Fiscal responsibility has
meant cuts in income support and social services, while "flexible wage
rates" meant reduced pay and deterioration in work conditions. The country'
s health system, earlier one of the best in the world, is in perpetual
crisis because of lack of resources. Youth suicide rate has doubled since
1984 and is now one of the highest in the developed world. New Zealand's
once progressive state housing system has been dismantled.
Inequality has risen dramatically. A study by Massey University points out
that over the period 1984 to 1998, 80 per cent of the population suffered a
decline in their share of the national income, and this decline was most
marked in the poorer sections of society. Only the top 10 per cent of New
Zealanders have experienced an increase in their share of national income,
and this increase was greatest in the top 5 per cent, where it rose by a
massive 25 per cent.
The privatised train service, Tranz Rail, is so bad that it is regularly
referred to in the local newspapers as Tranz Fail. Rail services in many
parts of the country are under threat.
The attempt to create a market in electricity led, for the first time, to
widespread blackouts in Auckland in 1998, an experience repeated later in
California. A privatised but near-monopolistic telecom sector led to high
charges for consumers, with little investment in new technology, and scant
interest in servicing rural areas. Bank privatisation led to many parts of
the countryside not being served by banks at all, while there was resentment
at the higher charges.
But is re-nationalisation a viable alternative? New Zealand is a small
country and, in a global economy, it has to continue to please foreign
investors if it is to remain afloat. The deviations from current economic
orthodoxy have already led to rumblings of protest. The government's stand
is that many of the neo-liberal reforms were dictated more by ideology than
common sense, and they are only opting for pragmatism over dogma, reality
over doctrine.
The experiment with privatisation has clearly not delivered what the people
of the country want, and that is why the government is stepping in. At the
same time, it also insists that public sector enterprises too must meet the
expectations of the people, or be allowed to fail. It has not hesitated to
put state-owned enterprises into receivership.
The failure of the New Zealand experiment holds lessons for the rest of the
world. It will be equally interesting, however, to watch the progress of the
bold new course that the country is charting out for itself.
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