The flight of the Kiwi
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.
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. 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.