Kiwis show it isn't all black

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The Independent Online
IF KIWIS can fly, as John McMillan writes so brilliantly, why not the rest of us? At a time of much soul-searching over weak growth and declining living standards in the industrialised economies, tiny New Zealand is a shining example of how to reverse these wrongs.

But it was not easy, and the reforms did not occur overnight. This is the downside of an otherwise uplifting tale of economic regeneration that offers good guidance to the industrialised economies. The political authority and 'vision' that marked New Zealand's reforms are notably lacking in the US, Europe and Japan.

The policy question of the day - are the industrial economies in long-term structural decline? - was one that New Zealand asked itself in the mid-1980s, and there are no easy answers.

Unemployment is rising alarmingly in Europe and the US, while productivity continues to fall. Japan's bubble economy has burst, producing the worst recession since the war. So how did New Zealand pull itself out of a similar mess?

The answer is innovative deregulation that also affected social and foreign policy goals. After more than two decades of worse than anaemic growth, during which the per capita income of New Zealanders dropped from the fifth highest in the world in 1955 to 19th by 1984, the nation tried a radical cure. This was the work of a Labour administration that some Kiwis described as 'loony lefties'. The medicine was so strong that it often had to be rammed down the public's throat. For example, opinion polls showed most people were strongly opposed to the sale of the publicly owned telephone monopoly. The government went ahead and did it anyway.

According to the work of Mr McMillan, a professor of international relations at the University of California, this and other such acts were born of desperation.

Mr McMillan provides strong examples of the old economy's failings that led to the unforgiving description of the policies of Robert Muldoon, the former prime minister, as 'Sink Big'. One involved the industrialist Alan Gibbs, who set off for Japan on a mission to bring back affordable TVs to New Zealand, while also honouring local assembly requirements imposed by the government. Shocked Japanese manufacturers said they could supply separate components - but only if workers at the end of their assembly lines were to unscrew finished TVs. Mr Gibbs had to pay 5 per cent more for the pieces than for a whole TV. His firm then had the parts shipped to New Zealand, assembled them, and sold the sets for twice the world price.

By the mid-1980s - after more than a decade of irrational prices, distorting subsidies, tariffs that were the highest in the OECD, and an income tax schedule with a top marginal rate of 66 per cent - the economy was floundering. Inflation averaged 12.5 per cent, the government deficit was 7 per cent of GDP, and foreign debt was 46 per cent of GDP. Enter a new Labour government.

Its reforms were sweeping. They encompassed a dollar devaluation, a free trade area, an overhaul of the tax system and the elimination of centralised wage settlements. There were severe consequences: high unemployment and declining real incomes for 80 per cent of full- time workers.

However, the economy has finally begun to make impressive gains, with manufactured exports now rising at an annual rate of 15 per cent. The next 10 years are projected to be much more prosperous than the last. New Zealanders took the short-term pain in the hope of long-term gain.

The leading industrialised nations are now asking themselves the same painful questions. Based on many indicators, the answer is that they are almost certainly in long-term structural decline, if present policies are pursued or modified only slightly. The bright side, of course, is that nations don't have to stay with misguided policies.

But the problem common to the large economies is that there is no internal consensus on how to reform. A 'new social contract' among Europeans to implement essential structural reform is notable by its absence, as is a 'shared vision' in Japan of how to build a mature post-industrial society. Meanwhile, the American Dream is slipping away with nothing likely to replace it until the US can be taught to invest today for tomorrow's gain. Maybe all would benefit from a tough Kiwi lesson.