THE MONDAY INTERVIEW : Bill Birch Inequality the price that some have to pay The hurricane behind economic revival

Diane Coyle meets a minister with a passion for reform

There is one country that has conducted a far more radical free- market experiment on its economy than Britain under Mrs Thatcher and her successor. That country is New Zealand.

Bill Birch is the Finance Minister in New Zealand's conservative government. On the London leg of a whistle-stop world tour to drum up inward investment, he confesses what he likes to do in his spare time: "Reform the economy."

To most of us that might sound an unappealing hobby, but Mr Birch puts in 100-hour weeks in his passion to take the experiment to its conclusion, sparing a few hours on Sundays for his family. After all, his project has enemies.

The architect of sweeping labour reforms introduced in 1991, Mr Birch was burnt in effigy in street marches and mass protests four years ago. He says the Labour opposition plans to water down his Employment Contracts Act, which swept away the old bargaining structures and legal framework.

They would ease the unions back into the bargaining equation, accuses Mr Birch."Unions don't need statutory recognitions," he says. "We don't officially recognise Rotary Clubs in legislation - why should we bother with unions?"

Before its National government lost power in 1984, the New Zealand economy had ossified into a centralised, over-regulated nightmare. Union membership was compulsory. Firms received notice of what wages they had to pay in a letter from the ministry.

The Labour government started to tear down the old structures until the election in 1990 delivered a conservative government. New Zealand now has about the least regulated, most open economy in the world. "It has been a breath of fresh air," says Mr Birch.

The process cost 150,000 jobs between 1987 and 1991. Since then 75,000 jobs have been created.

Mr Birch boasts that underlying inflation has been below 2 per cent for four years and growth above 6 per cent for two. It will slow down a bit, but he thinks the country can sustain expansion at a pace of 5 per cent. "Nobody is arguing about the strength of the economy now," he claims.

True perhaps - apart from farmers demonstrating against recent interest rate rises by New Zealand's famously independent central bank, whose governor's pay has been linked to its success in keeping inflation in its 0-2 per cent target range.

However, there are still arguments about the dramatic increase in income inequality the economic experiment has brought about.

It is a sore point with Mr Birch, who hands out a long rebuttal to statistics published recently in Britain that suggested New Zealand was the third worst for inequality out of 13 wealthy nations. The minister says the figures used pre-tax data on income and are, therefore, misleading.

He also points to research suggesting that while income inequality did increase between 1987 and 1991, the gap has narrowed again. These changes have been due mainly to the rise and subsequent fall in unemployment, he says.

"There has been a lot of pain associated with the adjustment process," Mr Birch accepts. But household incomes are rising at last.

He adds that the straight comparison also takes no account of income mobility. "We have a strong safety net and strong social mobility," he says. "There is wide access to education and training."

He clearly sees a bit more inequality as a price well worth paying for the big gains in productivity and competitiveness New Zealand has enjoyed. It is certainly impossible to find economists who disagree with the proposition that everything is fine and dandy with the country's macro- economic indicators at the moment.

As well as the strong growth and low inflation, the trade balance is healthy, investment is increasing, the currency is strong and the government has a budget surplus.

Some observers have concerns over whether even these payoffs are good enough to keep policy on a radical free-market track. Such concerns, however, are not enough to keep the government from galloping along the path of reform.

Mr Birch says: "There is a long way to go." In no particular order, he lists: improving incentives for the unemployed to get back to work; reforming the education system to improve the skills base; tariff reforms; tax cuts; paying off government debt; and more privatisation.

Then there is reform of what's left of the public sector. Managers will all be put on five- year performance-related contracts. They will be set a three-year budget and given a corporate plan every year.

"There are still some old-style departments around," says Mr Birch. "The Justice Department and Commercial Affairs, for example."

The path of private sector behaviour for the public sector has been blazed by last year's Fiscal Responsibility Act. Its most endearing feature is the introduction of a pre-budget parliamentary debate to replace the post-budget debate. It also introduced accounting standards similar to those in the private sector, six-monthly government financial statements and a commitment to a balanced budget over time.

"The government has to set an example. It should stick to the things it should be doing, and do them better."

Kenneth Clarke, the British Chancellor, said last week that nobody here was going to feel good about the recovery for at least a couple more years.

Growth of 4 per cent last year was too high to be sustainable - it brought the danger of rising inflation. Does Mr Birch think the British government stopped the economic experiment too early?

"Britain was a world leader. Everybody has accepted the validity of the arguments," he says. "The British have set an example in the right general direction. Whether it has gone far enough is a question you have to answer for yourselves." But he leaves no doubt at all about what he thinks the answer ought to be.