Slowly blunting the free market's competitive edge

By JIM EAGLES

Was 2002 the year when New Zealand decided that competition is not so important?

There were plenty of other significant trends during the year:

* The Stock Exchange began a major revamp but remained somnambulant in the meantime.

* The Shareholders' Association helped inspire a sharp increase in shareholder activism, attracting a positive response from some boards and animosity from others.

* There was a bitter and, so far, indecisive battle for control of the huge Central North Island Forest which may also determine the future of the forestry industry.

* The economy powered along at a remarkable rate, fuelled first by last year's low kiwi dollar and high commodity prices, later by immigration and a consumer spending boom.

* The value of the kiwi climbed during the year, hurting exporters but delighting importers and those planning overseas holidays, and ended at levels not seen for five years.

* The Commerce Commission started using its new powers over the telecommunications industry, to the distress of Telecom and the delight of TelstraClear.

But the most significant development, which has gone almost unremarked, may have been the downgrading of competition as the best way to achieve an efficient economy.

The Government may have started the trend in its first term when it renationalised the provision of accident compensation insurance so that ACC once again enjoys a monopoly and employers unhappy with their premiums have nowhere else to go.

It has set its face firmly against any thought of competition in areas such as health and education - although that has been effective in Europe, Britain and the US - and has shown a strong bias towards using regulations rather than relying on market forces to resolve hiccups.

The Government also passed the special legislation allowing Fonterra to embrace the overwhelming majority of the dairy industry in a single company without having to meet the competition requirements of the Commerce Act.

Next up, the country's second and third largest supermarkets, Progressive Enterprises (with a 25 per cent share) and Woolworths New Zealand (20 per cent), were allowed to merge even though the Commerce Commission indicated the deal would have failed competition rules now in force.

The - largely state-owned - power operators removed the need to compete for customers by taking over most of the retail business until every company's locked-in demand pretty well balanced its generation capacity.

Then the big forestry companies started making noises about a sort of Fonterra for the forestry industry and Carter Holt Harvey unveiled plans for a new company to co-ordinate marketing of log exports from New Zealand.

Now the Government has accepted that it would be in the national interest for Air New Zealand and Qantas to form an alliance (though, to be fair, the final decision will rest with the Commerce Commission).

All of this looks like a slow but steady erosion of the free market advocated by previous National and Labour administrations.

The Government would doubtless reject any such suggestion, correctly pointing out that it has in fact toughened up the competition rules, especially in the telecommunications area.

But, nonetheless, there are strong indications that its support for competition is patchy at best.

And apart from the proposed aviation alliance - where a lot of opposition is based on nationalism - there has been little sign of public disquiet.

Comfortable monopolies and duopolies, often state-owned and usually protected by regulations and import controls, were an integral part of the New Zealand business scene until the reforms of the 1980s.

The dismantling of that system caused a lot of pain, and a lot of people lost their jobs, but the result is a far more competitive, flexible and varied economy ... and one which has confounded the critics by creating record levels of employment.

The changes have also brought huge benefits to consumers who enjoy far greater choice and far cheaper prices for everything from clothes to cars and wine to wirelesses (or at least the descendants of wirelesses) than was ever the case under the old regime.

Probably the single most dramatic change came when domestic aviation was opened up to competition and Ansett Australia arrived on the scene.

Almost overnight Air New Zealand found it could reduce prices, it could provide air bridges, it could serve reasonable refreshments and it could treat passengers like valued customers instead of cattle with nowhere else to go.

Further competition in the aviation industry has since produced Freedom Air and its low-cost holiday trips to Australia, the Express service and its much cheaper domestic flights and the prospect of the Express service similarly reducing basic transtasman fares.

So why the apparent trend back to the bad old days?

First, when it comes to exporting it is often argued that New Zealand needs companies like Fonterra which are big enough to achieve economies of scale. Maybe. The crucial test of Fonterra will be whether the competitive edge provided by global battles against the likes of Nestle is able to outweigh the complacency engendered by having largely captive suppliers.

Second, there has long been a debate about whether commodity exports should go through a single-desk seller in order to avoid rival producers of, say, logs cutting prices against each other in foreign markets. The other side of that argument is that single-desk sellers can be too cumbersome and comfortable to pick up niche opportunities or to identify new openings.

Third, the so-called creative destruction which is an inherent part of the capitalist system - with unsuccessful businesses being allowed to fail, freeing up resources to be used by livelier newcomers - is often an uncomfortable process. Unfortunately the alternative, where bungling business are artificially propped up by the state, is higher prices, often taxpayer subsidies as well and a moribund economy.

Fourth, the instinct of many in the Government is that decisions are best taken by a few high-minded, university-educated politicians and public servants rather than through the collective wisdom of self-serving investors and consumers. The downside of that approach was seen when the flagships of the picking-winners approach - Ericsson Synergy and Sovereign Yachts - ran aground.

New Zealand is clearly not going to return to the economic approach of the 50s and 60s when the state effectively decided just about everything. But even a small move back to the Government seeking to take decisions by fiat, rather than allowing consumers and producers to decide for themselves by exercising choice, is a retrograde step.

Why? Just answer these questions:

Would Air New Zealand be operating Freedom Air and its Express service if it still enjoyed a monopoly?

Would your car insurance premiums be cheaper if there was only a single insurance company? Would Tranz Rail offer a better service to customers if the Government owned the network and it had to compete against other rail operators?