Times of changing economy

Fifteen years ago today Labour ousted National, led by Sir Robert Muldoon. NZ changed swiftly from a closed door economy to one thrown open to market forces. BRIAN FALLOW discusses the result ...

WELLINGTON - It is easy to forget just how regulated the economy was before the avalanche of reform struck 15 years ago.

As the saying goes, what wasn't forbidden was compulsory.

Reserve Bank governor Dr Don Brash recalled the period in a lecture three years ago: "By the early 1980s almost all prices, interest rates, rents, wages and dividends were controlled by the Government, to say nothing of the import controls and the foreign exchange controls. The result was a sort of serfdom, not the police state and concentration camp variety ... but the bureaucratic kind."

Between 1950 when, as we are fond of recalling, we enjoyed one of the highest standards of living in the world, and 1984 the economy grew at half the average rate for the OECD, the rich nations club. After the 1985 to 1992 reform period, in which growth stalled, came a longer and stronger expansion than New Zealand had experienced for decades. Growth has now stabilised at around 3 per cent a year, an internationally respectable rate thought to be sustainable on the basis of population growth and productivity trends.

On a per capita basis the turnaround is less impressive, however.

British economist David Henderson, citing OECD figures, says that GDP per head increased by 10 per cent between 1984 and 1997 in New Zealand, but by 90 per cent in Ireland over the same period.

Statistics New Zealand says people's average disposable incomes (that is, after tax and Government transfer payments) were only 3.5 per cent higher in 1995 in real terms than they had been in 1982. Continuing real wage growth and two rounds of tax cuts will have increased that figure since then.

But average figures mask the fact that much of the income growth has been concentrated in the top 10 per cent of households.

Dr Paul Dalziel of Lincoln University says that between 1985 and 1996 per capita incomes of the bottom 40 per cent of the population fell by between 3 and 9 per cent, while the top 10 per cent rose 26 per cent and the top 5 per cent 36 per cent.

The process of deregulation has affected just about every section of the economy.

Subsidies for agriculture and industry were among the first to go.

Closer economic relations with Australia were already on the agenda in 1984, but trade liberalisation was extended to the scrapping of import licences and rapid tariff reductions, exposing many sectors to international competition.

The consumer benefited in a wider choice of goods, often cheaper and of better quality.

In the process imports increased from 15 per cent of GDP to around 25 per cent now. The risk of imported inflation increased, making the Reserve Bank wary of a weak dollar.

And many manufacturing enterprises could not withstand the competition and closed their doors. In real terms the manufacturing sector today is about the same size it was when Sir Robert Muldoon left office.

Scrapping protection was one side of the new approach to competition policy; the other was the Commerce Act 1986, embodying one-size-fits-all, light-handed regulation.

The Government now appears to be having second thoughts about the wisdom of its laissez-faire approach to competition policy. It has intervened massively in the electricity sector and is considering changes that would bring more mergers and acquisitions, and more firms' behaviour, under the scrutiny of the competition watchdog, the Commerce Commission.

Between 1991 and 1996 the commission received 211 applications to approve business acquisitions; it turned 15 down. It found firms to be dominant - the threshold in the current act - only when market share was more than 70 per cent, and not always then.

The Labour Governments of 1984 to 1990 maintained compulsory unionism and centralised wage fixing. The Employment Contracts Act 1991 shifted the balance of power from unions to employers, in the name of flexibility.

From a peak of nearly 11 per cent in 1991 the unemployment rate fell to nearly 6 per cent. It rose again as the Asian crisis amplified an economic slowdown already under way, hitting 7.7 per cent by the end of last year, before dropping back to 7.2 per cent now.

But since the mid-1990s the number of full-time employees has been trending down, while the increase in part-timers continues to rise. In 1986 there were 250,000 part-time workers, now there are 420,000.

The tax system has also been comprehensively overhauled.

Income tax rates were so steeply progressive, with a top rate of 66 per cent kicking in at $38,000, that tax avoidance, if not outright evasion, was widespread.

Tax reform has lowered and flattened the tax scale, and replaced a mishmash of wholesale sales taxes with GST.

In another respect, however, the environment is more conducive to saving than in the pre-reform era.

Inflation has fallen from the double-digit rates of the 1980s, when real after-tax returns to savers were often negative, to the 1 per cent to 2 per cent range in the 1990s.

In the public sector state-run businesses were corporatised and privatised, while the core public sector underwent endless restructuring and downsizing.

The budget deficit in 1984 amounted to nearly 7 per cent of GDP. For the past six years the Government has run a surplus.

Benefits were cut in 1991 and have been more tightly targeted since then.

What might New Zealand have looked like today without the rapid and radical reforms of the past 15 years?

Dr Dalziel argues that the relevant contrast is not with a continuation of the ultra-regulated Muldoonist past but with Australia, which has also moved down a reform path, but more cautiously.

In the six years before 1984 New Zealand's average annual growth rate was little different from Australia's, 2.7 per cent and 2.9 per cent respectively.

Dr Dalziel says if New Zealand had continued to level-peg the growth rates Australia has achieved since 1984 its economy would be nearly a third as large again as it is.