Saturday, October 16, 2004

The New Zealand Way

No Right Turn has an interesting post on the Third Way. I think it's interesting to consider this in a New Zealand context given our much younger history. First, however, let me acknowledge that I am speaking only of the post-treaty history of NZ government economic and social policy. It includes the Maori perspective only insofar as Maori have been a part of those policies. I accept that there is an important Maori story of a much longer history but it is a different story and one others may be much better qualified to tell. There is also a Maori dimension to New Zealand's future which I do not specifically address in this post. This is in part because I will deal with it later and in part because the latest opinion polls give me some hope that Orewa was an iceberg we will safely negotiate.

The Blair/Schroder pamphlet NRT links to contains the following quote -

The politics of the New Centre and Third Way is about addressing the concerns of people who live and cope with societies undergoing rapid change - both winners and losers. In this newly emerging world, people want politicians who approach issues without ideological preconceptions and who, applying their values and principles, search for practical solutions to their problems through honest well-constructed and pragmatic policies. Voters who in their daily lives have to display initiative and adaptability in the face of economic and social change expect the same from their governments and politicians.

Compare this to Michael King's description of our first Liberal government (1891-1912)
Their unifying belief was in a dominant role for central government in the nation's affairs, but on pragmatic rather than ideological grounds. Private enetrprise was weak in New Zealand. Only the government could assemble sufficient capital to extend the country's transport and communications infrastructure.

The legacy of the Liberal government included a strong State sector (12 new departments), land reform (large stations broken up into smaller holdings), income tax, compulsory arbitration and targeted old-age and widow's pensions and universal suffrage. Compulsory free secular education had already been established in 1877.

The seeds of a centralised "Welfare State" were thus sown before the turn of the 20th century and the basic economic model served for the best part of a century. The changes brought in were a response to the opportunities afforded by refrigeration enabling New Zealand farms to export meat and dairy produce rather than just wool. The more intensive farming was conducive to smaller farms worked by their owners rather than large stations with separate land-owning and labouring classes. The class system was thus largely strangled at birth in New Zealand unlike many other new world countries where it merely shifted to a different elite.

The welfare state was greatly extended by the first Labour Government in 1935 but the changes were changes of degree rather than of kind and the motivation of Savage, Fraser and Nash was no less pragmatic than that of Ballance and Seddon. Again quoting Michael King -
Real progress was not made until the [NZ Labour] Party abandoned its programme of socialisation, particularly the threat to nationalise land and until it had convinced the electorate at large that it was not made up of fanatical reformers. By the time Labour took office in 1935 it had become apparent that the party, like most of its supporters, wanted to 'improve capitalism, not ... abolish it'.

The National Party eventually became the government in 1949 and ruled for all but six of the next 35 years but did not reverse any material part of the Social Democratic framework they inherited. The Muldoon government (1975-1984) was arguably the most interventionist government in New Zealand's history.

The owner-operated farm remained the driving force behind the New Zealand economy prior to the UK joining the European Union in 1973 (and the expiry of subsequent transitional arrangements for NZ). The Social Democratic model created by the Liberal and Labour governments proved an effective tool for managing this economy and ensuring that the benefits of our relative prosperity were widely enjoyed. The model was left largely intact by successive National and Labour governments and full employment, social security, free health and education were widely perceived to be part of our national birthright.

But this economic model could not last forever. Improved technology reduced farm labour requirements while New Zealand's overall population expanded. An increasing urban population created demand for more imports than could be financed from farm commodity exports. Much of the marginal land enthusiastically converted to pastoral farming (often with government subsidies) proved to be unsuitable for sustainable conversion. Even, without the loss of the UK market the need for economic diversification would have asserted itself. The UK accession to the European Union, precipitated our problems and a crisis was reached in 1984 under the newly elected Labour government of David Lange.

The government response to the crisis was with a series of measures that could well be characterised as a neoliberal revolution. Certainly these measures are classic "Washington Consensus". Specifically -

1) The exchange rate was floated
2) Income tax rates were reduced and GST introduced
3) Import controls were abolished and Tariffs reduced
4) Micro-economic controls and regulations were relaxed
5) Government assets were privatised

The supporters of these reforms within the Lange government were split between ideologues (eg Roger Douglas) who saw these moves as a first step on a neoliberal highway and pragmatists (David Lange) who saw them as a "necessary evil". This split became highly publicised and contributed to the government's defeat in 1990.

The incoming National government was similarly split between ideologues (Ruth Richardson) and pragmatists (Jim Bolgier). They introduced a second round of (generally harsher) reforms including -

1) Benefit cuts
2) The Fiscal Responsibility Act
3) The Employment Contracts Act
4) State spending cuts
5) More Asset sales.

Again, these were pretty much one-off measures. The election of a minority governmen in 1993 and tne subsequent introduction of MMP made it highly unlikely they would progress further even if the natural pragmatism and caution of Jim Bolger did not. The Clark government has rolled back some of the changes made by Douglas and Richardson and there is no immediate prospect of NZ making any further radical moves to the right economically.

We have much freer trade, a more competitive and less regulated economy then we had before 1984. We have an Employment Relations Act which is more Worker and Union-friendly then the ECA but is a very far cry from the regime we had before the ECA (Compulsory Unionism, National Awards, Compulsory Arbitration). We have had an eonomic system based on pragmatism but that has looked awfully like Social Democracy for almost a century followed by a brief period of "neoliberal reform". For the last decade (or very near) we have seen what may be a new pragmatic economic consensus emerging. This new concensus strikes a balance between fair redistribution of income and low tax rates not greatly different to that described as third way in England or Germany.

New Zealand must now trade in the global market to survive. We must adapt to those economic niches where small size and isolation are not too great a disadvantage and fully exploit those areas wheere we have natural advantages. We must produce a widely diversified range of high value products rather than a small number of bulk commodities. This means that we can never return to the economy or society we had before 1985. But just how much do we need to change?

The reforms between 1985 and 1993 include many measures which were obviously necessary and which are very unlikely to be reversed. These measures mainly relate to regulation. The pre-1985 regulatory regimes seem quite bizarre when we look at them now from a mere twenty years perspective. I cannot see that we will ever return to licensing milk vendors, granting import licences from government departments or requiring Japanese car manufacturers to smash the tops of the spark plugs on the engines they exported to New Zealand assembly plants so that they broken plugs could then be drilled out and replaced with legitimate Kiwi-made ones.

The reforms also included committment to greater transparency of government accounts, more rational control of departmental expenditure and separation of responsibility for monetary policy. Experience would suggest that these changes were mainly positive and they are unlikely to be reversed.

Changes to labour laws were also dramatic. Under the old law union membership was compulsory and union coverage was rarely contestable. Wages and conditions were defined in national awards negotiated between the union and an employer's representative (or imposed by arbitration). The Employment Contracts Act changed all these practices and adopted a model in which the employer-employee relationship becomes a simple contract (subject to statutory minimum conditions and the right to collective agreements). The ECA was repealed by the present government and replaced by the Employment Relations Act. Despite the orgy of ink-letting that surrounded this last move the ERA and ECA differ only in detail and both are light years away from the old system. Compulsory unionism and national awards seem most unlikely to return.

The top rate of income tax varied from 46 to 67% over the 1948-85 period. (Before 1948 the top rate of income applied to a taxpayer's entire income rather than just the portion over the threshold making comparisons difficult). For most of the period the rate was over 60%. In the reforms this rate was reduced to 33% but this was partly offset by the introduction of GST. A new top rate of 39% was introduced in 2000. The tax cuts were financed by reductions in government expenditure including social welfare benefits but the basic structure of the Welfare State remained. New Zealand is a less equal country than it was twenty tears ago but not greatly so. The "Working for Families" package may well restore much of this equality as it comes into force. New Zealand continues to recognise the need to look after the unfortunate and the value of state-provided health and education services. We also recognise that these things have to be paid for and that their is a balance to be struck between lower taxes and better services. The only real dispute is over where that balance is.

The final feature of the reforms was asset sales. For various historical reasons the New Zealand government owned a lot of assets (Banks, Airline, Railroads, Hydro stations, Telecommunications, Postal services, etc) which didn't need to be owned by the state. Many of these were sold off - partly for cosmetic book-keeping reasons and partly for an ideological belief that the private sector could manage these assets better. Subsequently the Government has reacquired a part share of Air NZ and the railway track as a result of distressingly clear proof that the private sector couldn't manage them better. It's likely that the government will continue to take a pragmatic and ad hoc approach to the question of monopoly regulation and state ownership. There is little enthusiasm for renationalisation and little left to privatise.

The New Zealand (Pakeha) economy and society between 1891 and 1985 could be characterised as Social Democratic but was really a pragmatic (within a general humanitarian liberal ethos) adaptation to particular external market conditions that are no longer with us. The reforms between 1985 and 1993 could be seen as a neoliberal (or even neoconservative) revolution. That was, no doubt, the intention of some of the architects and would have been the result of a continued trend in that direction. It seems more likely, however, that the reforms were a "jump to the right" rather than a change of direction. That we will now travel forward with an economy much better adapted to trading on a rapidly evolving global market but with a society, direction and values no less compassionate than before. This may or may not be the "third way" but to most New Zealander's it is "our way".


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