November 24, 2004

The New Zealand Anti-Miracle

John Quiggin muses about the New Zealand anti-miracle:

Crooked Timber: The flight of the Kiwi : Tyler Cowen links to Martin Wolf (FT, subscription) on the failure of the radical free-market reforms undertaken by New Zealand from 1984 to the mid-90s. The results are even more striking when you observe that the only sustained period of growth has come after 1999, when the newly-elected Labour government raised the top marginal tax rate, amended the most radical components of the Employment Contracts Act, and undertook some renationalisation. I’ve written about all this many times.... My reading of the New Zealand experience yields two conclusions. First, nothing in microeconomic policy can offset the impact of bad macroeconomic decisions and NZ made these in abundance. Second, the beneficial bits of the reforms were largely or wholly offset by mistakes such as giveaway privatisations, and the adjustment costs caused by what Brian Easton called the market Leninist approach to reform, in which massive reforms were rammed through fast...

Posted by DeLong at November 24, 2004 05:01 PM | TrackBack
Comments

Tim Hazeldine's 2003 working paper "NIE in Action: The New Zealand Reform Experience, 1984-2001" (KEYWORDS: Economic Reform; Agency Theory; Social Capital JEL Classifications: P11; D23; Z13) makes an interesting case that the NZ privatization backfired because it destroyed social "slack" or "forbearance" and required additional monitoring costs that exceeded any efficiency gains. He models "social capital" as both an output and an input to the "political-social-economic system". When outputs are also inputs, results can be counter-intuitive.

Posted by: Robert at November 24, 2004 09:19 PM

I worked briefly at the NZ Treasury during the period of major macroeconomic failure - the "monetary conditions index" and the unneccessary recession in 1998.

It was deeply painful and unsatisfactory. I must have criticised the zero per cent target every day over coffee. I am not a macroeconomist by nature - but it was bleating obvious something was not right.

I got nowhere.

As a general rule I found NZ Treasury to be the most blinkered and ideological place I ever worked. The organisation had made radical decisions and driven the country one way and was not prepared to admit faliability. (Come on - we are all faliable.)

The Australian Treasury by contrast has a reputation as secretive but is in fact the most open internal society I could imagine. Maybe I worked for the (very fine) Ken Henry - but I still remember open debates. I still remember us being collectively wiser than individually wise. I remember being wrong and I remember being right.

I do not remember any time I felt the need to say "told you so".

I think the institutions in New Zealand also needed reform. You could start with the unicameral system which gives the PM of the day too much power (until at least MPP reduced it somewhat).

But Quiggan is right about serious macro failure.

John H

PS. The boom in Wellington was at least part driven by the advent of a film industry and the Lord of the Rings. This is conditioned on one person (Jackson). Improvements in places like Christchurch however must have different causes.

JH

Posted by: John Hempton at November 24, 2004 11:02 PM

I worked briefly at the NZ Treasury during the period of major macroeconomic failure - the "monetary conditions index" and the unneccessary recession in 1998.

It was deeply painful and unsatisfactory. I must have criticised the zero per cent target every day over coffee. I am not a macroeconomist by nature - but it was bleating obvious something was not right.

I got nowhere.

As a general rule I found NZ Treasury to be the most blinkered and ideological place I ever worked. The organisation had made radical decisions and driven the country one way and was not prepared to admit faliability. (Come on - we are all faliable.)

The Australian Treasury by contrast has a reputation as secretive but is in fact the most open internal society I could imagine. Maybe I worked for the (very fine) Ken Henry - but I still remember open debates. I still remember us being collectively wiser than individually wise. I remember being wrong and I remember being right.

I do not remember any time I felt the need to say "told you so".

I think the institutions in New Zealand also needed reform. You could start with the unicameral system which gives the PM of the day too much power (until at least MPP reduced it somewhat).

But Quiggan is right about serious macro failure.

John H

PS. The boom in Wellington was at least part driven by the advent of a film industry and the Lord of the Rings. This is conditioned on one person (Jackson). Improvements in places like Christchurch however must have different causes.

JH

Posted by: John Hempton at November 24, 2004 11:15 PM

John Hempton

Please describe how New Zealand handled macro-economic policy during the 1998 Asian currency crisis. I did not realize they fared differently from Australia. Any other comments would be welcome.

I do not have general access to the Financial Times.

Thanks.

Posted by: anne at November 25, 2004 04:03 AM

John Hempton

Please describe how New Zealand handled macro-economic policy during the 1998 Asian currency crisis. I did not realize they fared differently from Australia. Any other comments would be welcome.

I do not have general access to the Financial Times.

Thanks.

Posted by: anne at November 25, 2004 04:09 AM

The New Zealand stock market has paced a robust Australian market for 5 years, even with the bear market period. Is this a thoroughly encouraging sign of transition?

Posted by: anne at November 25, 2004 04:59 AM

During the Asian currency crisis of 1998, did New Zealand raise interest rates to stem any contagion? If so, why? I was impressed that Australia weathered the crisis readily without resorting to austerity measures.

Posted by: anne at November 25, 2004 07:30 AM

"I worked briefly at the NZ Treasury during the period of major macroeconomic failure - the 'monetary conditions index' and the unneccessary recession in 1998.

"It was deeply painful and unsatisfactory. I must have criticised the zero per cent target every day over coffee."

Besides the zero inflation target, what were the other major macroeconomic mistakes that New Zealand made?

Posted by: Russil Wvong at November 25, 2004 09:21 AM

I notice that New Zealand has something that America doesn't, an escape valve.
When the New Zealand establishment increased immigration from the Pacific islands and decreased tariffs (thus reducing wages both ways), the proportion of New Zealand High School graduates getting out of school and immediately leaving for Australia approached one fourth.
This resulted in a serious economic penalty for immigration to the New Zealand establishment by raising (or preventing the fall of) wages.
One can imagine what would happen to America if we had a safety valve like New Zealand did. Wages would probably renormalize immediately if every immigrant was immediately followed by a emigrant, as in the New Zealand case.

Posted by: wkwillis at November 25, 2004 09:30 AM

John Hempton - interesting comments. If one hasn't been done, it sounds like the organizational culture of the NZ Treasury merits a case study.

Robert - can you provide a link to Hazeldine's paper? I can't find it on Google.

Posted by: Tom DC/VA at November 25, 2004 05:38 PM

1. I know nothing about NZ and look forward to more comments from people who do. But I'm struck by the apologetics of "giveaway privatisations" and "market Leninist approach to reform." With those arguments in your arsenal, neoliberal reform is completely protected from any contact with facts! It used to be that poor results were attributed to a slow pace of reform: entrenched bureaucrats and chicken-hearted politicians dragged their feet, credibility suffered, gradualist reforms produced further problems (see the sequencing literature). Now we have an example of a gov't that got religion and made sweeping changes with gusto and speed, and poor results are explained away by saying that they moved too fast.

2. In any case, what neoliberalism is about is efficiency, right? People who try to argue that it will produce faster *growth* always seem to bring other arguments in a very ad hoc way.

3. While I don't know the macro specifics here, institutional reform programs are rarely undertaken under happy macro conditions, for obvious political economy reasons.

Posted by: Colin Danby at November 26, 2004 01:43 PM

The thing is that using the setting of a 0% inflation target as exhibit A against neoliberal reforms doesn't really do anything to undermine their wisdom. That's an error of tactics, not strategy, no matter how painful it may be. Neoliberal reforms are mostly microeconomic in nature and bad macroeconomic policy doesn't have a party label as far as know.

The ideas of an independent central bank and an inflation target are still holding up pretty well as far as I know.

As for privatization, I think that the painful lesson has been learned from many countries that you need to privatize and deregulate at the same time before the new owners become vested interests.

Moreover, the new labour government raised the top tax rate from 33 to 39%. That's in contrast to a 66% top tax rate when the first reforms got through. This sounds more of a correction than a rolling back of the original insight that the tax rate was too high.

Another criticism I read on Quiggin's paper is that productivity fell in the 1990s. Without knowing the details, it seems that after reforming the labor market, you will have a falling of unemployment mostly due to lower-paying, low end jobs that become available. That translates to lower productivity and I guess that you have to wait for some time to see if the economy has become more adaptive and more productive for the long term (something that evidence from elsewhere points is the case).

Just my random thoughts from the various things I read. Both Quiggin and another rightist seemed rather partisan and biased though.

Posted by: Nick Kaufman at November 26, 2004 04:47 PM
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