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The land of the long clouds shows world... |
The land of the long clouds shows world the way to prosperity
Ahead of the arrival of New Zealand's first trade mission to SA this week, Business Times visited the tiny country to study its dramatic economic reform programme and its impact on business. This week SVEN LUNSCHE looks at its economic history and trade relations between SA and New Zealand. Next week we will profile how some companies have adapted by becoming niche exporters
Twelve years of economic radicalism have given New Zealand the reputation of being a laboratory for free-market ideas. It is a radicalism that has produced tremendous results - strong sustained economic growth, fiscal stringency, large-scale privatisation and enviably low unemployment. But after the rapid economic expansion in the early-mid 1990s the country is set for a few years of more pedestrian growth. Nevertheless, what the tiny island country has achieved is remarkable and has become a benchmark against which others can judge their efforts. Certainly some SA ministers are increasingly turning to the New Zealand model, notably the Ministers of Transport and Public Service. Many economists argue that small countries can have no influence, let alone control, over their economic destinies. New Zealand disproves this, having worked its way out of decades of inefficiency and underdevelopment culminating in a foreign exchange crisis in the early 1980s. The programme of reform has been carried out under both the Labour and National Party governments since 1984. The new coalition government of the National Party and the New Zealand First Party, formed in December last year, heralded a more cautious approach, but has since taken up the baton of reform by announcing drastic new measures to boost private savings. The key reform measures introduced in the 1980s, mainly under Labour, include: Then, under the National government elected in 1990 and re-elected in 1993, one of the most controversial policies was introduced but only after a protracted battle with the trade unions. The labour market was almost completely liberalised, with freedom for workers and employers to enter into individual or group employment contracts. The effect of this is that 90% of wage agreements are individual contracts and that collective bargaining is virtually dead. "The Employment Act of 1990 was definitely a cornerstone of our economic reform process," says International Trade and Agriculture Minister Lockwood Smith. "It created a flexible economy that allowed us over time to virtually halve unemployment to 6% from 12%." The unemployment rate has in fact fallen from 11.9% at its peak in 1992 to a current low of 6.1%. It is expected to level out at 6.3% this year. The National Party also imposed unpopular cuts on generous social welfare benefits.
As a result of these exceptionally coherent and comprehensive reforms, the world's view of the country has transformed. This year's global competitiveness report from the World Economic Forum in Davos rated New Zealand the world's fifth most competitive economy, slightly down from third in 1996.
For a long time, however, it appeared that these radical reforms would not bear fruit. Between 1985 and 1992 the economy went into virtual hibernation as one Governor of the Reserve Bank said at the time. Then at last it took off. Between 1992 and 1995 the compound rate of economic growth was 3.7% a year. It slowed to 2.1% last year and is expected to grow to 2.5% this year. Economists ascribe the slower growth rate to the strong New Zealand dollar which has cut into the earnings of the country's exports, long the driving force behind the boom.
Average weekly earnings rose at less than 3% and underlying annual inflation averaged 2% between 1992 and 1996. These movements have been underpinned by an exceptional fiscal performance. The government has run fiscal surpluses for the past four years.
The growth of the 1990s represents more than a few years of recovery after a long period of low and unstable growth; after the moderate 2% growth rate this year economists at the New Zealand Institute of Economic Research predict a return to the 4% level in 1998. This would be better than in the 1960s and 1970s, when growth was among the slowest of OECD members. One reason why continued growth looks plausible is the low rate of inflation. True, the Reserve Bank has been struggling to keep inflation below the 2% ceiling since mid-1995. This has necessitated the tight monetary policy and a soaring exchange rate. But it should be possible to push inflation back down without losing forward momentum altogether. Yet there are deeper problems. Saving rates are well below East Asian standards, for example, which explains the coalition government's drastic measure forcing individuals to build up a compulsory level of retirement funding.
Inequality has increased, as has insecurity. But this was inevitable, at least to a degree, in moving from the unsustainable positions of the last decade and a half, when skill differentials in pay were minimal and over-manning rife.
Moreover, the OECD argued in a report last year, in evaluating costs of reform, it is essential not to forget those of non-reform. At the end of Sir Robert Muldoon's period in office in 1984, New Zealand was on the verge of a default on its external debt and of an uncontrollable domestic inflation, with a fiscal deficit of 9% of GDP, even at a cyclical peak in economic activity. By 1984 the status quo was not an option. Since many New Zealanders know their country was on the edge of disaster, a comprehensive reversal of the reforms seems inconceivable.
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