Between 1984 and 1999 New Zealand underwent a series of economic changes which converted an extensively regulated economy to one of the most open and market-oriented in the world.
The changes introduced were very far-reaching and were introduced very quickly - the ``big bang'' approach. They had a profound effect on the New Zealand economy, on the country's social and administrative structure and on the country's politics. They had economic benefits but they also had huge human costs.
By 1984, there was almost unanimous agreement among economists that reforms were urgently required and a sense among the public that something needed to be done. Slow economic growth had meant a slide in living standards. In the 1950s New Zealand was among the richest five countries in the world. In terms of gross domestic product per capita, New Zealand dropped from 10th in ranking within the Organization for Economic Cooperation and Development in 1970 to 19th in 1980.
Problems also existed over New Zealand's balance of payments, its inflation rate, which rose to 20 percent in 1977, and its unemployment rate which was traditionally very low but was rising.
When a snap election was called in mid-1984 the National Party government was defeated heavily.
The incoming government, formed by the traditionally left-of-center Labor Party, was immediately faced with a foreign exchange crisis caused by an outflow of funds as business people and speculators anticipated a devaluation. While the government responded quickly, it also fostered a continuing sense of crisis to justify further drastic action.
The first period of reform lasted from 1984 until 1990 when the Labor government was defeated, after having been re-elected in 1987. The full range of measures taken during that time occupies two pages of a recent OECD publication. Among the major moves were the phasing out of import licensing, the removal of some occupational licensing and the removal of all state-regulated monopoly rights (except for the postal service and air traffic control). Export market incentives were phased out; there was a phased reduction so that all tariffs were to be gone by 2006; automobile tariffs were eliminated immediately; and farm subsidies were removed.
Major tax changes were introduced. Personal direct tax was reduced and a goods and services tax of 10 percent, later 12.5 percent, introduced. Many state agencies were corporatized and there were extensive sales of state assets.
The public service was reduced drastically and restructured to make it more efficient. Government expenditure was reduced and user-pays principles introduced for some remaining state activity. In other financial reform, the Reserve Bank was made independent and required, through monetary policy, to keep the inflation rate under 2 percent.
From 1990 to 1999, the National Party was in power again. During that period the labor market was deregulated by the introduction of a system of contracts between employers and employees. State-funded benefits and pensions for the unemployed, sick and elderly were lowered dramatically and many were targeted instead of being universal. Competition among hospitals was also introduced and competition among educational institutions reinforced. New Zealand retained state funding for health and the elderly.
The present government, elected in 1999, retains a tight control over expenditure and runs a surplus in its fiscal accounts but has none of the reforming zeal of the two previous governments. The effects of the changes varied. The gross domestic product was up 2 percent in the June quarter of this year from the previous quarter. Inflation in the September quarter was 0.6 percent. The unemployment rate in the September quarter was 5.2 percent, the same as it was in the June quarter. The monthly surplus in the trade balance has been rising in the last five months, caused by both an increase in exports and a decline in imports. So inflation is under control and GDP growth has been above the OECD average for some years.
The economic changes had a marked political effect. Many supporters of both the Labor Party and the National Party felt betrayed. The changes were radical. They were often bulldozed through parliament without adequate consultation. They were based on an ideology rather than practical experience. They threw tens of thousands out of work and they made the income disparity between rich and poor greater. Many Labor Party supporters felt alienated because theirs had traditionally been the party of social conscience to which the under-privileged had looked and they felt that their interests were being betrayed by their party.
Among voters there is more skepticism about the government. The reform process brought about some drastic changes in public attitudes. New Zealanders have become more self-reliant and a far greater number within the country now think in entrepreneurial ways.
Another effect has been on the social structure of the country. Differences in wealth are more evident in a country that once aspired to egalitarianism.
Are there lessons to be learned from the New Zealand experience? The following is my own summary of the lessons:
*The effect of reforms takes far longer to show than one expects at the outset.
*Timing is important. New Zealand was ready for change, even though it hurt many people. The initial tolerance New Zealanders showed surprised many people. The Labor government was returned even after three years of radical reform.
*A balance should be struck between not doing anything at all and moving so quickly that the country loses any sense of consensus. The latter eventually happened in New Zealand. Gradual reform is the sensible and moderate approach.
*When economic reforms are undertaken, they need to be based on a theory of economics. Yet those pursuing the reforms should not pursue abstract notions without trying to be practical. At the height of the New Zealand restructuring the government and the Treasury ignored the need to be practical and pursued ideas despite the consequences.
*The government has to be sure, before it risks high unemployment, that there is a safety net available for the unemployed.
*Even if cost savings are made in hospitals and in educational institutions, the twin actions of reducing taxes and trimming government expenditure will still mean that health care and education will suffer and that will cause distress among patients, health workers, parents and educators.
If one looks at Japan's restructuring program with the eyes of someone who has seen the changes in New Zealand, several things stand out. The comments are, of course, made as an observer, not as someone who believes he has a prescription for Japan.
The first is that because of its strong balance of payments and savings record, Japan is not as vulnerable as New Zealand was. It has more time, though its economy cannot falter indefinitely as it has done for the last decade.
The problem that Japan has is undoubtedly very severe and needs remedying but it is not a crisis in the sense that New Zealand had a currency crisis and the government had to take action within hours before financial disaster hit. It is better to do something before such a crisis because when it does hit the outcomes of the actions taken become unpredictable and possibly extreme.
Transparency in public and commercial accounting is a necessary part of sound reform. Once the principle of greater transparency in financial dealings takes hold, it spreads, and the whole economy is the better for it.
In Japan's case the problem of the banks' non-performing loans is critical and not only needs to be put right but needs to be seen to be put right.
Thirdly, Japan has traditionally sought to boost its economy through spending on the construction industry. The recent effectiveness of this approach has not been proved.
My fear is that if Japan allows itself to reach crisis point, a ruthless reformer will attack the health, education and welfare systems and that this will eventually undermine the country's cohesion.
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What can Japan learn from New Zealand?