Economic and environmental history of Aotearoa - New Zealand

The full story about the New Zealand economic "miracle"

From New Zealand Council of Trade Unions
10 June 1997

There is intense international interest in the state of New Zealand because structural adjustment during the last decade has been an almost "pure" version of the free market policies that the World Bank, IMF and similar bodies advocate.

The World Bank arranges regular study tours by senior politicians and government officials from less developed countries on topics ranging from agricultural reform to the privatisation of government activities.

The New Zealand model of administrative reform is under active study in Japan, the Swedish employers have mounted a strong lobby to introduce New Zealand industrial relations policies there, study visits of politicians, economists, journalists, employers and unions have come from Iceland, Norway, Germany, France, Austria and other countries, the Australians are under pressure to follow the financial sector liberalisation example and so on.

So much was deregulated and privatised in such a short period of time that it is difficult to paint an accurate picture of complex events. This allows outrageous claims to be made and defended, particularly if supporters of the New Zealand model are careful in selecting the starting points in data series, and in concentrating on those statistics = that show positive results.

In short, the New Zealand story is a good news story only if half the story is told.

This report takes issue with the basic propaganda that structural adjustment in New Zealand has created an "economic miracle" that other countries should follow.

It does that by telling the full story, not half of it.

If the actual performance of the New Zealand economy is assessed outside of all the fuss and fanfare that the international right wing community has created, there is really not much to comment about.

Summary of Current Economic Conditions

A snapshot of the New Zealand economy shows a fairly conventional pattern of a small, open economy that has passed the peak of a cyclical upswing.

The annual rate of GDP growth in the year to September 1996 was 2.3 percent (and falling), down from 4.3 percent in the previous year and 6.6 percent at the peak of the cycle fifteen months before that.

The main private forecasting agencies predict that GDP growth will fall below 2 percent by March 1997.

Unemployment stopped falling in the third quarter of 1995, and has started to increase, albeit slowly at this stage, to 6.3 percent by the September 1996 quarter. (The latest figure shows another drop in the unemployment rate to 5.9 percent, but the results are unreliable. Both employment and unemployment fell in the December quarter, the balancing factor being a surge in the number of women who inexplicably stopped looking for employment. The strong implication is survey sample error)

Consumer price inflation peaked at 4.6 percent per annum in the June 1995 quarter, but in 1996 it has hovered between 2 and 2.6 percent. It is currently (year to December 1996) 2.6 percent.

The monetary authorities reacted to the emerging inflationary pressures associated with the cyclical peak by tightening monetary conditions, and this has led to an appreciating exchange rate. The Trade Weighted Index appreciated by 18 percent between the June quarter of 1984 and mid December 1996.

This, and the normal expansion of domestic consumption associated with the business cycle, has led to a deterioration in the balance of payments. The current account deficit is currently 4.6 percent of GDP and is forecast to remain at about that level for some considerable time (at least two more years).

The Economic "Miracle"

Why then, do the international agencies regard New Zealand as a success story?. In part it is because the almost complete opening up of the economy to international finance, investment and trade has created new opportunities for private capital; in part it is because the almost complete removal of worker rights and trade union roles sets an example of what might be as far as employment law is concerned, and in part it is because restructuring has seen a massive fall in the role of the government in the economy, a lowering of tax rates on company profits and higher incomes, the generation of government surpluses and a radical decline in the level of government debt.

In order to export these policies, the right wing has to convince other governments that the consequences are positive.

* that the initial costs of restructuring were very high;

* that when the economy did grow, it might well have grown in spite of the restructuring and not because of it; and

* any gains are probably short term, and are not sustainable.

The supporters of the New Zealand experiment point out that the economy grew strongly from late 1992, and that unemployment fell from 11 to 6 percent. They do not point out that for six years before that, growth was zero and unemployment rose from 4 to 11 percent.

Other Explanations of Recent Economic Growth

Although the claim is that a reduction of the role of the government and of unions caused the growth, economists offer at least five competing explanations of why the economy grew.

Growth is not much more than what would be expected from a "bounce" off an incredibly long six year period of zero economic growth that accompanied the structural adjustment. Over the last decade, growth has averaged a very modest 1.5 percent.

The recovery was as much to do with good luck as it was good management. New Zealand experienced unusually good prices for some items it exported and imported at around the time of the economic uplift.

Structural adjustment rearranged the components of output, but much of the net addition to output - certainly in the period 1985 to 1993 - was a result of maturing horticultural and similar investments undertaken under the old regime of subsidies and tax incentives.

The main gains flowed out of the reform of finance, investment, trade, tax and public administration. The deregulation of the labour market and the dismantling of welfare entitlements were essentially about the distribution of national income, not about expanding it.

Growth was a result of a stimulus to private consumption which was in turn built around short term polices (high rates of immigration, cutbacks in public sector investment, one off reductions in the costs of employing low paid, unskilled workers) but these have overstretched the social infrastructure, dampened productivity growth, widened income inequalities, increased poverty and boosted household debt, and are inherently unsustainable.

Labour Market Indicators

The previous Minister of Labour has summarised government industrial relations policy as being "you can have rights or a job".

The government argues that the measure of the success of removing worker rights is that since then there have been over 200,000 jobs created. However, despite the job growth:

The numbers of people on benefits has continued to increase. 21 percent of working age New Zealanders depend on benefits, compared with only 8 percent in 1985. In the year to June 1996, there were 62,000 more people in jobs, a reduction in the number of unemployment benefits paid of only 5,000, and a compensating 7,000 increase in other benefits.

Over the full cycle of restructuring, the net effect has been to concentrate employment growth on part time work. Over the decade September 1986 to September 1996, full time employment only increased by 1.3 percent, part time employment by 52.1 percent.

Labour productivity has been negative over the last two years. It declined by 1.5 percent in 1995/96, and is forecast to be zero in 1996/97);

In the export sectors, and in sectors competing with imports, the rate of productivity growth and the level of employment have slumped. Productivity growth was zero between 1992 and 1996, and tradeables employment is down 48,600 over the last ten years.

A research project commissioned by the Wellington Manufacturers Association estimates that 65 percent of all exports are currently being produced at profitability levels below break-even, with the result that 85,000 manufacturing jobs are currently marginal.

From the point of view of workers, the key issues are:

* The government has controlled its own finances by cutting back on skills development, the development of industry, and upgrading the infrastructure. It has kept inflation under control by keeping interest rates high and by overvaluing the currency. Both factors have dampened productivity growth, reduced international competitiveness and lowered job security in those parts of the economy producing for export and competing with imports.

* Limiting worker rights has seen a fall in unionisation rates and worker rights, so that even when the quantity of employment has increased (eg in the service sector), the quality of employment has deteriorated.

* Over the country has a whole, unionisation levels have fallen by 45 percent since 1991, the numbers of workers having their conditions of employment set through some sort of collective negotiation has been cut in half and real wages have fallen.

The economic experiment may have worked for finance capital, but it has not been kind to workers, farmers and manufacturers.