NZ showing how reform can occur

Oliver Hartwich wrote in the Spectator:

Rarely does a government manage to build a positive narrative around the policy changes it implements. However, there are exceptions to this rule, or at least one exception: New Zealand.

At a time when many commentators have given up on the possibility of pro-market reforms, the New Zealand government under Prime Minister John Key demonstrates that they are still possible. More than that, Key shows how despite his government’s reformist zeal it managed to get re-elected not once but twice already.

In my new monograph Quiet Achievers: The New Zealand Path to Reform, published this week, I try to dissect Key’s political management and his leadership style. What I hoped to find were lessons for economic reforms that could be applicable to other countries, whether in the eurozone or in Australia. There are quite a few.

There are two types of reforms. The first are those reforms that are undertaken when there is no alternative, or at least no plausible one. The classic example is Margaret Thatcher’s radical turnaround of Britain. Following the winter of discontent, there really was no choice but to move on from the country’s post-war, half-planned economic model.

The labour market reforms under German Chancellor Gerhard Schröder in 2003 fall in the same category of reform, for lack of a better alternative. As unemployment numbers exceeded five million people, something had to be done. Closer to home, both Australia and New Zealand went for a radical restructuring of their economies in the 1980s and 1990s because circumstances were dire and something had to give.

These emergency-driven reforms constitute what I would call ‘pathological learning’. Policy mistakes are finally corrected only when circumstances have become so dire that even the greatest reform-deniers cannot block change. Eurozone reforms fall into this category as well. We can praise the heroes of such reforms, but their job is comparatively easy. What is far harder to achieve is to lead economic change when conditions are not quite catastrophic yet.

Australia’s more recent experience is a good illustration of this problem. Given the mining and terms-of-trade boom, it was hard to make the case for any policy changes. Instead, the temptation was there to use the proceeds of the boom on new government spending programmes.

Commentators like The Australian’s Paul Kelly and (ex-)politicians like former finance minister Lindsay Tanner have expressed their concerns about this. They argue that our political culture with its short attention spans and focus on headlines and sound bites has made good policy-making difficult, absent a major crisis which forces political action. They certainly have a point.

This is where the New Zealand counter-example is worth examining. True, the last few years of the Global Financial Crisis and the devastating Canterbury earthquakes have hit New Zealand hard. However, the situation was not so bad that it left Key without alternatives. He could have easily used these crises as an excuse to allow his budget to blow out or introduce emergency taxes. In fact, that was very Australia’s response to the GFC and the Queensland floods. Remember the giant stimulus packages and the so-called flood levy?

Instead, Key and his finance minister Bill English did the opposite of such populist activism. They quietly steered New Zealand onto a more sustainable economic path. They kept budgets tight, undertook a substantial overhaul of the welfare system, started an experiment with charter schools, part-privatised some state-owned enterprises, cut income taxes and increased consumption taxes.

It was a combination of policies that did not only put the budget back on a credible path to surplus. It also increased New Zealand’s competitiveness, which has now surpassed Australia’s. It created economic growth and tens of thousands of new jobs.

The surplus is not quite there yet, but Hartwich is right that there has been significant reforms in the last six years.

How did the Kiwis do it? How did John Key get away with so much reform?

The answer I have come to in Quiet Achievers is simple. Shunning any reform rhetoric or political grandstanding, Key quietly and slowly goes about his reform business. Reforms are carefully crafted while the public is prepared for upcoming changes and informed why they are necessary. In this way, the reforms are building their own constituency and by the time they are implemented, the measures appear imminently commonsensical. Key’s strategy is one of incremental, silent radicalism.

New Zealand proves that reforms, even in mature democracies, are still possible. They should be possible in Australia as well where they are much needed. Australia has not implemented any substantial economic reforms since the introduction of the GST in July 2000.

For any political leaders wishing to embark on a process of economic reform, whether in Australia or in Europe, a look at New Zealand may well be inspirational.

The welfare reforms are an excellent example of this.

But while there has been good progress in a number of areas, the need for reform is continual, and further reform is needed – especially around land availability.