Lessons from Down Under

For producing both material goods and personal fulfillment, economic freedom makes all the difference in the world. One country that proved that convincingly is New Zealand.

Situated in the South Pacific midway between the equator and the South Pole, New Zealand is just two-thirds the size of California and 86 percent as big as Poland. Its 4.3 million inhabitants live on two main islands and a scattering of tiny ones. New Zealanders—known as “Kiwis”—are proud of a long heritage as a British outpost that ended with full autonomy in 1931.

In 1950, New Zealand ranked as one of the ten wealthiest countries on the planet, with a relatively free economy and strong protections for enterprise and property. Then, under the growing influence of welfare state ideas that were blossoming in Britain, the United States and most of the Western world as well, the country took a hard turn toward statism—the notion that government should be at the center of economic and social life.

The next twenty years produced “Kiwi socialism”—a harvest of big government and economic malaise. Increasingly, New Zealanders found themselves victims of exorbitant tariffs, massive farm subsidies, a huge public debt, chronic budget deficits, rising inflation, a top marginal income tax rate of 66 percent, and a gold-plated welfare system.

The central government in those years became involved in virtually every aspect of economic life. It established its own monopolies in the rail, telecommunications, and electric power businesses. About the only things that grew during the period from 1975 to 1983 were unemployment, taxes, and government spending.

With an endless roster of failed state programs and economic ruin staring them in the face, New Zealand’s leaders in 1984 embarked upon what the Organization for Economic Cooperation termed “the most comprehensive economic liberalization program ever undertaken in a developed country.”

All farm subsidies were ended in less than two years. Tariffs were cut by two-thirds almost immediately and have continued to decline; today, the weighted average New Zealand tariff rate is a mere 2.0 percent—virtually unilateral free trade. In fact, most imports now enter the country completely free of any quota, duty, or other restriction.

Taxes were slashed. The top rate was slashed to 33 percent, half of what it was when the big government crowd was in charge.

From the mid-1980s into the 1990s, the New Zealand government conducted a massive privatization effort, selling off numerous state enterprises. Its most dramatic success was the sale of Telecom NZ. Pre-privatization, this state-run communications firm boasted 26,500 employees, many of them in unproductive or do-nothing jobs. Lean, modernized and in private hands, its bloated workforce was subsequently reduced to 9,300 workers and it faced the fresh breeze of competition from other providers for the first time. The country went from antiquated technology to a 97 percent digital system rated second on the planet within a decade by the World Competitiveness Report. Telecom NZ is no longer an annual drain on the public treasury. It actually pays taxes to the government and dividends to shareholders.

New Zealand’s public sector work force in 1984 stood at 88,000. In 1996, after the most radical downsizing of any government anywhere in recent memory, its public sector work force stood at less than 36,000—a reduction of 59 percent.

The country’s banking system is thoroughly deregulated. Other Westerners who have grown accustomed to the thought that government should guarantee their bank deposits might be shocked to learn that in New Zealand, the central government imposes no deposit insurance on financial institutions. Instead, banks provide full public disclosure of their financial conditions and secure whatever insurance they need in the open market.

Establishing a new business in New Zealand was made easy, largely because the few regulations imposed were finally applied evenly and consistently.

What the Kiwis did to change labor policy was especially remarkable. Economist William Eggers termed it “the most aggressive and far-reaching labor market deregulation in the world.” Compulsory union membership was abolished, as were union monopolies over various labor markets. Stripped of special privilege that once allowed them to hold the economy hostage, unions were granted a legal status no different from that of any other private, voluntary association. See this short piece by economist Charles Baird in “The Freeman” about the end of forced unionism in New Zealand in 1991.

The dramatic changes paid handsome economic dividends. The national budget was balanced, inflation plummeted to negligible rates, and economic growth surged ahead at between 4 percent and 6 percent annually for years.

The Left staged a political comeback in the late 1990s and raised tax rates a few points. Economic growth slowed as a result but the basic framework of a liberated economy wasn’t hugely changed.

The Fraser Institute in Canada publishes an annual “Economic Freedom of the World” survey which measures, country by country, the size of government (its taxes, expenditures and enterprises), property rights and legal structure, access to sound money, freedom to trade and regulations of finance, business and labor. The Institute’s latest survey ranks Hong Kong, Singapore, New Zealand and Switzerland, in that order, as the top four countries in economic freedom. The U.S. is 6th and Poland is 74th. Myanmar and Zimbabwe are dead last and, not coincidentally, they are not places to which investors are flocking.

In the rankings of the World Economic Forum’s “Global Competitiveness Report 2009-2010,” New Zealand placed 10th. The world’s most economically competitive country was judged to be Switzerland (the U.S. was second, Poland was 46th).

The World Bank’s “Doing Business 2008” survey rated New Zealand as the second-most business-friendly country in the world and 13th out of 178 nations in the business-friendliness of its hiring laws. The south Pacific nation was also the lowest ranked (meaning the least corrupt) on Transparency International’s Corruption Perception Index for 2009.

The 2010 Index of Economic Freedom (compiled by the Heritage Foundation and the Wall Street Journal) states that in New Zealand, “Starting a business is very easy and straightforward, taking only one day in comparison to the world average of 35 days. Obtaining a business license requires much less than the world average of 18 procedures and 218 days. New Zealand’s labor regulations are flexible. The non-salary cost of employing a worker is low, and dismissing an employee is costless. Regulations on work hours are flexible.”

Moreover, these impressive rankings might soon get even better. After ten years of Left–dominated governments, the generally pro-enterprise National Party, led by Prime Minister John Key, came to power in November 2008. Tax rates are headed down again.

There’s a powerful lesson here: Big Government sucks the life out of an economy. Free markets can undo the damage. Statists of every persuasion, whether they are in Auckland, Washington or Warsaw, would do well to take a close look at the New Zealand model.

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