New Zealand’s risky re-regulation path

Amidst the commentary surrounding John Howard’s Lazarus Rising book launch, much has been made of whether 25 years of Australian liberalising economic reform has drawn to a close.

Meanwhile, in New Zealand, reform stalled a decade ago. Now, amidst anaemic economic growth and a stagnant economy, many are now advocating turning around and marching back in the opposite direction.

Twenty-six years ago, New Zealand was known as the ‘Polish shipyard of the South Pacific’ for its inefficiency and protectionism. Since then, the political consensus has largely moved towards open trade and markets where possible.

But suddenly, less than a year out from the next election, opposition leader Phil Goff seems to be yearning for those good old days. In a speech to the NZ Labour Party conference last week, Goff asserted that market ‘neoliberalism’ and foreign investment are out, interventionism and arbitrary government is in.

So, for the first time in a generation, Kiwis will have a choice between largely market-based economics and an explicitly protectionist, xenophobic, 1970s Keynesian fortress.

For close watchers of New Zealand politics, this should come as no surprise.

Although the nation officially came out of recession in September 2009, the productive tradeables sector of the economy has been in recession since 2005. Public debt is relatively low; while private debt is very high (total debt is 90 per cent of GDP). Net debt is $NZ180 billion, up from $NZ100 billion in 2000.

Much of this debt has paid for overpriced housing and flat screen TVs. Over all, New Zealand has not earned what it has spent in a year since 1973.

New Zealanders also earn, on average, a third less than their Australian neighbours, where Kiwis can relocate to, unencumbered, at any time. This is a staggering $NZ64,000 gap for a family of four on the average income. The gap has stubbornly refused to close, and last quarter’s growth was a meek 0.2 per cent.

Put simply, New Zealanders expect first world living standards with an increasingly second rate economy.

The pressure to fix this second rate economy has now come to bear on the domestic political landscape. The global financial crisis seems to have convinced many policymakers and politicians that a new, interventionist path is needed. Unfortunately, the government, led by the National Party and Prime Minister John Key, seems unwilling or unable to put up a cogent argument against this new and wrongheaded populism.

An obvious example is foreign investment. Because of New Zealand’s low savings rates, most capital has to come from abroad, either through borrowing or investment.

To try to facilitate this investment, the government began a process of re-liberalising the Overseas Investment Act in 2009.

But amidst public concern about foreign ownership of dairy farms, and other supposedly ‘strategic assets,’ the relevant Minister has been given the discretion to veto politically unpalatable foreign purchases, clouding the integrity of the process.

There is also a Sino phobic dimension to the issue, with the public overwhelmingly opposed to Chinese dairy investors and the government happily pandering to this fear. It is instructive to note that a fortnight ago the Harvard University Endowment Fund purchased a large South Island farm without any major public or political outcry.

As a result of this pandering, the Labour opposition has felt emboldened enough to declare that if it is elected, foreign investment will likely be the exception rather than the rule. Aspects of free trade will be up for review, and a more interventionist approach will be introduced.

On top of this, Helen Kelly, President of the NZ Council of Trade Unions, says that under Labour, the unions would expect New Zealand to return to national industry award wages. This comes 20 years after productivity destroying awards were removed by the Employment Contracts Act 1991, a world leading labour market deregulation.

Continuing this mad dash to the left, Labour is also promising to raise taxes on ‘the rich’ and ‘broaden’ monetary policy – wrongly believing that targeting more than inflation and taking into account full employment, inequality and other political factors will magically create economic growth.

The popularity of these proposals in middle New Zealand should not be underestimated. Certain sectors of manufacturing and agriculture have long complained the NZ dollar is overvalued and that their real returns are not reflective of their productivity.

Even more disturbing is that a number of heretofore sensible local economists and commentators are now jumping on this bandwagon, advocating everything from tariff resurrection to exchange controls.

The real issue is that many New Zealanders have not seen the benefits – higher wages and more jobs – of 25 years of a relatively open economy. This is in part due to the previous Labour government (1999–2008) increasing spending by 50 per cent, raising taxes to fund it, and introducing a crushing burden of regulation.

It is also in part due to the unwillingness of governments to defend and continue pro-market reforms.

All this puts the Key government in a tight spot – it is scared to make a principled argument for a smaller government that performs a lot less functions. Indeed, this would be seen to be doctrinaire.

Key instead relies on ‘pragmatism’, which increasingly seems to mean slavishly following the polls. This means keeping middle class welfare schemes and ministries bequeathed by the last government, while confusing the electorate about the National Party’s policy principles.

Key’s personal popularity is still very high, as is his government’s (51 per cent). But this polling is deceiving. High polling always softens in the lead up to an election. With a multiparty electoral system and the free-market ACT Party looking unlikely to be returned to parliament, National will most likely have to face a grab bag of leftists on its own – Labour, Greens, and possibly NZ First and the indigenous Maori Party. Should National not get 50 per cent of the popular vote, and no party has since 1951, it will likely lose government.

New Zealand once led the Pacific on economic liberalisation. The question now is whether it will lead the region in the opposite direction.

Luke Malpass is policy analyst New Zealand Policy Unit of the Centre for Independent studies.