Second Thoughts

By Kanz, Martin | Harvard International Review, Fall 2001 | Go to article overview

Second Thoughts


Kanz, Martin, Harvard International Review


New Zealand's Economic Reforms

For over a decade, New Zealand followed a textbook approach to economic liberalization.

However, at the end of the experiment, the results are disappointing. As a result, Prime Minister Helen Clark, who was elected on November 27, 1999, has slowly modified the laissez-faire policies of her predecessors.

Clark's Labor Party was widely expected to return to the activist policies of the pre-reform era, but, contrary to initial worries, the Clark administration has been able to resist the temptation to abandon the road to economic liberalization. During its first two years in office, the government has demonstrated a great deal of pragmatism as it has strengthened the role of the state in a few key areas while upholding reform measures that have uplifted New Zealand's economy.

Sixteen years ago, New Zealand's government initiated an ambitious program of economic liberalization that subsequent administrations continued. At the outset of the reforms, it was obvious that the country could not achieve economic growth without a major overhaul of its fiscal and social policies. Until the mid-1980s, New Zealand's generous welfare state offered social services of Scandinavian proportions: the state sector provided a significant share of employment in the economy, and subsidies, mainly directed toward the agricultural sector, were sizeable. Unlike the socialist economies of Eastern Europe, however, New Zealanders enjoyed a high standard of living and a low degree of economic inequality.

New Zealand's deregulation was exceptionally fast, forceful, and broad. Within months, the government removed New Zealand's trade restrictions, eliminated subsidies to agriculture and manufacturing, and began to privatize public services. The National Party government that followed Labor in 1990 went further by weakening worker-protection laws and decentralizing wage bargaining.

But contrary to expectations, the extensive strengthening of market forces and the removal of price controls and trade barriers failed to spur stronger economic growth. Instead, growth slowed even further while unemployment and inequality rose to previously unseen levels. Over the same period, crime rates increased dramatically, a fact that many New Zealanders blamed on rising inequality.

The election of Helen Clark as New Zealand's prime minister in 1999 brought Labor back to power and marked a crucial turning point in the country's economic and social policy. Clark did not fail to emphasize the importance of trade and an open economy, but at the same time her campaign brought social-democratic values back to the Labor agenda.

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