In Australia, the United Kingdom and the United States, 'third way politics' is generally associated with the right wing of the Labor, New Labour and Democratic political parties respectively, as proponents argue that market-oriented policies and partnerships are essential for gaining and retaining electoral support (see the essays collected in Giddens, 2001, and in Arestis and Sawyer, 2001, for example). This is not the case in New Zealand. Following the defeat of Sir Robert Muldoon in the general election of July 1984, the Labour government of David Lange and Roger Douglas initiated a programme of wide-ranging reforms based on neo-liberal economic policies (Holland and Boston, 1990). A second wave of reforms implemented by the National government of James Bolger and Ruth Richardson, elected in November 1990, extended the market-based programme into labour relations, social security and the welfare state (Boston et al, 2000). Against the background of this history, it is the left wing of the Labour Party that has argued for 'a third way' as part of a wider centre-left movement intent on restoring a positive role for the state in the country's economic development (see especially Eichbaum and Harris, 1999).
Figure 1 provides a key illustration of the impact of the economic reforms on the role of government in the New Zealand economy. For at least two decades prior to 1984, between 30 and 40 per cent of all capital formation in New Zealand took place in the public sector, accounting for up to 10 per cent of gross domestic product (GDP). During the first wave of reforms, the public sector share of investment was reduced to 25 per cent, and during the second wave it was further reduced to less than 15 per cent. Public investment expenditure now operates at about 3 per cent of GDP.
There are many reasons for welcoming this trend. There is widespread agreement that in most industries capital formation is more efficiently undertaken by the private sector, because shareholders have stronger incentives to monitor the business performance of private sector managers than do politicians monitoring civil servants. Empirical studies typically find that former government trading departments such as Air New Zealand and Telecom became considerably more productive once they were privatised (Duncan and Bollard 1992; Evans 1998), while the large financial costs associated with the Think Big energy projects can be cited as an example where commercial considerations were overridden for political purposes (Massey 1995, pp. 48-50).
Nevertheless, the large scale public sector investment programme did have associated with it one positive feature that was well recognised at the time: it meant the government was involved in regional and national strategic planning with the aim of identifying New Zealand resources suitable for development. This strategic economic management role of central government, which is separate from the question of whether the public or private sector should normally manage investment projects, also atrophied during the economic reforms. In the political slogans of the times, it was argued that the government should restrict itself to providing a level playing field, rather than attempt to pick potential winners (as had been the approach adopted by the previous Minister of Finance; see, for example, Muldoon 1985, p. 8).
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The purpose of this article is to explain why there has been a reaction in New Zealand against both the 'level playing field' and 'picking potential winners' approaches in favour of a 'third way'. This third way invites the government to recover strategic economic management as part of its core functions, without returning to the discredited interventionist policies of large scale public sector investment.
The article is presented in four parts. The first two parts draw on a larger study (see Dalziel, 2001, for example) showing that New Zealand experienced a sharp fall in per capita economic activity compared to Australia after 1984, due initially to changes in the respective countries' employment ratios followed by a slow-down in New Zealand's labour productivity growth after 1991. …