Academic journal article Independent Review

Why Have Kiwis Not Become Tigers? Reforms, Entrepreneurship, and Economic Performance in New Zealand

Academic journal article Independent Review

Why Have Kiwis Not Become Tigers? Reforms, Entrepreneurship, and Economic Performance in New Zealand

Article excerpt

The New Zealand economy is now famous in policy circles for its turnaround during the 1980s and 1990s. Starting from a state of semiautarky in the early 1980s, New Zealand now has one of the most vibrant economies in the world. In fifteen years, successive governments reformed the country's institutional environment by injecting high doses of deregulation and opening the economy.

Following these changes, the New Zealand economy climbed the ladder of the Index of Economic Freedom: New Zealand's score increased from 5.9 in 1985 to 8.2 in 2002 (Gwartney and Lawson 2004). Yet its average growth rate in the past decade does not compare to that of the Asian tigers, Singapore and Hong Kong, or that of Ireland, Estonia, and Luxembourg, countries that share some of the best ranks in the index.

In addition to the modest growth in the past decade, the relatively poor growth prospects for the years ahead have fueled the debate about the success of the New Zealand reforms. Some economists think that New Zealand's less than stellar economic performance results from the failure to complete the reform process. Others believe that New Zealand's current situation is the result of too much reform: New Zealand has been a "laboratory" for free-market policies, and it went too far. Some maintain that it is now time to go back to more middle-of-the-road policies, taking into account not only economic efficiency, but also income distribution, the environment, and many other issues left out by the reform process. In this view, better "management" of the economy should help to improve growth prospects. The Labour government espoused this opinion when it was elected in 1999 (Kay 2000). Still others think that owing to New Zealand's cultural heritage, its inhabitants are relatively uninterested in high levels of economic growth.1 New Zealanders, it is said, do not need much money to be happy because they hold dear some egalitarian ideas that go back to the nineteenth century, reflected today in the romantic search for a peaceful and green New Zealand and perhaps also in the revival of Maori tikanga.2

It is now becoming clearer that in spite of the modest achievements and low productivity growth, the reforms have been hugely beneficial to the economy.3 In opposition to its earlier views, the Labour government now recognizes the importance of the reforms, as a 2005 Budget Policy Statement shows: "NZ's recent growth performance can be attributed to past structural reforms that began in the mid-1980s, which have resulted in a trend increase in NZ's growth rate since the early 1990s... a more flexible economy better able to absorb adverse shocks and take advantage of favourable shocks, and sound macroeconomic policy settings" (qtd. in Kerr 2005c, 1). This support is not wholehearted; the phrase "failed policies of the past" has been used at times to characterize what was done during the reforms of the 1980s and 1990s. However, a consensus is now emerging in regard to what has made the economy more vibrant and prosperous. The reforms have had a very positive impact on the entrepreneurial environment; unemployment is low, and growth is reasonably rapid. Most commentators today recognize this situation.

In the long run, what matters is the quality of the entrepreneurial environment. When the institutional and cultural environment enables individuals to discover and seize profit opportunities, growth occurs (Boettke and Coyne 2003; Sautet 2005). Taking this factor into account, I argue here that

* The reforms have vastly improved the entrepreneurial environment, and, as a result, given the starting point, they have greatly enhanced New Zealand's economic performance.

* To go beyond current levels of economic performance, New Zealanders need to improve the entrepreneurial environment further. New Zealand failed to become a growth miracle because the reforms that were implemented, though good, were not exceptional.

I first describe briefly the context in which New Zealand's reforms took place and then, second, consider the five main reforms that changed the New Zealand economy positively. …

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