Opinion & Commentary
Growth needs basic rules
The New Zealand economy is one of the freest in the world. This still holds true despite its freedom rating having slipped somewhat since the bold economic reforms that ended a decade ago.
The latest—and I believe most representative—estimates of economic freedom worldwide, which the Canadian Fraser Institute published this week at the G8 summit in Calgary, ranked New Zealand fifth among 123 countries, after Singapore, Hong Kong, the US and the UK.
Economic freedom and rapid economic growth normally go together and this inspires great confidence. Yet the real per-capita incomes of New Zealanders grew only a rather miserly 1.3 per cent per annum during the 1990s.
The freedom to compete and innovate normally translates into growth, thanks to stable, trust-inspiring rules and the need to be self-reliant. In New Zealand, not all the rules and institutions which normally encourage competitive behaviour were reformed by the time National decided to rest on its oars in the mid-1990s. And more recently the Labour-led Government has backtracked on several fronts.
Inconsistency between the economic and social institutions and back-flips to more regulation are bound to disorient New Zealand and foreign entrepreneurs alike.
Old-fashioned social welfare was, by and large, retained and as a consequence New Zealanders have to bear a burden of government that is unusually heavy for the Asia-Pacific region.
The re-regulation of labour markets and other prescriptive legislation so soon after liberalisation have ensured that deep-seated popular attitudes to competing and exploring new ideas did not change all that much. New social and environmental regulations (high- or narrow-minded, depending where you stand), as well as the ready endorsement of European-style internationalist-collectivist causes, have created the impression that New Zealand wants to be somewhere between Sweden and Holland, rather than in the more individualistic, competitive Pacific—somewhere near Australia, East Asia and America. Such perceptions influence international investors.
It was relatively easy to implement economic reforms, because New Zealand's political system has few of the constitutional stabilisers which oblige leaders in other democracies to avoid haste and inconsistency and to defend their plans in public discourse.
Here, there is no multi-cameral parliament, no real division of powers of the sort common outside the Westminster system, no written constitution, no assertive high court, and no federalism. The introduction of a less predictable political regime (MMP) has made further instability in the rules of the economic game even more likely.
Such constitutional stabilisers were probably not needed in the densely regulated economy of old. But in today's dynamic global economy and after pervasive reforms, this deficiency has become a handicap, as it can lead to inconstancy of the basic rules. That always goes along with a loss of confidence. It costs much growth. Just think of Britain's post-war nationalisation, privatisation and re-nationalisation of many industries, or the recent flip-flops in fixing the fundamental institutions in eastern Europe.
If faster growth is wanted, then New Zealanders will have to draw lessons from the discipline of constitutional economics and ensure stable, politically anchored ground rules that underpin a consistent competitive order.
Consistency demands that free and open product markets are supported by free capital and labour markets, small government, and a regime where responsibility for personal welfare is reprivatised. And consistency over time demands that convincing constitutional rules protect the people from hasty and confusing rule changes.
Without such an understanding, there is a real possibility that the 1984 to 1994 episode of bold reform, followed by a short, exhilarating growth spurt, will end up as so many similar reforms have, for example in Latin America: hard-bought growth is not sustained, because popular attitudes and standards of behaviour fail to follow the lead of the political reformers of the day.
All this is, of course, a matter of political choice. The objective outside observer can only state that sustained world-class growth is incompatible with inconstancy in the institutions, copious social welfare and addiction to collectivist causes.
The outside observer, must of course, respect the nation's public choices, and Australians can most decidedly not tell this sovereign nation what you should want! Continuing slow growth is not a drama, in particular as the young, the enterprising and the ambitious can so readily migrate to prosper elsewhere. After all, economic growth ain't everything!
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About the Author:
Professor Wolfgang Kasper, a senior fellow at the Centre for Independent Studies in Sydney, delivered a keynote address about New Zealand's economic growth at the Annual Conference of the New Zealand Association of Economists in Wellington on 27 June 2002 . His address can be found read HERE
