Political Leadership Was Essential in Transforming New Zealand

Transformation of the economy and the State sector did not just happen; it was masterminded by political leaders who staked their careers on dismantling the cocoon economy. At first glance, the newly empowered Labour party appeared unlikely to curtail the government's role in economic management. As a centre-left party, Labour was identified with the welfare state; in the past, it had endorsed an enlarged role for government in providing health care and other social programmes. Nevertheless, the postwar generation of Labour leaders that came to power in 1984 were determined to make radical changes in economic management and in government policy. During nine years in opposition, they became convinced that government intervention was the root cause of the economy's poor performance and that across-the-board deregulation was essential for New Zealand to compete in world markets. These views were most insistently argued by Roger Douglas, the Minister of Finance in the new government. Douglas pushed ahead with the reform agenda even when the economy faltered, and even when polls showed voters anxious over the pace of change. "Rogernomics" - the label pinned by the media and others on the new economic order - was used by some to criticise the new economic order and by others to urge still more reform. Douglas's views were shared by senior officials in the Reserve Bank and the Treasury. The Treasury brief Economic Management, prepared for the incoming government in 1984, served as a back drop for the changes that were to unfold in the next several years. This document did not break new ground in economic theory or practice - it extolled the benefits of competitive markets and advocated thorough liberalisation of the economy. The views held by the economic mandarins serving government were also held by incoming senior Ministers. The easy flow of ideas between senior officials and political leaders had a lot to do with the design and speedy implementation of the reforms.

The new Labour leaders were avid reformers. They did not want to settle for as little as they could get away with. Rather, they wanted as much change as the political system could generate, for they were certain that anything less than the full transformation of the government's role in the economy would spell continuing decline for New Zealand. They were guided by faith in the market and the conviction that over time the economy will do well if the government does not interfere, but that it will stultify if the government seeks to restrain or protect it.

Once in power, the Labour government encountered few obstacles on the path to reform. Indeed, it would be hard to devise a more accommodating political system than the one controlled by Labour in the 1980s. New Zealand is a unitary government, and it has a one-house Parliament. With the first past the post-electoral arrangements then in effect, one party typically had a majority in Parliament and did not have to dilute its programme to gain coalition support. Parliamentary committees have some power and independence - at the time of the reforms, most were chaired by backbenchers from the majority party - but their principal role is to fine-tune legislation, not to block passage. On important matters, Parliament typically goes along with the government, though sometimes only after making some adjustments.

These institutional arrangements may have encouraged Labour to proceed via legislation rather than (as has been more common elsewhere) through administrative adjustment in the machinery of government. Legislation had the obvious advantage, in that implementation would be backed by statutory prescription rather than only by political exhortation and administrative regulation. Moreover, it would likely proceed more uniformly if mandated by law than if it were merely urged or ordered by government leaders.

The progress of reform also was facilitated by New Zealand's small size and geographical isolation. (Despite this isolation, New Zealand's economic elites were well acquainted with avant garde concepts, as will be noted in the next section of this chapter.) Most Ministers and the Department of the Prime Minister and Cabinet have offices in the "Beehive," the centre of government, and the other two central agencies - Treasury and the State Services Commission - are a short distance away. There is frequent interaction among central agency officials, as well as between them and Ministers. Through its control of the purse and its intellectual leadership, Treasury had a dominant voice in the reform process. In the decade preceding the reforms, Treasury invested heavily in staff training and in the advanced education of some of its future leaders. These officials acquired new ideas about how the economy and public institutions should be managed. When the opportunity came following the 1984 election, they were eager to put their ideas into practice.

The first tasks of the Labour government were to stabilise the economy and to remove impediments to market efficiency; improvements in the machinery of government had to wait. Shortly after they formed the government, Labour Ministers began the process of liberating the economy by dismantling the wage and price controls, deregulating major sectors of the economy, and ending most subsidies. Within a few years, the liberalisation programme had transformed one of the most regulated economies in the OECD community into one of the most open.

The initial reforms affected the operation of government only to the extent that they terminated various regulatory and protectionist activities. The second stage, launched in 1986, targeted trading activities of government entities. The State Owned Enterprises (SOE) Act (1986) altered the structure and operation of government enterprises. This Act removed direct governmental control of the operations of these enterprises and reorganised them as companies along business lines. It empowered boards to run the enterprises on a commercial basis; henceforth, they - rather than government controllers - would be responsible for overseeing production and pricing decisions. Managers also were empowered to establish their own industrial relations policies, including pay and working conditions, without regard to Public Service rules.

Many of the corporatised SOEs achieved dramatic gains in productivity as they revamped product lines, changed pricing policies, shed redundant workers, and adapted to the commercial (and, in some cases, competitive) environment in which they now operated. In due course, some SOEs were privatised, though others are still owned by the government. The government has a shareholder's financial interest in these SOEs, but does not meddle in their operations.

The SOE successes spurred reformers to extend the logic of managerial accountability to the core State sector. This final stage of reform is the subject of this report. It was given statutory impetus by the State Sector Act 1988 and the Public Finance Act 1989. (These and other major actions taken during the 1984-89 period are listed in table 2).

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