Tuesday, 5 February 2008

Frederic Sautet on New Zealand (updated x2)

Frederic Sautet has an interesting and insightful post on the economic and political situation in New Zealand on the Austrian Economists blog.

He is right when he says
[...] that NZ didn’t become a Pacific tiger because the reforms, while extensive, zigzagged for too long and stopped short of the radical turn necessary to transform a heavy social democracy into a speed boat.
The famous Lange "breather and a cup of tea" of 1987 is still going on. Lange's cancelling of the reform package: flat tax, targeting of welfare benefits, the introduction of an element of user-pays into health, asset sales and so on, was the beginning of the end. If this package has gone through New Zealand's situation today would have very different. That speed boat could have been cruising the world's economic fast lanes.

Sautet goes on the say
The good news is that the political center, as the result of the reforms, has moved tremendously in the last 20 years, and in the right direction.
On this I'm not so sure. The recent student loan policy from National shows just how unstable the political center can be. Clearly it is just a vote buying exercise of the type we don't need.

But Sautet is right when he states
NZ never seriously reduced the size of its government expenditures.
As I have noted before the ratio of tax to GDP have been increasing over the last 30 years. In 1975 New Zealand's ratio was 28.5%, in 2005 it was 37.8%. The reforms haven't stopped this and this is one of the biggest failures of the reformers. And what is more worrying is that the gap between New Zealand and Australia in terms of this ratio is increasing. In 1975 New Zealanders paid a bit less than 3% more of GDP in tax than Australians, while by 2005 the gap had risen to about 7%. Not a good look.

The most important point Sautet makes, however, may be
The battle of ideas was won in the 1980s and 1990s. However, the battle of implementation was never fully won (see Peter Boettke’s interesting speech on this subject in NZ two years ago). This is now coming back to haunt us and, as a result, the battle of ideas is on the verge of being lost again.
If the battle of implementation has been lost then this raises the question, Under what conditions could it be won? Must there be an even bigger economic crisis than we had in 1984? Must we move even faster in the implementation of policy than we did post-84? Is gradual reform an oxymoron? Is politics the enemy of reform? The reality seems to be that it is a lack of political will that results in the losing of the battle of implementation. And in New Zealand right now there is little evidence that there is any political will to rejuvenate the reform process.

Update: For comments by Frederic Sautet see here.

Update 2: At Marginal Revolution, Tyler Cowen has this to say about the Sautet posting:
Speaking of small countries, Fred Sautet has an interesting blog post on what happened to the New Zealand reforms. Since the reforms starting in the 1980s, New Zealand has had excellent economic policies, probably better than Mauritius can expect to implement. But New Zealand has not had stunning rates of economic growth. A big part of the answer is simply that New Zealand still depends on the demands for dairy and agriculture. Yes, many parts of the country are booming but the worldwide demand for commodities is a big part of the reason why. The deregulation of agriculture helped but without rising food prices growth would be lower yet. Earlier, it was Britain's removal of imperial preference in 1972 that sent the country tumbling over the edge in the first place. Yes freedom is still better but in general small countries are less of an "economic laboratory" than we might think. Conversely, while there are some good explanations for "the Irish miracle," a small country with a few million people can with good luck grow quite rapidly.

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