The Pause That Refreshes:

A Coca-Cola Year

ARTICLE BY ROGER KERR FOR

THE INDEPENDENT

5 DECEMBER 1995

THE PAUSE THAT REFRESHES: A COCA-COLA YEAR

The economic recovery that began in 1991 has rolled on through 1995. The rate of growth fell back somewhat as the effects of monetary tightening in 1994 and slower global economic growth were felt. All the indications suggest, however, that 1995 was a pause that refreshes, and that the momentum of economic activity will pick up again through 1996.

The more consistent economic framework which has been in place since 1991 has proved to be robust through a full economic cycle. New Zealand appears to have broken out of the chronic boom/bust pattern of activity that plagued it for so long. Although underlying inflation briefly exceeded the 2 percent ceiling, the Reserve Bank of New Zealand Act 1989 has demonstrated its worth in a testing period. It has been supported by the discipline of the Fiscal Responsibility Act 1994 which has yielded a substantial operating surplus, falling debt levels and the prospect of Crown assets exceeding liabilities by the end of this financial year.

The Economist recently described New Zealand as having "probably the best fiscal and monetary framework anywhere in the world." There is the likelihood of a further credit upgrade in 1996.

Among the best news in 1995 was the continuing growth in employment and the related fall in unemployment. The failure of many analysts to appreciate the extent to which the behaviour of the New Zealand labour market has been transformed by the Employment Contracts Act 1991 was again evident in 1995. Consensus forecasts collated by the New Zealand Institute for Economic Research in October 1995 pointed to a fall in the unemployment rate to 6.1 percent by March 1997. In fact unemployment fell to that figure in the September quarter of 1995. Youth, long-term and Maori and Polynesian unemployment rates have all declined rapidly. New Zealand's unemployment rate is now around two thirds of Australia's, and the gap seems set to widen.

While it is true that the momentum of economic reform has slackened, the government has notched up some creditable achievements in the past year. They include tariff decisions which point the way to full free trade, electricity sector reforms, the rejection of heavy-handed takeover regulation, legislation establishing a fiscal responsibility framework for local government, some progress on international tax, education vouchers and producer board reform, and the planned forestry privatisation. A well-designed programme of tax reductions will rank among any of the major reforms of the past ten years in its capacity to boost growth.

The gains from the reform programme are being manifested in better and cheaper goods and services (flowing from things like lower import protection and state-owned enterprise reform), a stronger exchange rate which is increasing New Zealanders' purchasing power, and improved job security for many workers. Since 1991, 187,000 more people have become employed, some $2 billion of extra government spending is going into health, education and social welfare, and the forthcoming tax cuts will benefit low and middle income earners. It is no longer credible to argue that these are not widely shared gains.

Nor is it credible to maintain that New Zealand has been embarked on some kind of economic experiment. David Henderson, former Head of the Economics and Statistics Department of the OECD, made the point recently that:

New Zealand governments have been neither alone nor exceptional in taking the path of economic reform. In all 24 countries that were OECD members during these past 15 years or so, governments ... have taken measures to make economic systems less regulated and more subject to the influence of markets. There are no exceptions.

The pay-off from such efforts takes time to materialise. As the editor of the Swedish Social Democratic paper Arbetet, speaking of the reform task that lies ahead in that country, recently put it:

The next 10 years will have to be spent restoring the economy and there won't be a new harvest until the next century.

Yet despite the enormous progress made in rescuing the economy from its near-terminal condition of a decade ago, New Zealand is far from regaining its former position as a leading country in world income rankings. 1995 has shown that the economy is not yet capable of maintaining Asian-style growth rates at the bottom of an economic cycle. The productivity gap with top-performing countries is still wide, and it will take a great deal of investment in physical and human capital to bridge it.

Some parts of the economy remain relatively stagnant. In the two years to September 1995, the agricultural sector actually lost nearly 2,000 jobs while manufacturing employment rose by 34,000, construction by 20,000 and wholesale and retail trade by 38,000. Agriculture is not matching the rates of innovation and productivity growth of other sectors, and is being squeezed for resources. At a recent address to the Wellington Chamber of Commerce, David Henderson put reform of producer board structures at the top of a list of important outstanding reforms.

Going forward, the task of creating a freer and more dynamic, secure and cohesive economy and society extends beyond the government's sphere of responsibility. The eminent writer on economic development Lord Bauer has said that:

Government policies do indeed obstruct economic progress in most ... countries. But it is naive to believe that more favourable policies would bring an early, worldwide industrial revolution. Such a belief overlooks the limits to rapid modernisation set by parameters usually regarded as non-economic.

These include attributes such as hard work, a habit of savings to provide for contingencies and old age, and personal responsibility for individual and family welfare. These moral and cultural attributes were formerly evident in New Zealand and characterise many Asian countries today. To some extent they have become weaker in our society and replaced by habits of state dependence, victimhood and a no-fault mentality. The consequences can be seen in such things as an out-of-control accident compensation scheme and flabby and unaccountable state sector management. It should be regarded as intolerable, for example, if accountability for the Cave Creek tragedy is not sheeted home to those responsible for unsafe workmanship and those at the top of the Department of Conservation and the State Services Commission who failed to put in place proper controls and monitor departmental performance. As well as further reforms of policy, reforms of habits and attitudes will be necessary if New Zealand is to really move into the fast lane in 1996 and beyond.