The NZ Experiment. Paul Goulter to Danish Unions.

The New Zealand Experiment 1984-1999 Speech to SID by Paul Goulter, secretary, NZCTU 10 September 2001

Over the last few years we have met a number of visitors from Denmark. While we have been flattered by the interest shown in our small country at the bottom of the world, unfortunately we have to say we are not proud of the story that we have to tell about our recent past.

For the last 15 years or so, New Zealand has been regarded by neo-liberals is something of a cause cel?bre - a shining example of how bold free-market policies can create a high performing economy. But in recent years there has been more and more evidence accumulating that the experiment was a total failure, or at the very least was an extreme and misguided reaction to the so-called heavy-handed regulation existing prior to 1984.

The July 1984 election produced a new government committed to comprehensive economic and social reform. But it was not what the voters had supported at the election. Interest rate controls were removed, agricultural subsidies were phased out, New Zealand moved to a floating exchange rate regime, monetary policy was given a single statutory objective of maintaining price stability, detailed industrial and occupational regulations were replaced by a generic commitment to competitive markets, import quotas and tariffs were eliminated or reduced, public sector management was reformed, trading departments were converted into State-owned enterprises with a clear commercial focus, and a programme of selling State assets to the private sector was commenced.

In many ways the New Zealand experiment in this period was similar in its elements to the structural adjustment programmes imposed on some countries by the IMF. It involved fiscal discipline, reductions in public expenditure, tax reform, deregulation, foreign direct investment, financial liberalisation, a floating exchange rate, trade liberalisation, privatisation and assertion of property rights.

The corporatisation and privatisation programme was both massive and deceptive. Promises not to privatise were routinely broken. Since 1987, 40 state-owned commercial assets were sold for a total of $19.1 billion. The privatisation has been a huge windfall for overseas investors. Just over 79%, or $13.1 billion, of the increase in value has gone to offshore interests.

A change of government in October 1990 gave a further impetus for neo-liberal reform: from 1 April 1991, social welfare income entitlements were cut by $1.3 billion (1.7 per cent of gross domestic product); In fact, this scenario was made even worse by the National Government's programme of tax cuts which were not only damaging to state sector capacity, but also significantly weighted towards high incomes. One-third of the income gains from the tax cuts of 1996 and 1998 went to those in the highest income quintile.

New Zealand's system of industrial relations was transformed by the Employment Contracts Act 1991. The ECA removed the award system that provided minimum occupational or industry wages and conditions for many workers. The process for recognising and registering unions was abolished and unions were regarded as incorporated societies. The ECA introduced changes in the structure, process and content of employment contracts. The structure tended towards individual contracts. The process undermined the role of unions and indicated many of what we call "bad faith" elements of bargaining. The content changes were particularly evident in changes to hours of work, penal and overtime rates, service pay, and other allowances.
The effects of the Employment Contracts Act were extremely significant. There was increased wage dispersion. Many workers suffered major cuts in conditions of work. It exacerbated the growing gap between rich and poor in New Zealand. Coverage by collective bargaining was almost halved in the 1990s. Union density fell from 35.4% of the labour force in 1991 to 17% by 1999.

In many cases bargaining was on a "take it or leave it" basis. The Court of Appeal. said that this was what the ECA is intended to do:

"The policy and wording of the 1991 Act make it clear that either party to the negotiation may, in general, proceed on a 'take it or leave it' basis".

But there have been many other cases. The timber worker who in 1993 fell asleep while driving home after several consecutive 17 hour shifts. After his death, the Coroner criticised the employer for structuring shifts in such a way under the employment contract. The major retailer who had consistently refused to negotiate collective contracts, but in order to lock out commission workers initiated collective bargaining solely for that purpose. The employer who during a meeting between the union and senior management that while they were discussing union claims, staff in 82 branches were simultaneously being shown a video outlining their new contract written solely by the employer and being invited into the office one by one to sign it. The worker in an industrial cleaning company who had 23 years' service and lost all service-related entitlements, and had to sign an inferior contract, when the business was sold to a new employer. The Government department where managers called staff and offered them a one-off payment on the basis of leaving the union and signing an individual contract. The home care employer who insists that every new client a worker takes care of is a new contract. To get the client, workers need to sign the contract.

A letter from a supermarket checkout supervisor to the Department of Labour spoke for many workers when it said that:

"As soon as the Employment Contracts Act came in everything changed in this place we were told - now he'd do it his way. First he got rid of the union, and some were threatened that if they belonged to the union they would be down the road. The contracts were never negotiated. We were called in one by one and given this printed document with a place to put your signature. Some of the young ones were not allowed to take their contracts home for their parents to read. The first year all of us who already worked there got penal rates. As people left or were sacked, the new ones went on to a flat rate with no set amount - they were all getting different wages. Within a year there was a 90% rollover of staff."

Given that the ECA was intended to promote efficiency in the labour market, it must be disappointing to its supporters that aggregate productivity statistics are so woeful. NZ is now 23rd out of 26 developed countries in overall productivity. Labour productivity growth in successive years from 1993 to 1998 was -0.9, 1.7, -0.4, -0.7, 1.1 and 2.4. This is an average of 0.5%. Australia managed an average of 3.2% from 1993 to 1998.

An OECD study of manufacturing and service sector labour productivity in 1994 (GDP per hours worked) showed the following ratios (OECD average was set at 100).

Denmark - 95.7

Australia - 90.2

New Zealand - 71.9

After 10 years of the neo-liberal agenda, New Zealand labour productivity was at a very low level.

The NZCTU has attributed this decline to the ECA only to the extent that it delivered a collapse in social capital - trust, loyalty, and good faith in the workplace. That collapse resulted from employer attitude and an obsession with reducing unit labour costs at the expense of investing in good workplace relationships and skill development. Hazledine argues that "the ECA is above all an instrument for destroying social cohesiveness" and in essence argues that what has been lost is that concept of a "fair day's work for a fair day's pay" which was part of the "social contract" between employers and labour. He also observed that, at the very least, the level of union density does not damage productivity. In fact one economist calculated that labour productivity was a third higher in the most unionised sectors of the economy.

The post-1984 policy prescription has been misrepresented as a highly successful programme. In fact, it has been a failure. New Zealand at then end of this process was weaker economically, had high levels of debt, large income disparities, and massive infrastructural deficiencies.

There is no doubt that, although some elements of the post-1984 reforms have been popular (it would be difficult to reintroduce a ban on shop trading after 9 p.m. or on Sundays) many of the problems in our country evident by 1999 - poverty, disparity, low economic growth, low labour productivity - had strong origins in the neo-liberal reform programme.

It is not plausible to suggest that New Zealand would have engaged in no reforms had it not embraced the comprehensive programme adopted after 1984. Many other governments were following some sort of market-oriented policies. The decision to initiate reforms is not what marked New Zealand's reform programme as unique, but rather its extent.

In no other OECD country has there been such a systematic attempt at the same time (1) to redefine and limit the role of government, and (2) to make public agencies and their operations more effective, more transparent, and more accountable. It is this important extra dimension, as well as the range and scope of reforms that have more obvious counterparts elsewhere that gives the New Zealand programme its special character.

There was zero growth for about 6 years from 1986 to 1992. In terms of real gross domestic product per capita, New Zealand fell from being ranked 4th in the OECD in 1960 to 15th in 1993 and we have kept sliding.

A New Zealand economist, Paul Dalziel has looked at the reforms in New Zealand using Australia as a counterfactual. He compared the growth rates of New Zealand and Australia between 1978 and 1998. These data reveal a striking similarity between the two countries' GDP paths (adjusted to a common scale) for the years before 1984, and an equally striking divergence after 1984 that shows no signs of closing fourteen years later. The cumulative gap after 1984 is enormous: if New Zealand had continued to grow at approximately the same rate as Australia (as it did between 1978 and 1984), it would have produced extra output between 1985 and 1998 amounting to more than NZ$210 billion in 1995/96 prices, or well over twice New Zealand's total GDP in 1998.

If the New Zealand economy had grown at its previous trend rate, or matched Australia over the same period, output would be a third higher than it is now. The previous CTU Economist Peter Harris noted that:

"the amounts of personal and public income associated with this are staggering. At current tax rates the extra income would have generated an extra $11 billion of tax revenue per annum - enough to halve net government debt, or double spending on health and education".

Expanding beyond the OECD, GDP per capita rankings this year show Denmark at 8th, Australia at 22nd and New Zealand at 39th.

The reliance on private consumption fuelled by high levels of private debt persists. Household savings were positive (e.g. 12% ratio in 1980) until 1998. The decline is largely attributed to post 1992 fluctuations in social assistance and investment income. Household debt as a proportion of household annual income has risen dramatically from 48% in 1990 to 92% by 1999.

By 2000, the debt was at $109.1 billion which is 106% of GDP. The investment income deficit is now over $7 billion as the most significant factor in our current account deficit.

Another key problem that has emerged is the relatively low level of R&D expenditure. Although such figures are notoriously difficult to assess because of the different way firms treat such expenditure for tax and other reasons, total R&D was 1.1% of GDP in 1997/98 compared with the OECD average of 2.1%.

There have been some significant infrastructural and network issues that have emerged as a damaging legacy of the privatisation and reform programme. Tranzrail are now breaking up their company into various subsidiaries for sale. They have failed to invest in the rail network, have extracted millions of dollars in profits, and are now negotiating with Government over the rights to use the tracks. The electricity reforms are a shambles. Even Business New Zealand has said that the reforms need to be revisited with the full force of hindsight.

New Zealanders like to think of their country as one that has avoided the excesses of poverty and inequality that characterise some comparable countries elsewhere in the world. Up until the early 1970s, that belief might have had some validity. But over the last three decades - in particular, over the period since the reforms began in the mid 1980s, inequality in New Zealand has grown steadily and at a rapid rate. Several studies confirm this trend, and investigate the reasons behind the increase. A study by Stephens, Waldegrave and Frater shows that from 1984 to 1998 the top 10% of households increased income by 43% and the bottom 50% of households decreased income by 14%.
A cross-country comparison of gini coefficients for 1993/94 (the higher the figure, the greater the level of inequality between rich and poor) shows the following:

Denmark - 0.209

Australia - 0.302

New Zealand - 0.382

But the tragedy for New Zealand is that the gini coefficient has grown significantly since 1984.

1984 - 0.353

1992 - 0.382

1996 - 0.404

There was also evidence that in the post-1984 period a significant gap opened up between work-rich and work-poor families. The participation rate for men aged 25 to 59 fell from 91.9% in 1986 to 81.5% in 1991.In addition, in some households, the complex interactions between different policies resulted in exacerbation of hardship. For instance, the policy of state housing rentals being set at market levels forced many families to move from one house to another as they could not afford to stay in the house once the rent level was reassessed. This meant that young children could end up shifting from one school to another constantly. It has been clearly observed that the levels of literacy and numeracy of these children suffered appallingly under these circumstances. In this same period we witnessed the re-emergence of infectious diseases as a result of overcrowding and poor housing.

There was no doubt that by 1999, the country was ready for a change.

A new Labour/Alliance Government was elected in November 1999. This led to a new policy framework. Underpinning the change in policy is recognition that the neo-liberal reforms of the last 15 years have not produced a stronger economy nor improved labour productivity, but have instead created serious levels of disparity and dysfunction in New Zealand society. The experiment failed. The new set of policies are not, however, a return to the past. But there is a greater degree of government involvement in economic development, a renewed commitment to state sector capacity, and a clear social programme.

In the area of the labour market, the most significant change has been the introduction of the Employment Relations Act. The purpose of the new employment law is to build productive employment relationships through mutual trust and confidence in all aspects of employment. The Act recognises the need for good faith behaviour, acknowledges that there is unequal bargaining power between employer and employees, encourages collective bargaining, provides for voluntary union membership, and promotes mediation as the best way to resolve problems.

The government has also re-nationalised workers compensation, which was privatised in 1999. Further reforms of laws relating to the workplace are planned. Health and safety legislation is one of the major initiatives in 2001, along with reform of accident compensation entitlements, including the reintroduction of limited lump-sum compensation. There are several reviews underway, including a review of the Holidays Act; a review of the law as it relates to protection of workers' contractual rights in the sale, transfer, or contracting out of business; and equal employment opportunities.

Of particular significance is the renewed emphasis on apprenticeships and workplace training.

In 2000, the government increased minimum wages (and again in March 2001, along with a reduction of the age of application of the adult rate and an increase in the youth rate); increased pensions; reduced rents for state housing; increased funding for elective surgery; and reduced interest payments on tertiary student loans.

There is no doubt that the current Government is enjoying the benefit of particular economic factors that are partly cyclical and partly coincident with their policy implementation. Many would say that the economy is positively booming. Wages are slowly rising, unemployment is at a 13-year low, export returns are generally good, commodity prices are generally favourable, the exchange rate is helping (although it is not so great for those importing from US and exporting to Australia), the current account deficit is falling, the Government is running a fiscal surplus, retail sales are relatively strong, inflation is predicted to fall over the next six months, and there is a sense in which the economy is exhibiting the sort of balanced growth that has been elusive for many years. However the global outlook is not positive and this is likely to have a dampening effect next year.

Economic growth while not at a significant level, is reasonably broad-based. It is in the regions and starting to appear in Auckland also. It is in tourism, domestic sales, and exports. This is a change from the consumption-led growth we have seen in the past.

It is also significant that although the Government can only take some of the credit for the economic situation, the circumstances we have now are a far cry from the predicted by the doom merchants who were so harshly critical of the changes to ACC, the repeal of the Employment Contracts Act, and increases in the minimum wage. The Government programme in relation to economic development, modern apprenticeships, and a more generally hands-on approach, has certainly been of assistance.

There has been a major change in the last 18 months in respect of economic development policy. The Government has established a number of programmes for regional, industry and enterprise assistance. There is no doubt that not only the resources of Industry New Zealand, but the emerging focus on key sectors and the multiplicity of agencies and activities centred on economic development concepts is developing a momentum. Although the economic development budget is not huge, it represents a significant shift in policy direction.

However there are still some major issues to address. This includes addressing the problem of poverty that has emerged. There are also significant challenges in relation to physical infrastructure. In addition there are growing fiscal pressures on the government in relation to health and education expenditure in particular. There are problems in relation to literacy and numeracy. We still have relatively low economic growth, low real wages, a significant investment income deficit, and high levels of emigration to Australia. There are major pressures emerging in health and education, but there are broader issues of state sector capacity, recruitment and retention of staff, quality public services, and infrastructural issues (e.g. Rail).

There is increasing recognition that labour, education and employment issues are crucial to the development of a value-added economy. Knowledge is an infinitely renewable resource provided we invest in it. The importance of human capital to some extent has the potential to act as a counterweight to the pressures of finance capital. For unions there are opportunities to promote best practice workplaces, quality of working life solutions, remuneration systems, and other proposals which mean that workers are able to use the knowledge they have in the workplace. Once again, this is not an easy issue as there are concerns about the knowledge divide, digital divide etc to add to already prevalent income disparities. But the terrain of life-long learning and best-practice workplaces is a crucial area for policy development and implementation.

The political economy of the post-neo-liberal period is reasonably fluid. Certainly there is a social democratic base. There are references to the "third way". Terms such as economic transformation, inclusive economy, innovation economy, knowledge economy, knowledge society, social development, sustainable economic development, triple-bottom-line - represent a critique of the view that least-cost competitive conditions would create private profits and investment which would trickle down to and through society as a whole. There is a new and positive mood emerging creating a new form of social democracy but rooted in long-standing values.

Formal tripartite structures, centralised bargaining and industry structures/associations have been largely swept aside since the 1980s. But there is renewed interest in a National economic and Social Council, new forms of tripartism, and other forms of broader engagement. It is fair to say that there is some caution on all sides, but the fact that such ideas are being discussed indicates a shift to a much more co-operative atmosphere.

So in conclusion I can say that in the post-1984 period, New Zealand experimented with a radical neo-liberal policy programme. These policies failed to achieve economic and social progress. They left New Zealand weaker economically, and with large gaps between rich and poor. There was almost no economic growth for 6 years. If New Zealand had matched Australia in that period our economy would be one-third as large as it is today.

This experiment has left a costly legacy. It will take many years to recover. However the new Government elected in 1999 has made an impressive start with a solid social democratic programme in relation to state housing, superannuation, labour market reform, investment in skills and education and economic development.

But there remains much to be done to build a strong socially inclusive economy.