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PM: Address to APEC CEO Summit

Friday 17 November 2006

Rt Hon Helen Clark
Prime Minister

Sustaining Economic Reforms – The Challenges for Governments and Business

Address to
APEC CEO Summit

Hanoi
Vietnam

3.30pm (Hanoi time)

Friday 17 November 2006

Economic reform is a subject New Zealanders can speak on with some passion because our country has experienced a great deal of it from 1984 0n. The consequences were far reaching, not only for the economy, but also for the New Zealand political system. In my address today I will deal first with the impact on the political system of major and rapid economic reform, before looking at the circumstances in which it occurred and the way in which economic strategy and change is handled today.

Let me begin with a truism : if economies stay frozen in time, as ours did, and don’t face up to the challenges of changing global markets, then the adjustments they eventually make are likely to be made under pressure, without sufficient attention being paid to how to adjust to the new era.

That results in, a harsh transition from the old set of rules to the new, with more severe impacts on the economy, the labour market, and society than if the adjustment had been more gradual.

That in turn leads to a distrust in and cynicism about the decision making and political processes which produced the harsh transition, particularly when gains from far reaching change are slow to materialise.

In New Zealand’s case, the impact on the political system of economic change being implemented, without many in the public believing there was a mandate for it, was itself profound.

New Zealand governments from 1984 – 1996 drove through their economic change agendas under a first past the post electoral system. That system routinely delivered single party majority governments in a one chamber parliamentary system.

Our system lacked the checks and balances seen in most other western democracies. For example, the United States system sees power spread across the presidency, the two houses of Congress, and the Supreme Court. Australia has a two chamber parliament, each elected under a different electoral system, with the Senate often a check on the House of Representatives. Sweden, while not having an upper house in its parliament, has long elected its single chamber through proportional representation, which denies the largest party an outright majority and requires negotiation with others to govern.

New Zealand had none of these features – no upper house; no proportional representation; no executive arm of government independent of the majority in the legislature; and no court with the power to overrule the parliament.

Thus New Zealand’s political system was often described as an elective dictatorship, and this was indeed the case during the period of the major economic reforms. A majority gained in Parliament from a minority of the votes cast at a general election was able to drive through far reaching change in a way the public increasingly found unaccountable and unacceptable.

The result was a groundswell for change to the electoral system, to make the parliament more representative through proportional representation, and to force more dialogue and negotiation on policy by the government, which under proportional representation is most unlikely to be a single party majority one.

The changes to the electoral system took effect in 1996. They have had a profound effect on the system of government, by broadening the range of parties in the decision-making process and requiring governments to consult much more thoroughly on their programmes.

Thus the manner in which economic change occurred in the past could not happen in New Zealand today. But measured programmes for change and adaptation can be implemented, and I believe are more likely to be sustainable and to gain public acceptance than were the radical upheavals of the past.

It’s worth briefly recapping the nature of the economic problems which were engulfing New Zealand by the late 1960s and 1970s. At that time, we faced a series of external shocks and experienced wild fluctuations in our terms of trade.

The worst shocks were the oil price hikes of the 1970s, and the loss of preferential access to the British market in 1973 for our primary exports. New Zealand had a heavy dependence on that market when Britain joined the European Economic Community, but that contracted quickly and significantly because of the EEC’s protectionist agricultural policies with which Britain had to comply.

It’s clear in hindsight that New Zealand did not respond to the dramatic changes in its external environment well.

Governments spent a decade trying to compensate for the severe dislocation by continuing high levels of protection for secondary industry, introducing a broad web of ad hoc subsidies for primary and other producers, and by high levels of borrowing to cover government deficits.

This mix of policies had by the mid-1980s left the economy and government finances in a far weaker position than had been the case when New Zealand initially lost its preferential access to the UK market.

By the early 1980s, New Zealand’s key export sector, agriculture, was heavily subsidised and struggling internationally. Total government assistance or transfers to the pastoral sector had reached 33 per cent of the value of agricultural output.

Unemployment was also rising, and high domestic inflation and declining terms of trade were conspiring to reduce our international competitiveness rapidly. The government was running larger fiscal deficits each year, financed by offshore borrowing.

Thus the efforts made to protect New Zealand from external circumstances had actually made us more vulnerable. The adjustment, when it came in the mid 1980s, was severe.

In the turbulent years between 1984 and 1990, wage, price, and interest rate controls were removed, markets were deregulated, the New Zealand dollar was floated, export assistance was removed, import barriers were torn down, state trading activities were corporatised, a process of privatisation began, top tax rates were slashed, and far reaching changes were made in the public sector.

A new government elected in 1990 then carried the change process further, with severe cuts to social spending and provision, and with far reaching labour market deregulation. These latter changes were not politically sustainable and have been modified by my government in recent years.

Three key observations can be made about what happened:
 First, acting quickly across many fronts in an atmosphere of economic crisis inevitably means that some low quality decisions were made.
 Second, because many of these decisions were taken without the opportunity for proper public debate, the trust of the electorate in politicians and the political system declined, as I have already outlined.
 Third, and perhaps most importantly, the New Zealand experience suggests that it is better to adopt early, progressive, and incremental change, rather than delaying change only to impose much larger adjustment costs through radical reform later on.

New Zealand’s failure to adjust in the post war period through to the early 1980s meant that when reforms were implemented, the social adjustment costs were much higher than they would have been had change commenced earlier. It was the most vulnerable in society who were hurt the most by the delay, but the whole society paid a price in lower average incomes and less social cohesion.

It is surely far better to undertake reform when one’s economy is robust and an orderly transition can be managed, than to undertake it under pressure in a period of economic difficulty or contraction .

After a long and difficult period of adjustment, the New Zealand economy today is more responsive and flexible, and thus better positioned to respond to opportunities and challenges in international markets as they arise.

Since 1999, its annual growth has been significantly higher than the average for OECD economies, and even now at the bottom of the economic cycle, it continues to grow at a level not far below the best rates currently being achieved by the major continental European economies

Our economy is now around 25 per cent larger than it was seven years ago when my government was elected. In that same time period our unemployment rate has halved and, at 3.8 per cent, remains close to the lowest in the OECD.

While New Zealand’s recovery has been largely based on growth in the service sector and increases in labour utilisation, the primary sector has also increased as a share of total output.

The rural sector had an extremely painful time during the structural reform period, but has come through to contribute an even larger share of our economy, and is achieving that without either government subsidies, or distortionary rules and regulations.

These days our government has an ongoing economic transformation agenda, emphasising the need for continual innovation and improvement. New Zealand has to be strategic, innovative, smart, and skilled in taking its economy forward.

We have a strong focus on investment in education and skills; on science, research, and development; on exporting; and on the enabling technology and creative sectors which help lift the value and profile of our industries and New Zealand as a whole.

Other current priorities for us include:
 Heavy investment in the transport infrastructure.
 Lifting the performance of Auckland – our only city of international scale.
 Far reaching telecommunications legislation to get faster, cheaper broadband services.
 Achieving more commercialisation of our innovations within New Zealand and through joint venture partners.
 Reviewing the business tax regime to encourage more investment.
 Working with major sectors like food and beverage, and tourism, on higher value strategies.
 Lowering the barriers to trade through multilateral, regional, and bilateral agreements.
 Making the long term changes required for sustainability so that New Zealand can contribute to mitigation of climate change and reduce its greenhouse gas emissions.

Climate change is an issue we believe needs to come onto APEC’s agenda rapidly. The dire economic effects of unchecked climate change should be addressed by APEC because of the organisation’s primary concern for growth and development. Without a commitment to sustainability, we will likely get neither in future.

Overall, New Zealand’s economic fundamentals are now sound and the gains we are making are being felt across the society in much higher employment levels, in higher household income levels, and in greater investments in infrastructure and public services.

Our task now is to keep on fine-tuning and enhancing our economic framework to keep it up to date and able to meet new challenges. That way we avoid the pitfalls of earlier decades, when change was delayed too long and had highly disruptive effects when it came.

In my view, steady, ongoing change and transformation delivers better and more sustainable results.

ENDS

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