Lessons from Down Under

For producing both material goods and personal fulfillment, economic freedom makes all the difference in the world. No country proves that more convincingly than New Zealand.

Situated in the South Pacific midway between the equator and the South Pole, New Zealand is just two-thirds the size of California. Its 3.5 million inhabitants live on two main islands and a scattering of tiny ones. New Zealanders—known as "Kiwis"—are proud of a long heritage as a British outpost that ended with full autonomy in 1931.

In 1950, New Zealand ranked as one of the ten wealthiest countries on the planet, with a relatively free economy and strong protections for enterprise and property. Then, under the growing influence of welfare state ideas that were blossoming in Britain, the United States and most of the Western world as well, the country took a hard turn toward statism—the notion that government should be at the center of economic and social life.

The next twenty years produced "Kiwi socialism"—a harvest of big government and economic malaise. Increasingly, New Zealanders found themselves victims of exorbitant tariffs, massive farm subsidies, a huge public debt, chronic budget deficits, rising inflation, a top marginal income tax rate of 66 percent, and a gold-plated welfare system.

The central government in those years became involved in virtually every aspect of economic life. It established its own monopolies in the rail, telecommunications, and electric power businesses. About the only things that grew during the period from 1975 to 1983 were unemployment, taxes, and government spending.

With an endless roster of failed state programs and economic ruin staring them in the face, New Zealand’s leaders in 1984 embarked upon what the Organization for Economic Cooperation termed "the most comprehensive economic liberalization program ever undertaken in a developed country."

All farm subsidies were ended in less than two years. Tariffs were cut by two-thirds almost immediately and have continued to decline; today, the average New Zealand tariff rate is a mere 3.2 percent—virtually unilateral free trade. In fact, over 90 percent of all imports now enter the country completely free of any quota, duty, or other restriction.

Taxes were slashed. The top rate is now 33 percent, half of what it was when the big government crowd was in charge. The average income tax level is just 21.5 percent. There are absolutely no capital gains or real estate taxes at all.

Since 1984, the New Zealand government has conducted a massive privatization effort, selling off at least 22 state enterprises. Its most dramatic success was the sale of Telecom NZ. Pre-privatization, this state communications firm boasted 26,500 employees, many of them in unproductive or do-nothing jobs. Lean, modernized and in private hands, it now has 9,300 workers and it faces competition for the first time from such companies as MCI in long distance and Bell South in cellular.

Meanwhile, the country has not suffered some privately engineered communications nightmare; rather, it has gone from antiquated technology to a 97 percent digital system rated second on the planet by the World Competitiveness Report. Telecom NZ is no longer a drain on the public treasury. It actually pays taxes.

New Zealand’s public sector work force in 1984 stood at 88,000. In 1996, after the most radical downsizing of any government anywhere, its public sector work force stood at less than 36,000—a reduction of 59 percent.

The country’s banking system is thoroughly deregulated. Even foreign banks are now welcome. Americans who have grown accustomed to the thought that government should guarantee their bank deposits might be shocked to learn that in New Zealand, the central government imposes no deposit insurance on financial institutions. Instead, banks provide full public disclosure of their financial conditions and secure whatever insurance they need in the open market.

Establishing a new business in New Zealand is easy, largely because the few regulations imposed are applied evenly and consistently. Environmental and safety regulations are sometimes burdensome, but are largely offset by low taxes and a business-friendly policy climate.

What the Kiwis did to change labor policy ought to be of special interest in a heavily unionized state like Michigan. William Eggers of the Reason Foundation terms it "the most aggressive and far-reaching labor market deregulation in the world." Compulsory union membership was abolished, as were union monopolies over various labor markets. Stripped of special privilege that once allowed them to hold the economy hostage, unions now enjoy a legal status no different from that of any other private, voluntary association.

These dramatic changes have paid off handsomely in economic dividends. The national budget is balanced, inflation is negligible, and economic growth is surging ahead at between 4 percent and 6 percent per year.

Recent elections brought about a change in government once again, but most observers believe the political consensus for free-market policies has become too deeply rooted to be easily reversed. Indeed, the only party that openly opposed what New Zealanders call "the revolution" garnered a paltry 12 percent of the vote.

There’s a powerful lesson here: Big Government sucks the life out of an economy. Free markets can undo the damage. Statists of every persuasion, whether they be in Auckland, Washington or Lansing, would do well to take a close look at the New Zealand model.