How to Liberalize: Lessons from New Zealand for Latin America

Bettering Rogernomics with Three Decades of Hindsight

Paraguayan National Congress in Asunción. (Estudiantes por la Libertad Paraguay)

Paraguayan National Congress in Asunción. (Estudiantes por la Libertad Paraguay)

This speech was given in Spanish on October 19 at the invitation of EsLibertad Paraguay.

What an occasion for me, to speak in Paraguay before an audience of ambitious and politically aware people, eager to see their part of the world rise. Thanks specifically go to Mirta Fretes Viveros, who has been a gracious host and who invited me to speak during my stay.

I only ask for you to go easy on my Spanish: it is a work in progress, and it reflects a vulnerability among us Kiwis. We don’t put enough emphasis on languages at a young age — we are very monolingual — and I am making up for lost time. Of course, don’t hesitate to interrupt me if you have questions or would like me to repeat something.

The story for today is sensitive to me, since it so deeply intertwines with my life. My home country is dear to me, and yet I am part of the diaspora: another Kiwi in search of better prospects abroad. I am far from alone in this quest, since most of my friends from high school and university in New Zealand now live in Australia, North America, or Europe. Our mother country, England, is probably the most popular destination, along with Australia, since there is open migration between the two countries, and they are so close.

With the fox-terriers on my last trip home to the farm in New Zealand.

With the fox-terriers on my last trip home to the farm in New Zealand.

The large and seemingly endless exodus of our native population, replaced by people from the Third World, is suggestive that we have fallen behind much of the First World. In my own case I have found my career in the United States and Canada, and the American dream has shaped my thinking irreversibly.

New Zealand’s story is one of highs and lows, but she stands out for her period of rapid market opening or liberalization in the late 1980s and early 1990s. Many free-market enthusiasts abroad, particularly in the United States, have even gone so far as to call it the New Zealand miracle, and to some degree it was a miracle, or at very least an outlier among nations. Chile is another outlier of market reform, but New Zealand’s experience was far superior in that it came from a functioning, stable democracy, so it did not require a coup and was bloodless.

This piece of our history also holds considerable insights for Latin American nations, since they are crying out for reform and modernization. I am not so familiar with Paraguay’s case, but I know that many — including Argentina, Ecuador, and Venezuela — suffer from crippling national debt. Further, as many of you are well aware, various rankings of economic freedom are terribly revealing for this part of the world, with Chile being the only exception in the top 20 economies. I am, of course, favorable to the ranking of the Fraser Institute, which is data driven and well established. If you want to find more details, go to FreeTheWorld.com.

In the latest report, which takes data from 2014, places Paraguay at 88th out of 159 countries, and New Zealand is third. Given the fact that I see so much intervention from the bloated New Zealand government, this finding pains me. It affirms that there simply is no free-market haven to flee to.

For those curious, Venezuela has comfortably the least free economy in the world, at least of those reported — there is no data for places like Cuba and North Korea — and Argentina is right nearby at 156th out of 159.

Behind only Hong Kong and Singapore, New Zealand appears to be one of the best examples for policy reform. The natural questions then are:

  1. In what context did New Zealand engage in a rapid freeing up of the economy?
  2. Why were those in office so open to it and successful?
  3. What has been the push back?
  4. What could they have done better?

Since New Zealand is such a small country, and presumably unknown to many of you, let me give a little overview.

We are a child of the British Empire, and technically still part of the British Commonwealth. The queen of England is our head of state and sovereign, and her representative, the governor general, signs off on all our laws. Her approval gives them the force of law.

Given considerable immigration, the demographics are changing rapidly, but we are still largely descended from two groups: British settlers and Māori, the indigenous people of New Zealand. The British signed a treaty with many native leaders in 1840, and established British common law. Therefore, our country is about 180 years old, and I remember celebrating the 150th anniversary back in 1990 as a child. We have 4 million residents.

Our economic relationship with England remained very strong up until the 1970s, when the entire United Kingdom joined what was to become the European Union. That left the British colonies out in the cold. New Zealand was and is an agricultural nation, and the loss of open trade with England in 1973 hit us hard. We were too dependent on them as a trading partner, and we went into an economic crisis. That was not the only problem, of course. We had also built a lavish nanny state, one of the most generous in the world.

In the wake of that economic contraction and sharply rising oil prices, we had a National Party government and Prime Minister Robert Muldoon. He was aggressive and short tempered, and he decided to spend huge deficits on his “Think Big” scheme. He borrowed to build government factories and industrial sites, and since he didn’t like the accompanying inflation — which was at about 20 percent throughout his tenure — he imposed price controls.

key-graph-inflation-since-1970-cropped

This was an unmitigated disaster, and our national debt soared. There were many cost overruns, and government officials misspent much of the money. We soon found ourselves struggling to even pay the interest on our debts.

We have two major parties in New Zealand, similar to the United States. National is more conservative and supposedly business oriented, and Labour is the workers’ party. The workers’ party, therefore, was the opposition and the one to clean up the mess.

In 1984 we had a new prime minister, David Lange, and a renegade minister of finance, Roger Douglas, now well known around the world. Douglas had a friendly relationship with the prime minister, and with his backing he initiated a host of economic reforms which became known as “Rogernomics.”

There were also rogue members of the National Party that supported him and continued his work after he lost his position amid party infighting. Ruth Richardson was the most notable, since she became the minister of finance when National reclaimed power.

Roger Douglas reads the 1984 budget in New Zealand. (Te Ara Encyclopedia)

Roger Douglas reads the 1984 budget in New Zealand. (Te Ara Encyclopedia)

The major reforms included:

  1. Inflation targeting for the central bank, as the sole mandate (0-2 percent).
  2. Opening of foreign-exchange markets to floating rates. This saw a 20 percent devaluation of our dollar.
  3. Elimination of essentially all subsidies and many tariffs.
  4. Privatization of many government companies, and reforms of that would make many agencies generate a profit and sustain themselves.
  5. Cutting of the top income-tax rate from 66 to 33 percent.
  6. Transparency requirements on all government agencies, with monthly and annual reporting.
  7. More flexible employment contracts, removing some union power and making revocation easier.

This all took place when I was just a baby and young child, but I remember these reforms being a huge topic of discussion in the early 1990s. Further, throughout the 1990s the economy was still transitioning away from planned, subsidized industries.

The success was clear: New Zealand now has very low national debt and a relatively innovative economy. Unlike Greece and many other nations that get into fiscal crises, New Zealand emerged stronger than before, a world leader in many regards.

Even though this set of reforms was perhaps the most innovative and effective of its time, one of the great ironies is that much of the New Zealand public, particularly academics and politicians, demonize those who carried it out. In the end the Labour Party made them unwelcome, and a few of them started a new party. One lives in the United States and works with a think tank there.

When Roger Douglas managed to get back into parliament with ACT New Zealand in the 2000s, even the National Party wanted nothing to do with him. I held a campaign event for him at my university, and few people wanted to come to listen to this hero of our economy. Even more bizarre, recently a few members of parliament named him as our worst-ever prime minister, even though he was only minister of finance, such is the vehement yet ill-informed animosity directed towards him.

Some of the reforms have stayed, some have not. From the outcome, we can now draw a few important insights.

  1. These people were successful at the time because they were not partisan nor ideologically dogmatic. They saw reforms that worked, that would bring outcomes, and that was their focus. They were also willing to build positive relationships with people of other parties and not isolate themselves.
  2. Along the same lines, they did not pick favorite industries or special interests. Everyone had to take a cut: no industry was spared subsidies and tariff protection. This meant there was less bitterness or envy over the cuts.
  3. In some ways, the proof was in the pudding: when companies were privatized, everyone could see the better results. No one now, for example, is calling for the old bus company to be bought back by the government. We all see private companies functioning well without it, so there was no need. Further, we are now accustomed to private TV channels, the first of which began limited broadcasting in late 1989.
  4. The reforms were not merely cosmetic, but structural. The central bank, for example, had an entirely new mandate and contract relationship, and continues to function as one the best in the world, with perhaps the lowest and most stable rate of inflation.
  5. There has been considerable pushback, and a reversal of many of the reforms. The government has bought back and nationalized the railway, and it has started a new state retail bank. There have been many other expansionist policies in recent years, such as a new coerced savings scheme.

An American economist, Bob Higgs, has studied the New Zealand experience in detail. He points out that the locals did not wake up one day and become free-market enthusiasts. We should also remember that they voted for the people who got the country into the mess in the first place. Even after the reforms, they largely kept on voting for the same kinds of people, and the country went back to her old trajectory of the welfare state and a plethora of government agencies and controls, so many it gives me a headache.

That points to my final key insight. While these reformers were brilliant people, they failed to win over the New Zealand public to their way of thinking. Further, they did not have the infrastructure to defend what they had created. In New Zealand there are no private universities, so very few academics to defend the free market. There is only one business-friendly publication with any real prominence. There is no activist network of classical liberals — zero — and there is only one free-market think tank which has limited impact.

In other words, people did not properly understand the cause and effect of the policies. They then naturally continued on with their old ways, and there was little resistance to the backslide. This is particularly important, because the free market has no targeted special interests to protect it, no cronies. It benefits all in a dispersed manner, and therefore needs broader appeal to remain in place.

Fergus Hodgson About Fergus Hodgson

Fergus Hodgson is a traveler, economic consultant, and media executive. He holds degrees in economics and political science from the United States and New Zealand, and he divides his time between Canada and Argentina. Follow @FergHodgson.

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