When a man, a business, or an entire society is facing bankruptcy, there are two courses that those involved can follow: they can evade the reality of their situation and act on a frantic, blind, range-of-the-moment expediency – not daring to look ahead, wishing no one would name the truth, yet desperately hoping that something will save them somehow – or they can identify the situation, check their premises, discover their hidden assets, and start rebuilding. – Ayn Rand
Ayn Rand’s astute social observation is an uncomfortably chilling synopsis of New Zealand’s economic history of the last few decades. New Zealand Inc. is economically ill and the prognosis is not good, but few are prepared to acknowledge the terminal nature of the condition, nor its causes.
It is a time for reflection; to ask why it is that New Zealand has done so badly in recent decades; to ask why our politicians who are so eager to assume responsibility over our lives are so reluctant to admit their failures.
Self-criticism is not something we expect from our politicians, who continually have their eye on the next election. This has undoubtedly been made worse by MMP. Throughout its short history, there has been an embarrassing spectacle of vested interest groups lined up, their hands unashamedly outstretched for favours from the public purse, in return for their MMP support.
However, given the gravity of the situation we are in today, strong political leadership is called for – leadership that demonstrates the courage to do what is right not take the path of least resistance.
Sir Roger Douglas in his article “How the Labour Government Robbed You Blind (with a little help from their friends National)” – featured in the NZCPR’s Mid-Week Politics – points out how massively over-governed New Zealand has become. During the thirteen years from 1996 to 2009 government spending has skyrocketed from $31 billion to $81 billion today. This increase in the size of government is costing the average family over $30,000 every year.
But as Sir Roger points out, this is a double whammy: A growing government sector has slowed the economy” resulting in a dramatic fall in the rate of wage growth and a significant decline in average productivity. He estimates that altogether this has cost the average family $20,000 in lost wages over the last ten years.
The figures on government spending tell the story: in the thirteen years from 1983 to 1996 government spending per capita (CPI adjusted) increased by 3 percent from $10,961 to $11,292, but in the thirteen years from 1996 to 2009 – after the introduction of MMP – government spending per capita rose by a whopping 67 percent from $11,292 to $18,859. It is this escalation in government expenditure that the present National Government has inherited and that it must address. Regrettably, all of the job summits in the world will not disguise the fact that New Zealand’s government has grown too big, is now too expensive, and with a deep recession on us, is now unaffordable.
This was a theme that was touched on by Kiwi entrepreneur Stephen Jennings, the chief executive of the Russian based Renaissance Group, who earlier this month delivered the New Zealand Business Roundtable’s 2009 Sir Ronald Trotter Lecture. In his address Opportunities of a Lifetime: Lessons for New Zealand from New High-Growth Economies, which is featured as this week’s NZCPR Guest Commentary, Stephen shares his first hand experience of the unprecedented global growth that has been taking place in some of the world’s emerging markets – like the former Soviet bloc and sub-Saharan Africa – and reflects on the serious threat this poses to New Zealand.
He draws on the history of global growth to identify three fundamental factors common to all high growth economies: private property rights, the rule of law, and the use of competition and the market to allocate scarce resources. He also clarified that, contrary to what many New Zealanders have been conditioned to believe, governments are never the driver of growth but can often be the major impediment to progress! In many emerging economies, “a significant cross-section of society is fully aware of the horrific cost of bad government”.
Stephen describes how unprecedented economic growth, that far outpaces that of Western nations, has been occurring in countries as diverse as Cambodia, Tanzania, Greece and Angola, and that the only common thread that links these emerging nations is that they have increasingly realised the importance of using the market to allocate resources: “A combination of allowing markets to set the price of labour, capital and goods, and a commitment to opening up to trade and maintaining a degree of fiscal and financial stability, has been enough to kick-start growth”.
Unfortunately for us the state not only has a firm grip on our labour market, with the relative cost of labour having risen by 60 percent since 2000, but it also has monopoly control of many service areas that in other countries are open to private sector competition. In other words in New Zealand the government controls a great many areas that if subjected to the market and competition, would generate vast improvements in efficiency and productivity. This lack of competition (imagine if we had only government-run supermarkets!) is a key reason for our country’s decline in economic performance at a time when far poorer countries have been growing strongly.
For the last 30 years, the World Economic Forum has been assessing why some countries are more successful than others in raising income levels and opportunities for their respective populations, making these findings available to policymakers. Their Global Competitiveness Report, which provides appraisals of the key factors that determine economic growth in a wide range of countries, provides a mixed assessment for New Zealand. While ranking us at 24th out of 124 countries in terms of their “global competitiveness index” (Australia is ranked at 18th place) we fare badly, at 90th place in the extent and effect of taxation, 66th place in the burden of government regulation, and 53rd place in the wastefulness of government spending. The report also highlights our dismal savings record, ranking us at 97th place, and identifies our “brain drain” problem, ranking us at 91st.1
Stephen Jennings had this to say about the brain drain: “The staggering number of young New Zealanders who have chosen to make their careers and increasingly their lives overseas is the most damning indication of our performance and attractiveness. And we New Zealanders should stop kidding ourselves that this is because of our small size and isolation. Perth is very isolated, so are Iceland and Northern Finland in their own ways – but their people are not flooding overseas”.
He suggested that our dismal economic performance, which has led generations of young New Zealanders to seek better opportunities overseas, are due to “The choices that New Zealand society made… They include the incomplete nature of the liberalisation measures begun in the 1980s, particularly with regard to labour markets and social welfare; the relatively large size of government; and the inconsistent and stop/start nature of reforms over the last 20 years or so”.
Stephen reserved some particularly harsh words for MMP: “For the last decade or so, New Zealand’s political leaders have sought to retain power by placating and balancing narrow short term political interest groups through incremental and relatively minor policy adjustments. It does seem that New Zealand’s system of mixed member proportional representation has exacerbated this tendency; incremental decisions favouring special interests have tended to take precedent over bold decisions favouring the majority”.
He explained that “In a world of unprecedented change and growth, political leaders need to be able to lead and manage change. They need to be able to make policy choices quickly and efficiently. We know what kind of political behaviour our current constitution generates: gradualism, populism and the quasi-corruption arising from disproportionate pandering to tiny minorities. New Zealand not only needs to address future global changes but also catch up with the policy change that hasn’t occurred for more than 15 years. If we move to a constitution that permits government to promote a high-performance economy and avoids excessive capture by narrow interests we will be positioned to become global winners rather than global has-beens.”
In his speech, Stephen Jennings has articulated the frustration that many of us feel when we stand back and look at what is happening to our country. We feel hugely disappointed that as a nation of bright, talented and energetic people, we are unable to achieve our potential, held back by the constraints of a government that has grown too big and powerful. It brings to mind the infamous words of Ronald Reagan: “The nine most terrifying words in the English language are: I’m from the government and I’m here to help.”
New Zealand must do better. We can do better. But we need the government to focus its full energy and effort on improving our economic performance through cutting wasteful spending, introducing proper welfare reform, and lowering taxes and compliance costs so that Kiwi businesses can be competitive anywhere in the world.
This will not be easy; especially given it is in the nature of government to do more, not less, making us more dependent on their gratuities, not less so. But it will be a mark of the strength of political leadership if pet projects like the costly and unnecessary Emissions Trading Scheme are put on hold because they don’t advance the goal of improving the economy.
I will leave the final words to Stephen Jennings and urge everyone to read his excellent speech: “There are compelling reasons to believe that New Zealand can and should be a global success story; that New Zealand can have a tremendous resurgence and be recognised as a top global performer. In my opinion two things need to done to achieve a transformational outcome for this country. First, mainstream New Zealand must express and live the values that underpin a competitive, enterprise-based economy. Secondly, we must move back to a system of government that gives our democratically elected leaders the flexibility to promote high economic performance without excessive pandering to narrow sectoral interests. In my opinion both of these goals are readily achievable.”