“Failed” policies didn’t fail

The left love to blame economic, social and political ills on the “failed” policies of the 80s and 90s,.

But did the policies fail?

John Shewan, retiring PWC chair, found scant evidence  of that:

It is commonly asserted that the economic policies adopted in the 1980s and early 1990s failed. Little or no evidence is usually offered in support of that claim. I have a vivid memory of ‘old New Zealand’ and I find it an astonishing view.

The evidence that the reforms of that era were successful is persuasive.

New Zealand’s economic performance improved significantly following the reforms.

In the 16 years from 1991/1992, New Zealand enjoyed one of its longest uninterrupted economic expansions since World War II. Real GDP grew by over 70 percent at an average rate of 3.5 per cent a year. Real GDP per capita grew by an average of over 2 per cent a year.

Productivity grew more strongly in the ten years from 1991 than in either the decade Budget 2012 to 1991 or after 2001. Unemployment fell to levels not experienced in the 1980s.

Inflation, a perennial problem before the reforms, has been low and stable.

The Government’s Budget surplus and debt positions were in much better shape following the reforms than they had been before them.

While it took some time for the benefits of the reforms to become apparent, it is unrealistic to have expected the economy to move rapidly into high gear from its parlous state in 1984. There were longstanding and deep-seated problems to be addressed. There were longstanding and deep-seated problems to be addressed. Inflation had to be quelled. The Government’s budget position needed to be put on a sound footing. Resources had to shift from inefficient industries to more productive activities. All this takes time and can have a depressing effect on economic activity in the near term.  . .  

He admits the reform process wasn’t “text-book perfect”, as public policy rarely is given the tradeoffs and political considerations which take place in a democracy. But he concludes:

 Another argument might be that the recent economic difficulties show that the reforms failed. On the contrary, I think they show what happens when old habits re-emerge. The quality of economic policy making has fallen. The reform effort slowed to no more than a crawl after about 1993. The focus on growth was replaced by an emphasis on social policies following the 1999 election. A too lax approach was taken to Government spending, particularly from 2005, which pushed up the exchange rate. The competitiveness of the export and import competing sectors was eroded, productivity growth slowed and economic growth suffered as a consequence. Developments such as these rather than the post-1984 reforms account for the current situation.

Contrary to the delusions of the left, the “failed”policies didn’t fail. IF there has been any failure it is of the resolve to keep up the momentum of reform.

The quotes  above are from a column in which Shewan also lists key lessons learned from Budgets over the last three and a half decades.

They are:

Incentives matter
Whether at work or play, the average Kiwi behaves in an entirely logical way. As Sir Robert Muldoon discovered, when Governments introduce poorly designed incentives and subsidies, bad behaviour and high waste are inevitable.

• Focus on the big picture
The key things that matter most for economic performance are a stable and predictable macroeconomic environment, openness to trade and investment, effective labour and capital markets, relatively low taxes and regulatory burdens, and sound public finances. Policies designed to offset weaknesses in the basic framework, like export incentives and investment allowances, or a focus on one or two sectors are no substitute.

• Don’t stop reforming
Policy needs to be adjusted to reflect changing circumstances. Radical reform programmes, such as those of the Douglas era, can be avoided if regular policy housekeeping is undertaken. We are not good at this.

• Don’t take our eyes off the ball
A seemingly sound fiscal position can dissipate quickly as the past decade has shown. Maintaining competitiveness is crucial. Once lost, it’s a long way back.

• The best time to tackle structural reforms is when the economy is strong
History shows that in New Zealand it takes a financial crisis to trigger major structural reforms. That’s unfortunate.

• Politicians need to resist the temptation simply to be seen to do something about a problem rather than doing the right thing
As Economist Walter Williams recently wrote in relation to the US, “The track record of doing nothing is pretty good compared with doing something.”

• Consultation improves policy
Proposals announced in the Budget and passed into law that night often result in bad legislation. Fortunately, there is much less of that now than in the 1970s. Consultative processes such as the generic tax policy process have improved policy making.

• Competitiveness of the export and import sectors is more important than inadequate savings in examining our balance of payments problem.

• There is huge pressure on all governments to placate interest groups, to respond to focus groups and media campaigns

The standard of economic debate is often superficial. It is difficult for governments to withstand the tide. The private sector needs to play its part in engaging in debate and contributing to policy.

• Be sceptical of demands for a paradigm shift from government
These typically amount to requests for large government handouts to fund risky experiments where losses are socialised but profits revert to the promoters.

• The reforms (structural labour market reform, subsidy reduction and the significant opening up of the economy) of the 1980s and early 1990s imposed a lot of pain that Europe and some other parts of the OECD are going through right now. The pressures other countries are experiencing provide the opportunity for New Zealand to improve its relative ranking. In this year’s Budget lock-up Finance Minister Bill English noted that New Zealand’s growth outlook over the next four years exceeds that of most of the developed world.

Rather than failing, those policies of the 80s and 90s have made the country stronger and should get some of the credit for New Zealand’s relatively strong position in the face of global economic woes.

We aren’t doing as well as we need to, but we’re doing a lot better than we would have had it not been for those “failed” policies.

Hat tip: interest.co.nz