The Incredible Shrinking State

How New Zealand got up from down under its bureaucracy.

Life used to be pretty simple for Jim. A middle-aged career bureaucrat in New Zealand's Supply and Information Department, Jim had a job for life if he wanted it. The work wasn't too stressful: Some days Jim spent much of his morning reading the newspaper. But those days are gone. A few years back, SID was transformed into a "state-owned enterprise": It was required to pay taxes and dividends, raise capital, and operate according to commercial principles. They even brought in a brash young business whiz to run the agency. Employees were required to account for what they did all day, and for the first time, Jim and his colleagues were forced to compete for the business of other government agencies.

Jim has been a loyal-if not too industrious-state servant all his adult life, and now he's angry and bewildered at the changes that have occurred in New Zealand since the mid- 1980s. "In the old days, the PSA [the public sector employees' union] would never have let them get away with it," says Jim sadly.

SID was recently privatized-sold to a Japanese company, making Jim a private sector employee for the first time in his life. "Public service is supposed to be for life," he says. "That was the deal when I got in; now they're going back on it." Indeed, Jim and many of his co-workers would soon become "redundant," polite New Zealandese for being laid off.

Sound like fiction? It is. The story of Jim and SID's transformation is a synopsis of Market Forces, one of New Zealand's hottest plays. The changes transforming New Zealand government, however, are quite real. You know a country has gotten really serious about downsizing the state when one of its most popular plays is about privatization.

Since launching its reform program in 1984, New Zealand, a nation of only 3.5 million people, has outdistanced every other country in reducing government's size and streamlining its operations. In that time, two successive New Zealand governments-the first led by the formerly socialist Labour Party and the second by the nominally conservative National Party-carried out a massive program of deregulation, downsizing, and privatization that makes Thatchernomics seem plodding.

Markets for a variety of goods and services that were once highly controlled-financial, housing, energy, airlines, trucking-were opened to competition. All farm and business subsidies were eliminated. Import quotas were removed. Tariffs were dramatically reduced. Immigration was liberalized. All controls on prices, wages, dividends, and foreign exchange were lifted, and the labor market was deregulated to an extent not seen anywhere else in the Western industrialized world. The sale of more than two dozen state enterprises brought in NZ$14 billion (about US$9.7 billion) in revenue-about 19 percent of New Zealand's GDP. An equivalent asset sale program in the United States would realize over $1 trillion in revenue.

By the time the downsizers were finished, the island nation's tax and spending levels had fallen from 41 percent to 35 percent of the economy. New Zealand has gone from being one of the most protected and socialized industrialized economies outside the Soviet bloc to the third highest ranking in The Fraser Institute's Index of Economic Freedom survey (one place ahead of the United States). In the wake of disappointments-and some serious strategic errors-following America's 1994 Republican "revolution," the New Zealand experience offers powerful lessons in cutting back the state.

Expert Opinion?

If you had asked experts in the early 1980s whether a reform program like New Zealand's would be politically possible in a Western, multiparty democracy, the answer from most of them would have been a resounding no. A rich and distinguished body of political science literature-much of it written by academic critics of big government-insists that such a program is all but impossible.

Economist Mancur Olson's classic text, The Rise and Decline of Nations, advances the theory that as societies mature, ever more-and more powerful-interest groups emerge. Their main trade: lobbying the state for greater collective action on their behalf. Once these groups develop, they rarely disappear.

Jonathan Rauch has labeled this phenomenon "demosclerosis." Writing in REASON, Rauch argued that one consequence of demosclerosis is that it is all but impossible to downsize-or even reform-government. "Between comprehensive disaffection with government and comprehensive reform of government lies a vast chasm and no bridge," he writes. "The public despises government and it desires reform...yet there appears, at least at present, to be no path from here to there." (See "Eternal Life," August/September 1996.) Rauch's conclusion: The federal behemoth is here to stay-permanently.

Furthermore, Nobel laureate James Buchanan, the father of the public choice school of economics, contends that all human behavior-that of politicians and bureaucrats included-is dominated by self-interest. The result: Those in government will pursue their own self-interest at the expense of taxpayers, and bureaucrats will try to maximize their budgets by "capturing" the policy making process. Both usually succeed; government grows bigger, and bureaucracy becomes more entrenched.

But even if government cannot be made substantially smaller, can't business management practices be introduced? Yes, answers James Q. Wilson, the UCLA political scientist, but to minimal lasting effect. In his book Bureaucracy, Wilson argues that while it may be possible to introduce business ideas into government, sustaining them over time is all but futile. Politics always creeps back in. Writes Wilson, "Public management is not an arena in which to find Big Answers; it is a world of settled institutions designed to allow imperfect people to use flawed procedures to cope with insoluble problems."

Though history has generally borne out the observations of these thinkers, every now and then an opportunity comes along to reverse dramatically the growth of the state and to make radical changes in the machinery of government. In 1984, New Zealand's band of reformers seized their opportunity and eventually overcame the traditional barriers to cutting back the state. The question is, How did the Kiwis do it?

A Harmonic Convergence

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