The Incredible Shrinking State

How New Zealand got up from down under its bureaucracy.

William D. Eggers from the May 1997 issue

(Page 2 of 6)

First, New Zealand's revolutionaries were able to take advantage of their political system: a unicameral legislature, a professionalized and nonpartisan civil service, and no written constitution. This structure allowed the party in power to do pretty much whatever it wanted.

Second, there is nothing like a good crisis to force change, and the Labour government in 1984 confronted a dire crisis from the day it took office. The currency was devalued, the budget was bleeding red ink, inflation was out of control, and interest rates were at 20 percent. The business community had lost faith in the government, and the public was ready for strong medicine.

But New Zealand's transformation cannot be properly understood without understanding the people who made it happen. Perhaps no two people were more instrumental than Roger Douglas, the Labour government's finance minister (from whom "Rogernomics" was to take its name), and Ruth Richardson, the finance minister when the National Party took back power in 1991. Their vision, persistence, stubbornness, and drive were indispensable in bringing about reform.

In the late 1970s and early '80s, while most of New Zealand's Labour Party was preoccupied with left-wing social and cultural issues (remember their anti-nuke policy?), Douglas, a businessman from a political family, was left alone to fashion much of Labour's economic policies. When Labour took office in 1984, he had brought a number of key party leaders around to his market-oriented views.

At the time, New Zealand looked remarkably similar to the interest-group-dominated state described by Mancur Olson. "New Zealand had been the acme of a lobbying, rent-seeking society," remembers Roger Kerr, the director of the New Zealand Business Roundtable. "If you look in Olson's book, you see two or three pages on New Zealand. The country conformed precisely with his hypothesis."

While recognizing the power of interest groups to block reform, Douglas didn't believe their existence necessitated compromise or retreat. Instead he designed strategies to buy out or overwhelm interest group opposition. One tactic was to apply the reforms on a broad front in order to spread the burden and enhance the legitimacy of the program.

Soon after taking office, for example, Labour eliminated farming subsidies and reduced agricultural tariffs-an extremely controversial policy considering that 44 percent of the average sheep farmer's income came from government subsidies. When Kiwi farmers staged huge demonstrations-including killing sheep in the streets-Douglas didn't waver. Instead he used their anger as ammunition to push reforms further.

Farmers started agitating for the removal of privileges and subsidies for other favored groups. They also backed reduced public sector spending (to reduce pressure on real interest rates), and privatization of the horribly inefficient state-run railways and ports (to allow the farmers to lower their input costs and better compete in the marketplace). "We had a very deliberate strategy of directing interest group fire away from us toward other interest groups," recalls one of Douglas's cabinet colleagues. "When interest groups would complain to us that 'those fellows down the road ought to have their privileges removed also,' we encouraged them to go public."

Responding to pressure from the farmers, the ports and railways were privatized. The result: Freight costs plunged 50 percent and shipping freight rates fell 25 percent. Due in part to these lower input costs-and to increased international competition-New Zealand's farmers are now among the most competitive in the world.

Business took a big hit along with other interest groups (in marked contrast to the last GOP budget). Subsidies and export incentives were eliminated, import protections were removed, and protected markets were opened up. While many firms were wiped out in the process, it was a question of fairness, says Douglas: "You need to do it across the board to demonstrate that everyone is being treated equally."

Douglas had the perfect salesman to sell the sometimes painful reforms: Prime Minister David Lange. An immensely popular, charming, and humorous politician, Lange put a soothing, smiling face on the reform program (something the GOP Congress has also sorely lacked). Trusted by the public, Lange's solid social democratic credentials made it difficult for opponents to condemn the reforms as heartless and right-wing.

Douglas was eventually forced out of office in 1988 when he began agitating for more radical reforms than the Labour Party-which by then was having major problems with its left wing-could stomach. It would be several years before another individual would come along with the will and the clout to continue the New Zealand transformation.

Lady Rottweiler

From the moment you encounter her firm handshake and throaty "how do you do," it is clear that Ruth Richardson is determined. Barely over five feet tall, Richardson seems an unlikely revolutionary. When she became the shadow finance minister of the National Party, party strategists called in make-over consultants to try to tone her down-both her looks (by her own admission she was prone to wearing "fruit salad" dresses and hadn't quite discovered make-up) and her take-no-prisoners rhetoric. Considering her too hard- line and dogmatic, critics likened her to a Rottweiler.

Richardson is a true believer-"I'm moved by conviction, the supremacy of the individual, more than anything else," she says-unwavering in her advocacy of free market policies. She practices the Margaret Thatcher brand of politics: You are either with her or against her. There is no middle ground.