The Incredible Shrinking State

How New Zealand got up from down under its bureaucracy.

William D. Eggers from the May 1997 issue

(Page 3 of 6)

So that opponents would have no time to mobilize, the National Party-which Richardson had to bring kicking and screaming around to her free market policies-quickly pushed through an ambitious and controversial agenda upon taking back power in December 1990. Within months, the new government had cut social welfare spending deeply (though the country still has a fairly generous social welfare apparatus), reduced expenditures across government, and pushed through the Employment Contracts Act, its radical plan to deregulate the labor market.

Taking Labour's cue, many of the measures were bundled together, under the reasoning that a coherent package helps people understand the links between the different policy changes. "Bundling" was also considered good politics. "If you are bound to raise a storm anyway, you might as well put as many controversial measures together as possible," explains Richardson in her book Making a Difference. "The most controversial tend to drown out the less controversial."

While Douglas and Richardson are very different in temperament and style, they shared one important characteristic: an absolute conviction that what they were doing was necessary and morally right. "A key ingredient to what happened here is you had key people who weren't all that interested in being returned to public office," explains Jonathon Boston, a senior lecturer at Victoria University in Wellington. "I don't think Roger Douglas was concerned whether or not he lost his seat. He saw it as his responsibility to do what was right for the country irrespective of being returned to office, and if necessary to take his party down with him. Ruth Richardson was from exactly the same tradition."

Ultimately both Douglas and Richardson paid a personal price for their courage: They were both asked to relinquish their positions when their respective governments' popularity declined. But there are no regrets. When asked what she would have done differently, Richardson answers defiantly, "I would have moved further and faster."

Banking on Treasury

Douglas and Richardson needed considerable help in drafting their programs, getting them through the cabinet-where most of their colleagues cared very deeply about being re- elected-and driving the reforms down through the bureaucracy. What is startling is where that help came from.

It came in the shape of the Treasury, New Zealand's most elite and powerful department. Treasury provided not only the intellectual foundation for many of the reforms but also the technical expertise needed to translate theory into reality. "The Treasury became the life- support system for Douglas, Richardson, and other politicians trying to reform the system," says one longtime government watcher.

Treasury also brought an intellectually rigorous approach to New Zealand's reforms that had no parallel in either the Reagan or Thatcher administrations. "It became a 'think tank' for the neo-liberal [in the classical sense of the word] movement," writes political scientist Enid Wistrich, "using its authority as the top government department to influence the political leaders and secure the implementation of its blueprint." It was as if the Office of Management and Budget were run by University of Chicago economists.

New Zealand's Treasury had not always been a hotbed of free market thought. In fact, until the mid-to-late 1970s, Keynesianism was its economic orthodoxy. It was about this time that Roger Kerr (now director of the New Zealand Business Roundtable) landed at Treasury after 10 years in the Foreign Affairs Ministry. "It dawned on me after a year or two that Treasury's lofty reputation was unfounded," says Kerr. "There was lots of dopey thinking and not a high level of intellectualism in economics."

Appointed the second director of Treasury's Economics II division, which was charged with long-term economic thinking, Kerr quietly set about changing the institution. Speakers gave seminars on the latest economic thinking, exposing the Treasury staff to new monetary thinking, organization economics, supply-side economics, and public choice theory. "We got into the game of tapping into the really good brains from around the world," remembers Kerr.

Kerr also began aggressively recruiting the country's best young minds from the universities. Kerr "was an intelligent coach," recalls Rob Laking, a Treasury colleague. "He had a tremendous ability to pick out, recruit, and cultivate talent."

There was soon a growing cadre of free market intellectuals inside Treasury. While then- Prime Minister Roger Muldoon was experimenting with industrial policy and instituting wage and price controls, Kerr and his colleagues were busy writing alternative policy. "It was a remarkable feat of institution building," says a leading political commentator. "They got the department into an excellent state when Muldoon was making little use of them."

Though many of the policies advanced at Treasury were based on an appreciation of free markets, they were grounded in what was becoming mainstream academic economics, rather than the writings of prominent classical liberals. "At the time, most of us hadn't even read people like Hayek," explains Kerr. "[Milton] Friedman and others were not our touchstones at all." Partly because of this, the policies didn't carry the ideological and party baggage of the Reagan and Thatcher reforms.

This proved helpful politically when Labour was looking for a detailed economic plan. Treasury presented a 325-page report to the incoming government proposing a far-reaching liberalization program. Titled Economic Management, the report is almost universally considered the bible of the reform program.

Capturing the Bureaucracy