New Zealand's New Zeal

How a Labour government is demolishing the huge old edifices of a socialist state

Alan Gibbs is one of a handful of new New Zealand entrepreneurs, an impatient, driving, zealous bear of a man. He's hard to get to interview in a little country where most of the elite are quite accessible to a journalist. But I was persistent, because I kept being told that Alan Gibbs was the kind of man who is driving New Zealand's free-market revolution.

They call that revolution "Rogernomics"—Finance Minister Roger Douglas's economics. As he is the first to admit, it is really classical economics, mostly Adam Smith's prescriptions. But Douglas is also quick to say that his role in government is to remove the obstacles and that it is up to the country's entrepreneurs to take advantage of the new free economic environment.

With that in mind, I kept calling Gibbs and eventually got through his protective secretary. That's all the full-time staff he has, a secretary. An accountant by training, Gibbs has made a large personal fortune out of takeovers and company reorganizations, and efficiency is his god. Talk to the left wing of the ruling Labour Party, and they will speak bitterly about Roger Douglas and the Labour government's embrace of people like Alan Gibbs.

Since assuming office in 1984, the Labour government of Prime Minister David Lange has deregulated financial markets, eliminated wage and price controls, slashed the country's budget deficit, and almost entirely wiped out farm subsidies. Some state-owned enterprises have been sold, the rest "corporatized"—given business-like structures and expected to make it without bailouts or subsidies. This radical restructuring of a socialist economy by a Labour government that replaced long-entrenched conservatives represents one of the most dramatic swings toward the free market in recent years. And the Labour Party won reelection last August.

The blunt-spoken Gibbs has been the most spectacular demolition manager of the huge old edifices of the New Zealand socialist state. He is now leading a commission charged with reorganizing the nation's bloated health insurance and welfare system. But he first tackled forestry, as chairman of the "corporatized" state forestry operations.

Swiveling impatiently in his office chair and glancing out occasionally at the spectacular view he has of Auckland Harbor, Gibbs recalls that the Forestry Service was rightly regarded as "one of the better" civil service operations.

But once he started looking at the operation, he concluded it was an "absolute disaster." When Gibbs took it over in 1985, the service, which had annual revenue of $200 million and a staff of 7,100, had only one qualified accountant and consequently no real financial records.

"They had no monthly financial reports. No proper budgets. They could not tell you what their wage costs were, for example. There was no separation of capital from current expenditure. It was just one great cash bucket really. We took one look at it and said: 'Forget it. We will start again from scratch.'"

He applied the same approach to staffing. "We took a blank sheet of paper and said, 'This is impossible, let's start over again.' We forgot about the old organization. Didn't even go look at it." Beginning with the existing able chief executive and some help from consultants, the new management team decided how many employees they needed to get the job done and redesigned the organization accordingly.

By offering people an average of a year's pay to get out, they slashed the number of employees to a quarter of the previous roster. The white-collar administrative payroll was reduced from 2,000 to 550, with many branch offices decimated: "We had one regional office serving one small forest that had 55 white-collar employees, and it now has five." The number of daylabor workers dropped from 3,780 to 200, as work was transferred from wage employees to contractors. Many of the new contractors are former wage-earners who used their settlements as downpayments on trucks and other logging gear.

Much of that gear itself was formerly government-owned. Earth moving equipment, tree handlers, trucks, even workshops, are all being sold to the contractors. These newly minted entrepreneurs then do their own maintenance and are free to work for several lumber companies as well as the Forestry Service, making much fuller use of their equipment. When they were on wages, the loggers supplying a Forestry Service sawmill would use nine logging trucks to bring trees to the mill. Now the mill operates at the same rate of production with three logging trucks run by contractors.

Alan Gibbs's commercialization of state forestry has turned it around from an annual loss of about $70 million to a profit of about $30 million. Costs have been almost halved, while revenue has risen 5 percent.

"It is just mind-boggling," Gibbs says several times during the interview. "No one can imagine just how bad government is until you get right inside it and see it for yourself. Mind-boggling."

There was "nothing wrong" with the people employed by the Forestry Service, he says. "They are generally excellent individuals, I found—on average superior to those in the private sector—but the system they were in would not allow them to manage. They could not hire, or fire, or promote anyone, or alter their pay, because all that happened according to the government book as written by another government agency in another building.

"Also every facility and piece of equipment was Rolls Royce quality—the workshops were all over the country and they all had heated floors. Computers were the very latest model, facilities absolutely first-rate, vehicles of the latest model by the drove, $20-million worth of equipment just parked. They had enough ladders to climb each tree at once." Gibbs rocks with laughter at his hyperbole, but he makes his point.

He is full of enthusiasm for what has been done in New Zealand under the unexpected free-market policies of a Labour government that has gone shrieky-left in foreign policy, banning U.S. warships because they might carry nuclear weapons and breaking out of the defense alliance with the United States. Gibbs is not interested in that stuff. He sees the Labour government and especially Finance Minister Roger Douglas as genuinely dedicated to tackling the country's economic ills by reducing state intervention.

Rogernomics has succeeded largely because of the economic disaster it followed. Under the previous National Party government, New Zealand suffered elaborate and often contradictory controls over wages, prices, interest rates, imports, money transfers, foreign investment, and new projects. Long-time conservative prime minister Robert Muldoon, an accountant by training and a giant on the small New Zealand political scene, never understood any economics and considered the economy capable of infinite manipulation by controls and talk.

Says Gibbs: "You name it, Muldoon controlled it, often personally. Under the previous regime we had the ultimate in interventionist government."

Although a third-generation Labour politician, Roger Douglas, the leader of the free-market revolution in New Zealand, grew up in business. He inherited a small herbal tea company, trained as an accountant, ran a carpet company, and, even now as a government official, maintains a pig farm.

He also admits to being heavily influenced in a free-market direction by 10 years of talking to Treasury Department economists—whom Robert Muldoon studiously ignored. They, in turn, were influenced by the Chicago school of economics and by publications of free-market think tanks in the United States, the Institute of Economic Affairs in London, and Australia's Centre for Independent Studies—whose New Zealand offshoot is now active in Auckland.

The man himself, Roger Douglas, was out election campaigning the week I was in Wellington. His close associate, Trevor de Cleene, parliamentary undersecretary for finance, saw me in his office in "The Beehive"—the aptly nicknamed 1950s-style concrete building that houses most of the New Zealand cabinet and is connected incongruously with the neoclassical Parliament proper. Both sit right on the middle of an extremely active fault line, "more dangerous than the San Andreas," maverick National Party MP Simon Upton told me.

Like Douglas, Trevor de Cleene is a reluctant politician. He says he thinks he'll "toss in" the Parliament after the next session and get back to his "real career" as a barrister, where he says "they pay you to have fun."

Meanwhile he's full of enthusiasm for his job, which is to be the principal talker and advocate of the country's economic reforms. Whereas Douglas is a slow, flat speaker, who can make the most exciting things sound boring, de Cleene is a most effective speaker with a ready wit and a lawyer's training. He does a lot of "fronting" for the finance minister.

"We got off to a flying start in July 1984 because we came into government with a huge crisis from Muldoon. He'd been defying all economic advice and maintaining the exchange rate at an unrealistic level. Money was just flooding out. We had to take drastic and immediate action or the country would have been out of foreign reserves."

The day after the election, they faced a constitutional crisis. In New Zealand, an outgoing prime minister is expected to follow the instructions of the newly elected government during the two-week transition before it can be formally installed. Muldoon refused to do so.

The sticking point was the Labour Party's insistence—and the Treasury's and the Reserve Bank's—that he stop trying to keep the New Zealand dollar (NZ$, or Kiwi, as it is sometimes called colloquially) above its market rate. This was no mere technical discussion: New Zealand had only four days of foreign currency reserves left. But Muldoon would agree only to a closure of the foreign exchange markets.

For a dramatic four days, New Zealand had no foreign exchange markets operating, as the government wrestled with the crisis brought on by Muldoon's obstinance. Finally, his Cabinet colleagues forced him to concede, and the Kiwi was devalued by 20 percent. Muldoon's cavalier rejection of the increasingly desperate pleadings of his own top economic officials left his government utterly discredited and paved the way for Rogernomics.

Muldoon left New Zealand's economy in a shambles. Overseas debt was 50 percent of GNP and growing. Capital was pouring out of the country because of ceilings on interest rates. Public debt had grown tenfold in a decade, and even now 20 percent of the government budget goes for debt service, compared to less than 10 percent in the 1970s.

Trevor de Cleene says the Muldoon government's borrowings were "catastrophic." Mostly the debt was used to fund the trade deficit, allowing the country to continue to import more than it exported, and most of the imports were consumer goods. An exception was the nearly NZ$8 billion borrowed in the early '80s to finance a set of grandiose "energy crisis" projects—a natural-gas-to-gasoline manufacturing plant, a steel plant, and an oil refinery.

In the characteristic Muldoon style, these were government-owned or -backed projects because they were deemed too iffy to fly by risk capital. The New Zealand prime minister always responded to critics by urging them to "Think Big"—his election campaign slogan in 1981.

The supposedly small-minded critics of Muldoon's state sponsorship of industry were proved so right in their criticisms of the "Think Big" projects that the term became by 1983 a universally accepted piece of derisive shorthand. When in the recent election campaign Roger Douglas accused the National Party of wanting to "revive Think Big" (pronounced there Thurnk Burg), everyone knew he was talking about those government-sponsored white elephants.

But at most only 10 percent of New Zealand's Latin American–scale foreign debt is attributable to the folly of the think-big projects. The vast majority came from the politicians' unwillingness to let the New Zealand economy feed through to its people the hard news of the value the world now places on its products. With traditional rural exports (butter being the most important) massively subsidized, and those subsidies funded in considerable measure by overseas borrowing, a grossly irresponsible Muldoon government was making future generations pay the price for contemporary illusions. And in a small economy—population about that of Kentucky, GNP less than Arizona's—protectionist policies can wreak awful havoc by denying the opportunities for specialization and exchange that larger economies can generate internally.

Once in office, Roger Douglas moved swiftly to take large segments of New Zealand's economy out of government control—starting with the financial and agricultural markets. Grant Spencer, director of economic research at the Reserve Bank of New Zealand, suggests that the sequence of decontrol was determined more by seeking the path of least political resistance than by any economic logic. The new Labour government owed nothing to entrenched interests either in banking and finance or in the large agricultural sector of the economy. Traditionally, businessmen hobnobbed with the National Party, and its stalwarts were the farmers and rural townspeople dependent on agriculture and think-big projects. (See sidebar, "Down on the Farm.")

The same day the New Zealand dollar was devalued, most controls on interest rates were abolished to encourage capital to stay in the country. Within a month, the government outlined a program to phase out export subsidies and increase access for imports. A week later, a four-company cartel of official money market dealers was broken up. A week after that, trading and savings banks were allowed to move into areas of borrowing previously permitted only to specialized finance companies. After two months in government, Labour announced the end of export credit assistance.

In its first budget in November 1984, after four months in power, the Lange government announced that:
• A range of subsidies and incentives for rural and manufacturing industry would be removed or phased out.
• Rural-sector loans would steadily lose their preferred interest rates, until they were aligned with market rates.
• Prices of state-supplied electricity, coal, and other services would be increased to match full costs of production.

By the end of 1984, the government had abolished years of wage and price controls and all controls on both inward and outward capital flows. Major changes in a free-market direction were announced in monetary management and supervision of banking, and in March 1985 the New Zealand dollar was allowed to float.

In June 1985, the second Labour budget was introduced. (Unlike in the United States, in a parliamentary system such as New Zealand's or Britain's, introducing a budget is tantamount to passing it; the ruling party's majority ensures success.) It cut the budget deficit by a third, continued the phase-out of farm subsidies and manufacturing protection, and introduced the scheme to make government-owned business operations more commercial. By September, a firm schedule was announced for the complete phase-out of import licensing and tariff protection.

Also in 1985, a major package of tax reforms was announced. The most significant item was a 10 percent value-added tax called a Goods and Services Tax (GST), which had the immediate beneficial effect of allowing some cuts in marginal income tax rates to levels at least competitive with Australia—a step that may stem emigration west. Income taxes under Muldoon had reached 66 percent for middle-income earners whose family income reached NZ$30,000 (US$15,000); the tax rate now goes to only(!) 48 percent at that level.

That rate will be falling even further, however. On December 17, 1987, Prime Minister David Lange announced a series of major economic reforms—including a flat income tax rate of 25–30 percent, with very few deductions. (The exact rate was to be forthcoming in February.) Corporate tax rates will be reduced to the same level, and many tariffs will be cut in half over a five-year period. To make up the revenue, the GST will be hiked 2.5 percentage points, to 12.5 percent. A negative income tax arrangement, providing a guaranteed minimum income, will replace some current welfare programs. The government also plans a major assault on occupational licensing.

Most dramatically, however, Lange declared his intention to retire a third of the NZ$42-billion public debt by selling off $14 billion in government assets—including the telecommunications monopoly. This major privatization effort marks a significant departure for the Labour government, which has mostly confined itself to corporatizing state-owned enterprises.

A glance at the central business districts of Auckland and Wellington confirms the boom in financial and business services brought about by deregulation—because the first manifestation is an enormous increase in demand for office space. The two largest cities of the country are undergoing an office-building boom.

More importantly, there has been massive restructuring of the New Zealand economy. Old established companies have sloughed off decades of acquisitions, and new enterprises have formed in record numbers. For example, Fletcher Challenge, New Zealand's largest company, has sold many of its manufacturing plants and trading companies and gotten completely out of car assembly and sales. At the same time, it has aggressively expanded its main line of business, forestry products. By some estimates, Fletcher Challenge is now the world's largest company in that business, with major interests in Canada, Chile, and Australia, as well as in New Zealand.

Sir Ronald Trotter, managing director of Fletcher Challenge, explains that the company's restructuring began before the economic reforms of the Labour Government but is vastly simpler now. "In his last years Muldoon got increasingly autocratic. The tangle of controls was so thick that almost anything you wanted to do required the approval of many agencies. Nothing would move in the bureaucracy until you took it to the top, and then they'd invariably say: 'You had better see the old man.' They were afraid to move without Muldoon's okay."

So, he says, every leading businessman had to spend a good proportion of his time cultivating his relations with the government in Wellington and with the prime minister himself. Under the National Party, Trotter used to spend perhaps half his own time personally working with the government to shepherd through projects that needed government approvals or to cultivate relations for future projects. "Now I hardly see government people. I can attend to the business better," he says.

Rogernomics cost Trotter's company NZ$40 million a year in export subsidies and other government supports, and some of its products face difficult competition now. But, he says, the environment for adjustment and greater productivity has improved. "People are focusing on business now, not lobbying. They realize in this context there is no logical argument for a favor for this group or that. Lobbying is no longer very effective. Everybody knows strong competition is here, so we have to adjust."

The economic reforms have unleashed a wave of entrepreneurship, and not only in the obvious areas of downtown redevelopment and corporate takeovers. As in other small countries, many New Zealand entrepreneurs have to look for world markets, and the country's exports have increased about 5 percent a year over the past three years of economic reform. Tidco International, manufacturer of a new line of rock crushers for quarries, is one of the new success stories of New Zealand entrepreneurship.

Paul Tidmarsh, 40, a metalworker by trade, used to make his living on farms in the Waikato region 100 miles south of Auckland, building and fixing dairy sheds and other farm machinery. He was intrigued by a novel rock crusher devised by a tinkering engineer who had become frustrated by the high wear and downtime on conventional hard-steel rock crushers.

The new design spun the rocks in a stone-lined vortex so rock broke rock—hence a "rock-on-rock," low-maintenance, low-cost crusher, since named the Barmac Rotopactor. It became very successful in quarries in New Zealand and Australia in the 1970s, but it was Tidmarsh who built the business into a real international company by selling the machine in the world's biggest market for rock crushers, the U.S.A.

Beginning at Chandlers Sand and Gravel near Los Angeles, Tidmarsh developed a network of partnerships and dealers across the United States to market the machines, which are manufactured close to where Tidmarsh grew up in the small town of Matamata. The Tidco design has since been copied by the large established rock crusher builders, but the New Zealand company retains a healthy market share worldwide.

The entrepreneurial instinct has even hit the agricultural sector. When I grew up in Australia in the 1950s, the rambling vine fruit that grew over the outhouses in backyards was called a Chinese Gooseberry. It was something you picked if you had a vine, but it wasn't commercially marketed. But in recent years, New Zealand farmers—once the world's largest exporters of apples—have dubbed the Chinese Gooseberries "kiwi fruit" and developed them into a major industry supplying upscale consumers. Kiwi fruit now earn more export income than apples.

New Zealand's rich volcanic soils, warm climate, and plentiful rainfall give it a natural advantage in high-value horticulture. The potential of many exotic fruit and berry projects has been overhyped there, but much of New Zealand's new agricultural entrepreneurship is paying off. Wealthy Japanese consumers are buying difficult-to-grow rare fruits in increasing quantities—like the Nashi pear, which is individually tended with tissue paper while still on the tree, and a $100-a-shot melon delicacy.

In the search for overseas markets, some New Zealand businesses are exploiting their country's image as a "greenie" environmentalist refuge. Artaki Honey, a long-established exporter, has considerably increased its sales by labeling its jars: "New Zealand bees have collected this honey from flowers in a pollution free environment. No acid rain, no smog, no additives."

Many of these export industries, which benefit from free-market policies at home, are threatened by big government in the importing countries. New Zealand honeys have been forced out of the mass market by the U.S. government's dumping of vast quantities of surplus bulk honey on world markets. When lobby groups demand protection, the Japanese sometimes suddenly ban the import of one or the other exotic fruit that New Zealand farmers have developed. And the European governments now subsidize a local kiwi fruit industry by funding the removal of surplus grape vines and their replacement with kiwi.

Rogernomics is not without its drawbacks, of course. Faced with international competition for the first time, manufacturing is generally in contraction, and many rural areas are hard hit. Unemployment is up a bit, to around 6 percent, low by international standards but high for New Zealand—though the country's employment problems have traditionally been looked after by Australia, which takes a constant stream of New Zealand emigrants.

And even supporters of the reforms fear they've raised more expectations than they've produced results. Alan Bollard of New Zealand's Institute of Applied Economic Research bemoans the fact that international investors are infatuated with New Zealand's move toward more market-oriented policies. He says the hyperbole over economic reform may be leading to overinvestment in New Zealand and an overvalued New Zealand dollar.

Money from Japan, Hong Kong, and Australia is flooding in, and American investment, too, is growing. Bollard is afraid that the benefits of deregulation and reduced protection are "slipping through" because of New Zealand's huge accumulated debt burdens, continuing very high government spending, the high New Zealand dollar, high interest rates, and high inflation.

Debt has grown so huge that 20 percent of the government budget goes to interest payments, compared to 10 percent in the United States. By some estimates the 3.4 million people of New Zealand have the highest per capita debt in the world. Len Bayliss, an economic consultant, estimates that as of December 1986 gross overseas debt was NZ$41 billion, or 84 percent of GNP, of which about two-thirds was public debt; 1987 debt appears to have shrunk slightly, largely because of the lower value of the U.S. dollar. This is, Bayliss notes, an "extraordinarily high" debt burden by any international standards.

Comments Bollard: "One of our biggest problems is that there is too much confidence in New Zealand now, at least premature confidence. I applaud what Douglas is doing, trying to make New Zealand open and competitive, but the payoff may take a long time, and much more reform remains to be done."

Bollard says that microeconomists who study individual New Zealand industries opened to competition are all quite optimistic, but macroeconomists' working models of the whole economy are usually pessimistic. He notes that serious rigidities and protections remain in the New Zealand economy despite the spectacular free-market moves under Douglas.

Also he is somewhat skeptical about the extent of deregulation's benefits, especially in the short-term. "I suspect we are in danger of New Zealand becoming a sort of economic laboratory, trying out deregulation on behalf of the western world. Much of the current overseas interest in our economy is based on this."

The reforms have yet to touch large segments of New Zealand's economy. Four major industries, including energy, remain under price control. A collection of "sacred" manufacturing industries is still protected by import licensing, including motor vehicles, steel, and clothing. Tariffs on imported goods are being reduced, but the phase-down period is quite long and there could be slippage in the schedules. The corporate state still reigns supreme in the marketing of traditional agricultural produce through producer, or marketing, boards. Moves to expose these boards to competition or deprive them of their monopoly privileges are tentative.

Deregulation is particularly difficult in the extremely important area of the labor markets. Eighty percent of the work force is unionized, and unions provide a crucial component of Labour Party support.

Alan Bollard credits the Labour government with going "about halfway" in labor market reform. Gone are general "wage orders," edicts by which New Zealand governments used to curry favor with unions and boost labor costs across the board. Wage bargaining—traditionally done on a national, rather than workplace, level—is now more decentralized, and "flow-ons" of wage increases from one sector to another are far less automatic than before. But union "givebacks" are rare, featherbedding remains rampant, and unionism is effectively compulsory in most industries and extends an extraordinary distance up the managerial ladder.

A new labor law enacted after the August election could actually enhance the power of Big Labor in New Zealand. It requires all future unions to have at least 1,000 members, thereby effectively banning small unions and encouraging consolidation. Also, the law removes the few existing protections for employees who prefer to bargain individually.

Roger Kerr of the Business Roundtable says the new government's moves in the labor area have been "one step forward and two steps backward." He sees the rigidities of the labor markets as the single biggest factor in his country's relative decline over the past 30 years, from about 3rd in the world in per capita income to 30th today.

New Zealand has suffered a terrible brain drain because of its lack of incentive for the able individual. Bright New Zealanders are found all over the world, with thousands in the States. In Australia, New Zealanders are among the major immigrants, with Sydney often described as New Zealand's second-largest city.

Lower income tax rates may alleviate the brain drain, but the value-added tax has a serious long-term drawback—this very "efficient" tax makes it politically easier to maintain a very large government sector. Close to half of GNP still goes to government in New Zealand. While Douglas has ended subsidies to industry and cut the waste of ill-begotten government business enterprises, these savings are offset by a relentless growth in health, welfare, and interest costs.

It is too early to say whether the free-market reforms will take New Zealand out of the economic doldrums. There have been two years of 5 percent growth and two of 2 percent growth since Labour came in. Much will depend on whether the country can sustain and continue the economic opening up.

What is the source of New Zealand's new fascination with the free market? Explanations, both theoretical and political, abound.

Most western movements come to New Zealand late and in exaggerated form, says Walter Murphy, a political science professor at Victoria University in Wellington and no fan of Rogernomics. He cites the current antinuclear movement, environmentalism, health foods, and now the free-market enthusiasm as examples.

Others offer historical or sociological explanations. Roger Sandall, a former New Zealander who is now an anthropology professor at Sydney University, sees the zealotry of New Zealanders (as compared to the cynicism of Australians) as deriving from their Scots and Lutheran past. Whereas Australians come largely from rough Cockney English and Irish people, New Zealanders are heavily Protestant Scots. "Scratch a peace-loving New Zealand liberator of the oppressed and you will find that Dad or Granddad was a [protestant] preacher," he remarks. Prime Minister David Lange is still an active Methodist lay preacher.

I asked Trevor de Cleene, the Finance official, what he thought of a conservative's comment that the natural opponents in the Labour Party of Douglas's deregulation had been effectively distracted by Prime Minister Lange's antinuclear policies and ensuing dispute with the United States over warship port visits. "That's a fair comment," he responded.

New Zealand has now made its break from the world of the nuclear deterrent and alliance with the United States, so the left of the New Zealand Labour Party can once again redirect its attentions to the government's domestic policies. Prime Minister Lange shows signs of anticipating this and talks of focusing on "social policies" in the second term, after the first term's economic reforms. This makes some of Roger Douglas's supporters nervous, since they see the possibility of a loss of momentum in the movement toward a free economy.

Colin Hicks, president of the country's largest civil service union, says his organization and other left-wing unions are "trying to regain a toehold" within the policymaking of the Labour government. In an interview, he accused Finance Minister Douglas of "demonizing public service." He said government must continue to play a large role in a country like New Zealand because of "market failure," the "natural monopoly" argument, and the country's "infant industries" that need special nurture. If government businesses are made commercial in form, he said, it will become difficult to argue for the retention of government ownership—a cornerstone of Labour ideology.

"Once you apply the tests of the marketplace to public services, you begin to tamper with the very nature of the welfare state. We will get an Americanization of services. We face a gnawing away at the system of welfare both parties had built and accepted in this country."

Hicks accused Finance Minister Douglas of being "more at home" with businessmen than with colleagues in the labor movement, and he talked of the infiltration of "the forces of evil" into the party. Much of what had been done in the first term of the Labour Government was "anathema to what we understand to be the Labour approach to government.

"I cannot see how we are moving closer to the creation of jobs, or improving the quality of life, by reducing the role of government and loosening regulations," said the union leader, who will be at the forefront of efforts to roll back Rogernomics.

Indeed, at its annual conference in October, the Labour Party passed a series of measures ordering the Lange government to abandon its free-market policies. But the government has defied these instructions, and so far it is holding together.

That cohesion may not continue indefinitely, however. Both Walter Murphy, who dislikes Rogernomics, and Simon Upton, a maverick National MP who wholeheartedly supports it, think it is an anomaly. Labour's natural constituency, they both say, is in the labor unions and among the functionaries of the welfare state. A Labour government cannot go on drawing major political sustenance from entrepreneurs.

Either Roger Douglas and his supporters will be defeated within the party, or it will split apart. The opposition National Party, still carrying the albatross of Muldoonism around its neck, is floundering about trying to determine what its constituency is. The end result of the Douglas-Muldoon clash of economic philosophies could well be a radical reshaping of the New Zealand political landscape.

Contributing Editor Peter Samuel is a Washington-based journalist specializing in South Pacific affairs.

Down on the Farm
Ten years ago the fad crisis was food. The world was going to run out of it and hundreds of millions of people were going to starve. Food prices were up. So governments reduced restrictions on production and raised price supports to encourage farmers to grow more. In the 1980s, as even Hollywood knows, there is too much food and farmers are going broke. So the fad crisis now is farmers—the threatened demise of the family farm.

A byproduct is budget-busting bills for farm price supports and export subsidies. The U.S. Treasury will shell out some $30 billion to pay farmers to produce and dump unwanted food this year; proportionately, Europe and Japan pay even larger subsidies. Virtually everyone agrees it's crazy, but it is politically too difficult to end the subsidies—so the madness continues.

But not in New Zealand! When the Lange Labour government came to power, farm supports—including price deficiency payments, subsidized interest on farm loans, fertilizer subsidies, export incentives, and other implicit and explicit government handouts—were estimated at NZ$2 billion a year. That's equivalent to 14 percent of the government budget or 6 per cent of the country's gross national product. Under Labour, all these subsidies were wiped out in 1985.

How was it done?

First, the new government felt it owed nothing to the farmers politically. Traditionally, New Zealand's farmers have voted for the National Party; Labour politicians were drawn from many walks of life, but rarely farming. So the government was prepared to stick it to the farmers.

Second, a decade of arbitrary big government and economic crisis after economic crisis persuaded the farmers themselves that government intervention was their major problem and that they could do better in the free international market if their own government could get its financial house in order.

Says Owen R. Jennings, vice president of the Federated Farmers of New Zealand: "We had to face up to the need for a drastic restructuring of farming. We had to make our contribution to getting national inflation down, to cutting the budget deficit. We had to be able to demand that other sectors lose their government protection. We were asking for an end to the import restrictions and import tariffs on manufactured goods that caused us to have high input costs, and we wanted an end to the cossetting of labor, so we had to be prepared to give something away."

Over the years, with a heap of studies, consultations, reports, and conferences, farmers en masse were persuaded that they lost more than they gained from government subsidies, supports, and protections. The farmers federation became a champion of free-market/small-government policies.

Of government price supports, or supplementary minimum prices (SMPs) as they were called there, the Federated Farmers' election pamphlet for 1984 said: "The continuing need for SMPs would be eliminated if the economic package advocated by the Federation was adopted by the Government. In brief, this package would include the adoption of a realistic exchange rate, introduction of a managed float exchange rate regime, elimination of protectionist devices, a reduction in government expenditure, and greater controls on the money supply." The pamphlet said that fertilizer subsidies could be eliminated once reforms had restored farm profitability. Export incentives should not last more than three years.

Jennings is not by any means happy with the Lange government's performance. He says the farmers have taken a disproportionate share of the burdens of national economic readjustment by losing their price supports and subsidies cold turkey, while manufacturing's protection is phased out very gradually. He complains, too, that government spending is not being adequately cut and that labor market reform has not occurred.

The farmers federation agreed to the phase-out of supports and protections as part of an even-handed package of policies for the whole economy—which Jennings says it never got. Inflation and interest rates have dropped, but not nearly enough to put New Zealand farming on a sound financial footing. As a result there's continuing major trouble for farmers.

Still, Jennings says he has no regrets about the federation's adoption of free-market policies that helped the new government sweep away farm subsidies and protections.

—P.S.