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

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.

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

One of the most interesting features of New Zealand's reforms was the extent to which they were shaped by cutting-edge economic and political theory: public choice, agency theory, transaction-cost economics, and the latest in business management practices. Again, it was the Treasury–some of whose senior managers learned these disciplines in U.S. graduate schools–that was largely responsible for furnishing the reforms with their intellectual underpinnings.

After Labour's re-election in 1988, Treasury submitted another book-length report to the government. Turning its attention to the bloated public sector, the brief struck a distinctly public-choice note: "The state is not an omniscient and omnicompetent solver of social problems, but rather is subject to the same pitfalls that face private solutions to social problems plus other ones."

But instead of simply using public choice to explain why government doesn't work–about all that public choice has really been used for in America–Treasury went a step further. It used the theory's insights to devise a series of institutional countermeasures to minimize or offset the self-aggrandizing activities of public employees and interest groups.

For example, a central problem identified by public-choice theorists is "agency capture." This refers to the tendency of service departments to capture the policy-advice process, using this power to recommend themselves as service providers and to bias policy advice toward increasing the size of their budgets. To cite one instance, the U.S. Air Force once contracted with the RAND Corporation to do a study demonstrating the need for strategic bombers.

To counteract such agency capture, policy advice was separated from service delivery, which in turn was separated from regulatory functions. Dubbed the "purchaser/provider split," the goal was to free policy advisers to advance options that are in the public's best interest but may be contrary to the self-interests of the department. From prison services to road design, policy units now "purchase" services (called outputs) from their choice of public and private service providers. The new incentives this creates have turned the policy units into more discriminating consumers.

The Treasury also tried to figure out how to get public managers to achieve the results desired by the party in power. (It's not easy; one minister likened it to "pulling on a lever not attached to anything.") What they came up with was a series of accountability mechanisms–performance contracts, purchase agreements, accrual accounting, output-based budgeting–designed to help achieve some degree of political control over the bureaucracy. "The combination [of the mechanisms] really holds our feet to the fire," says a senior public manager.

Street Fighting Man

To get a better idea of just how far New Zealand's reforms have gone, consider just one department, the Ministry of Transport. Prior to the reforms, Transport owned and operated the ports, a national airline, the railroads, the air traffic control system, the airports, the ships, and so on. In its regulatory role, the ministry protected the same industries–and others–from competition.

Today, the Ministry of Transport doesn't run any transportation industries–they have all been privatized or corporatized. And from trucking to taxicabs, transportation markets have all been deregulated. Ministry employees, once numbering 4,500, can now all fit into two floors of a downtown office building. The results? Road freight rates are down by one- quarter. Domestic air fares have fallen in real terms at the same time air service has improved (Air New Zealand is now considered one of the best airlines in the world). As for taxi service, I never waited more than five minutes for a cab in three weeks in the country–and the fares were reasonable.

A leading actor behind the story of the Incredible Shrinking Ministry is Richard Prebble, Douglas's closest cabinet ally. Prebble held numerous cabinet posts in the Labour government, including minister of railways, minister of transport, and minister of state-owned enterprises (where all state trading activities, once constituting over 20 percent of the country's total investment, were placed under his supervision).

In one post after another, Prebble observed that state enterprises were not exactly paragons of efficiency. At the end of a rail line that had been abandoned for 20 years, he found a warehouse still in operation. A storeman was working in the warehouse, keeping a full inventory of supplies for the line. No one had ordered a supply from the warehouse for 20 years. It is no wonder Railways, the government railroad, was losing NZ$1 million a day. Other enterprises were little better. Australia's least efficient port was more efficient than New Zealand's most efficient port, boosting transport costs for businesses and farmers. Strong action was needed, and Richard Prebble was the ideal man to take it.

While not a big man, he has the swagger of a street fighter–and you can be sure he'd throw the first punch. "Preb appeals to people who have a taste for blood in politics," says Member of Parliament Rodney Hide, a longtime acquaintance. "He doesn't mind at all if people hate him; in fact I think he relishes the attention." A "political Rambo," says one detractor. "He doesn't fight clean," says a friend.

Such qualities made Prebble valuable to a government trying to downsize. Whenever someone had to break some unpleasant news to certain groups, Prebble was sent in. Former colleagues were amazed at how much heat he could take. "Every other politician I've ever known will at some point have that look of fear in their eye when opposition becomes too intense," says Rob Laking, who worked with Prebble on numerous privatizations. "But not Prebble. He's fearless–he never loses his bottle."

Soon after Labour took office, Transport Ministry officials went to Prebble and told him the air traffic control equipment was antiquated, asking for an additional NZ$150 million to upgrade it. "Prebble said, 'Get lost. There's no bloody way this government can afford it,'" recalls a Transport official who was there. "'Corporatize it,' he said. 'Let it raise its own money on the open market.' When we expressed some apprehension, Prebble got very red. He glared at us and barked, 'Get it done. I want a bill in the house by the end of the week.'"

Soon Prebble and the Labour government had corporatized all commercial trading activities owned by the government (including state-owned commercial forests which were ingeniously renamed "wood plantations"). The unions went along reluctantly when the government assured them they had no intention of privatizing the enterprises. "When we started out, we believed there weren't any inherent reasons why the state couldn't manage enterprises as well as the private sector," explains former Deputy Finance Minister David Caygill.

Corporatization led to sharp staff reductions and significant productivity gains in most enterprises. At the government-run mail service, New Zealand Post, for example, average productivity doubled, costs fell by one-third, and the percentage of next-day delivery rose by 20 percent. Stamp prices were actually cut by five cents.

Nonetheless, people still tended to treat the state-owned enterprises differently from private companies. When the chairman of a major SOE came to him with certain investment recommendations, Prebble was skeptical. "I said to him, 'If this was your own company, would you do this?'" remembers Prebble. "He gave me a straight-faced answer: 'No.'"

For these reasons–and because the government needed the cash to pay down huge debt burdens–the government shifted course and began aggressively privatizing the SOEs, a program that National continued. The results have been dramatic. One example: Railways reduced the number of employees from 22,000 to 4,000 (part of this reduction occurred under corporatization) and cut freight charges in half. The privatized railways are now one of the world's best, according to the World Bank.

Phone service is also much better. It used to take six weeks to install a phone in New Zealand. Now, the privatized New Zealand Telecom guarantees hookup within 24 hours, or the customer gets NZ$50 in long-distance calls free. At the same time, the work force at Telecom has dropped from 27,000 to 8,500. But the presence of hundreds of new companies in the country's telecommunications market means that more people are employed in the communications sector than ever before.

Privatization dramatically altered the New Zealand public landscape. "Of all the changes wrought by the Labour Government…privatization may well have the greatest long-term impact on the society and politics of New Zealand," writes Colin James, New Zealand's leading political commentator, in his book New Territory. But while all this was happening, where were New Zealand's once-feared labor unions?

The Unions Strike Out

Conventional political wisdom says you need to achieve consensus support before embarking on reform; otherwise the reforms will prove unsustainable. Roger Douglas doesn't buy this argument. "Consensus among interest groups almost never arises before decisions are made," he says. "It comes after they are taken, as the public sees satisfactory results." If you wait for consensus, he says, all you do is give interest groups time to organize. A better strategy: Make your next move while opponents are still trying to mobilize against the last one; this way you force them to fight uphill. That was the strategy followed when it came to reforms affecting labor unions.

First, the Labour government dealt several critical blows to public unions. Privatization and corporatization removed 22,000 state employees from the core public service; many employees left the union in the process. Within months after his ministry was turned into an SOE, the new chairman of the Forestry Corporation had nearly 90 percent of the employees (all of whom had to reapply for their jobs) signed up on individual contracts. Before the unions had recovered from corporatization, the government was already talking about privatization. "Things were moving so fast that I don't think the unions realized what was going on," says one observer. "By the time it became apparent that privatization was on the table, it was too late to stop the momentum."

With public unions preoccupied battling privatization, the government rammed through Parliament the State Sector Act, which effectively broke up the unified public service. It gave department heads, called chief executives, total control over hiring, firing, pay, promotion, and industrial relations; abolished statutory criteria governing collective bargaining and compulsory arbitration; and allowed all state employees to opt out of collective bargaining contracts and be put on individual employment contracts.

"The public unions were broken by the State Sector Act," says one high-ranking New Zealand official. "The stranglehold of their combined grouping was snapped."

Ironically, Labour's lead M.P. for the State Sector Act was Don Rodger, the former head of the public employees union. Nevertheless, Labour didn't even consult with the unions about the legislation. "The Labour government had no great love affair with the public unions," says Roger Kerr. "It was almost that because they couldn't make the grade on labor reform in the private sector that they were willing to go so far in the public sector."

If the Labour Party was unwilling to deregulate the private labor markets (Douglas was willing, but politically unable), National was more than happy to finish the job. Soon after taking power, National passed the Employment Contracts Act in May 1991. Considered the most aggressive and far-reaching labor market deregulation in the world, the ECA established freedom of association for individuals, abolishing compulsory union membership and union monopoly powers. The unions' legal status is now no different from that of any other private association. In the five years since the ECA was introduced, private union membership has plummeted by one-third.

Ken Douglas, the president of New Zealand's Council of Trade Unions (the equivalent of our AFL-CIO), explains how the unions let this happen (and in the process became the laughingstock of the international labor movement). A large man of Irish descent in his 60s, with white hair and a bulbous red nose, he is the spitting image of Tip O'Neill.

When National first unveiled the details of the ECA, the unions profoundly underestimated the government's resolve. "I told the unions, 'They've got this bill, it's well prepared and its going to pass,'" recalls Ken Douglas. "But we had union leaders saying, 'No, they won't do it. The employers will want order.' They were naive. National had seen how Labour thoroughly ignored the unions and got away with it, so they did the same thing."

Though the disagreements within the union movement delayed a strong response, eventually the unions would mount the highest level of industrial protest the country had ever seen. But unlike in France, where two years ago the unions were able to defeat a government austerity package by shutting down the country for three weeks, there was no general strike. The individual unions wouldn't support a general strike," says Douglas bitterly. "Our union movement was strong on rhetoric and short on delivery."

Despite his denunciations of the ECA, Douglas wouldn't go back to the pre-ECA days. "Compulsory unionism is why the union movement was so weak here," says Douglas. "I'm in favor of voluntary unionism." It turns out that a lot of workers are much better off under the ECA. Unemployment has fallen from around 10 percent to 5.5 percent, and real wages have grown briskly for skilled workers.

Replicating New Zealand

New Zealand's reforms have attracted considerable international attention–it is said that government reform is the country's best tourism draw. The hundreds of government delegations, academics, and policy wonks who converge on New Zealand each year all have the same question: Can the New Zealand model be replicated in my country? That depends.

Already, at least one government–the state government of Victoria in Australia–is aggressively following the New Zealand model, and Great Britain has instituted many of the same reforms. There is considerable interest in New Zealand's state sector reforms from both Rep. Scott Klug of Wisconsin, the GOP's point man on federal privatization, and from the folks at Al Gore's National Performance Review. Some of New Zealand's public sector reforms will almost surely find their way into the federal government and to some states.

But can the New Zealand model be duplicated holistically in the United States? Fat chance, say the experts. "I think it would be impossible to have such a sweeping overhaul in the United States," says UCLA political scientist Susan Lohmann. "There are too many veto players." Not only that, but transforming a country of 3.5 million people is a lot easier than one of 270 million.

"When talking about the changes in New Zealand, we're talking about an enormous range of changes–macroeconomic, labor markets, health, housing, education, social welfare, privatization, public sector reforms–you name it, we probably changed it," says Victoria University professor Jonathon Boston. "I can't imagine that any other society, in the absence of war or pestilence, will seek to re-engineer virtually every significant public institution simultaneously like we did."

At the national level, Lohmann and Boston are probably right. But a smaller government–a state, city, or county–where the executive and legislative branches are controlled by the same party would have at least a fighting chance. And at least one individual believes the New Zealand model can be duplicated.

"Sure, it's doubtful that you could sell a program like New Zealand's to the public in advance," says Roger Douglas. "But it can be done if you're willing to do it and then take the public with you. But in order to win, you have to be willing to lose."


On October 12, New Zealand held a general election, the first under a proportional representation system approved by voters in 1993. The new electoral system was endorsed by voters who clearly wanted to reduce the ability of the party in power to make sweeping changes.

National, the incumbent party, received the largest percentage of the vote of any single party. After six weeks of negotiation, National formed a coalition government with New Zealand First, a populist party led by Winston Peters, a former National M.P. Peters is anti-immigrant, anti-free trade, and anti-big business–kind of a cross between Pat Buchanan and Ross Perot–but you can't take his positions too seriously, because they change so often.

Roger Douglas, Richard Prebble, and a few other disenchanted Labour and National party radicals formed their own party, ACT. Quasi-libertarian, its platform calls for educational vouchers, a flat tax, and privatizing social security. ACT squeaked by the 5 percent threshold needed to garner parliamentary representation. Though hardly an impressive showing, it is not terrible for a new party advocating radical reform in a country that has just been through a decade of change. Led by the irrepressible Prebble, ACT's eight parliamentarians will be vocal, though their small numbers mean it will be an uphill battle to have a major influence on government policy.

Thus, a dozen years after New Zealand embarked on the most radical and comprehensive set of government reforms seen in the industrialized world, further market-based reforms are likely to be on hold. What happened?

The probable answer is the simple one: A majority of New Zealanders want a breather from the relentless pace of change. But free market advocates shouldn't be dismayed. While not a resounding vote of confidence, the people clearly did not vote to reverse the reforms. (Alliance, the major party of the left, saw its share of the votes drop from 18 percent to 10 percent.) The New Zealand experience shows above all else just how much can be accomplished in that limited time by determined reformers with vision.

William D. Eggers (wdeggers@reason.org) is director of privatization and government reform at the Reason Foundation and the co-author of Revolution at the Roots: Making Our Government Smaller, Better, and Closer to Home (The Free Press).