The Perils of Success

Revisiting New Zealand's decade of privatization

This October, New Zealand will hold its first general election under a system of proportional representation. Why would the only Western-style democracy running budget surpluses and reducing its public debt with less than 2 percent inflation toss aside a stable two-party system in favor of fractious coalition governments? A backlash against its aggressive decade-long privatization program might be a principal cause.

In 1984 New Zealand may have had the most tightly planned economy outside the Communist bloc. And the nation was a basket case. Public debt totaled 43 percent of national income, inflation was 6 percent, unemployment was 8 percent, and Finance Minister Roger Douglas said the country "was bankrupt–about to go into [International Monetary Fund] receivership."

Douglas's Labor Party won the 1984 election and implemented sweeping reforms. Labor freed the exchange rate and farm prices; repealed import and foreign-investment restrictions and agricultural subsidies; cut the top income-tax rate from 66 percent to 33 percent and implemented a 12.5 percent consumption tax; placed many of the 23 state-owned businesses up for sale; and put the head of the nation's central bank under a performance contract that made his sole job keeping inflation between zero and 2 percent.

Thanks to "Rogernomics," New Zealand Rail–which was NZ$70 million in debt when a group of private companies bought it in 1993–turned a NZ$73 million profit last year. New Zealand Post, the privatized mail company, cut stamp prices from NZ 45 cents to NZ 40 cents last October, and Telecom, the privatized phone company, wants to bid against American companies to provide service in the United States. Unemployment is less than 6 percent, real economic growth exceeds 4 percent, and public debt is now less than 30 percent of GDP.

But Rogernomics roiled the political system. The Labor Party split in 1988 when Douglas proposed a flat tax and privatizing health and retirement benefits. Labor then lost the 1990 election to the National Party. And populist reformers pushed through the proportional-representation reform. It will give seats in the legislature to any party that gets at least 5 percent of the vote.

The biggest beneficiaries of the new system may be the New Zealand First Party, which wants to re-establish trade and exchange barriers, cut off immigration, and force the central bank to pump up the money supply. Recent polls show New Zealand First getting 29 percent of the vote, moving past the Labor Party into second place; National Party support has dropped below 40 percent.