By Simon Louisson of NZPA
Friday 9th July 2004 3 Comments
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Appropriately, the election was on July 14 - Bastille Day, which marks the French Revolution, and revolutionary it certainly was.
It transformed an economy from what Lange described as operating like a Polish shipyard into one of the most deregulated free market economies the industrialised world has known.
And like Charles Dickens' A Tale of Two Cities novel on the French Revolution, it was the best of times and worst of times. Certainly, it was a ripping ride.
There were booms in everything: shares, takeovers, property, foreign exchange, art, consumer spending. It was the time of the yuppie with BMWs proliferating and more champagne sold per head than in any other country. The booms turned to crashes on a scale not seen since the Great Depression.
The United States was in the grip of Ronald Reagan's free market Reaganomics while Margaret Thatcher was also pursuing Chicago School of Economics' monetarist policies. But neither went as far as New Zealand under Finance Minister Roger Douglas and his National Party successor Ruth Richardson.
It began excitingly on June 14 with a drunken Sir Robert Muldoon calling a snap election, followed a month later with Labour's landslide victory. Then, nine days before Lange took office the country was plunged into a financial and constitutional crisis over devaluation of the currency.
Because Labour had signalled, even possibly deliberately leaked, it would devalue the New Zealand dollar by 20%, there was such a run on the dollar the Reserve Bank had to suspend trading. Muldoon refused Lange's order to devalue until threatened by a mass resignation of the outgoing Cabinet.
There is debate about whether that crisis established the whole path of what followed - financial market deregulation including floating the dollar, a radical reshaping of the tax system including introducing GST, removal of subsides and tax breaks, corporatising Government trading departments followed by a huge privatisation programme, giving the Reserve Bank operational independence and opening the economy up by removing tariffs and so on. The programme of social shake-up was almost as radical and extensive.
Economist Peter Harris, who led the charge for the unions against what became known as Rogernomics, said the foreign exchange crisis, whether deliberately provoked by Douglas or not, allowed him to ram through a programme which had been rejected by the party in February.
"Douglas followed the so called "crash through" theory - instead of having an orderly transition, he rammed through a set of measures."
Under this "change programme", while opponents try to negotiate moderation of one measure, you move along the agenda so there is no ability for opponents to reorganise and regroup.
While the platform may have been known to some party insiders, it was a total surprise to most in the electorate and in the media.
Rob Campbell, who at the time worked for the unions alongside Harris as an opponent of Rogernomics but later became a cheer leader, said the labour movement had expected a traditional Labour programme.
"When it became obvious that Roger Douglas and others in the leadership had a much more clearly defined and quite radical economic policy, there was quite a strong feeling that that was something of a betrayal," he told NZPA.
"David Lange took the approach in the Council of Labour that this was something which was forced on the Government by the facts of the economy as they found them when they came to power.
"I think that we always felt that that was an excuse and I still think it was. The policy position that Roger Douglas had was well developed and ready to go whether there been a devaluation crisis or not, but I think the party as a whole was unaware of it."
David Caygill, a key figure in the Cabinet who took over as finance minister when Douglas was dramatically sacked in 1988, said the currency crisis was not anticipated but what followed was not inescapable.
He said unwinding of the wage-price freeze imposed by Muldoon and Labour's deregulation of the financial markets did not mean that everything that followed was inevitable despite Douglas and Lange's political slogan of "there is no alternative".
"It was generally recognised that the New Zealand economy was both over-regulated and under great stress - that major changes would need to be made," Caygill told NZPA. The Planning Council had published a series of reports calling for major policy changes.
"It is no coincidence that the steps that New Zealand took were similar to the approaches being adopted in other countries before and since. Most of what New Zealand did was not intellectually novel.
"Most of what happened, happened in Australia. The changes here were more rapid but in my view, that can be explained by the fact that we got ourselves into worse difficulties than Australia."
Labour's Opening of the Books exercise showed the economy it inherited from Muldoon, the so-called economic wizard, was indeed a mess with huge current account and budget deficits and the legacy of billions of debt from the disastrous Think Big programme.
Campbell said there even though the programme was opposed to leftist economic orthodoxy, there was a compelling logic to the Rogernomics process and the programme. And there was a high degree of inevitability about it.
"From my point of view it was really all about how the process was managed."
With the opposition in disarray, the job of opposing was left to the unions and those on Labour's left such as Jim Anderton. The pivotal debate was the introduction of GST. In the end, Campbell for the Federation of Labour negotiated that a big proportion of the tax went on benefit increases. Because it coincided with the abolition of sales and wholesale taxes and a big cut in income taxes, the benefit hikes caused a big fiscal hole. But the political battle was won by Douglas.
"It was a bribe to the people with their own money to generate a short term gain to push through the structural package," said Harris.
"After that, there was never any serious possibility of reining in what Roger was trying to do until David Lange changed his mind and called a `cup of tea break'," Campbell said.
Neither he, nor Caygill, have any substantive criticisms of what followed.
"In retrospect, I think it was a necessary watershed period in New Zealand history," said Campbell. He rejects Business Roundtable criticism that the welfare system should have been reformed at the same time. That was not a political reality, he said.
On similar grounds, Caygill rejects World Bank criticism that the labour market should have been reformed before financial deregulation.
"That was not a political reality. The reality that we faced was that we had to do things in a less than ideal order".
Apart from the political disintegration that followed Lange's call for a tea break, Caygill's main regret was that more was not done to relocate and retrain the tens of thousands who lost jobs from corporatisation and restructuring of the state sector.
Peter Harris is less forgiving. He argues that New Zealand growth stagnated during the restructuring while Australia grew modestly by changing more gradually.
"It was so traumatic. We went through a period of something like six years of zero growth and that six years of massive turbulence meant we slipped behind Australia by something like 20%."
Harris, who until recently worked for current Finance Minister Michael Cullen, says that only now are the excesses of Rogernomics being repaired with reinvestment in infrastructure, education, training, and health.
But Caygill argues that because of the state of the economy New Zealand did not have the luxury of a slow transition.
"I'm proud to have been in a Government that did things which were necessary."
Campbell said that the prosperity of the 2000s, when annual growth has averaged 3.5%, can be traced back to the reforms.
But more importantly has been the opening of the economy.
"There is an enormously greater degree of freedom and opportunity, there is just a much wide range of choice about who you are and what you have and what you do. That's what it was about - it's not about whether you are richer or poorer, it happens to be that we are more prosperous, but the real gains are in the soul - the soul benefits from choices."
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