Why Have Kiwis Not Become Tigers? Reforms, Entrepreneurship, and Economic Performance in New Zealand (TIR version)

The New Zealand economy is noteworthy in policy circles for its turnaround during the 1980s and early 1990s. Starting from a state of semi-autarky in the early 1980s, the country now has a much more flexible and efficient economic structure. In the 15 years to 1999, successive governments reformed its institutional environment by injecting high doses of deregulation and opening the economy to the world. Following these changes, New Zealand climbed up various indexes of economic freedom: its score increased from 5.9 in 1985 to 8.2 in 2003 on the Fraser Institute measure (Gwartney and Lawson 2005). Strong employment growth from the early 1990s and productivity gains increased economic growth. Yet its average growth rate in the past decade does not compare with that of the Asian tigers, Singapore and Hong Kong, or that of Ireland, Estonia and Luxembourg, countries that share some of the highest ranks in the index. Recent performance and the modest growth prospects for the years ahead have fuelled the debate about the success of the New Zealand reforms. Some economists think that the less than stellar economic performance results from the failure to complete the reform process. Others believe that the current situation is the result of too much reform: New Zealand has been a 'laboratory' for free-market policies, and they went too far. Some maintain that it is now time to go back to more middle-of-the-road policies, taking into account not only economic efficiency but also income distribution, the environment and other issues said to have been left out in the reform process.1 In this view, better 'management' of the economy should help to improve growth prospects. The Labour-led government espoused this opinion when it was elected in 1999 (Kay 2000). Still others think that owing to New Zealand's cultural heritage, its inhabitants are relatively uninterested in high levels of economic growth.2 New Zealanders, it is said, do not need much money to be happy because they hold dear some egalitarian ideas that go back to the nineteenth century, reflected today in the romantic search for a peaceful and green New Zealand and perhaps also in the revival of Maori tikanga.3 In the first section of this report I describe the context in which New Zealand's reforms took place and then consider the five main reforms that did most to improve economic performance. In the third section, I examine the reasons why New Zealand is not performing like an Asian tiger and discuss some policy implications