New Zealand is a testament to the benefits of market liberalisation – and a warning of the subsequent back peddling that can arise

24 May 2018 // Jamie Fraser

Jamie Whyte at the First Economic Freedom Summit, addressing liberalising reforms in New Zealand

The transformation of New Zealand’s economic policy from 1972 to the present day is extraordinary. The extent of state intervention during the 1970s under Robert Muldoon offers poignant illustrations of the negative impact that central planning can have on national economies. The insistence on exclusive import licenses for example led to widespread bribery and corruption to procure such licenses.

The subsequent election of the Labour Party in 1984 demonstrated the positive effects of radical economic liberalisation. The abolition of agricultural subsidies was a recognition of their inefficiency. By distributing subsidies on a per livestock basis, livestock farming had begun to occur on almost any land to activate the subsidy; despite this development, no productivity gains were achieved; meat output remained the same.

By abolishing subsidies, the industry thrived; the farm sector grew by nearly 4% per year in real terms and grew as a proportion of GDP by over 2% in the same period.  The elimination of subsidies for sheep farming in particular saw the industry produce the same amount of lamb from half the number of sheep, with a 20% cut in greenhouse gas emissions. The optimisation of land was also realised; the development of the New Zealand wine industry was a direct consequence of land being utilised for its most efficient purposes rather than for chasing subsidies. The Common Agricultural Policy of the European Union would do well to similarly reform its current subsidy structure of a per hectare payment, which exhibits many of its own unintended consequences that compromise productivity and innovation.

While many lessons can be learnt from these developments, New Zealand today also serves as a warning of the extent of back peddling that can occur post-liberalisation.

The most detrimental return to central planning is the extent of restriction within the Resource Management Act (or RMA, strangely enough passed by the otherwise economically liberal Labour government of the 1980s). The RMA is the regulatory system that governs the use of land, under which it is very difficult to buy and develop land for either residential or commercial purposes. The bizarre consequence of this is that, despite having a slightly bigger land mass than the UK, with less than a tenth of its population New Zealand has a land shortage – caused entirely by regulation. This has led to stifled economic growth and has disproportionately increased house prices relative to average income, particularly in large cities such as Auckland.

With the current coalition government consisting of the New Zealand First, Labour and Green parties, it is highly unlikely that this burdensome regulation will be overturned, which is further cause for concern. New Zealand must relearn its own lessons of the 1980s, and once again flourish through an agenda of liberalisation.

Read more on New Zealand’s market liberalisation and the problems of the RMA:

Liberalisation of financial markets in New Zealand

New Zealand: Developing and Sustaining Economic Liberalisation

Addressing the Shortcomings of the RMA and RMA Processes – Where to from here?

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