Dialogue: Everyone stands to gain when business booms

The story of New Zealand's long-run slide down the international league tables of average per capita incomes is well known. From near the top 100 years ago, we are now around 30th place.

For decades, our growth rate was only half to two-thirds that of the average of the developed world.

This outcome can be attributed to the poor economic policies pursued by both National and Labour Governments during the 40 years preceding the reforms of the mid-1980s.

These policies resulted in many businesses relying on "favours" in the form of Government contracts, import licences and myriad heavy-handed regulations which affected industries such as transport, manufacturing, finance and liquor.

The skills of many businessmen revolved around how well they could negotiate the red tape to their advantage to preserve privileged positions, minimise competition and maintain monopoly profits.

When this protected and highly Government-controlled environment was swept away, many businesses were found wanting in their ability to compete on quality, innovation, service and price in the world market.

Can we reverse this trend? We can with sound economic policies.

It is less well known that New Zealand recovered ground during the 1990s. International Monetary Fund data shows that our economic growth for the decade 1992-2001 averaged 3.1 per cent a year, a vast improvement on the 1.2 per cent annual growth rate for the decade 1982-91.

New Zealand did much better in the 1990s than the European Union (2.2 per cent) but less well than Australia (4.1 per cent) and the United States (3.7 per cent).

In turn, the average figures for New Zealand mask an outstanding performance in the early and middle part of the decade, when we achieved the best job creation record in the OECD, and a weaker performance in more recent years as efforts to build on the earlier success fell away.

As former Treasury Secretary Graham Scott recently put it, "The notion that New Zealand has had 15 years of relentless free-market reform glosses over an untidy reality. We have had two periods of radical policy announcements to reform the role of the state in the mid-1980s and 1991-92. In between these two periods there have been consolidations, policy modifications, policy reversals, changes in leadership at various levels and a return to more familiar pragmatism driven by political resistance to some of the changes."

Average per capita incomes in Australia are now about 40 per cent higher than in New Zealand, yet there is much concern in that country about economic under-performance and the challenges of globalisation.

The No 1 issue for many Australian businesses is the brain drain. Attempts to play down this threat in New Zealand deny reality.

It is not as though New Zealanders do not want better living standards. The economy is not everything, but in a 1999 Massey University survey of attitudes and values about politics and government, support for economic growth came out, overall, far ahead of other goals.

A concern for growth must translate into a concern for the business environment. Businesses will not create wealth and jobs if policies and institutions are not conducive to growth. That is the lesson of the Soviet Union and the Third World.

There is little mystery about the prerequisites for economic growth. Key elements are relatively free and open markets, respect for property rights and contracts, sound currency, modest spending, tax and regulatory burdens, high-quality education and avoidance of welfare dependency.

Much harder is the task of achieving consensus about sound policies. In the US there is more of a consensus. In the recent presidential campaign, Al Gore declared: "I don't ever want to see another era of big government." No US politician could succeed today on a platform of big government.

Other countries have developed a consensus for smaller, better government. Ireland, which was a basket-case economy in the 1980s, is now just behind Hong Kong and Singapore in the rankings of economic freedom.

Government spending in Ireland has almost halved as a share of the economy, from more than 50 per cent in the mid-1980s to a projected 26 per cent next year. (New Zealand's ratio is around 40 per cent.)

There is a strong consensus in Ireland for its reforms. The push for privatisation, for example, originated with its Labour Party.

The values of most New Zealanders are not antagonistic to those needed for economic success. The Massey study showed that although there is still strong attachment to Government intervention (despite overwhelming disillusionment with government), far more people see competition as good rather than harmful, support private ownership of business and favour personal responsibility and freedom of the individual.

There is also a sound instinct that the priority equity goal should be the alleviation of poverty, not the narrowing of income gaps as such.

Attitudes to business are less positive, and business must rise to the challenge of earning greater respect.

Business performance also affects growth. Some businesses have destroyed a lot of shareholder wealth, and New Zealand still has a long way to go to develop a deep reservoir of business skills and an entrepreneurial culture.

By contrast, criticisms of unethical conduct in business, inadequate commercial laws and a lack of social responsibility are exaggerated.

The constituency and the capacity for economic growth-oriented reform have been weakened by negative attitudes towards business, opposition from entrenched interests, failures in political leadership and the advent of MMP.

Yet the case and the evidence for revitalisation are stronger than ever.

Former senior OECD official David Henderson has recently written: "The critics of economic reform are wrong to argue that liberalisation has been taken to extremes over the past two decades, so that a healthy 'communitarian' reaction is now due. Liberalisation is still, on balance, going ahead in many if not most countries, including some of the largest.

"There are only a few countries where the current trend is in the opposite direction: examples are New Zealand, Venezuela and Zimbabwe."

The benefits of sound economic growth are widely distributed. Recent World Bank research confirms that, internationally, growth has been good for the poor.

Policies for redistribution can do much less to raise living standards and, taken too far, they undermine the all-important incentives for people to work, invest and create wealth.

But growth is a long-haul business. It must be sustained by continuous improvement of policies and business practices, and supportive and stable public attitudes.

New Zealand showed in the 1990s that an economic turnaround is possible. Equally, however, we could resume a long-run slide.

The difference between a First World and a Third World future will be determined by what the community understands and chooses.

* Ralph Norris is the ASB Bank managing director.