A WORLD REPORT SPECIAL EDITION ON THE PACIFIC RIM : THE SOUTH RIM : Essay : New Zealand Profits From Taking Tough Road : It is now called the world’s most competitive country after dismantling the welfare state and slashing public debt.

For sheer economic and governmental reform, the Republicans’ much-touted Contract With America can’t hold a candle to the “Contract With New Zealand” that both major political parties in that South Pacific island nation have supported for more than a decade.

In 1984, New Zealand’s budget deficit had reached 9.5% of the country’s output of goods and services, or gross domestic product. (For comparison, the U.S. budget deficit is less than 3% of GDP). Inflation was high and so was the national debt because New Zealand had borrowed heavily throughout the 1970s to help its farmers and industries cope with the loss of its traditional market in 1973 when Britain entered the European Community.

But the borrowing and the subsidies--by 1984, 40% of a New Zealand farmers’ income came from subsidies--were to no avail. New Zealand lamb and wool and manufactured goods proved non-competitive even with Australia across the Tasman Sea when the two nations established a free trade treaty in 1982-83.

As New Zealand’s James Bolger, the current prime minister, puts it, that treaty was “NAFTA without conditions,” and it made clear that his country had to change.

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So it did--dramatically. Within a year, farm subsidies had been cut to near zero. Protective tariffs came down. New Zealand began to cope with the newly competitive. And it has been coping ever since with dramatic results.

Today, the Wellington government has a budget surplus and the nation’s economy is growing about 6%, the fastest of any industrialized nation.

New Zealand now is called the world’s most competitive country; its determination to open its markets and deregulate its economy is hailed as a model for other nations as they adapt to global change.

But the transition to superstar has not been easy. There were years of struggle in the late 1980s as it pursued contradictory policies: hobbling the economy with high interest rates to hold back inflation; then paying high benefits to the unemployed in that limping economy and financing those benefits by high taxes on those who had jobs.

In the last four years, New Zealand has scrapped all that. The present government is bent on reducing taxes and inflation and to spurring economic growth.

So New Zealand can teach others a lesson or two, particularly Americans at this time of political and economic transition. Yes, the two countries are very different. New Zealand is small--3.4 million people and an economy of around $50 billion, which is less than 1% of the U.S. GDP. Moreover, 44% of New Zealand’s economy involves foreign trade (compared with under 20% for the United States) and thus is vulnerable to shocks and dictates from the world economy.

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But global capital markets affect both large and small. And the New Zealand dairy farmer hurt when his subsidies disappeared in 1984 was no more vulnerable than a Wisconsin farmer would be today if the same happened in the United States--as well it might.

Many New Zealand farmers coped by simplifying, poorer land was taken out of production, cows were fed on grass rather than purchased or specially grown feed.

New Zealand agriculture, which still accounts for 35% of the country’s exports if only a shrunken 6.1% of its total economy, added value by processing more of its lamb and beef rather than shipping live animals. The shift to new markets in Asia, which often lacked the food-processing capabilities of New Zealand’s old customers in Europe, helped foster change.

At every stage of its economic transformation, says Bolger, New Zealand “had no choice.” It could not afford to isolate itself from a changing world nor to subsidize its citizens’ adjustments to those changes. It has reformed welfare, made unemployment benefits contingent on recipients actively looking for work and limited other benefits.

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Bolger’s government, in office since 1990, has privatized state-owned companies--selling the railroad, telecommunications and even the government’s computing services to U.S. companies.

It also ended the pattern of compulsory unionism and national bargaining agreements between industry and labor unions.

Efficiency comes at a price, at least initially. Unemployment rose early in the decade and is still above 7%, although falling now, thanks to rapid growth. New Zealand’s changing economy, like America’s, also exhibits widening income gaps: The lowest paid, least-skilled and least-educated 20% of New Zealand’s workers have seen their incomes fall or remain flat while the incomes of the better educated, best-paid 20% have risen.

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Bolger’s response has been to go for growth to provide jobs in the country’s growing tourism industry or in manufacturing, services and computer software. “Any kind of job is preferable to the dole,” says Bolger, 59, a onetime farmer.

To stem a brain drain of skilled New Zealanders, who for years had sought opportunity in Australia and beyond, his government reduced income taxes to a top rate of 33%, down from 40.5%. A value-added tax helps maintain government revenues.

Meanwhile, health and retirement benefits are now tested according to need and, in language that anticipated Newt Gingrich’s contract, Bolger’s government passed a Fiscal Responsibility Act that empowers New Zealand’s central bank authority--similar to that of Germany’s Bundesbank--to take whatever means necessary to hold inflation below 2% annually, unless the inflation is caused by external factors such as oil crises.

New Zealand also is determinedly paying off its national debt, hoping to bring it down to less than 20% of gross domestic product by 2003. The debt had reached 77% of GDP in the 1980s. For comparison, the U.S. national debt is now about 66% of GDP.

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America take note: New Zealand is not pursuing these economic policies out of ideological whim. Its left-leaning Labor Party began the economic reforms in 1984 and its right-tending National Party has carried them on because they are necessary for a small country adapting to a changing world.

New Zealand, the world’s largest butter exporter, was a contented former British colony--less assertive than Australia--until the early 1970s. Then, its world changed. Its new trade partners are in Asia, from Thailand and Malaysia to Japan and South Korea.

Those countries, some of them industrializing at a furious pace, are not interested in New Zealand’s internal structures or history, only whether it can deliver the lamb or wool or kiwi fruit at an acceptable price.

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So New Zealand has adapted. Was compulsory unionism making the costs of its exports too high? It abandoned compulsory unionism. Was a high national debt leaving it vulnerable to rising interest costs in global markets? Very well, it is paying down its national debt.

New Zealand is small, to be sure, but exemplary nonetheless. For even the mighty United States has lately found its freedom of actions limited by the need to borrow to fund trade deficits and the need to pay massive interest on an enormous national debt. It might well take a look at that “Contract with New Zealand.”

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Leaner and Meaner

New Zealand’s economic reforms are paying off in more growth, less unemployment and lower public debt.

Source: New Zealand government