Story: Economic history

Page 11. Government and market liberalisation

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Active government

The British colonial government arrived in New Zealand before all but a handful of European settlers, and people turned to it whenever they were in need. The new government was more interventionist than the British government on which it was based.

Central government had more borrowing power than the private sector. It purchased land from Māori, and carried out the New Zealand wars. It built and owned much of the transport network, often after private enterprise had failed to deliver. It began to provide for the poor and others in need, for there were few private charities. Later it would restrain the monopolies inevitable in a small country, including enabling farmers to sell their produce overseas collectively.

Depressions accelerated government involvement. The Liberal government, elected in 1890 during the long depression, extended the economic authority of the government in a market context, with the major exception of the Industrial Conciliation and Arbitration Act 1894. The first Labour government, elected in 1935, took a more ‘anti-market’ stance in its interventions, reflecting the distrust of the market which the great depression engendered.

The expansion of government bureaucracies in the first half of the 20th century was part of the growing service sector in the economy.

Lack of flexibility

In the long run government interventions tended to be inflexible. The great depression demonstrated that markets could be ruthless if technological or other changes made processes obsolete. Those whose interests are damaged often appeal to government to protect them from changes, even at the cost of the rest of the economy.

From 1949, following the election of a National government, there was some cautious market liberalisation. The external diversification of the 1970s reinforced the view that the government’s interventions were inhibiting the export effort; for example, some exporters were forced to source an input from a high-cost domestic supplier, while their overseas competitors did not.

The complexity of the post-war economy and the external diversification of the 1970s made market liberalisation increasingly necessary. Politicians and public servants could not control the entire economy. However politicians were reluctant to liberalise because they saw markets as disrupting people’s lives. Robert Muldoon, prime minister and minister of finance from 1975 to 1984, used controls to try to repress inflation. Controls had been effective during the Second World War, but conditions had changed.

Market liberalisation

The new Labour government elected in 1984, more confident with market mechanisms, commenced a radical programme of market liberalisation. The National government which followed it in 1990 at first reinforced the process, but by the mid-1990s was proceeding more cautiously.

Effects of the liberal reforms

One consequence of the economic reforms was the ‘Rogernomics’ (or long) recession. Per capita gross domestic product (GDP) fell or stagnated in every year between 1986/87 and 1993/94, the longest recession in the post-war era. At its bottom, economic activity was 9% below trend – unemployment rose to 11.1% of the labour force in March 1992.

What’s in a name? 

‘Rogernomics’ was the term used to describe the liberal reforms of the post-1984 Labour government. The name refers to the minister of finance, Roger Douglas, who initiated the liberalisation, although other ministers followed him. It echoes ‘Reaganomics’, the liberalisation of the American economy by President Ronald Reagan in the 1980s, and ‘Thatchernomics’, the policies of Prime Minister Margaret Thatcher in Britain at the same time. 

There is no agreement as to the cause of this recession. It was not the 1987 international sharemarket crash, because other countries that had a crash did not stagnate like New Zealand. The world economy flourished, and New Zealand faced neither major external borrowing pressures nor falls in its relative export prices. The recession seems to have been a domestically generated slowdown. A common explanation is that the economic liberalisation was badly managed, especially by over-valuing the exchange rate, which stalled the export engine of the economy.

Reforms a success?

There is debate on the success of the liberalisation. Some argue that all reforms were necessary, and more should have been made. Others believe that the measures caused unnecessary hardship – they speak of the conversion of ‘fiscal deficit’ into a social deficit.

The middle view is that many of the liberalisation measures were necessary, but not always well implemented, while others were extreme and inefficient. That was the view of the Labour-led administration elected in 1999, which reversed or modified many of the extreme measures, but broadly continued with the liberal market economy its predecessor Labour government had initiated.

How to cite this page:

Brian Easton, 'Economic history - Government and market liberalisation', Te Ara - the Encyclopedia of New Zealand, http://www.TeAra.govt.nz/en/economic-history/page-11 (accessed 21 August 2017)

Story by Brian Easton, published 11 Mar 2010