New Zealand Reforms Economy, But Electorate Shows Discontent

IN the last nine years, New Zealand has undergone a social experiment that has been watched closely around the world.

This small country has been transformed from one of the most regulated and protected economies to one of the least. Its one-time double-digit inflation rate has been brought to under 2 percent, the lowest in the Organization for Economic Cooperation and Development. And the economy is expected to grow at 2.9 percent in 1993-94, better than the United States, Japan, and Europe.

But while the New Zealand economy has made a remarkable turnaround, voters here have signaled that they do not care for the way it was done.

In the general election Nov. 6, voters gave the ruling National Party the most seats but no clear majority. Two new minor parties have been given greater powers. And the true tally will not be known for 10 days when 200,000 special votes will be counted.

In the wake of political uncertainty, the share market initially lost 6 percent of its market capitalization, one of the steepest falls since the 1987 crash. The New Zealand dollar weakened against the US dollar. Bond yields jumped between .05 and 1 percent.

A newly elected Labour government began the changes in 1984, floating the dollar, relaxing investment rules, shrinking tariffs, and selling state-owned assets. Tax rates dropped from 66 percent to 33 percent; a 10 percent goods-and-services tax was instituted and later increased to 12.5 percent. The Reserve Bank was given statutory independence and a contract to keep inflation under 2 percent or face sanctions.

Labour's sudden and radical changes proved politically disastrous. The unemployment rate shot up to 10.5 percent. When a bruised and angry electorate dumped the Labour party in 1990, the more conservative Nationals went even further, introducing enterprise bargaining, cutting welfare benefits, and instituting user fees for formerly free hospitals and universities.

Unemployment still hovers around 9 percent. Real wages have fallen. One million people, nearly one-third of the total population, have a Community Services Card that gives them discounted medical benefits. The Salvation Army says requests for food assistance have increased from 423 to 4,938 in the last three years.

Bob Stephens, an economics professor at Victoria University, says keeping inflation low ``maintained interest rates at reasonably high levels, and kept the exchange rate high.... The recovery could have come quicker and been more dynamic if inflation wasn't such a policy tool.''

Minister of Finance Ruth Richardson was the architect behind many of National's social policy changes, including slashing benefits in the middle of a recession. She narrowly won reelection to what had been a safe National seat. ``We had a choice: We could continue to pump air in the tires or fix the leak,'' she says. ``We chose to fix the leak. It required dramatic, urgent action.''

Analysts say they do not foresee further drastic changes ahead for New Zealand. ``With this election, the voters said they were fairly happy with the economic reforms but not happy with the marketization of social and community services,'' says Paul Frater, an economist with Business and Economic Research Ltd. ``There also seems to be some disquiet about continued privatization of state-owned assets.''

``If National becomes the government, they're likely to maintain current policy settings in terms of fiscal and monetary policies,'' says Petrus Simons, an economist with Integrated Economic Services, an economic consulting firm.