New Zealand the larder land is in for economic austerity

July 9, 1985

New Zealand is undergoing one of its most dramatic periods of change since it was first settled by the British nearly a century and a half ago. The process began in the 1970s when two events shook this South Pacific island nation of 3.3 million -- a country which, blessed with good soil and plenty of sun and rain, had grown into one of the world's richest agricultural producers.

Developed essentially as a faraway farm for Britain, New Zealand's name had become synonymous with the finest meat, dairy foods, and wool. By the early 1960s it was rated the third-richest country in the world in terms of its living standards.

Then, in 1973, Britain joined the European Community, and barriers began to rise against New Zealand meat, butter, and cheese exports.

The same year, the first world oil shock struck a further blow. With virtually no oil of its own, the country depended on imported fuel, and as prices soared, New Zealand's terms of trade suffered a drastic fall. New Zealand's standard of living slumped to 20th on the world table of countries. Inflation soared. Unemployment, unknown in the '60s, emerged as an unwelcome fact of life. The economic growth rate slumped and incomes fell.

Last July, New Zealand voters elected a Labour government for only the second time in a quarter of a century. It inherited a financial crisis.

The country was virtually bankrupt. Overseas debt stood at around NZ$17 billion (New Zealand dollars -- about US$8.5 billion), the current-account deficit (imports against exports) was more than NZ$2 billion, and money had been flowing out of the country at the rate of NZ$120 million a day.

The world recession had hit New Zealand hard, and as prices and markets for the country's major agricultural exports weakened, unwanted surpluses mounted. In mid-1982 the government froze wages at an average level of about NZ$300 a week (or roughly US$10,000 a year) and controlled prices and interest rates.

The economy had become highly regulated, enmeshed in controls that strangled market forces and protected farmers and manufacturers with a range of subsidies and other aids worth around NZ$2 billion a year.

The new government immediately devalued the currency by 20 percent and removed most controls on lending and deposit interest rates. Now farm support prices, which had topped NZ$350 million a year, are being chopped, and domestic producers are to lose much of their import protection.

Foreign-exchange controls have been lifted, allowing New Zealanders to invest overseas without restriction and giving foreign companies easier access to New Zealand capital markets. The New Zealand dollar has been allowed to float.

The government is committed to reviewing New Zealand's traditional and costly cradle-to-grave welfare policies and is pledged to major reform of the tax system -- moves that have drawn fire from traditional Labour Party supporters, especially the labor unions.

Agriculture still provides 70 percent of export earnings, but huge natural gas desposits are reducing the imported-fuel bill. Industrial development is growing, and the weak New Zealand dollar is attracting more and more big-spending overseas tourists.

The first electoral test of Labour's policies saw a 10.2 percent swing against the government in a June 15 by-election. The South Island port city of Timaru, a Labour stronghold for 57 years, was won by the opposition National Party. Prime Minister David Lange accepted the vote as a rebuke to the government but said it would not be swayed from its economic policies.