Rogernomics

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RogernomicsFrom Wikipedia, the free encyclopedia

Jump to: navigation , search The term Rogernomics , a portmanteau of "Roger" and "economics",was coined by journalists at the New Zealand Listener by analogy withReaganomics to describe the economic policies followed by Roger Douglas after his appointment in 1984 as Minister of Finance in theFourth Labour Government . Rogernomics was characterised by market-led restructuring and deregulation and the control of inflation throughtight monetary policy, accompanied by a floating exchange rate andreductions in the fiscal deficit. [1] Douglas came from a background of Labour Party politics. His adoption of policies more usually associatedwith the political right, and their implementation by the Fourth Labour Government, were the subject of lasting controversy.

Contents

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1 Douglas and the Development of Economic Policy, 1969-1984 2 Reforms 3 Immediate results 4 Legacy 5 References

6 Further reading

[edit ] Douglas and the Development of Economic Policy,

1969-1984Douglas became a Labour member of parliament at the 1969 generalelection . He showed his interest in economic policy in his maidenspeech, in which he argued against foreign investment in the domesticeconomy. [2] His case for external protection of the domestic economyand government involvement in investment was characteristic of theLabour Party of the time. From 1972-1975, Douglas was a junior minister in the Third Labour Government , where he won a reputation
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for his capacity for innovation .[3] This government followed a broadlyKeynesian approach to economic management.

As a minister, Douglas was innovative in context of the public sector .As Broadcasting Minister he devised an administrative structure inwhich two publicly-owned television channels competed against eachother. [4] He was among the governments leading advocates of compulsory saving for retirement, which he saw not only as asupplement to public provision for retirement but as a source of fundingfor public investment in economic development. [5] The superannuationscheme he helped design became law in 1974, but was disestablished

by Robert Muldoon almost as soon as the National Party won the 1975

election .[6]

Douglas maintained his interest in economic issues in opposition. Heframed his chief concern as the deep-seated problems in the structure of the economy that had contributed to deteriorating economic

performance and a standard of living that was slipping in comparison tothat of other developed countries. In 1980, he described New Zealandas a country living on borrowed money, unable in spite of the record

efforts of its exporters to pay its own way in the world.[7]

The economic policy of successive governments had left the domesticeconomy sheltered and unresponsive to consumers. Inflation, whichwas more than ten per cent a year throughout the seventies, was high bythe standards of the countrys major trading partners. There was a

persistent fiscal deficit. The public sector was inefficient. A large partof the economy was controlled by regulation, some arbitrary or inconsistent. The political consensus of the post-war years producedstability at the cost of innovation. [8] Both major political partiesmaintained the high levels of protection introduced by the First Labour Government from 1936 onwards, and since 1945 both parties had aimedat maintaining a structural shortage of labour. Beneficiaries of theregulated economy flourished in both public and private sectors .[9]

Douglas argued that only radical action would improve the economicoutlook. In 1980, he released an "Alternative Budget" that attackedwhat Douglas called the Muldoon governments tinkering with theeconomy. He wrote that twenty years of pandering to entrenched
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interests had dampened productive investment. The Labour leadershipsaw his proposals and their unauthorised publication as unfavourablecomment on Labour policy. The Labour leader Bill Rowling publiclyrebuked Douglas. [10] Douglas then published his thinking in the form of a book. [11] Alongside far-reaching proposals for reform of taxation andgovernment spending, it advocated a twenty per cent devaluation of thedollar to increase the competitiveness of exports. Although radical, ittook an eclectic approach and did not hint at the abandonment of Labours Keynesian policy framework. [12]

Douglas became increasingly frustrated by what he saw as the Labour Partys reluctance to deal with fundamental issues of economic policy.

He claimed in 1981 that Labour had an image as a party that would promise the public anything to be elected. He argued that the partyshould agree on its economic policy before it agreed on anything else,and allow economic reality to play a part in its decision-making. Unableto convince Rowling of the merit of his case, a disillusioned Douglasdecided to stand down from parliament at the 1981 election .[13] One of those who persuaded him to stay was Labours deputy leader DavidLange who offered to make Douglas Minister of Finance if Lange was

prime minister after the 1984 election.[14]

After Labours narrow loss in the 1981 election, Douglas found agrowing audience in the parliamentary party for his view that Laboursestablished approach to economic policy was deficient. His colleagueMike Moore claimed that there was a public perception that Labour

policy sought to reward the lazy and defend bludgers .[15] Douglasscase for a radical approach was strengthened by the belief among many

of his parliamentary colleagues that the economys deep-seated problems could only be solved by extensive restructuring. It wasunderstood that some restructuring must follow the Closer EconomicRelations agreement with Australia, which took effect in 1981 andreduced barriers to trade between Australia and New Zealand .[16] At thesame time, many economists were arguing for the greater use of competition as a tool of policy, and expressing concern about excessiveor inappropriate regulation of the economy. [17] In 1983, Lange

succeeded Rowling as Labour leader. He gave Douglas responsibility
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for economic policy and made it clear that economic policy woulddetermine other policy. [18]

Although Douglas was innovative in his approach, and his opendisregard for Rowling had earned him a reputation as a maverick, heremained within the mainstream of economic thinking in the

parliamentary Labour Party. [19] He argued in 1982 that the governmentshould actively support small business, and intervene to stop theaggregation of assets by big business. In his view, the governmentshould use the tax system to encourage productive investment anddiscourage speculative investment. Until the end of 1983, Douglas sawexchange rate, tax and protection policies as means of actively shaping

the business environment. In August 1982 he supported a contributorysuperannuation scheme as a means of funding industrial developmentand in February 1983 he wrote a paper called Picking Winners for Investment which proposed the establishment of local consultativegroups to guide regional development. In a paper dated May 1983Douglas argued that an unregulated market led to unhealthyconcentrations of market power. [20]

At the end of 1983 there was a marked change in Douglass thinking.He released a paper called the Economic Policy Package which calledfor a market-led restructuring of the economy. The key proposal was a20 per cent devaluation of the dollar, to be followed by the removal of subsidies to industry, border protection and export incentives. The

paper doubted the value of picking winners and saw only a limited place for government funding of economic development. [21] Hiscolleague Stan Rodger described the paper as a quite unacceptable

leap to the right. It immediately polarised opinion in the Labour Party.[22]

Douglas characterised the policy package as restrained and responsible,and an appropriate response to the countrys economic difficulties. [23]

He acknowledged the contribution to the package of Doug Andrew, aTreasury officer on secondment to the parliamentary opposition, amongothers. [24] W H Oliver noted the close alignment of the package and

Economic Management , Treasurys 1984 briefing to the incominggovernment. [25] His assessment was that Douglas was predisposed
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towards the Treasury view because greater reliance on the marketrequired decisive action and solved what Douglas saw as the problem of interest-group participation in policy-making. [26]

Division in Labour over economic policy crystallised when a competing proposal was submitted to the Labour Party's Policy Council. Its proponents included Rowling and others who had resisted hisreplacement as leader. It argued for a Keynesian use of monetary andfiscal policy. It was sceptical about the ability of the private sector to

promote economic development. Economic restructuring was to be led by the government, which would act within a consultative framework.In this way, the social costs of restructuring would be avoided .[27]

There was stalemate in the Policy Council. As the 1984 election drewcloser, Labours deputy leader Geoffrey Palmer drafted a compromisethat contained elements of both proposals. The Palmer paper was

broadly worded. It made no mention of devaluation. It anticipated someform of understanding between government and unions about wagerestraint. It allowed for extensive consultation about economic policyand stated that necessary structural change would be gradual and

agreed .[28]

When Muldoon unexpectedly called an early generalelection, the Labour Party adopted Palmers paper as its economic policy. Lange said that Labour went into the election with an unfinishedargument doing duty as its economic policy. [29]

[edit ] Reforms

Main article: Fourth Labour Government of New Zealand

After the snap election of 1984 , Douglas hastily began to reform the New Zealand economy, under the governments slogan of "We will dothe right thing". The speed of the reforms can partially be attributed tothe currency crisis that resulted from Robert Muldoon s refusal todevalue the dollar after being advised to do so by the incominggovernment. Labour had planned to devalue the dollar but had notannounced devaluation as part of its election policy - Douglas later stated that doing so "...would wreak havoc in the foreign exchange

market and invite a run on the New Zealand dollar". The businesscommunity became aware of the government's plan and speculated
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against the dollar, converting New Zealand funds and credits to foreigncurrency, and then back to a larger quantity of New Zealand dollars.

The reformers argued that the speed with which the reforms were madewas due to the fact that New Zealand had not adjusted to Britainsabandonment of the empire, and had to move quickly to catch up withthe rest of the world. [30] Douglas claimed in his 1993 book Unfinished

Business that speed was a key strategy for achieving radical economicchange: "Define your objectives clearly, and move towards them inquantum leaps, otherwise the interest groups will have time to mobiliseand drag you down". [31] Political commentator Bruce Jesson argued thatDouglas acted fast to achieve a complete economic revolution within

one parliamentary term, in case he did not get a second chance. [32] Thereforms can be summarised as the dismantling of the Australasianmodel of state development that had existed for the previous 90 years,and its replacement by the Anglo-American neo-classical orthodoxy

based on the monetarist policies of Milton Friedman and the ChicagoSchool .[30] The financial market was deregulated and controls on foreignexchange removed. Subsidies to many industries, notably agriculture,were removed or significantly reduced, as was tariff protection. The

marginal tax rate was halved over a number of years from 66% to 33%;this was paid for by the introduction of a tax on goods and services(GST ) initially at 10%, later 12.5%, and a surtax on superannuation,which had been made universal from age 60 by the previousgovernment .[33]

[edit ] Immediate results

New Zealand became part of a global economy . With no restrictions onoverseas money coming into the country the focus in the economyshifted from the productive sector to finance. [34] Finance capitaloutstripped industrial capital [30] and redundancies occurred inmanufacturing industry; approximately 76,000 manufacturing jobs werelost between 1987 and 1992. [31] During wage bargaining in 1986 and1987, employers started to bargain harder. Lock-outs were notuncommon; the most spectacular occurred at a pulp and paper millowned by Fletcher Challenge and led to changes to work practices and ano-strike commitment from the union. Later settlements drew further
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concessions from unions, including below-inflation wage increases, acut in real wages .[35] There was a structural change in the economy fromindustry to services, which, along with the arrival of trans-Tasman retailchains and an increasingly cosmopolitan hospitality industry, led to anew caf culture enjoyed by more affluent New Zealanders. Someargue that for the rest of the population, Rogernomics failed to deliver the higher standard of living promised by its advocates. [30]

Between 1985 and 1992, New Zealand's economy grew by 4.7% duringthe same period in which the average OECD nation grew by 28.2%. [36]

From 1984-1993 inflation average 9% per year, New Zealand's creditrating dropped twice, and foreign debt quadrupled .[37] Between 1986

and 1993, the unemployment rate rose from 3.6% to 11%. [38]

[edit ] Legacy

After Rogernomics, the New Zealand Labour Party was paralysed byinfighting for most of the next six years, as former Trade Minister MikeMoore became Leader of the Opposition (19901993), followed byHelen Clark , whose first term as Leader of the Opposition was

undermined by Moore's populist personal faction. However, Clark survived and steadily gained ground during the third and final term of the Jim Bolger and Jenny Shipley administrations. Much like TonyBlair in the United Kingdom, Clark decided on a compromise solution,combining advocacy of the open economy and free trade with greater emphasis on fighting the New Right consequences of socialexclusion .The policies of Ruth Richardson , sometimes called"Ruthanasia ", are often seen as a continuation of Rogernomics.Richardson was Finance Minister in the National Party governmentfrom 1990 to 1993.In New Zealand advocates of radical economic

policies are often branded as "rogergnomes" by their opponents, linkingtheir views to Douglas's and the supposed baleful influence of international bankers, characterised as the Gnomes of Zrich .
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