NCPA - National Center for Policy Analysis

New Zealand's Success With Free Markets

May 1, 1997

Those who doubt that economic freedom makes a difference in productivity should take a close look at New Zealand's dramatic transformation over the past 12 years.

Between 1975 and 1983, New Zealand established state-owned monopolies in the rail, telecommunication and electrical businesses, and instituted massive farm subsidies, a huge public debt and a top marginal income tax rate of 66 percent.

The result was rising inflation, unemployment, taxes and government spending. But in 1984 New Zealand's leaders began a massive movement to tear down their welfare state. Between 1984 and 1996:

  • New Zealand's public sector work force shrank 59 percent.
  • All farm subsidies were ended in less than two years.
  • Tariffs were cut by two-thirds almost immediately and have continued to decline, with the average New Zealand tariff rate today 3.2 percent.

Since 1988, more than two dozen state enterprises have been sold off, including railroads, ports, telecommunications operations, banks, public works and even commercial forests, raising revenue equivalent to 26 percent of New Zealand's annual output.

  • Today over 90 percent of all imports enter the country free of any quota, duty or other restriction.
  • Compulsory union membership has been abolished.V
  • The top marginal tax rate is now 33 percent, half of what it used to be, and there are no capital gains or real estate taxes at all.

The changes have had significant impact.

  • After the ports and railways were privatized, freight costs plunged as much as 50 percent.
  • The telecommunications industry has gone from antiquated technology to a 97 percent digital system rated second on the planet by the World Competitiveness Report.
  • The national budget is balanced, inflation is negligible and economic growth is surging ahead at between 4 and 6 percent per year.

New Zealand provides a powerful lesson: free enterprise can repair the damage big government does to an economy.

Sources: Lawrence W. Reed (Mackinac Center for Public Policy), "The New Zealand 'Revolution,'" Freeman, May 1997; and William D. Eggers (Reason Foundation), "The Wonder Down Under," Government Executive, March 1997.

 

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