Wednesday, June 25, 2014

Lessons from New Zealand

Last night, after I watched a video from ABS-CBN Bandila about invitation for Filipinos to study, work, and migrate to New Zealand, I searched for articles to find the nation's economic situation. I found seven articles, and five of them through Mises Wiki. The remaining two were from Forbes and New Zealand Herald respectively. In this article, I would like to share my reflection on Maurice P. McTigue's lecture delivered on February 11, 2004. 



Maurice P. McTigue has a very impressive profile. His lecture focused on the reduction of the size of New Zealand government and the lessons that can be gleaned from it, and I came up with at least seven of them. 

In sharing these ideas, I recognize that 10 years have already passed since the lecture was first delivered, and I have no time right now to research further about the present status of New Zealand's economy. Moreover, I am also aware that contrary assessment exists that views New Zealand economy as a bubble. Therefore, if ever I am mistaken in my assessment of the material, I apologize for I am not an economist. I am just an ordinary citizen concerned for the future of Philippine economy. 

The central lesson we can learn from the lecture is the need to have a different perspective about the government. By government, I don't mean only the Philippine government, but includes all governments of the world. The main goal in this new way of thinking is the reduction in the size of government. And I think the lecture of Maurice P. McTigue will help us see how to achieve this goal. For this reason, we came up with seven lessons from New Zealand:

1. Adopt a new policy. In New Zealand, when they started to reform their government, they precisely identified the real sources of their economic difficulties. They identified three: "too much spending, too much taxing and too much government." To block the source of their economic problems, they looked for ways "to cut spending and taxes and diminish government's role in the economy." This meant adoption of a new policy by applying practices borrowed from the private sector. Consequently, unique features characterized this new policy that determine government activities. In dealing for instance with senior executives of government agencies, "there would be a purchase contract" with specific expectations in return to peoples' taxes. Non-performance was punished for dismissal, and good performance with a possible extension. 

This new policy includes a new way to measure the success of government's welfare program. Instead of counting the number of people under welfare list, they now assessed the success of the program by the number of people who "get off welfare and into independent living." 

2. Kill regulations that hinder economic growth. Here the role of bureaucrats is critical for they are the ones who exercise this regulatory power despite the fact that the people did not elect them for office. McTigue found many regulations used by bureaucrats that hamper the market, but the reformists came up with a way to eliminate them. They rewrote the laws on which those regulations were based. They did this with environmental laws, "the tax code, all of the farm acts, and the occupational safety and health acts." The guidance they gave to the writers was "to pretend that there was no pre-existing law" and that they should write in mind to come up with "the best possible environment for industry to thrive." One remarkable outcome of this was the reduction in the size of regulations. For instance, the environmental laws were reduced from "25 inches thick to 348 pages." By doing this, the reformists were successful to kill old regulations. 

3. Eliminate useless government departments and jobs. The leaders of this reform were not afraid to ask difficult questions such as what the government should be doing. In their resolution for change, they eliminated tasks outside the legitimate function of government. What follows seems shocking for those who have conventional ideas about public service.

In Department of Transportation, they eliminated 5, 547 jobs, reduced the number of employees from 5,600 to 53. In Forest Service, they eliminated 16, 983 jobs, from 17,000 employees down to 17. In Department of Works, the whole 28,000 employees were fired except 1, the Minister. By doing all of these, jobs were not killed. What happened was that "the government stopped employing people in those jobs, but the need for the jobs didn't disappear." In fact, according to McTigue, after several months, he visited some of the forestry workers, and found them happy for "they were now earning about three times what they used to earn."

4. Sell Government Owned and Controlled Corporations/ State Owned Enterprises (GOCCs/SOEs) and pattern other government agencies after profit management. Consistent to the new policy, the government of New Zealand sold SOEs/GOCCs involved in following industries: "telecommunications, airlines, irrigation schemes, computing services, government printing offices, insurance companies, banks, securities, mortgages, railways, bus services, hotels, shipping lines, agricultural advisory services, etc." When they did this, the productivity under those industries increased, cost of services reduced, and the economy grew. 

Moreover, the remaining government agencies emulated the private sector as their model. They did this "with about 35 agencies" and the remarkable result was that instead of spending taxes, these agencies now produced the exact amount that they wasted prior to changing the management, "about one billion dollars per year". This was indeed a remarkable transformation from a 1 billion dollar liability into 1 billion dollar asset!


5. Revisit government subsidies. The strategy here was either to totally stop or modify government subsidies. McTigue recognized the fact that the main trouble with government "subsidies is that they make people dependent" and as a result "they lose their innovation and their creativity and become even more dependent." McTigue gave three examples: sheep industry, farming, and education. 

In the case of sheep industry and farming, the government totally stopped the subsidies. As of 1984, 44% of income of sheep industry depended on subsidies for the price of lamb per carcass was $12.50. When the government stopped the subsidies, the sheep farmers thought of new ways to produce and process a different product and sell it in different markets to come up with $30 per carcass. Within two years, they accomplished their goal, and as of 1999, the price reached $115 per carcass. 

Similar productivity happened in farming. When subsidies stopped, "coporate farming moved out and family farming expanded". McTigue commented: "if you give people no choice but to be creative and innovative, they will find solutions."

In the case of education, subsidies were modified. New Zealand was wondering why despite more funds were poured into education, the results were getting worse. And so they hired international consultants to identify where the money was going. After receiving the report that for every dollar, 70 cents went to administration, they "immediately eliminated all of the Boards of Education in the country." "Every single school came under the control of board of trustees elected by the parents. . ." The government gave schools funds "based on the number of students. . . with no strings attached." ". . . 4,500 schools were converted into this new system on the same day."

And then the government did the same thing with private schools. The fear that students would transfer from the public to private schools did not happen for the academic advantage of the latter diminished in about 18 to 24 months. This happened because "teachers realized that if they lost their students, they would lose their funding; and if they lost their funding, they would lose their jobs."

6. Simplify and reduce taxation. Complicated system of taxation was one major reason for New Zealand's economic setback. Such system "distorted business as well as private decisions." To reform the system, they eliminated distractions from taxation such as concerns for "social services and changing behavior" and concentrated only on the rationality of taxation. Out of this realization, they focused on "two mechanisms for gathering revenue - a tax on income and a tax on consumption." They simplified these mechanisms and they reduced the tax rates. They "lowered the high income tax rate from 66 to 33 percent," "the low end down from 38 to 19 percent," set the consumption tax rate to 10 percent and "eliminated all other taxes - capital gains taxes, property taxes, etc." As a consequence, government revenue increased by 20 percent. The reason for this was that "If tax rates are low, taxpayers won't employ high priced lawyers and accountants to find loopholes." McTigue claims that every country he visited that has "simplified and lowered its tax rates has ended up with more revenue, not less."

7. Create a business-friendly environment. This is related to the foregoing. Those in the public sector fail to realize that "capital and labor can move so freely from place to place that the only way to stop business from leaving is to make certain that your business climate is better than anybody else's." The Irish tax policy was cited as an example of this. 

The Irish government "had reduced their tax on corporations from 48 percent to 12 percent and business was flooding into Ireland." The European Union "was highly critical" of such policy, and "wanted to impose a penalty on Ireland in the form of a 17 percent corporate tax hike. . ." The Irish government did not give in. EU responded that Ireland's policy "was unfair and uncompetitive." "The Irish Minister of Finance agreed: He pointed out that Ireland was charging corporations 12 percent, while charging its citizens only 10 percent. So Ireland reduced the tax rate to 10 percent for corporations as well." 

Returning to the Introduction

As stated above, as government increases in size, economic problems become worse. The experience of New Zealand provided us a good example how to prevent this from happening. For McTigue, transparency and accountability are necessary to achieve this goal. 

In the introductory part of the lecture, McTigue enumerated other symptoms of economic deterioration of New Zealand from being the 3rd in the world in per capita income prior to 1950s down to the 27th place by 1984:

  • Unemployment rate was 11.6 %

  • 23 successive years of deficits

  • National debt had grown to 65 % of GDP

  • Government spending was 44 % of GDP 

  • Investment capital was exiting

  • Young people were leaving in droves

And the reason for the above deterioration was the expanding power of the government, which was evident in the following interventionist policies: 
  • Government controls and micromanagement were pervasive at every level of the economy. 

  • Foreign exchange controls 

  • Buying shares in a foreign company was considered illegal

  • Price controls on all goods and services, on all shops and on all service industries. 

  • Wage controls and wage freezes. 

  • Import controls

  • Massive government subsidies on industries 

But after the "reduction of 66 percent in the size of government," and decrease of government's share of GDP "from 44 to 27 percent," the economy improved. Instead of deficits, there were surpluses. 

Reflection

Reflecting on the data provided by McTigue, it sometimes puzzles me why most Filipinos still look up to the government and to the political class to provide us the solution to our economic ills. I think, if there is anything good that will come out of the current PDAF scandal, I wish it will be this: the enlightening of the minds of the people as to the real nature of government. 


I agree with McTigue that the government should only be doing duties within its legitimate sphere. Welfare, providing employment and education are not part of this sphere. Imagine the kind of government waste that had been stopped in New Zealand. 50, 630 employees in government departments had been doing tasks that they were supposed not to be doing, and they were paid for their unproductivity! No wonder, New Zealand suffered economically prior to government reforms! 

I am just thinking if similar reform will be applied to the Philippines, how many tasks government agencies do should be stopped? How many jobs will be eliminated? And how many departments should be shut down? 

I consider that our President's goal to reduce the number of GOCCs/SOEs down to less than 100 is economically sound. Regarding charter change, let us continually educate ourselves about the real issues behind this debate. Let us also remain vigilant as to the progress of Freedom of Information bill. This will help a lot to establish the mechanism for transparency and accountability to at least minimize corruption, since its complete eradication is impossible. 

The challenge both to the political class and the people is that if we are really serious to improve our economy, we should start following the model New Zealand has provided. A clear indication that a change is taking place once the people stop looking up to the political class as the solution to our economic difficulties, and instead of focusing on personalities, principles and policies are emphasized. Central to this change is the idea that the expanding size of government is not the remedy, but the source of our economic ills. 



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