Chapter 5 of The Commercialisation of New Zealand
Keywords: Political Economy & History;
In principle the Minister of Finance is just another cabinet minister, but in practice he or she can be as powerful as the Prime Minister. That power comes from the importance of economic and financial issues in the politics of the country, where no other portfolio is comparable, together with the size and the scope (and the competence) of Treasury, which services the minister. While the Prime Minister has the constitutional power, including that of appointing and dismissing a Minister of Finance, in most policy matters the latter has more effect. A rough measure can be seen from the size of the respective offices which service the two positions. In 1995/6, the central activities of the office of the prime minister and cabinet were voted $4m, while Treasury was voted $59m for its advice role. The imbalance was even greater in earlier years, before the advisory arm of the prime minister’s office was built up.
This feature of New Zealand politics was obscured in the 1975 to 1984 period when the prime minister, Robert Muldoon, also held the finance portfolio. Even so there was the acknowledgement when it was said that he was too powerful as a result, and that the premier should never be minister of finance. The practical equality of the premiership and finance portfolios is moderated by the personalities of the ministers involved. The period of 1984 to 1988 was characterized by a weak prime minster and an exceptionally strong finance team.
Lange and the Ministers of Finance
David Lange’s greatest strength was his handling of the government’s relations with the New Zealand public, where he had no peer. He was also an able crisis manager, perhaps with the flaw of precipitating unnecessary crises. However his internal management of the government was much less successful, most evidently when he was in conflict with the ministers of finance.
On the other hand over most of the period of Lange’s premiership there were three ministers of finance, each an effective politician. The finance team of 1984 – sometimes called the `Troika’ – was a unique innovation. In the past there had been a junior minister assistant to the minister of finance. This was partly to share an increasingly onerous workload, together with the practicalities of the office. The appointment of a second minister became standard with Robert Muldoon. On occasions he even had two associate ministers, but they were junior in ranking, and very much under his direction.
Instead Lange appointed three extremely able politicians, Roger Douglas, Richard Prebble, and David Caygill, ranked 4th, 5th, and 7th in cabinet, and who in addition held major portfolios of Transport and Trade and Industry. The three ministers (with the parliamentary under-secretary for finance, Trevor de Cleene), had offices on the same floor of the Beehive which increased their degree of integration. There was both an institutional and physical integration of the three ministers.
In contrast the prime minister was isolated at the top of the Beehive without any really close associate. Neither Lange, nor Deputy (and later) Prime Minister, Geoffrey Palmer had any competence in economics. (Indeed, that they and two of the Troika – Caygill and Prebble – were lawyers, seemed to give them a stance of representing their client’s views – in this case Treasury’s – rather than having independent views of their own.)
The economic direction had started out badly, with little agreement in the direction of economic policy in opposition. The 1984 manifesto papered over the differences, relying on what became a characteristic feature of the Labour government, of language that was so vague it often had two meanings. Once it was agreed to, the commercialisers, who in government had the power of implementation, interpreted the text in their way, or if necessary ignored the agreed text when they could not.
Initially Lange also was part of their team too, supporting the Troika’s policies. The policy process went like this. The Troika would come to some policy conclusion based on Treasury advice, persuade Lange and Palmer of its correctness. The tight five would then take a proposal to a cabinet committee. The recommendations would then go to cabinet, and then on to caucus. At each step in this decision tier, there was already a majority in agreement. This most obviously applied at the caucus level. The 1984 cabinet plus the six undersecretaries amounted to 26 (of the caucus total of 55) who usually supported the cabinet decision under the principle of collective responsibility. Allowing for a few other functionaries (whips, chairperson of committees, caucus secretary), and few loyalists, the cabinet (which might have been split when it made its decision) had a natural majority in the caucus. (Often the caucus would not even be consulted, because the cabinet knew it could rely on retrospective acquiesence.) The same process of majoritarian loyalism gave the government majority in parliament. Thus the Troika, obtaining the support of Lange and Palmer and a few loyalists in cabinet, could impose their policies on a house of 90 plus MPs, and so the country. This was a formidable degree of leverage by a few politicians over the entire country.
Adding to the effectiveness of the Troika was there was usually no coherent alternative economic policy. While Treasury marked (in the sporting sense, and sometimes in the academic sense too) virtually every other department to some extent (formally because they had to approve its expenditure), there were major areas of economic policy where the only expertise within the government was within Treasury. Yet when Treasury clashed with another government department on the latter’s patch it could rarely win, because there was now within cabinet a minister who was as well briefed as the Troika. (Chapter 8)
Thus the ministerial structure that Lange chose gave considerable power to the Troika. It could be said to be more dispersed than under Muldoon when so much power was held by one man, but given the compliance of the prime minister with a large parliamentary majority who were also unable to resist policies that they doubted, given the unity of purpose of the three, given the consistency of that purpose with that of the most powerful economic department in the land (whereas Muldoon had been in conflict with his advisers), one could argue the Troika was more powerful than Muldoon.
The broad direction of the Troika’s policies was that there should be greater use of the market in the regulation of the economy, and an economy which was more open to the outside world. To what extent they were initially committed to full commercialization of the economy is less clear. It seems likely that the ministers started down the more-market road, and found it leading to the advisers’ commercialization strategy they had not foreseen.
Roger Douglas had been highly interventionist as a minister in the Third Labour Government from 1972 to 1975. His 1981 There’s Got to be a Better Way is a confused document. For every sentence that can be read as a precursor of Rogernomics, there is another which shows him still a keen interventionist. His scheme for carpet factories across the country made him one of the greatest of think-biggers, although mercifully it was launched while he was in opposition. It is not until 1983 that he seems to be more directly moving towards the economic policies which today we call Rogernomics, under the tutelage of a Treasury official attached to the Labour opposition. When he came to office in 1984 he supported an uncontrolled float of the dollar, but he favoured a retail sales tax and had to be persuaded by Treasury into a GST.
His 1987 autobiography, Towards Prosperity, suggests Douglas’s main characteristics is that he is an activist, liking to do things. but was rather casual about what exactly they were. In a different economic regime, as occurred in 1972 to 1975, he was happy to be an active interventionist. Douglas was trained an accountant with little economics. His writing has consistently shown a lack of interest in the welfare state. Instead there is a belief that giving people cash income will resolve such issues as the distribution of health and education. Thus his support for a minimum guaranteed income, and the policies in his Unfinished Business are a continuation of what appears to be a long held belief.
Richard Prebble was the most ideologically right wing of the three on economic policy. Treasury officials quickly identified him as the economic dry and `monetarist’ in macroeconomic policy: today he is leader of ACT, the most right wing of the parliamentary parties. Yet in opposition he had campaigned for a public (and intervened) transport sector. One guesses that trained as a lawyer Prebble has little knowledge of the economist’s market theory and its underlying notion of the role of efficiency that drove the reforms. Rather, he is inclined to grab simple economic ideas – bumper slogans he called them – often based on anecdotes, which he waved about with a ferocious intensity. Prebble was the most political animal of the three, a determined negotiator, a good political tactician, a superb grasp of parliamentary procedure, and a first class bovver boy. Muldoon loathed Prebble – it was like looking in his mirror.
David Caygill was the most unassuming of the three, but was as crucial to the Troika’s success, not least because of his reasonableness. When he became Minister of Finance, after Douglas in 1989, the tone of Treasury changed. Caygill was willing to look for compromises. When the funding for the cervical smear campaign was raised he asked Treasury officials to look around for a source within the budget. When the green element in the caucus wanted something done about lead free petrol, he put a differential in the petrol tax. Unlike the other two, Caygill majored in economics (and political science), although he then went onto a law degree. The course imbued him with a neoclassical market oriented microeconomics, and was more monetarist than keynesian. (He was the minister responsible for the Reserve Bank Act). He had a distaste for political lobbying of the self-seeking kind. Whereas his predecessors in the Trade and Industry portfolio, had their ministerial anteroom filled with those who wanted some handout, Caygill’s soon became empty because he refused to offer lobbyists any special concessions, other than to ease the transition to the government’s ultimate goal. Caygill was a superb negotiator. Douglas couldn’t, and Prebble wouldn’t, but Caygill would compromise on detail, providing the fundamental principles of the policy were not endangered.
This is well illustrated in his border policy, which is unique because it is the one substantial part of what we call Rogernomics which was signalled – in detail – in the 1984 Labour Party manifesto. It was a remarkable feat that a party which had been protectionist for over half a century should have promised in its 1984 manifesto substantial reductions in protection. Not that all the caucus agreed with the policy (and it was in part to be offset by the promise of a major investment fund). But in a cobbled together policy which was designed to hide the deep differences within the opposition caucus between the Douglasites and the interventionists, the border protection policy was a rare exception indicating that Caygill had persuaded enough of his colleagues to make it acceptable.
When they took office the key economics portfolios were given to Douglasites, and out of that grew Rogernomics. However it is noteworthy that there was a general acceptance of a less intervened economy among a much wider spectrum than the Troika and their acolytes. Minister of Labour, Stan Rogers, who was only a Rogernome in the wildest of rhetoric, became `Sideline Stan’ as he resolutely refused to get involved in industrial disputes, arguing that good industrial relations had been compromised by Muldoon’s willingness to intervene early and to intervene often, so that the disputants never had reason to settle between themselves, since they knew that ministerial intervention would be the ultimate resolution, perhaps with some government subsidy or concession thrown in as a sweetener.
After the 1987 election Lange tried to break up the Troika. Douglas would not give up the finance portfolio, but he was given Michael Cullen, who at that time was considered an anti-Rogernome, as an associate Minister of Finance. (Cullen was also given the social welfare portfolio). Prebble was also taken out of the associate finance portfolio, and given a group of portfolios which amounted to minister of the just corporatized state owned trading enterprises. However the portfolios were subject to Treasury advice, so in effect Prebble remained a Treasury minister (and the Troika remained on floor six of the Beehive).
Caygill also lost associate finance, retained trade and industry, and was given the ministry of health. It was a portfolio he handled with exceptional acumen by announcing he knew nothing about the area and would take a year to master it, so nothing would be done in the period. While little was publicly done loudly, there much was in preparation and announced quietly. Caygill’s successor Helen Clark got the kudos. Caygill seems to have diverged quite markedly from the other two in the Troika, in that he made no attempt to commercialize the health area. It would appear that Caygill (like Lange) believed that it was possible to make the business sector more-market, while maintaining a public social service sector. Douglas and Prebble vehemently disagree.
At some stage he began to have private doubts about the drift of economic policy. Some of his closest advisers were expressing such doubts by mid 1985. But having decided he did not like the direction the commercialisers were going, Lange failed to evolve a either a coalition of supporters within cabinet or within caucus or one in the country. There was a `kitchen cabinet’, but it seems to have nobody of the technical competence to challenge the Troika. Lange built up his prime ministerial office, but the advisers dealt mainly with fires, and there does not seem to have been a long term strategy element in it. The Royal Commission on Social Policy was established but proved ineffective. (Chapter 8) There was a Cabinet Committee on Social Equity, as an ineffectual attempt to resist the push for efficiency, which too often papered over the differences, in the tradition of the 1984 manifesto, rather than resolving them. A set of advisory committees established on social policy established in December 1987, not only cut across the Royal Commission, but in some cases was captured by commercialisers.
Lange used his power of patronage poorly. The Labour government had said that unlike the Muldoon government it would not put its supporters into the wide range of positions to which it held the power of appointment, but would put the best man or woman for the job. Of course it did not follow this in practice with any purity, but in the economic area it was ignored to appoint anti-commercializers to positions of influence, no matter how competent they were. Instead the government appointed businessmen with little loyalty to Labour (as they proved in 1990). Economists soon learned that public dissent against the current economic policies was not a pathway to opportunity, whereas uncritical loyalty had enhanced one’s career. When Lange needed economic support for his resistance to economics there was no one in a position of significance who could (or would) support him.
Thus a weak or compliant prime minister, posed against a formidable trio of cabinet ministers with economic portfolios, led the Labour government down a commercialization path. Resistance was difficult from elsewhere in cabinet and caucus because there were few alternative sources of economic advice. Those which might have been were repressed.
The Blitzkrieg Approach to Policy Making
The Troika’s ability to implement policy came not only from its ability to control parliament through the already described process of institutional leverage, but a policy approach with similarities to the blitzkrieg in warfare. In each case the `lightening strike’ involved a policy goal radically different from the existing configuration, to be attained in a short period, following a surprise announcement and a very rapid implementation. While each blitzkrieg was different in detail, at each’s heart was the aim to transform profoundly some substantial aspect of the economic and social framework. Policy blitzkriegs were nothing if not audacious.
They were a response to the perceived policy sclerosis which occurred under the previous Prime Minister. The master of the overnight raid, Robert Muldoon rarely ventured into any policy development which involved much time between announcement and implementation. Leaving aside Muldoon’s own personal style, a major reason was that the consultative process seemed to give almost every major interest group an effective veto. The blitzkrieg was expressly designed to move so rapidly that the interest groups were unable to provide an effective resistance, so the public’s immediate wishes had to be discounted, for fear they could be manipulated by the pressure groups.
Like other successful generals, Douglas has written down his strategy.
* If a solution makes sense in the medium term, go for it without qualification or hesitation. Nothing else delivers a result which will truly satisfy the public.
* Consensus among interest groups on quality decisions rarely, if ever, arises before they are made and implemented. It develops, after they are taken, as the decisions deliver satisfactory results to the public.
* Do not try to advance a step at a time. Define your objectives clearly and move towards them in quantum leaps.
* Vested interests continuously underestimate their own ability to adjust successfully in an environment where the government is rapidly removing privilege across a wide front.
* It is uncertainty, not speed, that endangers the success of structural reform programmes. Speed is an essential ingredient in keeping uncertainty down to the lowest possible level.
* Once the programme begins to be implemented, dont stop until you have completed it. The fire of opponents is much less accurate if they have to shoot at a rapidly moving target.
* The abolition of privilege is the essence of structural reform.
Douglas’s formulation shows no introspection as to how one might decide that a policy solution is right. Given uncertainty of purpose is the greatest threat, the approach requires that all opposition to the reforms must come from `privilege’, or vested interests. There is no room for reflection or an alternative analysis. Once the commitment is made, speed and quantum leaps are essential: anything less is vulnerable to resistance from the vested interests. Under urgency there cannot be consultation, but Douglas thinks the public will support the reforms as it sees the benefits, including the ending of privilege.
This recipe is all the more ironic for being expounded at a meeting of the Mont Pelerin Society, founded by Friedrich von Hayek and honouring Karl Popper, whose social engineering was essentially incrementalist. In contrast the blitzkrieg is `Plato’s dream like the Leninist actuality … of an elite political order guided in the exercise of absolute political power by its supposed insight into essential reality.'
The classic policy blitzkrieg was the introduction of GST, a success in contrast to the consequence the Australian experience. Chapter 1 described the successful blitzkrieg of corporatization of state trading activities followed by their privatization. Chapter 9 analyses the health reforms as a failed blitzkrieg.
After the Troika
The inherent political tensions between the policies of Douglas and Prebble and the Labour movement eventually led to the collapse of the Troika’s hegemony, and a little later the termination of the fourth Labour government.
The incoming National Government continued both the extreme commercialization policies, and their implementation by blitzkrieg. In December 1991 there was the Economic and Social Initiative which aimed to `redesign’ the welfare state, and announced the measure which became the Employment Contracts Act which redesigned industrial relations law. In July 1991 the process continued with the budget announcements which included redesigning the accident compensation scheme, the health system, the provision of public housing, and social security. This was the final great thrust of the reformers. Within weeks the government was backing down, and it found it self in constant administrative and political turmoil on all these fronts, experiencing the same cut in its electoral share in the 1993 election as Labour had done in 1990. Only the peculiarities of the First-Past-the-Post (FPP) electoral system gave it a bare majority in parliament.
What seems to have happened is that from their election in 1990, once more the `other prime minister’ took charge of policy. The new Minister of Finance, Ruth Richardson, was as enthusiastic for change as Douglas. This time the Prime Minister, Jim Bolger, a far more effective politician than Lange, steadily limited her ability to make unilateral policy, especially as the policies led to one political and/or administrative disaster after another. In this he was helped by having close friend and able administrator, Bill Birch, at number three in cabinet. (Bolger was older and more experienced than Richardson, whereas Lange was younger and less experienced than Douglas.) Various cabinet committees were put in place, chaired by Bolger with Birch as a deputy, which weakened Richardson. By the end of 1991 Richardson’s power was crumbling. Following the 1993 election Bolger was able to demote her, offering her the position of Minister of Agriculture. She resigned from cabinet instead, and shortly after left parliament.
By then blitzkriegs were extinct. Bolger had neither the mandate in the house nor the personal inclination to continue them. The new parliamentary regime, a consequence of the Mixed-Member-Proportional (MMP) electoral system, implemented by referendum in 1993, will veto future blitzkriegs. Since no party would hold a majority of seats, the ability for a few politicians to get leverage over the whole house becomes severely limited. Undoubtedly pressures for further commercialization will remain, but in the future the outcome is likely to be settled by administrative infighting, parliamentary scrutiny, and even public consultation. That is what the voters were instinctively voting for when they chose MMP over FPP.
Nevertheless the record of the Troika and later the National Government led by Richardson in achieving change is impressive. Appendix 3.1 provides a summary list of the changes. They are astonishing in their breadth, although in less quality and only mixed in success. Often the successful more-market reforms has been obscured by a macroeconomic policy involving a high real exchange rate, which inhibited the tradeable sector and so was antagonistic to economic growth. Other reforms are still in the balance, some are abject failures. As this study proceeds we shall see that the application of commercialization principles to non-commercial activities tend to belong to the latter group. A dictionary definition of `reform’ is `form again’. That need not lead to an improvement.
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 A curious echo of the tight five appears in Lange’s belief in 1996 that `[w]e have still 20 or 24 cabinet ministers, and you could run the show on four or five.’ Reported in The Dominion, 16 October 1996.
 Oliver (1989).
 Prebble (1996).
 Douglas (1993:215-238).
 Flew (1989:17).
EXAMPLES OF REFORMS OF SINCE 1984
Restoring the Market Mechanism
Liberalization of entry licensing into industry.
Partial liberalization of occupational licensing.
Removal of other operating barriers to industry.
Removal of price control.
Removal of import licensing.
Significant decrease in import tariffs.
Establishment of Closer Economic Relations (CER) with Australia.
Removal of financial controls.
Liberalisation of foreign exchange controls.
Floating the exchange rate.
Revision of corporate, personal, and indirect taxation.
Removal of monopoly rights on state trading.
Corporatisation of state trading activities.
Corporatisation of some local authority trading activities.
Review of competition regulation.
Liberalization of the transport sector.
Liberalization of financial services sector.
Liberalization of ports and waterfront work.
Partial liberalization of energy sector.
Removal of concessions for favoured investment.
Removal concessions for favoured sectors.
Removal of shop trading hours restrictions.
Revision of town and country planning.
Commercialization of broadcasting.
Commercialization of science research.
Reforming Core Government Activities
New relations between minister and ministries.
Introduction of accrual-based and balance sheet accounting for entire public sector.
Changes in appointment procedures of chief executive officers of government agencies.
Public sector industrial relations put on a similar base to private sector industrial relations.
Resource management law reform.
Revision of role of producer boards.
Abolition of many quangos and quasi-government organisations.
Program of asset sales.
Reorganisation of core government departments.
Reform of local government.
Reserve Bank given operational independence.
Redesign of Welfare State
Reform of delivery of social welfare provision.
Reform of provision of accident compensation scheme.
Reform of provision of compulsory education.
Reform of provision of health system.
Reform of provision of public housing provision.
Reform of provision of tertiary education provision.
Labour market reform.
Major reductions in relative benefit levels and entitlements