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Archive for the ‘New Zealand’ Category

When President Trump proposed zero trade barriers among major economies, I applauded. Government-imposed barriers to commerce hurt prosperity, whether those restrictions hinder voluntary exchange inside a country or across national borders.

There’s a debate over Trump’s sincerity, and I’m definitely with the skeptics (look at his supposed deal with Mexico, for instance), but let’s set that issue aside and investigate the merits of free trade.

But let’s go one step farther. Instead of looking at whether multiple nations should simultaneously eliminate trade barriers, let’s consider the case for unilateral free trade.

In other words, should the government abolish all tariffs, quotas, and other restrictions so that buying products from Rome, Italy, is as simple as buying products from Rome, Georgia.

The global evidence says yes, regardless of whether other countries do the same thing.

Consider the examples of Singapore, Macau, and Hong Kong. According to the World Trade Organization, trade barriers are virtually nonexistent in these jurisdictions.

Have they suffered?

Hardly. According to the World Bank, all three jurisdictions are among the most prosperous places on the planet. Indeed, if you removed oil sheikdoms and tax havens from the list, they would win the gold, silver, and bronze medals for prosperity.

To be sure, there are many reasons that Singapore, Macau, and Hong Kong are rich. They have low taxes and small government, as well as comparatively little red tape and intervention.

But free trade definitely helps to explain why these jurisdictions have become so rich at such a rapid pace.

Let’s also look at the example of New Zealand. It doesn’t have absolute free trade, but average tariffs are 2.02 percent, which means it is the world’s fifth-most pro-trade nation.

Have the Kiwis suffered from free trade?

Nope. I shared a remarkable video last year that explains the nation’s remarkable turnaround coincided with a period of unilateral trade liberalization.

Today, let’s look at a column on the same topic by Patrick Tyrrell.

New Zealand…is one of the champions of economic freedom around the world. But it wasn’t always so. In the mid-1980s, New Zealand was facing an economic crisis, with its domestic market and international trade both heavily regulated. Unemployment had reached 11 percent… In response, the government of New Zealand began implementing revolutionary economic reforms, most significantly related to trade policy. It announced in 1987 a program that would reduce the tax on imports to under 20 percent by the year 1992. By 1996, that tax was reduced further to under 10 percent, and by the end of 1999, about 95 percent of New Zealand’s tariffs were set at zero.

Was that a successful policy?

Extremely beneficial.

New Zealand’s adoption of less restrictive trade policies has corresponded to its climb up the trade-freedom scale…and with a huge boost in per capita gross domestic product. The United States could take a page out of New Zealand’s trade-policy book and implement the same type of reductions in tariffs… That would enhance innovation and economic freedom—and grow our economy.

Here’s the chart from Patrick’s column.

Once again, the obvious caveat applies. New Zealand has adopted many pro-market policies in recent decades, so trade is just one of the reasons the country has moved in the right direction.

Now let’s go back in history and peruse Professor Peter Cain’s analysis of what happened when the U.K. adopted unilateral free trade in the mid-nineteenth century.

The trend to freer trade began in the late eighteenth century. …it was the 1840s that saw the beginning of a true revolution in policy. Earlier moves towards freer trade had been conditioned by an insistence on reciprocity (i.e. agreements with other states on mutual tariff reductions), but from the 1840s policy was determined unilaterally. The most dramatic instance of this was the Repeal of the Corn Laws in 1846. …It also reflected a growing belief that cheap imports were the key to prosperity because they would benefit the consumer as well as reduce business costs… Free trade certainly became a hugely popular cause in Britain… It was attractive not only because it guaranteed cheap food, but also because it supported the belief, widespread amongst both the business class and their workforce, that the state should be kept out of economic life.

What was the impact of this shift to unilateral free trade?

…free trade, in combination with heavy foreign investment, certainly helped to change the shape of the British economy in the late nineteenth century. …the long run effect of unilateral free trade had been to increase competition for British agriculture and industry, lower profits and stimulate capital exports. …this regime had yielded great benefits. British capital, pouring into foreign railways and other industries overseas, had helped to reduce agricultural commodity prices, shifting the terms of trade in Britain’s favour and raising national income. Dividends and interest payments on foreign investments had also increased greatly and these returns were realised by importing cheap foreign produce freely. Furthermore, …this unilateral free trade-foreign investment system had provided a strong boost to Britain’s commercial and financial sector.

Here’s the Maddison data on per-capita GDP in the United Kingdom between 1800-1914.

Looking at this chart, I’m wondering how anyone can possibly argue that unilateral free trade hurts an economy.

Once again, many caveats apply. Most important, many other policies play a role in determining national prosperity. It’s also worth noting that a handful of tariffs on products like wine and tobacco were maintained. Most troubling, the era of unilateral free trade coincided with the imposition of the income tax (though it didn’t become a money machine for bigger government until the 1900s).

The bottom line is that every example of unilateral free trade (or sweeping unilateral reductions in trade barriers) tells a positive story. Trade liberalization isn’t everything, but it’s definitely a huge plus for growth.

Yes, the best of all worlds is for trade liberalization to happen simultaneously in all countries, and negotiations have produced considerable progress since the end of World War II, so I’m somewhat agnostic about the best strategy.

But there’s no ambiguity about the ultimate goal of ending protectionism.

P.S. Sometimes bad things happen for good reasons. The income tax in the United States also was adopted in part to offset the foregone revenue from lower trade taxes.

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Most politicians are feckless creatures driven by their insecurities to say anything and everything in hopes of getting elected. And, once in power, they will do or say anything and everything in hopes of getting reelected. Public choice” theory explains how these conventional politicians behave.

But not all politicians fit in that box. There are also evil politicians in the world. Maduro in Venezuela would be a prime example, and you can add the dictators of North Korea, Cuba, and other hellholes to that list.

There are even a few admirable politicians, though that’s a very limited list.

But there’s also another category, at least in my mind. These are the ones who behave conventionally but say things that are really blur the line between foolish and despicable. For lack of a better phrase, these are the morally blind officials.

The politicians who eulogized Cuban dictator Fidel Castro belong in this group.

Another example would be Michael Higgins, the President of Ireland, who urged a return to “collective values” and condemned the “Celtic Tiger” era for being too individualistic and selfish – even though that was the period when the people of Ireland enjoyed both rapid income growth and huge improvement in quality-of-life measures ranging from central heating to infant mortality.

Now I have another politician who belongs in this special category.

The new Prime Minster of New Zealand just demonstrated her profound ignorance of world history and New Zealand history by declaring that capitalism is “a blatant failure.”

New Zealand’s new prime minister called capitalism a “blatant failure”, before citing levels of homelessness and low wages as evidence that “the market has failed” her country’s poor. Jacinda Ardern, who is to become the nation’s youngest leader since 1856, said measures used to gauge economic success “have to change” to take into account “people’s ability to actually have a meaningful life”. …Ms Ardern has pledged her government will increase the minimum wage, write child poverty reduction targets into law, and build thousands of affordable homes. …The Labour leader said her government would judge economic success on more than measures such as GDP.

She sounds like a clueless college student, regurgitating some nonsense she heard in a sociology class. Is she not aware that capitalism is the only successful strategy for reducing poverty? Does she not understand that the entire world was mired in poverty before free markets took hold?

Is she unaware that horrible material deprivation in countries such as China and India only fell after those nations opened themselves to some economic liberalization?

I wish some journalist would ask her a version of my two-question challenge. Or, better yet, have Bono talk with her about how to genuinely help poor people. Heck, let’s sign her up for an economic history class with Deirdre McCloskey.

She reminds me of Pope Francis, who has a knee-jerk view that capitalism is bad. I’ve explained why those views are wrong, though I’d first recommend reading what Walter Williams and Thomas Sowell wrote on the matter.

By the way, I don’t know enough to comment on homelessness and child poverty in New Zealand, but if their welfare state is anything like the mess in the United States, I wouldn’t be surprised to learn that the government is actually subsidizing destitution and dependency.

But even if that’s not the case, Ms. Ardern is condemning capitalism because it doesn’t solve every problem in society. That might be a fair assertion, except the alternatives to capitalism have never solved any problem. Indeed, the various forms of statism are the cause of much misery around the world.

For what it’s worth, I would not be agitated if she simply had made a conventional left-of-center argument about being willing to accept less growth to get additional redistribution because the benefits of capitalism aren’t “equally shared,” or something like that. That’s the standard equity-vs-efficiency debate. But she apparently doesn’t have the depth or knowledge for that discussion.

The bottom line is that New Zealand is now governed by a politician who doesn’t know what she doesn’t know. That doesn’t mean she’ll be any worse than the standard elected official, but I’m not overflowing with optimism that New Zealand will continue to be ranked near the top by Economic Freedom of the World.

By the way, I appeared on New Zealand TV earlier this month while in the country for a speech. But we talked about America’s top politician (and his worrisome protectionist mindset) rather than what’s happening in Kiwi-land.

Though I did mention that New Zealand made great progress because of sweeping economic reforms in the 1980s and 1990s. Hopefully Ms Ardern won’t have much success in moving her country back in the wrong direction.

P.S. Obama came close to joining the morally blind club when he suggested we could learn from communism. And Bernie Sanders deserves to be in that club, but may belong in an even worse category.

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I wrote last September that New Zealand is the unsung success story of the world.

No, it doesn’t rank above Hong Kong and Singapore, which routinely rank as the two jurisdictions with the most economic liberty.

But it deserves praise for rising so far and fast considering how the country was mired in statist misery just three decades ago. That’s the story of this great video, narrated by Johan Norberg, from Free to Choose Media. It’s runs 56 minutes, but it’s very much worth your time.

But just in case you don’t have a spare hour to watch the full video, I can tell you that it explains how New Zealand made a radical shift to free markets in key areas such as agriculture, trade, fisheries, and industry.

I wrote about New Zealand’s shift to a property rights-based fisheries system, which is a remarkable success. But I’m even more impressed that the country, which has a very significant agricultural sector, decided to eliminate all subsidies. I fantasize about similar reforms in the United States.

To give you an idea of New Zealand’s overall deregulatory success, it is now ranked first in the World Bank’s Doing Business.

As a fiscal policy wonk, my one complaint is that the video doesn’t give much attention to tax and budget policy.

Which is an unfortunate oversight because there’s a very positive story to tell. In the early 1990s, the government basically imposed a nominal spending freeze. And during that five-year period, the burden of government spending fell by more than 10-percentage points of GDP.

And because policy makers dealt with the underlying disease of too much spending, that also meant eliminating the symptom of red ink. In other words, a big deficit became a big surplus.

The same thing also has been happening this decade. Outlays have been increasing by an average of less than 2 percent annually. And because this complies with my Golden Rule, that means a shrinking burden of spending.

And there’s also a good story to tell about tax policy. The top income tax rate has been slashed from 66 percent to 33 percent, and the capital gains tax has been abolished.

Let’s close by highlighting what should be the main lesson of the video, namely that any country can rescue itself from economic decline.

As I watched, the first thing that occurred to me is that New Zealand’s reforms are – or at least should be – a road map for Greece to follow.

The Fraser Institute’s Economic Freedom of the World shows the history of economic liberty in the two nations, and you can see that they used to be very similar – in a bad way – back in the 1970s. They began to diverge between 1975 and 1985, mostly because policy got even worse in Greece. Then both adopted better policy started in 1985, but New Zealand went much farther in the right direction.

Policy has been generally stable in both nations this century. That’s acceptable for New Zealand, but it’s basically a recipe for continued misery in Greece.

But the good news is that Greece can simply copy New Zealand to get the same good results.

P.S. Remember when Gary Johnson caught grief for being unable to list any admirable foreign leaders. I defended him by pointing out that there are not any obvious choices in office today, but I did mention that Roger Douglas and Ruth Richardson – both prominently featured in the above video – would be on list if it included former politicians.

P.P.S. New Zealand ranks #3 for total human freedom, trailing only Hong Kong and Switzerland.

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When writing a few days ago about the newly updated numbers from Economic Freedom of the World, I mentioned in passing that New Zealand deserves praise “for big reforms in the right direction.”

And when I say big reforms, this isn’t exaggeration or puffery.

Back in 1975, New Zealand’s score from EFW was only 5.60. To put that in perspective, Greece’s score today is 6.93 and France is at 7.30. In other words, New Zealand was a statist basket cast 40 years ago, with a degree of economic liberty akin to where Ethiopia is today and below the scores we now see in economically unfree nations such as Ukraine and Pakistan.

But then policy began to move in the right direction, especially between 1985 and 1995, the country became a Mecca for market-oriented reforms. The net result is that New Zealand’s score dramatically improved and it is now comfortably ensconced in the top-5 for economic freedom, usually trailing only Hong Kong and Singapore.

To appreciate what’s happened in New Zealand, let’s look at excerpts from a 2004 speech by Maurice McTigue, who served in the New Zealand parliament and held several ministerial positions.

He starts with a description of the dire situation that existed prior to the big wave of reform.

New Zealand’s per capita income in the period prior to the late 1950s was right around number three in the world, behind the United States and Canada. But by 1984, its per capita income had sunk to 27th in the world, alongside Portugal and Turkey. Not only that, but our unemployment rate was 11.6 percent, we’d had 23 successive years of deficits (sometimes ranging as high as 40 percent of GDP), our debt had grown to 65 percent of GDP, and our credit ratings were continually being downgraded. Government spending was a full 44 percent of GDP, investment capital was exiting in huge quantities, and government controls and micromanagement were pervasive at every level of the economy. We had foreign exchange controls that meant I couldn’t buy a subscription to The Economist magazine without the permission of the Minister of Finance. I couldn’t buy shares in a foreign company without surrendering my citizenship. There were price controls on all goods and services, on all shops and on all service industries. There were wage controls and wage freezes. I couldn’t pay my employees more—or pay them bonuses—if I wanted to. There were import controls on the goods that I could bring into the country. There were massive levels of subsidies on industries in order to keep them viable. Young people were leaving in droves.

Maurice then discusses the various market-oriented reforms that took place, including spending restraint.

What’s especially impressive is that New Zealand dramatically shrank government bureaucracies.

When we started this process with the Department of Transportation, it had 5,600 employees. When we finished, it had 53. When we started with the Forest Service, it had 17,000 employees. When we finished, it had 17. When we applied it to the Ministry of Works, it had 28,000 employees. I used to be Minister of Works, and ended up being the only employee. …if you say to me, “But you killed all those jobs!”—well, that’s just not true. The government stopped employing people in those jobs, but the need for the jobs didn’t disappear. I visited some of the forestry workers some months after they’d lost their government jobs, and they were quite happy. They told me that they were now earning about three times what they used to earn—on top of which, they were surprised to learn that they could do about 60 percent more than they used to!

And there was lots of privatization.

…we sold off telecommunications, airlines, irrigation schemes, computing services, government printing offices, insurance companies, banks, securities, mortgages, railways, bus services, hotels, shipping lines, agricultural advisory services, etc. In the main, when we sold those things off, their productivity went up and the cost of their services went down, translating into major gains for the economy. Furthermore, we decided that other agencies should be run as profit-making and tax-paying enterprises by government. For instance, the air traffic control system was made into a stand-alone company, given instructions that it had to make an acceptable rate of return and pay taxes, and told that it couldn’t get any investment capital from its owner (the government). We did that with about 35 agencies. Together, these used to cost us about one billion dollars per year; now they produced about one billion dollars per year in revenues and taxes.

Equally impressive, New Zealand got rid of all farm subsidies…and got excellent results.

…as we took government support away from industry, it was widely predicted that there would be a massive exodus of people. But that didn’t happen. To give you one example, we lost only about three-quarters of one percent of the farming enterprises—and these were people who shouldn’t have been farming in the first place. In addition, some predicted a major move towards corporate as opposed to family farming. But we’ve seen exactly the reverse. Corporate farming moved out and family farming expanded.

Maurice also has a great segment on education reform, which included school choice.

But since I’m a fiscal policy wonk, I want to highlight this excerpt on the tax reforms.

We lowered the high income tax rate from 66 to 33 percent, and set that flat rate for high-income earners. In addition, we brought the low end down from 38 to 19 percent, which became the flat rate for low-income earners. We then set a consumption tax rate of 10 percent and eliminated all other taxes—capital gains taxes, property taxes, etc. We carefully designed this system to produce exactly the same revenue as we were getting before and presented it to the public as a zero sum game. But what actually happened was that we received 20 percent more revenue than before. Why? We hadn’t allowed for the increase in voluntary compliance.

And I assume revenue also climbed because of Laffer Curve-type economic feedback. When more people hold jobs and earn higher incomes, the government gets a slice of that additional income.

Let’s wrap this up with a look at what New Zealand has done to constrain the burden of government spending. If you review my table of Golden Rule success stories, you’ll see that the nation got great results with a five-year spending freeze in the early 1990s. Government shrank substantially as a share of GDP.

Then, for many years, the spending burden was relatively stable as a share of economic output, before then climbing when the recession hit at the end of last decade.

But look at what’s happened since then. The New Zealand government has imposed genuine spending restraint, with outlays climbing by an average of 1.88 percent annually according to IMF data. And because that complies with my Golden Rule (meaning that government spending is growing slower than the private sector), the net result according to OECD data is that the burden of government spending is shrinking relative to the size of the economy’s productive sector.

P.S. For what it’s worth, the OECD and IMF use different methodologies when calculating the size of government in New Zealand (the IMF says the overall burden of spending is much smaller, closer to 30 percent of GDP). But regardless of which set of numbers is used, the trend line is still positive.

P.P.S. Speaking of statistical quirks, some readers have noticed that there are two sets of data in Economic Freedom of the World, so there are slightly different country scores when looking at chain-weighted data. There’s a boring methodological reason for this, but it doesn’t have any measurable impact when looking at trends for individual nations such as New Zealand.

P.P.P.S. Since the Kiwis in New Zealand are big rugby rivals with their cousins in Australia, one hopes New Zealand’s high score for economic freedom (3rd place) will motivate the Aussies (10th place) to engage in another wave of reform. Australia has some good polices, such as a private Social Security system, but it would become much more competitive if it lowered its punitive top income tax rate (nearly 50 percent!).

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