Explaining the Economy
Explaining the Economy
A revolutionary strategy
for Hawaii's ailing
economy, Kiwi style
Frustration with a poor economy need not discourage us. Times are tough and they will get worse if we only shrug in disgust.Indeed, a sweeping economic revolution in New Zealand has demonstrated a potential path for us in Hawaii.
In the quarter century following World War II, New Zealand experienced the slowest growth in productivity of all the advanced countries of the world. By the 1970s New Zealand lost its principle export market when Britain joined the European Union.
The government of New Zealand tried to borrow itself out of trouble and laid on the subsidies-until the credit ran out.
Even the money borrowed was spent poorly.
In one case the government bought sheep for $330 million in order to kill, freeze, and then process them into fertilizer which it sold for $6 million.
Hawaii has many parallels.
Hawaii had the worst economic performance of all 50 states in the 1990s.
Tourism has fallen flat and the $360 million convention center seems in trouble. The current government plan to spend the state out of recession may add to the debt without solving the crisis.
In 1984, New Zealand's Labor Party took control from the conservatives and Sir Roger Douglas, an ardent socialist, was appointed to the key post of minister of finance.
Almost immediately Douglas introduced sweeping reforms that swiftly ended farm subsidies; cut income taxes in half; and abolished controls on wages, prices, rents, interest rates, foreign exchange and foreign investment. Tariffs and industry subsidies were removed while many government owned enterprises -- railroads, telephones and airlines -- were privatized.
Railroads saw their costs drop to one third while carrying even more freight.
Many bureaucracies were downsized and corporatized, requiring them to show a profit. The Department of Transportation was cut from 5500 employees to a mere 57.
CEOs of these government agencies were given annual contracts with performance criteria to meet or be fired.
Agencies were opened to competition, paid taxes and, with the new incentives, performed better and at a profit. The Forestry Department went from an $80 million loss to a $130 million profit under the same leadership by simply restructuring the incentives. Farmers lost all of their subsidies, but they became more prosperous and employed more people and earned more income than ever.
The reforms didn't occur without pain, but Douglas and others were straight with the people about the crisis, implemented change at lightening speed, and the voters understood. The Labor Party was re-elected by an even greater majority.
Eventually New Zealand went from decades of stagnation and inflation to achieve the highest annual growth rate (up to 6 percent) and the lowest annual inflation rate (less than 2 percent) among the industrial nations of the world.
What would such a revolution look like in Hawaii?
Such reforms might downsize or retire whole bureaucracies -- i.e. the Department of Agriculture and the Department of Business, Economic Development and Tourism. Government entities might be privatized -- i.e. the stadium, the convention center, the airports and harbors.
Other agencies might be corporatized, thus opening government to competition, holding personnel accountable for performance, and requiring profits and the payment of taxes -- i.e. the Department of Commerce & Consumer Affairs, the Department of Labor and Industrial Relations, the Department of Land and Natural Resources, the University of Hawaii and the Public Library System.
Many social services might reduce administrative costs -- i.e. education, health and welfare.
Many costly regulations might be retired -- i.e. the Jones Act.
Subsequent tax reduction and growth might then attract investment as did the New Zealand magnet.
The people of Hawaii may not be interested in such drastic reforms, unless compelled by a prolonged recession.
Ken Schoolland is an associate professor
of economics at Hawaii Pacific University.