July 1984: When life in NZ turned upside down

Frontier Centre, Role of Government, Uncategorized, Worth A Look

A snap election called late at night, followed by a change in government, was to alter the political landscape of New Zealand forever. JOHN ROUGHAN, a political reporter at the time, looks back on that tumultuous year.

This time 20 years ago New Zealand realised it was in for a change of Government. It had no idea how big that change would be.

Sir Robert Muldoon’s reign was ending; that much was clear. If his demise was not a foregone conclusion on the night of June 14 when he called a snap election – or over the next few days when voters watched television replays of the inebriated announcement – the election was effectively over by the end of the first week of campaigning.

The Labour Party’s televised opening in the Christchurch Town Hall had been a piece of political theatre unmatched in New Zealand before or since. Leader David Lange would later say the dramatic quality was accidental. He was worried about finishing his speech within the televised hour. So he kept coming in over the applause.

Accidental or not, the effect was awesome. Lange, who the country had not yet taken to heart, had no time to enjoy his best lines. At each round of applause he would come back booming over the top. Each time it seemed to lift the performance higher.

His theme – ironically, it would turn out – was about “bringing the country together”, dispelling the nastiness of the Muldoon years and returning to the politics of consensus.

It was a message borrowed wholesale from the Australian Labor Party’s successful campaign the previous year. Like Bob Hawke, Lange was carefully dressed in authoritative dark suits and Labour promised nothing more than to copy the ALP’s “economic summit conference”.

But behind the warm rhetoric, something else was happening. Word was around the business world that Labour’s finance spokesman, Roger Douglas, favoured devaluing the dollar, as the ALP had done.

The more likely Labour’s victory became, the more dollars were sold. And since the currency had to be traded at a fixed rate through the Reserve Bank, the flight from the dollar rapidly depleted the bank’s foreign currency reserves.

After the election the bank suspended trading, a step that brought the crisis to public attention. That Sunday morning Reserve Bank Governor Spencer Russell and Treasury Secretary Bernie Galvin flew to Auckland to brief Lange and Douglas.

The officials advised an immediate devaluation, which they had been urging on Muldoon since the crisis began early in the campaign.

Muldoon resisted, and continued to resist that Sunday and Monday. Though he had been defeated, the formal transfer of power by the Governor General would not happen for another 10 days.

Muldoon tried to convince Lange that the two of them could arrest the run on the dollar with a joint declaration against devaluation. The officials disagreed. They and Douglas believed the fixed rate had become too high for the country’s underlying economic weakness anyway.

On Monday night Muldoon gave a television interview at Vogel House in which he proposed his solution to the crisis.

When he heard it, Lange went ballistic, calling a late-night press conference at Parliament to accuse the defeated Prime Minister of defying the instructions of the incoming Government. The headlines next morning screamed, “Constitutional crisis”. Some of Muldoon’s senior ministers met to discuss whether they should topple him immediately.

Before the day was out Muldoon capitulated. The dollar was devalued by 20 per cent and the exchange re-opened. But the dye was cast. The fourth Labour Government had been hijacked by the crisis.

And far more importantly, the extraordinary sequence of events had given the public a sharpened sense of the economy’s fragility, creating a climate receptive as never before to drastic change.

The complete reform of New Zealand – from a protected and centrally controlled economy to a free-trading state of competitive markets – did not begin at the 1984 election. But it would never have been as rapid and comprehensive, and probably never would have gone so far, had it not been for the events of that June and July.

The free-market policies that took root in New Zealand from 1984 had been developed in the United States and Britain in response to the “stagflation” (inflation and an high unemployment) caused by the oil crises of the 1970s.

The idea that economies are strongest when built on competitive private enterprise, tight monetary controls and less government, came to the ascendancy in Britain with the election of Margaret Thatcher (1979) and in the United States with Ronald Reagan (1980).

There were advocates of those policies within the conservative governments of New Zealand and Australia in the early 1980s. Derek Quigley, Ian McLean, George Gair, Hugh Templeton and Jim McLay were among those doing what they could to liberalise the economy in the Muldoon years, and they had some achievements.

Trucks were permitted to carry freight long distances, ending a state rail monopoly. Meat processing became more competitive. Closer economic relations with Australia was negotiated. Compulsory trade union membership was outlawed and, near the end, National’s caucus considered privatising Air New Zealand and Petrocorp.

But they were peripheral steps, out of sync with the main thrust of Muldoon’s methods of economic management. He hardly bothered to disguise his scepticism when announcing each tentative liberalisation.

The dominant themes of his Government were quite the opposite – state-led investment in domestic energy and import substitutes (“Think Big”) and an attempt to keep inflation at 15-18 per cent with wage and price controls.

Back in 1982, when he failed to negotiate wage restraints with national organisations of unions and employers, he simply took command of all wages and prices in the economy. The freeze suppressed inflation for a while but neither he nor anybody else knew what to do after that.

Think Big and the freeze could hardly have been more offensive to market principles, which held that governments should not influence patterns of investment (“pick winners”) or stifle inflation anywhere other than at its source (monetary creation).

Little wonder the public scarcely knew any economic liberalisation was happening. The reforms were peripheral, negligible and probably would have been short-lived had it not been for the crisis of 1984.

Even then it took months for the news to sink in that Lange-Douglas meant business.

The economic summit was duly held at Parliament but while the televised communion of corporate leaders, trade unionists, social sectors and beneficiaries caught public attention, it did not produce a radical programme.

The significant moves were coming from the Finance Minister’s office in decisions to remove interest rate controls, tender public debt, relax price controls – all clear signals to finance markets of a new direction.

And Lange and Douglas were talking tough to farmers and industry about a new economy in which farm production would not be subsidised and manufacturers could not continue to have licensed market shares, cost-plus pricing and protection from imports. All such contrivances would be stripped away so resources and investment might move into activities that were genuinely internationally competitive.

But it was not until November 8, when Douglas present his first Budget, that the country really began to take him seriously. As Douglas calmly read that Budget to Parliament, pronouncing the death notice of one farm subsidy after another, Opposition whip Don McKinnon made a pistol of his fingers and pointedly picked off one Labour MP after another in marginal seats. Little did McKinnon know that after three years of breathtaking economic change, almost all those MPs would survive and the Labour Government would increase its majority.

We would not see another three years to match. Almost every week another sector was marked for deregulation, competition, exposure to international prices.

Sacred cows of socialism were slain. Income taxes were reduced, universal welfare discredited, a consumption tax introduced, national superannuation clawed back from recipients with private means.

All but the last was accepted by the affected. The country was seized by a heady sense of freedom, optimism. It sprang from a realisation that at last the country was tackling its chronic economic problems. It was going somewhere.