Maurice McTigue - distinguished visiting scholar, Center for Market Processes; former New Zealand Cabinet Minister; entered New Zealand Parliament in 1985 as the National Party's Junior Whip and Spokesman for Works, Irrigation, Transport and Fisheries.

 I am going to start by telling you a story, because it is apropos of some of my experiences. It is about three professional people who were standing having a drink by the bar one night. One of them was a surgeon, one of them was an architect and one of them was a politician. After a while, the surgeon said, "certainly my discipline is the most important discipline; it is the oldest. If you go back to the books of the Bible, you'll find that God took a rib from Adam and made Eve - certainly the first example of surgical work in our history. So mine is the oldest profession."

The architect said, "No, you are wrong. If you look back further into the books of Creation, you'll find that God saw chaos and from that chaos he created order. So architecture is the oldest of professions."

The politician smiled and said, "Who do you think created chaos?"

Ladies and gentlemen, this is a little of the history of my country, giving you some examples of how we set about over a ten-year period to change the chaos to a logical form of order.

I start by giving you a little bit of history because frequently, when you talk to people about this, they say, "That's very easy to do in a country away down in the South Pacific, 1,200 miles from its nearest neighbor, populated by 3.5 million people and 60 million sheep. It's not much of a problem." But I must say to you, wherever you live in the world, the principles we applied are identical. You might use different mechanisms to achieve the results, but in my view, the principles remain immutable. And unless those principles are addressed by government, then future generations are going to face a worsening crisis both in their social life and in their economic life.

By 1984, New Zealand was recognized as the most socialistic country in the Organization for Economic Co-Operation and Development (OECD). It certainly had the most socialized economy. It had the tightest level of control. And if I could just give you an example, our foreign exchange controls were so rigid that if you wanted to buy a subscription to the Economist, you needed the permission of the Minister of Finance. The only way you could invest in a foreign company was to resign your citizenship. There were total government controls on wages and on all prices. Extraordinary.

We had dropped from being number three in the world in terms of wealthy nations, in the 1950s - the United States, Canada, and New Zealand - to, by 1984, ranking number 27 - about equal with Portugal and Greece.

Prospects for our children were dim, and many of the best and brightest of our children were moving into other places around the world. I make this comment because I believe the underlying unease was moving the population to say that we needed to have change.

The government at that time was taking 45 percent of the GDP for its activities. And at 45 percent there is no way for there to be sufficient wealth left in the economy to create the new wealth that you need, the new jobs that you need, or the opportunities for a rising generation.

So those were the problems. In addressing these problems, I want to make it clear, that this process was attacked first by a government of the center-left, the Labor government that came to power in 1984. The Labor Party had acquired, over time, a number of people who belonged really in a right-wing party. But the things - the problems - that I just identified for you were mainly caused by conservative-type governments. And those people had deserted. They joined the Labor Party. They were able to capture the policy process and started to put in place a number of reforms.

They were very successful in starting to address the "role of government" issues. They were also successful in looking at some of the areas where we were putting in entirely ineffective government subsidies. For example, the subsidies that went to farming and the welfare that went to the corporate world.

Where they had an inability to address problems were the major "people-problems" - of dealing with welfare issues, of dealing with health and education, and finally balancing the budget. Those were the problems addressed by the government that I was part of that came after the Labor government.

One of the interesting factors of the process in New Zealand was that you had a government of the center-left and then one of the center-right who adopted almost identical policies in their approach to reforming the economy. More interesting, no government was defeated while it was seen as making progress on that agenda. The Labor government lost office only because of the level of political infighting that developed when its union base started to agitate very strongly against the policies that it put in place.

So as I speak to you this morning about "we," I collectively refer to the two governments responsible for governing New Zealand between 1984 and 1994. I don't want to embark upon the distinctions between them, because in my view, both of them did a good job. They addressed the right kind of issues.

The basis for the change, the foundation upon which this change would be built, was a recognition of major problems.

The first of those was that, clearly, we had too much debt. We had acquired that debt because, as we had drifted in wealth from number three in the world to number twenty-seven in the world - the government masked that by running deficits for a long period of time. Twenty-three successive years it went without balancing its budget. One result of that - you accumulate a lot of debt. Already the international rating agencies were starting to downgrade our credit rating. We were having to borrow our money internationally from less and less desirable sources. So debt and deficits were a major issue to be addressed. Any change to be made had to reflect improvement in that issue.

The second, which isn't much referred to, but I think is equally important, was that New Zealand's ability to create wealth needed to be markedly improved. When you looked at the country and what was happening in the rest of the world, the only way you could improve your wealth creation would be to increase your international competitiveness. So that would be the second test.

Every policy measure had to be tested against, "what does this do for the debt and deficit situation?" And, "what does this do for our international competitiveness?" If it didn't improve both, you weren't to do it. That's part of a recognition today that jobs in any economy are becoming portable, internationally.

I've just come back from a trip to Argentina and Uruguay. A number of major industrial companies are investing down there because of the competitiveness of countries there in terms of creating the goods that you want. But if they can't maintain that competitiveness, those jobs will move to Malaysia, to Indonesia, to Taiwan, or somewhere else. You cannot ignore your competitiveness today. You cannot put up walls and ignore the rest of the world. It does not work like that any longer. Money moves instantaneously to any market in the world. Ignoring that, in my view, is a recipe for disaster. So the exportability of jobs is important.

I am now going to spend a few moments talking about the role of government.

One of the things we addressed was to get very simple principles that would remain appropriate in all circumstances and use those as the basis for making decisions.

In the role of government, we determined that government's involvement in the economy was to provide the best quality services at the lowest possible price with the best level of availability. Finish. It does not matter who delivers those services. The interest of government is to see that the citizens get them according to those criteria. And that meant a major change in the thinking of government.

Now I'll take some examples and show you how that works when you apply it.

The first thing you have to do to start applying that, is to move from what governments have traditionally done. That is, to measure where they spend money. In other words, don't just count what they are spending the money on. Measure what is achieved for the expenditure of that money. Seems like a subtle difference, but it is incredibly important. It is something you and I take for granted in the private sector, but governments do not do it. You are at the moment, in the process through your Congress, to apply that criterion to the way in which your government works.

Anything you can do to encourage Dick Armey and his colleagues to pursue that even more aggressively can only be good. And I would hope that I can demonstrate that to you as I give you some examples of where my colleagues and I were able to use this criterion, as we looked at different functions of government in New Zealand.

One of the organizations we had in government was called the Ministry of Works. It was the "do-all" agency that looked after the public buildings, designed the roads, did the design work on the new schools. It did all of those sorts of things. It had 24,000 people working for it. Every single thing that it did could be done better in the private sector. And today it has zero people working for it.

The State Forest Service, responsible for looking after our forests, didn't do a very good job. It was pretty muddled between what were conservation interests and what were production interests. So we separated those out - conservation interests from production interests. We then moved to a property right for the harvesting of forests, because what we gave those who harvested forests previously was a short-term rate, which meant that they did not exercise good stewardship.

So we now moved to give them a long-term rate, which means that the cutting rate lasts about 70 years instead of something that was over inside of one year. That means that these people will now make investments in the process of harvesting timber where they didn't before. That has seen the value of our timber exports of timber go up 400 percent. It has seen the level of timber-related employment go up by 40 percent. In some cases where you add very high value, it has taken the raw product of timber valued at about $200 a cubic meter, and at its highest value - in what they call "dimension products," - it is now fetching $2,800 a cubic meter.

We couldn't have done that under government stewardship.

 That agency - the State Forest Service - use to have 17,000 employees. Today it has 17. It is a policy advisory body to government. It helps set the rules. For the contract management issues of who has the contract to harvest the timber, we let out to another contract, because people like Pete Marwick, and Ernst and Young are much better at managing contracts than government agencies. So you don't need the government doing those things.

We didn't set out to reduce the Ministry of Transport to 53 people from 5,500 people. But that's what happened. What we set out to do was to find ways of improving the safety inside transport. In the past, we had an authoritarian body in a command-and-control type structure that everybody resented. They hid from the public anything they possibly could. You had ownership of the safety issue in the wrong place.

The ownership of that issue should be with the transport operator. That's where we put it. We require all of the transport operators to develop their own safety plans. The Ministry now orders those plans, and that's all it has to do. The volume of accidents and fatalities has dropped dramatically. Last year on our roads we had the lowest level of fatalities for 30 years. And that's not making any allowance for increased traffic volumes. But safety now is an integral part of the planning process for everybody who is a transport operator. They have to take account of it. In the past it was the responsibility of the Ministry of Transport. What is important is to think through how you should actually operate these issues to produce the public good that you need.

These exercises in looking very carefully at the role of government meant that we were able to shrink government by 66 percent. It sounds like a lot. Taken a little bit at a time, it's not that difficult. Maybe I'm oversimplifying it there. It's certainly achievable. In my opinion, it's achievable in any economy. You might use slightly different mechanisms, but you can get there.

Can I spend a moment now, talking to you about reforming revenue? It is an issue here in the United States.

In our case, we had a complex revenue-gathering system, somewhat similar to yours. Not quite as many pages of regulations - but a lot of them. We had an incredibly unpopular revenue service. It was not their fault. The fault was very bad law. What we were doing was pressuring those people to try and gather the revenue in a very complex and very difficult system. To do that, they had to consistently be more invasive. I think as a citizen, that's objectionable.

The first thing that we learned to do when we reformed revenue was this. Some things are so badly broken that you have to start right from the beginning all over again. You can't fix what's there. So what we would do was say "Let's just put everything that exists at the moment to one side and bring in our brightest and best brains." We said to them, "As if we had no taxation system at all at the moment, you design for us what would be the ideal. And we will give you some founding principles to address this research."

The first thing we said was that we wanted a tax system that had a broad base and very low rates. The second thing - it has to be seen to be fair by the majority of the people. The third, it has to improve our international competitiveness. The fourth, it has to gather as much revenue as it does now. And the fifth, it has to be defensible, easy to defend.

The first decision that came out of that was you have to decide whether your tax system is about gathering revenue or delivering social policy. In our case, we said it's about gathering revenue. We will deliver social policy by targeting it directly at those people who need it.

It also has to be about how to improve the ability for people to operate and create more wealth. Very important, because that additional wealth creates the additional jobs. And we needed those additional jobs. That led us to the decision that we would only have two taxes: a tax on income and a tax on consumption.

It is simple and easy to understand. But that also meant that you eliminate everything else. So capital gains taxes went, estate taxes went, gift duties went, excise duties went, tariffs went - all of those things were eliminated. At the same time, we said that the rates are too high. We have to bring them down. And part of the process of bringing them down was saying, "How do you do this fairly?"

The ideal was to have a flat tax for income -but it wasn't politically sustainable. We had had a highly structured, progressive system in the past. We knew that the people on the top incomes were going to get a very high level of benefit out of this. To bring everybody down to a flat tax on income, which would have been about 24 percent or 25 percent from 66 percent, probably meant that it would not be sustainable in the long-term. Some other political party would have come along and turned it over.

So instead of going to a flat tax, we set two rates - 33 percent for upper income, 19 percent for lower income, and we require everybody to pay tax from the first dollar earned. There are no longer any exemptions, any deductions for social reasons. There are no kinds of incentives to change behavior in the business community. All of those have gone. We said we would rather leave the money in the hands of those people to make those decisions than try to have government create some kind of complex incentives and get the answer wrong.

The other thing that I don't like about exemptions is this: Government expenditure never gets reviewed by the elected processCit just keeps on. And in many instance, while there might have been justification for doing it in the initial stages, there's no justification for its continuation.

In social policy we said, "Okay, now we're charging people on low incomes taxes from the first dollar onwards." But in the past we use to pay people an allowance for caring for children - and it was universal - everyone got it.

We said there is no sense in paying this money to rich people - they are much better having a lower tax rate. So we said, "Let's just pail this money and redistribute it." Previously, everybody got $12.50 per week per child, regardless. By pailing that money and making it income tested, so that you lost entitlement to it when you got just above middle income, we were able to give $48 per week for the first child, and $37.50 a week for each subsequent child.

Some justification at the bottom end for people who now had to pay taxes. They were able to sustain a slightly improved standard of living. That's the fairness bit coming in. Having taken all of those other taxes out, having reduced the tax rates by 50 percent, we actually got 20 percent more revenue than previously. So you can make major changes and not destroy the revenue base. There are a variety of reasons for why that happened, and I'm not going to go into them in any great substance now.

I just want to touch quickly on reform of the labor market.

One of the major problems we had was our industrial relations situation - it was very, very disruptive, particularly in our key industries. People in unskilled jobs got paid much more money than people in skilled jobs.

For example, if you worked in a meat processing factory, you would typically get paid about $2,000 per week. If you were the fourth year into your career with a Bachelor of Science degree or an M.A. in arts, you would get about $500 a week. A positive disincentive to go out and get qualifications, and that was bad. Why did that happen? It happened because the unions with the huge collective contracts were able to hold the country to ransom in those important export industries. So we needed to change that.

We had a system of compulsory unionism. It was based upon something that was called the "specified preference clause." Every employment contract had to have a "specified preference clause" in it. What it meant was, if a union member came along and asked for your job, you either had to join the union or surrender your job to that person. The first part of the change was to abolish that. No more compulsory unionism.

The second part of the change was to say that contracts in future will be on the basis of a strict law of contract, enforceable in court with only two parties to the contract: the employer and the employee. Neither the government nor employers organizations nor unions have any standing. You can't take strike action over something that isn't in your contract.

You can't take strike action during the currency of your contract. You have to go to the tribunal - the employment tribunal - and resolve it. Or to the employment court to get the issue resolved. That has seen industrial disputes drop by 77 percent. It has seen a massive change in the way in which negotiations happen inside the labor market. It has seen a break-up of all the huge collective contracts. Virtually 60 percent of bargaining today is on an enterprise basis, with, inside the enterprise, probably about 50 percent of the employees on individual contracts and the other 50 percent being on collective contracts.

Whether you are an employer or an employee, you have an absolute right to choose who your negotiator is. You can use a union, and your employer has to recognize it. As an employer, you can negotiate yourself or you can use somebody else. The union has to recognize that negotiator or the employee has to recognize it.

The flexibility that was created has had a profound effect on the way in which our industry operates. Now we have a labor market that is very responsive to change.

If there is a shortage of skills, the cost of those skills goes up immediately and quite dramatically. What about where there is a surplus of skills, where we would expect that the price would go down? That hasn't happened. What happens is that they stop growing. They remain at that base level. So the market is now very responsive to skills, and that means that people are prepared to skill the staff that they have employed.

 The most dramatic cultural change is that employers now consider their staff to be an asset that you invest in, rather than a cost of doing business. Going into the next century, in my view, that is a very important distinction.

I want to finish by touching on education.

There was major concern that our education system was failing probably about 40 percent of our children - and it was the bottom 40 percent. They were being pushed through the schools on a social promotion structure that meant many of them came out being only being semi-literate. Measured against peer groups from other countries around the world, they were about 15 percent-20 percent below.

We put in an audit team to look at education. This audit team would be - the best way I can describe it for you - more like a liquidation team that you'd put into a failing corporation in the private sector. Because that's what it needed. When the audit team came back, with all of its findings, the most dramatic was, that for every dollar that was spent in education, 70 cents in that dollar was consumed in administration and 30 cents went to expenditure for in-classroom activity for children. I've looked at some of your expenditures here; they're not too different.

The instruction to that team was to find a way of reversing that ratio. And they came back to us and said, not surprisingly, "You are over-administered." And we said, "How do we fix that?" They said, "In our view, what you need to do is give parental ownership to what happens inside schools - and we would recommend that you do it like this: that you have the parents of the children, at each single school, elect a board of trustees. Give the money directly to that board of trustees and let them manage the school. Having made that decision, there is now no useful purpose for the education board bureaucracies, and you should eliminate that." And we did.

As you might expect, a few people get upset about measures like that. The politics of that is interesting because I don't think they vary around the world. If you allow the unions to dominate this argument, you keep it an argument between them and the government. And you will lose.

What you have to do is go out and convince the parents that this empowerment of them is the most important thing that can possibly happen to them and their children. And we did that on the basis of saying to parents: apart from parenting, the most important thing that will happen to your children is the quality of the education that they get. You have a right to have a very important say in that.

So the parents were very supportive of what we were doing. And the unions, particularly the teacher's unions, realized that they could not win an issue that the parents supported strongly. So we got the issue through. In fact, half way through the battle, the teacher's unions said to the bureaucratic unions "You're on your own; we're bailing out, because we can't win on this." So, we had to fight only one union.

We also had another debate: "How do you fund schools?" And on funding schools we said, "There is only one logical way to do it. You count how many children are there and you fund them accordingly." So we have three days during the year, spread out into each third of the year, on which we count the rolls. And we give the funding to the board of trustees of that school on the basis of how many children are there. It has a few adjustments to deal with - low socio-economic activity in small schools. But basically, just count the children and give the money accordingly.

And we allow parents to choose which school their child goes to. An absolute right for parents to choose, because you make the argument that the most important thing that's going to happen to your child, next to parenting, is the quality of education. It's illogical to say to a parent that you can't move your child from a school if you don't like it.

We separated these two things, and we never ever used the word "voucher." We built it so it was slightly different, because the word "voucher" has with it some rather bad concepts. It is a concept that people have of a little child of five years of age, running around with a pocket full of money saying, "Please take me." We separated that by saying, we'll count the number of students on these particular days. Then we'll fund the schools accordingly. And over here, you have a right to be able to decide which school your child goes to. So we separated them out of it - the impact is identical.

By getting rid of the bureaucracy, we released a large quantity of money. We used that to upgrade the schools where any arrears of maintenance were required. We put a lot of new high-tech equipment in the schools, so that there is now one computer to every three children. And we used the rest to make certain that no class has more than 20 students per teacher.

Very hard for the teacher unions to argue against that. The impact on quality of the changes we made has been that we now rank about 15 percent-20 percent above our international peer groups in the quality of education coming out of the schools.

Remember I mentioned to you that the responsibility of government was to give people the best quality service, the lowest possible price, with the greatest level of availability. Applying that to education, we give exactly the same funding to private schools as we do public schools. It's not the government's business who does the education. The government's business is the quality of education received.

So, in conclusion, what were the results of these changes?Since 1984 we've moved from being 27 in the world to last year number 10 or 11 in terms of wealth per capita.

In measures of competitiveness, last year we were ranked third in the world - Singapore, Hong Kong, New Zealand, the United States.

On the freedom index, by the three different agencies I look at, we were ranked number one, number one, and number three.

We run surpluses now instead of deficits.

We've run surpluses since 1992 - and they are large. Last year, about 3.5 percent of GDP. We used that surplus to pay off debt. Instead of our debt being about 50 percent of GDP, today it is down to around about 27 percent of GDP, and it will be under 20 percent by the year 2000. We used three fourths of the surplus to pay off debt. We used the other one fourth to give tax cuts. New Zealand has had a tax cut every year since 1995 and will until the year 2002, just to keep the surplus down to a manageable level.

When we started this process, we had a high level of unemployment, 11.7 percent. By 1995 that was down to 5.5 percent. But much more important than that was that we had grown the number of jobs in the economy by 20 percent - four times the reduction in the level of unemployment. That was the competitiveness showing through.

Ladies and gentlemen, these aren't theories. This is a recounting of facts that have been done.

In my view, we did not have extraordinary people. We just did a lot of things that were sensible. We did a lot of things that were logical. What we did that was probably a bit different was that we established some very strong principles and the politicians stayed with those principles all the way through. So it was a principled approach rather than seeking political advantage.

And what I want to say to you is this, that I believe that politics have changed around the world, particularly in developed democracies, so that the public won't support you on the basis of buying votes through pork issues or additional spending. I'm not talking just about my country.

While I was our Ambassador in Canada, I watched carefully what happened in the provincial governments in Canada. They had governments from the far left to the far right. Of those ten provinces, eight of them were adopting policies somewhat similar to the ones I've mentioned. Every one of those eight governments was reelected. The most interesting was the government of Saskatchewan, where the Premier represents the most left-wing of all the political parties in Canada. Just five weeks before the last polling day, he closed 200 rural hospitals, and he won every single seat in the legislature.

There's a public out there looking for good governance. It's not going left or right. It's saying, "We want people who do a good job." So I think the political process can take on board these issues. People who make a feature of them in their campaigns can go out and win. I keep going back to our case. No government was defeated while it was making progress on these issues. And by traditional political standards, we were doing some things that most people would say were certain to push you into oblivion for a long period of time - but it didn't.