The Legacy of the Hungry Mile
Labour Market Reform in New Zealand 1984-1989
In New Zealand, directly or indirectly---and it would
be much the same in most countries---60% of the nation's
wealth flows through our labour market. World Bank
studies show that countries with relatively flexible
labour markets on average achieve between 1 and 4 percent
more economic growth per year, than countries with
relatively rigid labour market arrangements.
That looks a very modest gain, until we look at the
outcome, compounded over a 40-year working life-time.
Then we are talking about a 74% gain for working people.
1-4% a year, compounded over 40 years amounts to $230,000,
in dollars of the day, added to the pay packet of a
New Zealander earning the average wage.
A good labour market ensures that when unemployment
or shortages of skill occur those problems are resolved,
as far as possible, with a minimum of delay. It encourages
the movement of staff out of uncompetitive industries
and into industries which are expanding. A good labour
market provides incentives for work and skill. It rewards
productivity. It creates cooperation in the workplace,
to the benefit of everybody.
If the economy hits a rough patch, a good labour market
helps everyone ride through it, with minimum loss of
output, income and employment. Constructive adjustments
are made quickly to get back on to a sound growth path.
Disadvantaged groups are given opportunities for rewarding
employment which develop lifetime skills and improve
incomes. Vulnerable groups have four-way protection:
by law, contract, demand for their services, and good
income maintenance systems. People have a direct, democratic
voice in processes for fixing their own terms of employment
which are fair and take account of individual preferences.
We all face the problem of ensuring that work practices,
complex laws and cumbersome institutions with a very
long history---continue to adapt and change in line
with the opportunities opened up for us, by continuous
rapid change in the international marketplace. I want
briefly to describe the progress made in New Zealand
over the last four years to reform two key areas of
our labour market: the waterfront, and the public sector.
New Zealand is a small, open economy dependent on
imports and exports. Over the years, huge barriers
were erected in both those areas against normal competition.
Behind that competition, both those sectors developed
rigid demarcation systems and work practices which
were detrimental to productivity.
Waterside workers, in the year to last September,
were paid on average for just over 43 hours of work
a week. They actually did, on average, just under 29
hours work a week. The Harbour Workers Union in the
past, had sole rights to operate mobile plant on the
wharf proper. Watersiders had exclusive rights to load
and unload a vessel. A mythical 'point of rest' divided
what is essentially a single operation into two parts.
A curious and wasteful exchange occurred at that point
between one machine and another---one driver and another,
with inevitable costly duplication.
A 1987 survey by the Economist Magazine found that
our rate of container movement as 20-30 per hour, compared
with 35-40 in North European ports, 40-45 at Tokyo
and Hong Kong, and 64 at the port of Singapore. As
at last year, more than 50 per cent of our waterside
workers were 40 years of age, or older. Forty-five
percent of them were 50 years old and upwards. The
impact on the economy was exactly as if the government
were imposing a major tax on everyone, then using the
proceeds to subsidise those who work in the ports and
The New Zealand Treasury estimated last year that
the cost of these inefficiencies could be as high as
1.4% of GDP, equivalent to up to $800 million in the
1986-87 Year. Whether one accepts that particular figure
or not, there is no doubt that New Zealand has paid
a high price for arrangements of that kind.
As the first step in reform, the government legislated
last year to turn our labour boards into port companies,
required to operate on a strictly commercial basis.
We removed the former harbour board monopolies on the
provision of mobile equipment. We took steps to eliminate
the previous national system of cross-subsidisation
of labour costs and to put it on a sound port-by-port
basis, where each port company would have to face up
to local labour costs. Finally, we abolished the old
New Zealand Ports Authority, a centralised body which
used to have responsibility for developing a national
plan for ports.
This new framework clearly implied that employment
arrangements on the waterfront had to be normalised.
As a result in Auckland, our largest port, the new
port company now employees 35 per cent less staff than
the old harbour board. Savings of around $10,000 per
vessel are being achieved as a result of competition
in the provision of cargo handling equipment.
We had a situation where investment decisions were
often made on an irrational basis of parochial pride.
Now we are starting to get them made on a sound commercial
A waterfront industry reform bill introduced this
year removes the special procedures which have regulated
the conduct of relations between workers and employers
in the waterfront industry. We had a system where a
permanent pool of labour was allocated on a national
basis by a Waterfront Industry Commission which also
administered the payment of our ports workforce. The
Commission acted as an intermediary between workers
That system prevented the development in either group
of the normal accountability which results from a direct
employer-employee relationship. The Commission will
be abolished from 30 September this year. At that point
the relationship between worker and employer will move
onto the same basis as other areas in the economy.
Matters which were previously underpinned by statute
will be negotiable in the normal way, between the parties.
It is up to them to determine whether the industry
will have a national document on wages and conditions
or go for regional documents instead.
So far the unions have refused to acknowledge any
need for port-by-port awards and working conditions.
The employers on the other hand want the nitty gritty
negotiated at the local level. These changes are an
important step towards genuine market-driven reform.
In New Zealand, since 1983, deregulation of rail transport
has reduced rail freight rates by more than 40%, in
real terms. The port of Auckland has already signalled
its intention to reduce its charges by 10 per cent
in real terms over the next 2 years. There is a good
prospect of achieving, across the board, a reduction
of around 30% in our stevedoring charges. In some ports
the reduction may be as great as 50%.
One of the key problems facing governments everywhere
is the built-in tendency of public sector expenditure
to rise, and to keep on rising. A great deal of that
expenditure is inefficient. The public sector in New
Zealand accounted for 25% of GDP. It had all the usual
problems of public sector activity, inadequate accountability,
perverse incentives, and conflicting objectives. Public
sector inefficiency had become a damaging burden on
Reform of the public sector labour market is playing
a crucial role in helping us to reduce the costs of
producers throughout the economy. In the past, in New
Zealand, government departments operated in a totally
protected labour market environment, fully regulated,
centrally controlled, and protected from outside competition
by a Public Service Appeal Board. That approach over
a long period had a devastating effect on the efficiency
of state business enterprises.
State Business Managers in New Zealand were operating
to mixed objectives which made it almost impossible
to know what their enterprise was supposed to be there
for. What was their job? To produce efficiently? To
provide a service regardless of efficiency? To create
enough unproductive jobs at a cost greater than the
value of their output so that nobody would have to
realise that the economy had stopped creating real
jobs fast enough to meet the needs of a growing labour
These were major businesses using resources equivalent
to about one-eight of the nation's total GDP. They
had been under the control of responsible ministers
of the crown, in some cases, for 100 years or more.
I was the Minister, under a previous administration,
responsible for running the New Zealand Post Office,
which had a staff of some 40,000 people. For a hundred
years or more, all those ministers believed they were
in control, and thought they were doing a good job.
It was not until we got into the detail of corporatisation
that we discovered the size of the illusion we had
all suffered from.
When you think about it, how can any minister run
a large corporation in a businesslike manner? Parliament
sits four days a week; cabinet meets on Monday; ministers
have cabinet committees to attend on Tuesday and Wednesday;
caucus meets every Thursday. The idea that you can
run an operation with 30-40,000 staff on that basis
is just not realistic.
The key thing we did to change the situation was not
more hands-on, day-to-day management. Instead, for
the first time, we stood right back from the problem
and thought about the fundamental principles of the
situation. We started to ask ourselves what we were
doing and what the objectives of state business operations
should be. (These were commercial operations; non-commercial
functions should be separated from them.) The outcome
was a set of basic objectives:
1. Managers would be required to run state corporations
as successful businesses.
2. Ministers and managers would agree on the corporation's
objectives and set priorities.
3. The managers would have direct responsibility for
deciding how to achieve those objectives and would
be held strictly accountable for the results they achieved.
4. State businesses would be placed on a level playing
field with the private sector, with no special advantages
or penalties, and private sector boards would guide
the whole operation in line with its commercial purpose.
That was a very important decision: the fact that
we decided we would appoint a full board of directors.
What that meant was that for the first time ministers
took a back seat and did not get involved in the day-to-day
operations of those commercial enterprises. In fact,
we ended up with a minister of state-owned enterprise,
who looked after some twenty commercial operations.
The role of this minister and the minister of finance
was to sit down with the Board of Directors at the
beginning of the year and agree on the overall plan
and objectives of the business, and then monitor performance
on a quarterly or half-yearly basis. Apart from that
that Board was in complete control.
lf the government wanted those businesses to carry
out some non-commercial role we would contract that
to them, on a separate basis, with the cost totally
transparent, and totally upfront. We decided in the
first year that we were going to pay the Post Office
Corporation something like $40 million to run post
offices that wouldn't be operated under normal commercial
circumstances. New Zealand had something like 12,000
post offices; six months into that year we decided
to close around 435 of them on one day. There were
some complaints about that.
So those departmental businesses have now been transferred
into state corporations. They are required to operate
to private sector ground rules. They have to pay taxes,
return a normal dividend, and make a commercial profit.
Over time, a considerable number are being privatised
so that we can use the proceeds to reduce our excessive
burden of public debt. In the process, ministers have
finally seen the detailed proof emerge of the inefficiencies
which we all knew were there but could never successfully
Since 1983 the railway has shed 9000 of its 21,000
staff and reduced real freight rates by 43%. Over the
next two or three years it will probably get down to
a staff of around 7,000 and should be operating at
a commercial profit. Coalcorp, with only half its former
staff levels, continues to produce as much coal as
ever, at half the cost. They now sell their coal to
Electricorp and NZ Steel at about half the price they
used. State Coal had lost money in 21 of its last 22
years; Coalcorp makes a profit. (I'm not sure quite
how they made the profit in the second year, I think
it was probably an accounting error.) Electricorp has
reduced its costs by 30 per cent. Telecom promises
to do even better. The business sector is at last starting
to get the kind of service it needs from Telecom to
keep pace with the information revolution.
An essential element in those changes has been a move
for all the staff involved out of the old public sector
labour market arrangements on to the normal commercial
basis which applies in the private sector. The change
has not been easy. Quite large numbers of people were
made redundant in the process. Not all of them have
yet been reabsorbed into the productive labour force.
It takes time before improvements in productivity and
competitiveness can create the growth necessary to
give them that opportunity.
On the other hand, many who took the redundancy still
work for the same organisations in a totally new role;
as self-employed contractors, and a lot of those people
have doubled, even trebled, their productivity in the
process. They also make more money, they have more
freedom of choice, and better prospects. During the
last election campaign I was at a public meeting, and
when it came to question time one gentleman got up
from the back of the hall and said: 'Mr Douglas, I
am a victim of your policy. I worked for the forestry
corporation for twelve years. You made me redundant.
I took my redundancy money, I started up a business
and I now employ two people. My question to you is:
when are you going to do it for the rest of the public
A revolution of comparable scope has now begun in
the core public sector. Under our new State Sector
Act, department heads are now appointed on five year
contracts which make them personally accountable for
the performance of the department. The Minister and
the chief executive sign an annual contract which spells
out the government's objectives and priorities for
the year and agree the resources required to achieve
them. Performance is judged on output against the contract---not on inputs. The chief executive sets staff levels
and has direct responsibility for hiring, firing and
promotions within the department and this has been
removed from the State sector services ambit.
The old centralised system operated by the State Services
Commission has gone. The Public Sector Appeal Board
has been abolished. A single act governs the principles
for fixing pay and conditions in both public and private
sectors. Each department is to be treated as an enterprise.
Future negotiations will be based on departmental claims
and reviews not on occupational class.
The system puts new pressure on ministers to take
a strategic view of their role. They have to learn
to concentrate on setting the right objectives, and
on monitoring performance. Obviously there is a learning
process involved in that for ministers as well as the
chief executives of government departments.
Getting the annual contract right is now far and away
the most important single task in my view on any minister's
calendar. I would like to emphasise that. I think that
we have in place a state sector act that could enable
us to make the same sort of gains in the core public
sector---education, health, social welfare and the
rest---that we have made with the state enterprises.
The only difference is that it is up to the minister
to set the objectives and priorities of each department.
In other words he has to fulfil the role that the boards
of directors have managed to do so successfully for
the Coal Corp, Telecom and the postal service.
Many of the ministers are not trained to do this and
haven't thought about it in that way. We all tend to
get locked up into the means of doing things rather
than the end result that we want. We have all got a
learning process now in New Zealand. It is forcing
us to sit back and ask ourselves: 'What do I want to
achieve in terms of this department over the next year,
the next five years? What are my goals, what priorities
do I have for the department?' Some ministers probably
still get the head of department to write their contract
for them. That is what was intended. But at least we
are moving in the right direction.
I had to sit down with Graham Scotland and undertake
the contract of the terms of Treasury. I'm not sure
how many pages that ended up, I'm not sure I did it
in fact as well as I might. We tended to do it most
evenings over a two or three week period and that probably
wasn't the right way to go about it. But we listed
under the various department sections the issues we
wanted to raise and the issues that other ministers
were likely to raise in one column. In the next column
we put down the approach which we thought would be
best. We estimated how long it would take to develop
that policy, and tried to put a money figure on its
benefit to New Zealand. We then made a judgement of
its chance of political success. Finally I made a judgement
about priorities within different divisions and between
divisions. I don't think we did it perfectly, but at
least it was a start.
The changes we have made in the corp public sector
and the state sector bill open up opportunities for
big gains in productivity and better performance in
the NZ economy. In the area of public sector reform,
New Zealand has now gone further and faster than most,
if not all, other countries in the OECD. I believe
that, in time, we will reap the rewards of increased
productivity, increased growth, increased capacity
to generate new productive employment. Such rewards
will be great indeed.