The Legacy of the Hungry Mile

Labour Market Reform in New Zealand 1984-1989

Roger Douglas

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 shipping sectors.

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 basis.

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 and employers.

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 the economy.

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 force?

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 quantify.

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 service?'

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.