The New Zealand economy and politics: the revolution and the future

Seminar: America’s Relations with Australia and New Zealand Beyond the Turn of the Century

University of Maryland

Baltimore, 8 November 1999

Abstract: Just as a vigorous flowering of the arts in the 1980s signalled New Zealand’s true emergence as an independent (decolonialised) nation, it energetically espoused neoliberalism, the third radical policy shift in its 160 years of Anglo-Celtic rule. This third “New Zealand model”, which attracted considerable international interest from economists, businesspeople and such diverse politicians as the government of Mongolia, the Japanese House of Councillors and Vice-President Al Gore, is now embedded in policy. But, while the economy is undoubtedly more flexible and robust, it is (for various historical and contemporary reasons) still far short of neoliberals’ high-wage, high-performing ideal and it has left most citizens political “outsiders”, at odds with the “insiders” in the business, bureaucratic and political establishments and this has destabilised politics. Other “outsiders”, the indigenous Maori, are posing demands for power- and resource-sharing which many non-Maori find threatening but which seem likely nonetheless to lead to constitutional change in the next decade. To reconcile these disparate dimensions in a stable society and politics, the search is on for a new political language.


The Peanuts character Linus once said something like this: “I want to be terribly, terribly famous but terribly, terribly humble.” New Zealand is a bit like Linus: a tiny country at the bottom of the world, painfully aware of its insignificance but shyly proud nonetheless of what it can offer the world.

Indeed, the story of New Zealand’s century can be written as one of models we think the world might envy and emulate: the social policy innovations of the 1890s, the world’s first comprehensive welfare state in the 1930s and 1940s and the world’s most determined application of the neoliberal economic model in the 1980s and 1990s. Each model attracted international attention, none more so than the most recent. But after each wave of attention, we have found ourselves returned to anonymity.

In the 1890s a Liberal government introduced land reform, old age pensions, votes for women, cheap state housing and state-backed wage conciliation and arbitration to protect fledgling unions and guarantee a decent living wage. The state was deeply implicated in economic life, through nationalisation, regulation and protection. Left-leaning politicians and academics from Europe trekked to the South Pacific to study this frontier socialism and found instead a practical “socialism without doctrine”, to quote the title of a contemporary book by the French sociologist Albert Métin.

In the late 1930s, in the wake of the Depression, which hit New Zealand particularly hard because of its dependence on agricultural exports, this agrarian country turned to a Labour party nurtured on the ideology of industrial class warfare. Appropriately, instead of socialising the means of production, distribution and exchange, Labour put its energies into social security: import quota protection for local industry (the guaranteed job), free compulsory education and nearly free health care and blanket assurance of financial support in hard times and old age. Prime Minister Michael Joseph Savage called this “from the cradle to the grave” security; “applied christianity” was another popular description at the time.

It worked a treat for as long as the post-1945 international trade expansion for our sorts of countries rolled on. We held ourselves up as the model egalitarian society, having achieved, in historian Bill Oliver’s words in 1959, “a modest affluence for all”. But it unravelled after the collapse of Bretton Woods in the early 1970s. By 1984 we had serious and chronic balance of payments and budget deficits, we were heavily subsidising our export industries and the economy was dangerously distorted structurally.

We then embraced neoliberalism. The pre-1984 administration (an awkward marriage of conservatism and populism) had tiptoed into these waters with some minor liberalisations in the late 1970s. But after the second oil shock in 1979 it retreated into controls on wages, prices, rents, directors’ fees and interest rates in a desperate attempt to plug the gaping holes in the dyke through which the tides of international economic change were by then pouring.

The incoming Labour administration of 1984 did not have an option of more regulation. The limits had been reached and there was a financial crisis. It had no option but to pick up the 1970s deregulatory ideas. This was clearly evident to any halfway attentive observer of the party’s public pronouncements and internal debates before the 1984 election. But no one guessed beforehand how far and how fast these heirs to welfarism would drive deregulation.

In seven years this administration and the National party government which replaced it in 1990 transformed the economic policy framework from one of the most regulated in the OECD to one of the most deregulated.

• Foreign exchange, capital flows and interest rates were completely freed within eight months of Labour taking office and light-handed regulation of banks introduced.

• Control of inflation was delegated to the Reserve Bank. Under a contract with the Treasurer, the governor of the Reserve Bank is required to hold consumer inflation (excluding debt servicing) between 0% and 3%, on pain of possible dismissal.

• A complex, loophole-ridden tax system was replaced with a broad-based, lowish-rate system: only three steps of personal income tax, company tax at the same rate as the top personal rate and a 12.5% value-added tax (goods and services tax, known as GST) on all goods and services except those which were technically too difficult at the time (such as financial transactions). There is no capital gains, wealth or inheritance tax.

• The budget was fully funded within the internal economy and brought into surplus. In 1994 a Fiscal Responsibility Act was passed requiring governments to run budget surpluses until “prudent” levels of net government debt are achieved, maintain those levels once achieved, achieve and maintain a level of government net worth as a buffer against adverse factors and pursue “policies that are consistent with a reasonable degree of predictability about the level and stability of tax rates for future years” and explain to Parliament any redefinition of “prudent” and deviations from it. Though the act can be changed or repealed by a simple act of Parliament, it is proving a powerful moral persuasion against a reversion to deficit financing: all parties in the current election campaign are promising surplus or at least balanced budgeting.

• Almost all subsidies and tax breaks were removed. Full or part charges were introduced for many government advisory or regulatory services. Government activities in the economy are now confined to areas of clear market failure and “picking winners” is eschewed.

• Trade was opened up. This process began very tentatively in 1979 and was given a push with the Closer Economic Relations free trade agreement with Australia (CER) in 1983 but did not gather any real momentum until 1987 when import quotas (which once applied to all imports) were tariffied and tariffs set on a reducing path. By 1996 only 5% of imports by value still carried tariffs; by 2001 on the current plan all imports will be tariff-free, except for textiles, clothing, footwear and carpets, which will phase out by 2006. (The opposition Labour party proposes a five-year freeze on this phase-out.) This has led to a rapid intensification of import penetration and helped push the trade balance into deficit.

• A light-handed generic regulatory regime was applied to all internal economic activity, including utilities and labour. New Zealand now has one of the most deregulated labour markets in the OECD; unions have no official recognition or protection and wages and conditions are set mainly by individual contracts. Now 22% of the workforce (waged, employed) is unionised, down from 54% in 1989.

• All central government business activities, including many services previously supplied free of charge, were commercialised either into state-owned corporations or other semi-autonomous business units. Many of those have since been privatised.

• Private sector management techniques were imported into the core state departments: accrual accounting, with operating balances and a balance sheet of departmental and government net worth; close attention to “moral hazard” in regulatory frameworks; a “customer” orientation (both to end-users of services and to portfolio ministers) to improve service delivery and reorient policy focus; a contract-based relationship between ministers and departmental chief executives, with closely monitored performance agreements related to “key result areas” of priority activity (outputs) which feed into “strategic result areas” embodying the government’s major objectives, or “outcomes”. Recently the cabinet was reorganised into “teams” of ministers (in addition to the formal committees) to focus cross-portfolio activity on high-priority projects.

The main objectives of this radical economic policy shift were to lay bare price signals and so shift investment and labour from low-yielding to high-yielding, internationally competitive activities, to make economic governance “transparent” and thus reduce transaction costs. The ultimate aim was to enhance consumer choice and welfare.

This became the third “New Zealand model”. It attracted great interest from economists (and the august London Economist magazine), business leaders, bureaucrats and politicians all the way up to the government of Mongolia, the Japanese House of Councillors and Vice-president Al Gore. Special interest was shown in the innovative and largely home-grown state sector management reforms. Former politicians (including two of the main architects of the reform, Sir Roger Douglas and Ruth Richardson) and senior public servants travelled the globe, running seminars and advising governments. We were the showcase of the new neoliberal orthodoxy – and, for two years in the mid-1990s when growth was 5%-6% we were touted as the living proof of the merits of the free market and rational policymaking.

This new orthodoxy is now embedded in policy. The argument in this month’s election is about refining the new policy environment, not rejecting it.

But far more than economic policy was changed. Every other policy area came under radical assault.

• Environment and resources policy was re-based on “sustainability”. New Zealand is still the only country to have done this.

• Foreign policy was shaken free of its client status to the United States. New Zealand adopted a “nuclear-free” policy against nuclear weapons and nuclear power. Applied to warships and warplanes, this effectively ditched the Anzus (Australia, New Zealand and United States) treaty.

• The Treaty of Waitangi, under which sovereignty was ceded to the British Crown in 1840, was rescued from the legal “nullity” to which a colonial court had consigned it in 1877, elevated in rhetoric to “the founding document of the nation” and given some legislative recognition, including the establishment of a process for redress of breaches of the treaty by successive governments. Nearly 800 claims are before the tribunal. Only 11 have been settled and another 15 are in negotiation with the government for settlement (though among the settlements are some of the biggest claims, which have subsumed many of the smaller claims, and a great many of the 800 are overlapping claims or minor ones).

• The electoral system was changed and parliamentary processes reformed. Freedom of information legislation passed in the early 1980s was given very liberal interpretation, such that the New Zealand government is now perhaps the most open in the world.

• Targeting to need and user part-charges were introduced into social policy, together with some decentralisation of education administration and part-commercialisation of the publicly-funded health system.

Taken with the economic policy reform, this amounted a policy revolution, almost all of it carried out very rapidly between 1984 and 1992.

Why such an upheaval? To some extent New Zealand was simply doing what everybody else was doing: the neoliberal tide was flowing throughout the Anglo-Celtic world, green values were gaining ground, the cold war was loosening the bloc mentality, indigenous peoples were demanding recognition and redress in many countries and winning it in some, electoral systems were in contempt and/or turmoil and the welfare state everywhere was in review. Also, in common with other Anglo-Celtic countries, New Zealand had been through a values revolution in the 1960s as young people won moral and social freedoms and these people were moving into positions of influence by the 1980s.

But why so far and so fast in New Zealand?

• In some cases we started earlier: green values entered New Zealand national parliamentary politics in the 1972 campaign; Maori demands began to imprint themselves on the national consciousness from the mid-1970s and the first limited steps to provide redress were taken in 1975.

• In the economy we started from farther behind, with an economy more tightly controlled than any other in the OECD. Just to match early-1970s orthodoxy, let alone join the move to the emerging neoliberal orthodoxy, required a giant leap. In 1982, for example, the Minister of Finance could and did freeze or set all prices, wages, fees, rents and interest rates by decree.

• New Zealand has a small, intimate political system in which a few like-minded and determined cabinet ministers and public servants can move mountains – and in the 1980s did. Local government is weak and there are no states or provinces to check the national government, which is drawn from a single-chamber parliament dominated by disciplined political parties which are in turn dominated by their leaderships. There are very few checks and balances, apart from triennial elections which attract, by international standards, high voter turnouts (though they are falling). Moreover, in New Zealand’s case the apex of the cabinet and the influential positions in the Treasury were occupied after 1984 by people in their 40s – that is, people whose politically formative years were in the revolutionary 1960s, risk-takers of radical mentality.

• But also, unique to New Zealand, the 1980s were the coming of age time for the nation. In that decade there was a flowering of fiction, plays, dance, craft, film and popular music. Before then our writers, musicians and artists had been highly derivative and the output sparse. In the 1980s we developed our own voice as a nation – and in doing that we became independent in the true sense. It would have been surprising if, while we were going through this national adolescence, we did not change the policy framework and change it greatly.

In the latter 1990s we have been trying to settle down again after the excitement, to make a new order after the upheaval, to live this newly independent life. How are we doing?

One of the first points most New Zealanders make is that the economy has failed to live up to the neoliberals’ star billing. We do not have a high-wage, high-energy economy. We are constantly reminded that Australia has done far better during the 1990s: with the exception of the two New Zealand boom years in the mid-1990s, Australian economic growth was consistently higher than New Zealand’s; notably, while New Zealand reeled from the Asian crisis and drought, Australia sustained 4%-plus growth. If pain is supposed to lead to gain, most New Zealanders feel they are still waiting.

The economy is nevertheless more soundly based than it was. It has a strong fiscal framework and monetary policy operates pretty much on autopilot (though not without some grumbles that the Reserve Bank is too conservative and stifling growth). Most areas of the economy are much leaner and cost-efficient and so is the government. The rules are transparent and relatively simple.

The economy has proved remarkably flexible and robust. In late 1997 and over the summer of 1997/98 it was hit by the Asian crisis and a serious drought. Asia had been taking 40% of exports and providing 30% of tourists and was furnishing the fastest growth. Korea, which had moved into fifth position as an export market and was the fastest growing source of tourists, stopped almost dead. The drought, which hit agricultural exports hard, cut around 1% of GDP on top of the loss of export and tourist markets. These two events struck just as the economy was beginning to emerge from the trough in the business cycle and they pushed the economy into recession. But the recession was shortlived, only two quarters long, and shallow: exporters and tourists operators re-oriented their marketing. Confidence returned by late 1998.

Even so, New Zealand did not ride through the crisis as comfortably as Australia, which awarded itself the accolade of miracle economy. Even though, according to a widespread consensus among economists, we are now heading into a period of firm growth of between 3% and 4% over the next three years, there are some serious structural issues. If the pain has not yet led to the gain neoliberal reformers promised, it is at least partly, and arguably mostly, because of these structural issues.

• New Zealand is still largely a “quarry” economy, living off the land and the sea. Exports of primary products (much of them still in commodity or little-processed form) still account for around 40% of foreign exchange earnings (around 60% of goods exports) – and the terms of trade relentlessly move against these products. Pastoral agriculture returns an average of 1% on capital; the huge sunk capital in that sector is a constraint on overall economic performance and entrant farmers continue to buy farms at exorbitant prices. Until farmers rearrange their methods to ensure a higher return on capital this sector will remain a drag on growth.

There are encouraging signs of that necessary change. There is also cause for optimism in manufacturing where there is now very little attempt to compete in low-wage areas like textiles and clothing and much more development of elaborately-transformed manufactures. We have some leading-edge high-tech companies, notably in biotechnology and yachting, and these are likely to develop. Upmarket tourism for high-net-worth individuals in one of the world’s most desirable getaway places is developing.

But for at least the near future our trade balance will be weak. Weakness in primary products earning capacity and rapid import penetration as tariffs have been lowered have turned what was traditionally a trade surplus into deficit. To this needs to be added enthusiastic tourism abroad by “the world’s greatest travellers” which offsets the benefits of inbound tourism and helps fuel a deficit on services.

• The trade and services deficits are contributing to a dangerously high balance of payments deficit, likely to exceed 8% of GDP sometime in 2000 and put us at serious risk of being dumped by foreign portfolio and fixed interest investors. The main culprit is actually an accounting figure: a huge imbalance between earnings of foreign companies operating in New Zealand and those of New Zealand companies operating overseas which is counted as a negative in the balance of payments, even if profits earned here are reinvested, as the great majority have been during the 1990s. But behind this accounting figure is the cold fact that foreign investment in New Zealand is far higher than New Zealand investment abroad. New Zealand lives off others’ savings and has been doing that for a long time.

This is not unusual in a country’s development phase – and New Zealand could be said to be in a redevelopment phase after its restructuring. However, there are two disturbing elements. One is that it reflects very low personal savings (see below). The other is that much of the foreign investment is not in greenfields export-oriented businesses but in existing utilities with virtually guaranteed cash flows.

• We are becoming a “branch” economy and a “nursery” economy. An increasing number of foreign companies run the operation in New Zealand as a branch from Australia or Singapore. Companies domiciled in New Zealand quickly reach a ceiling in the tiny local market; when they expand in Australia as their next step there comes a point where the logic of relocating their headquarters becomes compelling. Successful startups frequently end up in foreign, usually American, hands for lack of local capital or lack of scope or lack of local synergies. These developments are natural consequences of our tiny size and the internationalisation of the world economy but they constrain policy choices.

• We have not adjusted to our diminished economic status. The household savings ratio is very low – last year it went negative. Household debt was 97% of annual disposable income, up from 44% in 1990. We have been catching up to the consumerist habits of our Anglo-Celtic sibling societies. If we are to reverse our serious balance of payments problem, savings habits will need first to change and there is very little sign of that. As a substitute, parties on the left have been reviving, via industry assistance policies, in effect the notion of state savings to make up for low personal savings.

• And there is a political and social fallout from the new economy. As in all countries which have adopted the neoliberal reforms, incomes have become more unequal: a “significant” increase in inequality of after-tax disposable income was confirmed in a Statistics Department report in February on income changes in the 15 years since economic reforms began in 1984. Higher-paying, secure industrial jobs have given way to less secure, lower-paying service jobs, many of them part-time. While unemployment is relatively mild at 7% (and falling as the economy lifts), that is considered a high figure in a country which boasted less than 1% for a quarter of a century after world war II. The New Zealand experience has been more wrenching than in many other countries because we started from a more egalitarian base.

In short, ordinary folk have not got ahead and, moreover, don’t feel they have got ahead. Many have gone backwards for at least part of the reform period – at a guess, 400,000 in a population of 3.8 million have been unemployed or have had a cut in pay at some point. As in many other countries a minority has flourished in or at least adjusted to the internationalised economy and society. But the majority remains uncomfortable and insecure: their wages, working conditions and jobs are changeable. At the bottom things have got worse: the symptoms of poverty have re-emerged in a country that thought it had abolished poverty forever. This social dislocation – and the accompanying diminution of community spirit and interaction (what some call “social capital”) – is common in Anglo-Celtic countries in the 1990s but for “cradle-to-the-grave” New Zealand it has a special poignancy.

So, like other countries, New Zealanders are now divided into a minority of “insiders”, relatively at ease with the new economy and new society, and a majority of “outsiders”, buffeted and bewildered.

Running through this social dislocation is a generational stratification. Those in their upper-50s and older pre-date the revolution (and, indeed, came to adulthood before the 1960s values revolution). Those in their upper-30s and younger stand squarely in the post-revolutionary society, having known no other as fully-developed adults – 18-year-olds who had their first vote in 1984 are now 33. The in-betweens are in transition, part revolutionary, part would-be counter-revolutionary.

We may be on the verge of passing political power to this next generation. The National party has promoted four young ministers aged 34-40 to high prominence in its cabinet: the most prominent, Bill English (38), is the Treasurer and the acknowledged heir to the leadership.

These four ministers, known colloquially as the “brat pack”, take the economic policy framework as given, not as something that must constantly be fought for and protected as do longer-lived ministers who went through the revolutionary phase. They have therefore a less doctrinal attitude to policy – an appropriate attitude as the neoliberal intellectual wave breaks and the debate moves on.

For the “brat pack” deregulation and asset sales are deemed desirable but not, as with the revolutionaries, because they conform to the “right” doctrine. The “brat pack” judges policy initiatives case by case by whether they will produce desirable outcomes (lower costs to business and greater international competitiveness). Social policy reform is deemed necessary not just to hold spending but to improve the quality of delivery of social services to a public that demands the same quality from its public services as from its private sector services. Moreover, the “brat pack” accepts that substantial cuts in the 25% of GDP that goes on social services and social security are politically impossible and in any case are necessary for social order.

That concern with social order suggests that what the four young men are attempting to do is generate a new conservatism through which they can command the political centre. It is not a standstill conservatism, as the reformist mentality of its adherents makes clear: the new policy orthodoxy the “brat pack” seeks to establish is a process as much as a position. But the new conservatism presumes a need to settle things down, to establish some social benchmarks that will bind people together after the revolutionary upheaval. More “outsiders” need to become “insiders” if social and political order and stability are to be restored. That requires the apparatus of the (reformed) welfare state.

But in what form? We do not yet have much recognition in our political debate that the battle lines have been fractured by the “outsider”/”insider” split. Instead, the leading opposition party, the Labour party, is fighting the 27 November election very much in traditional terms, assuming a political stratification determined largely by socioeconomic status. This leaves scope for populist parties and parties instead to pitch to disoriented, disgruntled and alienated rejects of the revolution in the language of “outsiders”, of rejection of the economic reforms (the “mad experiment”), of resistance to foreign investment and immigration (“New Zealand for New Zealanders”) and resentment of welfare “bludgers”, criminals and Maori agitators for redress of injustice (“one country”).

So far the “outsiders” have not been marshalled into a major political force. But their presence has been felt in elections. In 1993 some “outsiders” fetched up with the neo-marxist Alliance of five small leftist parties, led by a charismatic former Labour party president, Jim Anderton, proposing a reversal of the reforms. Voters also vented their frustration with established parties by voting to change the electoral system, which has greatly complicated our once simple politics by multiplying the number of parties in Parliament and forcing the two old parties to share power with them. In 1996 a former National party minister, Winston Peters, was able to collect 13% of the vote for his New Zealand First party, exploiting anti-immigration sentiment and resistance to economic internationalisation. Peters also scooped off the Labour party the vote of another group of “outsiders”, the Maori.

Since 1996, when Mr Peters disappointed his supporters by going into coalition with the National party he had campaigned to get rid of, “outsiders” have been parked with the Labour party, which has kept up a barrage of criticism of social ills but offered little in the way of “vision” and “hope”. This has left room for a new populist force which has been partly filled by the small rightwing ACT party, led by a former Labour minister, Richard Prebble. ACT was formed in 1995 to argue for more radical deregulation and privatisation, including of social services. But since February it has been targeting “outsiders” with a “one country” appeal on the Treaty of Waitangi settlement process (echoing Pauline Hanson’s One Nation call in Australia) and other populist stances on crime and benefits. Until recently this had no effect, but as the election has come into focus it has: ACT’s opinion poll standing in the past month has almost doubled and the Labour-aligned parties’ lead over the National-aligned parties has almost disappeared.

This should be Labour’s election. Fifteen years after the beginning of the revolution voters are ready for what the financial markets would call a “correction” and this is what Labour is offering: keeping the open economy but reinjecting the government into economic management with facilitative assistance to business and increasing social spending rather than cutting taxes henceforth. Labour is proposing a small tax rise for incomes around twice average earnings.

But in fact the Labour leadership is backward-looking. In a sense it is expiating its (reluctant) complicity as cabinet members in the economic policy aspects of the 1980s revolution. Both leader Helen Clark and deputy leader Michael Cullen hail originally from the left of the party and have never been entirely comfortable with the internationalised economy though they intellectually accept they cannot escape from it and the constraints on policy internationalisation imposes. Ms Clark talks of reversing out of the “cul de sac” of the 1990s and then setting off in a new direction, which looks rather like a reheating of the 1960s welfare state ideals, adjusted for the less buoyant economic conditions of the turn of the century.

This approach treats the fractures in modern society as an illness that can be cured by a poultice or two. It does not look like the sort of “vision” or “hope” that might give “outsiders” a sense of a world in which they can be “insiders” again. Ms Clark is not a visionary. She is a disciplined intellectual and a conservative one.

During Labour’s nine years in opposition and Ms Clark’s six years leadership neither she nor the party has done the sort of deep rethinking necessary to re-tune social democratic principles to the reality of an internationalised economy. The leadership’s politically formative years were at a time when the protected, regulated economy and the incrementally expanding welfare state were the generally accepted political wisdom.

So the party has little yet to contribute to the new “third way” thinking (though one senior MP, Steve Maharey, who has read the literature, does want to use “social entrepreneurs” to identify social issues and propose solutions and there are elements of that in Labour’s election policy). In our part of the world, we must look to Mark Latham of the Australian Labor Party for that – and Mr Latham has been exiled to the back benches, from where he issues books, articles and speeches redeveloping social democracy to apply to modern society but does not make official party policy. Mr Latham wants to reach and reconvert “outsiders” by rebuilding “community”, a lost “socialism” of localised mutuality. His party’s leadership and New Zealand’s, however, continue to pursue statist solutions. At a time when the “outsiders” distrust the state, this is not a recipe for building a strong and durable constituency to underpin long periods in government.

If there is a Labour-led government after this election, then, it will either last only three years or it will survive only by electoral accident or because it has done some fast rethinking in government. Since the second two are unlikely (though not out of the question), the odds are on Mr English’s new conservatism, either through a win at this election or by regaining power at the next, in 2002. New Zealand is moving on from the third “New Zealand model”

What Mr English is bidding for, though he doesn’t put it in these terms, is to establish a new political language. If he succeeds, he will set the terms on which the mainstream debate is conducted over the next decade, perhaps longer, and secure National’s place as the “normal” party of government, as it was from 1949 until the revolution. Labour’s failure to rethink social democracy and to redevelop social democratic concepts (for instance, to take Mr Latham’s argument, to revive an early notion of socialism as local mutuality) has given Mr English a head start.

The real test of the new politics, whatever form it eventually takes, is to meet the central challenge for New Zealanders: adjusting to their new status in an internationalised world. The option of isolationist retreat is closed off, having been found wanting in the 1980s. The rising generation has no sympathy for it.

New Zealand is a small, beautiful, sparsely populated country at the bottom of the world, far from the great economies and its majority population ethnically and culturally isolated (except for cousins across the Tasman). It is inventive by nature but also conformist. It grew rich on its agricultural advantage but now is in the middle of the pack, with few advantages and many disadvantages. For the next decade at least its people are likely to be constantly reminded as they travel that their material standard of living is falling relative to that of most other countries. Their brightest children will become Londoners or New Yorkers or (for those with lower sights) Sydneysiders. Excellence, which has seldom been prized except in sport, will become more elusive at the very time it is most needed to make a place in the world.

Yet, if you project out 20 years, beyond the current post-revolutionary depression of spirit, there are some glimmers of a fourth New Zealand model. Louise Rosson, recently elected president of the local authorities’ national organisation, Local Government New Zealand, gushes in an interview in this month’s issue of North and South magazine that “New Zealand, a small but perfectly formed multicultural country, can write the blueprint for excellence.” How might it do that? By marketing its space: a physically attractive place to live and think, an ideal location for the inventive individual at the forefront of the new sciences, technologies and occupations. Connection with big-city life is only a plane ride or a mouse-click away.

But if it is to develop in this way it must find a way through the challenges posed by another dimension – perhaps the determining one of our next decade or two. New Zealand is bicultural and is rapidly becoming multicultural. Coming to terms with those now established and irreversible facts is an immense challenge for a society that only a generation ago thought itself monocultural.

By bicultural I mean that two cultures have a claim to a leading role. The Anglo-Celts are dominant in numbers and have controlled the economy and politics for 160 years. Maori are indigenous, the “people of the land”, by virtue of having got to New Zealand first. And, they argue, the Treaty of Waitangi accords “partnership” status, that is equality between the cultures.

This is expressed in many ways by a rapidly growing and confident new elite of educated Maori: through resource and injustice claims before the Treaty of Waitangi Tribunal, including, for example, for control over the radio spectrum; through demands that social services paid for by the state should be distributed to Maori by Maori; through demands for special treatment in educational institutions; through demands for legislation to redress imbalances and injustices that cannot be dealt with through the tribunal process; through direct action to hurry along restitution.

The demands now also go to the heart of the power structure: a change in the constitution to give Maori equal decision-making power with the rest of the country or at least greater leverage. The change in the electoral system did give Maori more leverage but there is a growing clamour for institutional change as well. One claim is for two houses of Parliament of equal power, with a reconciling upper House. Demands of this sort have no chance of success, at least for the next decade or two, but the push by Maori is leading a gradually stirring debate on the constitution which is likely to develop momentum and possibly lead to change during the 2000s decade.

Part of the reason for Maori interest in the constitution is the debate across the Tasman on abolition of the monarchy (now temporarily suspended). Also, most MPs want to abolish legal appeals to the British Privy Council which is still New Zealand’s final court of appeal, an anachronistic hangover from colonial days. Maori claim, through the treaty, a special relationship with the British Crown, which (even though only symbolic) they will not give up unless there is some arrangement in a written constitution (the New Zealand constitution is a hotchpotch of laws and conventions, not a single written document).

There is another dimension to the cultural relationship – what has become known as the “gap”. Maori have much lower (though improving) educational achievement, much lower (and possibly worsening) health status, more than twice the general level unemployment and three times higher likelihood of going to prison. Under the Treaty of Waitangi’s third article Maori are accorded full citizenship and this is being used to argue for more social assistance, channelled through Maori organisations. But there is a hard-nosed economic issue at stake. Maori are 15% of the population and that proportion is rising. Such a large segment underachieving is a brake on the economy. The irony is that the Maori enthusiastically took up British technology in the nineteenth century and took readily and successfully to the capitalist economy, falling back into underclass status only when dispossessed of their land and stripped of their mana (dignity).

New Zealand is also home to other Polynesian races, a legacy of our mini-empire in the South Pacific. Also a rapidly growing proportion of the population (now around 5%), Pacific islanders exhibit the same characteristics of underachievement. But, while there is some fellow-feeling between Maori and Pacific islanders, Maori also jealously guard their special bicultural status. Some Maori reject entirely the notion of multiculturalism: there is Maori culture and other culture, they say.

This is a brake on developing a full policy on multiculturalism, though now 3% of the population is ethnic Asian and that proportion is also growing very rapidly, reflecting New Zealand’s proximity to Asia and the economic opportunities Asians see in New Zealand. Unlike Pacific islanders, Asians are economically successful and the object of resentment.

Most countries in one way or another are having to come to terms with a diversity of cultures within their borders. But in most cases it is an issue of a dominant culture making space for other cultures. In New Zealand it is a case of the two leading cultures having to make space for other cultures at a time when the leading cultures are still coming to terms with each other. The potential for tension is therefore doubled.

A liberal consensus among politicians and bureaucrats has so far held the line on biculturalism and multiculturalism and tensions have been contained; no political force has given voice to conservative (redneck) views on Maori issues, though New Zealand First used coded messages to tap resentment against Asians in 1996. But now the ACT party has breached the Wellington consensus with direct attacks on the treaty process which strike a chord not just with rednecks but with many middle class liberals. The next decade is likely to be much more tense in race relations than the one we are leaving.

Dealing with cultural adjustment and diversity is an internal preoccupation. How will the New Zealand of the first decade of the twenty-first century relate to the outside world, and in particular the United States? It will be generally outward-looking and internationalist with a preference for multilateral arrangements.

In culture, New Zealand is an avid importer, particularly of American culture, both low and high. We are internationalist in that sense. As we become more secure in our own national expression we are likely to maintain that internationalist attitude.

In trade New Zealand is internationalist with a first preference for multilateral initiatives, though there would be diminished zeal for new bilateral and regional initiatives if Labour leads governments (its allies, the Alliance and the Greens, are strongly opposed to free trade). With very little border protection and industry assistance, which requires most business to be internationally competitive (or dead), New Zealand has everything to gain and scarcely anything to lose from free trade agreements. Hence it has committed itself to beat the 2010 deadline for APEC tariff elimination and is actively seeking free trade wherever it can, quite apart from the World Trade Organisation round, of which it is one of the most enthusiastic advocates. Its burning shorter-focus ambition is for a five-nation agreement involving the United States, Australia, Singapore and Chile (the so-called “P5”) and linking the Nafta, CER, Asean and Mercosur. While the United States and Australia demur on that initiative, New Zealand is negotiating a “state-of-the-art” free trade agreement with Singapore, into which both countries hope to bring Chile, and is scoping a deal with South Korea. New Zealand’s trade relationship with the United States would benefit from an absence of the sorts of protectionist measures as have been applied recently to timber and lamb. But that sort of protectionism is something we have to live with as an exporter of the products (food) that are among the most sensitive to local producers.

In politics and defence New Zealand is multilateralist. The effective withdrawal from the Anzus treaty in the mid-1980s as a result of the anti-nuclear stance looks isolationist on the surface, an impression that would be reinforced by a glance at the niggardly record in defence expenditure and a multi-party parliamentary report in August this year urging an army-based force, with the navy and airforce downgraded to army support and shed of their expensive strike hardware. But that is to misread the public attitude.

New Zealand suffered high casualties in the world wars (because of inadequate preparation and equipment before them). By the time the United States requested participation in the Vietnam war in the 1960s (with heavy hints about the future of our beef trade) even the conservative government in power was very reluctant. But New Zealand has been among the most dedicated of United Nations peacekeeper, contributing to about half of all operations. When the East Timor crisis developed in September even our peaceniks were demanding involvement, including combat if necessary. The parliamentary committee’s suggestion of an army-based “niche” force is drawn from our experience in the past 30 years as a peacekeeper.

But the anti-nuclear stand is unacceptable to the United States, which requires a nuclear alliance. Moreover, if Labour leads the next government it will adopt the parliamentary committee’s approach, which is likely to upset Washington. Even if National remains in power, however, it will not move on the anti-nuclear policy. We are destined to remain militarily apart. From Wellington, Washington’s view looks petty, especially since New Zealand has now been part of several coalitions which the United States has led or been part of, including Iraq (we still have a frigate in the Persian Gulf) and Somalia.

Thankfully, Washington does not seem to allow that to affect other aspects of the relationship. There is no evidence its unfriendly trade acts and recent unfriendly pressure to replace a high-performing New Zealander on a United Nations committee are linked to the military standoff. President Clinton’s desire to appoint a person with a chequered background as next ambassador seems likewise unrelated. In Canberra, however, where both Labor and Liberal politicians think New Zealand is a freeloader and shirker on defence, that judgment does from time to time adversely affect Canberra’s attitude on other matters – most famously when in 1994 Paul Keating unilaterally killed a proposed single air market without warning or compunction.

New Zealand is a country in transition. The novelty of its third “New Zealand model” has worn off and independence has turned to loneliness in an unforgiving world in which we do less well than we used to. The country faces a huge and difficult cultural adjustment amid dauntingly challenging economic conditions. We may not have a new “model” to offer for the world’s envy but we are an interesting society for study.