Sir Roger Douglas: Timeless Wisdom – The Politics of Successful Structural Reform

It’s a well-known pattern in public policy – profligate politicians damaging their economies with out-of-control spending, massive borrowing and higher taxes – inevitably leading to fiscal crisis, sharp declines to growth and ultimately rapidly falling currency value and living standards. 

How do countries recover from such negative downward policy spirals?  The answer is bold and quality “structural reform” to right size government, eliminate special interest privilege and create an environment for strong private sector growth. 

The following article was written in 1990 by Sir Roger Douglas, who was the finance minister in the Lange Labour Government between 1984 and 1988. He was the driving force in rescuing his country from financial collapse with bold structural policy reforms which became known as “Rogernomics”.   Sir Roger was voted as one of the most influential New Zealanders of the past century.

Politicians almost universally believe that timely, appropriate and voluntary action to remedy structural economic imbalance should be avoided at all costs because it amounts to political suicide.  Consequently, as studies by the Organization for Economic Cooperation and Development show, in eight out of 10 cases over the past decade, reform was left until the developing imbalance had collapsed the currency or caused some other costly economic or social disaster.  This is the point at which the government that failed to take timely action is normally thrown out of office, and a new party is elected to carry out reforms that could (and should) have been undertaken years sooner.

The idea that governments can retain power by refusing to make necessary and valuable structural reforms is, in fact, nonsense.  It inevitably leads to the downfall of those foolish enough to believe it.  Rather, it is quality decisions, which strengthen the economy and improve the medium-term prospects of the voting public, that are the key to any party’s hopes of re-election.

These conclusions are all supported by our experience in New Zealand, where wide-ranging structural economic reforms have been undertaken in the 5 1/2 years since the present government won power in July 1984.  Wherever quality medium-term policies have been implemented without compromise, opinion polls show that the government continues to enjoy the approval of the voting public.  On the other hand, wherever our approach, for political reasons, stopped short of an uncompromising emphasis on quality, we are in trouble with the public now.

Implementing quality decisions also provides an important insight into the nature of political consensus.  Most governments believe they must have consensus support for reforms before they are enacted, otherwise the actions they take will not be politically sustainable at election time.  The inevitable result is compromised policies.  Our experience in New Zealand shows consensus develops progressively, after the decisions are made and deliver satisfactory results to the public.

What then, beyond quality decisions, are the principles that form the basis of politically successful structural reform?  The New Zealand experience has highlighted 10 fundamental laws of policy making that create the environment needed to support such reform:

1. You need quality people for quality policies.

In New Zealand, this was evident politically in the calibre of new Labour Party candidates attracted in the 1978, 1981 and 1984 elections.  Without politicians prepared to get their minds around complex issues and the guts to adopt policies that would achieve the results needed, the government’s program of reform would have stalled.  The quality of political candidates is a world-wide problem.  Politics is a mess because too many people with education, vision and courage are content to criticize from the sidelines.  As long as this continues, we will wait in vain for good government in democratic countries.

The importance of good people was evident also in our public-sector reform.  Getting the structures and incentives right can transform the performance of many dynamic workers who were held back by the old system.  But it was even more essential to replace the people who could not or would not adapt to the new environment.  This applied in the private sector as well.  Deregulation has forced a dramatic improvement in the quality of business and company management.

2.  Once you have defined your objectives clearly, implement reform in quantum leaps.

If you advance a step at a time, the interest groups will have time to mobilize and drag you down.

Packaging reforms into larger bundles is not a gimmick but political efficiency.  The economy operates as an organic whole, not an unrelated collection of bits and pieces.  When reform is packaged in this way, the linkages in the system can be used to see that each action effectively enhances every other action.  Large packages provide the flexibility to ensure that losses suffered by any one group are offset by gains for the same group in some other area.  The public will accept short-term pain if the gains are spelled out and the costs and benefits are shared by the whole community.

3.  Speed is essential.

It is impossible to go too fast.  The total program will take some years to implement even at maximum speed.  The costs appear immediately while the tangible benefits take time to become visible.  Move too slowly and the consensus that supports reform can collapse before the results are evident and while the government is only partway through its program.  Apparent requests from interest groups to a slower pace often turn out, on closer analysis, to be resentment that government is not moving fast enough to abolish privileges still enjoyed by rival groups.  Privileges impose costs on everyone else.  It is uncertainty, not speed, that endangers structural reform programs.

4.  Once you build up momentum don’t lose it until you have completed the total program.

Opponents find a rapidly moving target much harder to hit, and you will have plenty of opponents if you are removing privileges and protection.  Staying in front allows the government to lead the public debate.  Removing privileges evenhandedly across the board reduces the grounds for interest groups’ opposition and offers them a more constructive role in a better society.

5.  Consistency plus credibility equals economic confidence.

Maintaining credibility is essential to keep public confidence in structural reform and minimize the costs.  The key to credibility is consistency of policy and communications.  If the government lacks credibility, people refuse to change their behaviour to fit new policies and thus place avoidable costs on the economy.  Speed, momentum, avoiding ad hoc decisions, and an unwavering adherence to medium-term objectives are crucial in establishing a government’s credibility.

6.  Let the dog see the rabbit.

People cannot cooperate with the reform process unless they know where you are going.  Where feasible, spell out your objectives and intentions in advance.  If programs are to be implemented in stages, start by publishing the timetable.  Businesses and professional analysts understand the importance of quality in decision making and the benefits of medium-term policies.  In time, their increasing good will toward the programs becomes a major factor in creating a favourable climate of public opinion.

7.  Never fall into the trap of selling the public short.

Successful structural reform is not possible until you trust, respect and inform the electors.  Tell the public, and never stop telling them:

• What the problem is and how it arose.
• What damage it is doing to their own interests.
• What your objectives are.
• How you will achieve those objectives.
• What the costs and benefits of your action will be.
• Why your approach will work better than the other options.

People may not understand all the technical detail, but they have a lifetime of experiences to help them sift wheat from chaff.  They know when key questions are being evaded.  They respect honest responses to their questions.

8.   Don’t blink; public confidence rests on your composure.

Over the past five years, ministers in the New Zealand government have announced some of the most radical decisions on structural reform in the past 50 years.  Structural reform demands a major change in the ideas and attitudes most people grew up with.  Such demands inevitably cause discomfort and uncertainty.  People become hypersensitive to any signs of similar anxiety in the politicians responsible for these reforms.  When they cannot understand the argument, they base their judgment on their assessment of the speaker’s mental and emotional condition.  That is another reason why it pays to make decisions of the finest quality.  When you know you’ve got it right, that comes out through their television sets.

9.  Incentives, choice, monopoly – get the fundamentals right.

A sick economy cannot be regulated back to health.  Since 1917 the concept of command economies has been tested to extinction.  Government became the most oppressive vested interest of all.  The role of governments today is to create a framework that widens people’s opportunities for choice, improves the incentives to productive activity and sees that their gains benefit society as a whole.

The abolition of privilege is the essence of structural reform.  Wherever possible, use your program of reform to give power back to the people.

10.   When the pressure becomes extreme from colleagues or vested interests to abandon medium-term policies and accept an easy ad hoc compromise, ask yourself: “Why am I in politics?” 

No party holds power forever.  Sooner or later we all find ourselves out of office.  That is the reality of life in a democracy.  We may as well use the time we have to do something worthwhile.  Genuine structural reform, carried through without compromise, delivers greater gains in opportunity and living standards in the medium term than any other approach to political decision making.

What the voting public wants most from politicians is the guts and vision to make decisions of real benefit to them and to their children.  Their future depends on it.

This article by Sir Roger appeared in The Wall Street Journal, January 17, 1990 and is reprinted from the Frontier Centre for Public Policy HERE.