Timeless Wisdom – The Politics of Successful Structural Reform

Sir Roger Douglas, finance minister in New Zealand’s reform-minded Labour government between 1984 and 1988 implemented bold structural reforms that rescued his country from financial collapse. The following is a timeless [abridged] commentary Sir Roger wrote entitled “The 10 Principles of Structural Reform.”

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.

That belief leads to the nonsensical idea that governments can retain power by refusing to make necessary and valuable structural reforms.

Here are ten principles of structural policy reform:

• Quality people for quality policies.

The quality of political candidates is a worldwide 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 bold public-sector reforms. Getting the structures and incentives right can transform the performance of many dynamic workers 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.

• Once objectives are clear, 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. 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 gains for the same group in another area offset losses any group suffers. The public will accept short-term pain if gains are spelled out and the community shares the costs and benefits.

• Speed is essential.

It is impossible to go too fast. The program will take some years to implement, even at maximum speed. The costs appear immediately, while the tangible benefits take time to appear. Move too slowly, and the consensus that supports reform can collapse before the results are evident while the government is only partway through its program. It is uncertainty, not speed, that endangers structural reform programs.

• Build and maintain momentum until the total program is completed

Opponents find a rapidly moving target much harder to hit, and there will be plenty of opponents if you remove privileges and protection. Staying in front allows the government to lead the public debate. Removing privileges

even-handedly reduces the grounds for interest groups’ opposition and offers them a more constructive role in a better society.

• 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, thus placing avoidable costs on the economy.

• Let the dog see the rabbit.

People cannot cooperate with the reform process without knowing where it’s going. Where feasible, spell out objectives and intentions in advance. If programs must be implemented in stages, start by publishing the timetable.

• Never sell the public short.

Successful structural reform is impossible 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’s doing to their interests.
• What your objectives are.
• How you will achieve those objectives.
• What the costs and benefits will be.
• Why your approach will work better than the alternatives.

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

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 signs of similar anxiety in the politicians responsible for these reforms. When they cannot understand the argument, they base their judgment on assessing the speaker’s mental and emotional condition. That is another reason it pays to make decisions of the finest quality.

• 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 for productive activity and sees that their gains benefit society.

The abolition of privilege is the essence of structural reform. Use your reform program to give power back to the people wherever possible.

• When the pressure from colleagues or vested interests becomes extreme 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.

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

Sir Roger Douglas was New Zealand’s Finance Minister during 1984-1988 and is a member of the Expert Advisory Panel of the Frontier Centre for Public Policy