Radical Welfare State Retrenchment in New Zealand

Radical Welfare State Retrenchment in New Zealand Comparative Political Economy Home Assignment 2013 STU count: 22684 Corresponding to number of pages: 10 Physical number of pages (excluding frontpage and bibliography): 9 Physical number of pages (including everything): 12

Introduction In 1984, New Zealand began implementing what may be the most rapid and comprehensive neoliberal economic and social reforms an OECD country has ever experienced. It s welfare state, which had been considered among the world s leading welfare states since the 1930 s, underwent a radical retrenchment process that led to rapidly rising levels of poverty and income inequality. This paper takes a longitudinal approach, and examines the following main research question: How has the foundation of the New Zealand welfare state changed from the period after World War 2 compared to the mid 1990 s, and how can the radical nature of its transformation be explained? It is puzzling why New Zealand went from being one of the most regulated to one of the most deregulated countries in the world over a surprisingly short time span, in what has been called one of the most notable episodes of liberalization that history has to offer. By analyzing how such radical transformation could occur, we can potentially obtain knowledge about which variables can cause such drastic change to happen. By observing and analyzing these variables, it might shed some light upon why welfare retrenchment has happened to different degrees among seemingly similar OECD countries. To answer this research question, the paper will first use Esping-Andersen s welfare regime typology supplemented with ideas by other sociologists such as by Francis G. Castles, in order to determine the characteristics of the New Zealand welfare state in the post-war period. Second, in order to understand how the foundation of the New Zealand welfare state became unsustainable, and consequently the neo-liberal economic and social reforms were implemented, the study will use Jessop s scheme regarding capital state development. Last, by taking the previously examined neoliberal economic and social reforms into account, the paper will reapply the concepts of Esping- Andersen s welfare regime typology to New Zealand s welfare state in the mid 1990 s, and then compare these findings with the initial findings on the New Zealand s welfare state during the postwar period. The paper has chosen to use Esping-Andersen s typology along with Jessop s scheme, as it predicts a high amount of complementarity between them when using a longitudinal approach. Whereas Esping-Andersen s typology can be used to compare two time periods in frozen stages as if they were two separate welfare states, Jessop s scheme can be used to show how we get from the first period to the next. However, these theoretical approaches have their limitations. By using the 1

approach of Varieties of Capitalism 1 on the neoliberal reforms from 1984, the paper would have been able to distinguish a wide-ranging set of institutional complementarities within and among the reforms. Moreover, the intention of establishing such complementarities could potentially explain the reasoning behind the rapidity of the neoliberal reforms, as an attempt to undergo a successful change from a central market economy to a liberal market economy. Also, this paper does not comment on where the neoliberal ideas came from. Likewise, it does not mention the political struggles between the Labour Party and the National Party, and it does not point out why the neoliberal ideology prevailed. This could have been done through a constructivist approach 2, where the paper could have examined how such deregulative neoliberal ideas gained support after a century of highly regulative policies. Similarly, by using the approach of Social Structures of Accumulation (SSA) 3, the paper could have analyzed New Zealand s deep economic crisis and following reforms as the collapse of a regulated SSA, and the potential appearance of a new liberal SSA. Esping-Andersen s Typology Esping-Andersen s highly influential theorizing and research on welfare regimes does not focus solely on the total amount of social expenditure, but instead attempts to capture how and why welfare states operate in the way that they do 4. He argues that welfare regimes will cluster around three ideal-types 5, of which two are relevant to this paper: 1) A social democratic type, characterized high levels of decommodification and universal benefits, with the purpose of ensuring equality and solidarity on the highest standards through an extensive redistribution of wealth. 2) A Liberal model with low levels of decommodification, only modest universal transfers, and relatively low means-tested assistance directed towards a low-income group. As a result of the modest transfers as well as strict entitlement rules, the redistributive effects of the model are low. From one perspective, New Zealand shared a number of attributes with the idealist liberal welfare model following the Second World War. With the exception of child allowance, and an income taxed universal superannuation benefit payable at age 65, all social security benefits were flat-rate 1 Feldman (2006) 2 Blyth (2001) 3 Diebolt (2002) 4 Arts & Gelissen, (2002), p. 570-571 5 Esping-Andersen (1990), pp. 167-169 2

and means-tested by income 6. According to Esping-Andersen s typology, the lack of universal benefits, as well as supposedly stigmatizing means-tested payments, should lead towards a society with a low redistribution of income 7. From another perspective, the seemingly liberal structure and thereby expected outcome of the New Zealand welfare state does not do any justice to its true capacity and results, and New Zealand had many claims to being the most equal Western society. 8 This paper recognizes two main reasons behind this inconsistency: Firstly, as argued by Francis G. Castles, it can be argued that the liberal characterizations masks the real extent of security ensured in New Zealand. Castles describes New Zealand as a wage earners welfare state, where social protection is obtained by a range of policy instruments targeting inequality within the labor market 9. It was managed through the Court of Arbitration, which set the wages based on principles of equality and adequacy 10, thus ensuring a high wage level, and, in the period 1948-1968, what may have been the lowest spread of incomes amongst First World countries 11. This was combined with Keynesian demand management as well as trade protectionism (through tariffs and import licensing), thus combining the high and equal wages levels with an almost entirely frictional unemployment level 12. By ensuring employment and high wages to more or less all male workers, the state was implicitly also directing resources towards their wives and children. Consequently, although the welfare system was not based on universal benefits, the policy instruments that operated within the labor market provided universal income-earner prosperity, which is a similar outcome to what we expect from the social-democratic welfare model. Secondly, and largely as a complementarity to the above mentioned labor market policies, the means-tested and selectivist benefits targeted at those outside the wage system have been described as generous, which does not correspond with the expected modest transfers of the liberal model. In 1972, the New Zealand Royal Commission on Social Security argued that if all categorical benefits were provided on a universal basis, the benefits levels would be lower than otherwise desirable and possible. Moreover, it is suggested that a progressive tax system along with these, arguably 6 Castles (1996) online 7 Esping-Andersen (1990), p. 168 8 Davidson, (1989), p. 249 9 Starke (2008), p. 54-55 10 Castles (1996) online 11 Davidson, (1989), p 249 12 Castles (1996) online 3

generous, selective benefits, served to further amplify the equalizing effects of the already highly redistributive wage system. 13 By taking into account the two above-stated reasons, it becomes clear why New Zealand seemingly liberal welfare state structure does not correspond with its socioeconomic reality. The aim of the welfare state was to ensure that everyone had: [ ] a protected job in both senses of limited competition and ensured employment[...] 14, which, given the high wages and the low spread of incomes, led to the system being unusually redistributive and very similar to the social democratic type of welfare regime in terms of outcome. One of the defining features of the social democratic welfare regime, high decommodification, is defined by Esping-Andersen himself as something that occurs when a service is rendered as a matter of right, and which ensures that an individual can maintain a livelihood without reliance on the market 15. This is arguably highly characteristic of the New Zealand welfare state in the post-war period. Whereas a liberal welfare regime would typically have a low safety net in terms of means-tested benefits, New Zealand operates with two nets: One constructed by full employment and high wages, and one constructed by somewhat generous means-tested benefits to the few individuals who slipped through the first safety-net. The idea of New Zealand as a wage earners welfare state helps to define why many sociologists seemingly avoided 16 classifying New Zealand s welfare regime before the 1990s: Due to the rare and highly unique nature of the wage-securing policies within the labor market, this parameter is not present in Esping-Andersen s typology. As a result, while New Zealand seems to be a close fit with the liberal model in terms of structure, the actual outcome of the welfare state is much closer to the social-democratic model. The development of an economic crisis In Bob Jessop s theory of capital state development, he argues that the form of state which developed after the Second World War in advanced capitalist economies went into a crisis from the 1970s and onwards 17. Specifically, he argues that the predominant ideal-type of postwar state, the Keynesian welfare nationalist state (KWNS) became unsustainable, and developed into the 13 Davidson, (1989), p. 275 14 Ibid, p. 249 15 Esping-Andersen (1990), p. 163 16 The paper does not claim that no sociologists approximated a welfare regime before the 1990s, but simply that none of the sources used in this paper suggests it. New Zealand was not mentioned by Esping-Andersen until 1990. 17 Jessop, (2002), p. 2 4

Schumpeterian workfare postnational regime (SWPR) 18. In the following section, the paper will show to which degree New Zealand fits the ideal-type definition of a KWNS during the post-war period. Next, the study will consider why the form of New Zealand s state became unsustainable, and lastly, how the structure rapidly changed towards a SWPR from 1984 and onwards as a result of radical neoliberal economic and social reforms. New Zealand as KWNS Bob Jessop defines an ideal KWNS on four dimensions, which are all relatable to the New Zealand postwar state. Firstly, he argues that it is Keynesian in terms of aiming towards full employment through demands-side economics. As previously stated in this paper, this commitment towards full employment was highly regarded, and it was complemented by tariffs and import licensing. Secondly, the ideal KWNS had a universal welfare orientation, which was carried out by having male workers earn a family wage. Again, this type of male breadwinner logic was previously analyzed as one of the core aspects of the New Zealand s wage earners welfare state. Thirdly, it was national meaning that the state was responsible for developing and guiding Keynesian welfare policies on a national level. This condition is met in the sense that the state did in fact not operate on an international level, but instead focused heavily on tariffs and import licensing to protect national employees. Lastly, the KWNS was statist in the sense that state institutions were to complement market forces in dealing with market failures. As previously touched upon, the highly regulated labor market of New Zealand existed in a wider environment of regulation. The country was considered one of the most regulated within the OECD, thus further emphasizing the magnitude of the state s influence 19. In sum, the paper concludes that New Zealand carried a high resemblance to the ideal KWNS in all four dimensions during the post-war period. In relation, Jessop makes an interesting argument with regard to Esping-Andersen s typology, stating that it is mainly based on just one of these dimensions, being the state s role in decommodifying men s waged labor 20. If one accepts this argument, it becomes apparent why inconsistencies can occur between Esping-Andersen s ideal models and a case study of a KWNS. Jessop suggests paying more attention to modes of economic 18 Jessop, (1999), p. 1-12 19 Menz, (2005), p.50 20 Jessop, (2002), p. 63-65 5

intervention and modes of governance when creating new typologies, which seems to be what Castles does in his description of New Zealand as a highly regulated wage earners welfare state 21. Crisis in the welfare state Jessop argues that in the ideal KWNS, the Keynesian economic management eventually leads to stagflationary tendencies, due to increasing concerns with international economic competitiveness and supply-side intervention in a rapidly globalizing world. Thereby, the state s role in ensuring macroeconomic stability is suddenly undermined, and the objective of full employment can no longer be sustained. This is highly relatable to New Zealand during the late 60s and 70s, where they found themselves highly vulnerable to a variety of external shocks, which in turn raised questions towards the sustainability of their welfare state. After many years of prosperity, a wool price slump, followed by the first oil price shock in 1973, caused real GDP growth and the balance of payments to drop considerably along with a rapid increase in inflation as well as the rate of unemployment 22. The situation was worsened further when the UK, New Zealand s main export market for agricultural products, decided to join the EEC, which put an end to 40 years of specially negotiated access to the British market 23. Moreover, cash transfer expenditure as a percentage of GDP rose by exactly a third from 1980 to 1990, thus making it the highest proportional increase in any OECD country in this period 24. Logically, if a country is based on means-based welfare benefits, an increasing rate of unemployment will lead to higher social expenditure due to a larger number of people receiving unemployment benefits. However, the increase in cash transfer expenditure was largely due to institutional welfare changes (by some considered a political overshoot), which interestingly included a lone parent benefit 25, exemplifying the long run unsustainability of the male breadwinner society. In Jessop s terms, one can say that in spite of devaluations and overseas borrowing, along with a freeze on wages, prices and rents in 1982, it became increasingly evident that the state of New Zealand in its current form was not able to control the stagflationary tendencies through minor demand-side adjustments. Its role in ensuring macroeconomic stability had been undermined, which along with the foreign exchange crisis of 1984 triggered economic reforms 26. 21 Castles (1996) online 22 Massey, (1995), p. 7-15 23 Dalziel and Lattimore (2004), p.20 24 Starke (2008), p. 48-49 25 Starke (2008), p. 69 26 Evans (1996), p.1 6

The drastic reforms Jessop argues that due to the gradually developing unsustainability of the KWNS, states will eventually develop towards an ideal type SWPR 27. This includes a shift from demand-side to supply-side management by promoting an innovative and flexible economy, thus ensuring competitiveness in a globalized world. As a consequence, there is a shift of focus from guaranteeing full employment and social benefits for national citizens, to endorsing a highly flexible and business-friendly labor force. As the following sections will suggest, this paper argues that such a development is highly applicable to New Zealand from 1984 and onwards. Over less than a decade, it went from being one of the most regulated countries in the world to becoming one of the least regulated, with a pace and intensity widely considered to be unmatched by any other OECD country. The reform programme, known as Rogernomics, included highly liberating financial and monetary reforms, corporatizations and privatizations, trade liberalizations (including removal of tariffs and import licensing), an abolishment of competition rules and subsidies, and several reforms to improve productivity in the public sector 28. Generally, the neoliberal means of deregulation are very much in line with the goals of the SWRP as described by Jessop. These reforms, along with some back-and-forth benefit adjustments, certainly had an impact on New Zealand welfare state, but in order to see the full picture, it is crucial to consider the radical welfare retrenchment from the early 1990s, as well as the Employment Contracts Act of 1991 Firstly, there was a dramatic reduction of most welfare state benefits (some up to almost 25%), as well as a tightening of eligibility for means-based benefits. Moreover, some of the few universal welfare benefits were removed, economically worsened, or changed into means-based benefits 29. While the official goal was to ensure better targeting, the effects of the substantial reductions cannot be ignored. Secondly, the Employment Contracts Act of 1991 put an end to compulsory membership of trade unions, and entirely abolished the Court of Arbitration, thus leading to deunionization and decollectivization 30. A large number of employees ceased to be covered by bargaining contracts, multi-employer bargaining collapsed, there was an increase in downward wage flexibility, and it created relative wage flexibility between industries. As a result, employment benefits were reduced for many workers, and the relative wage flexibility logically lead to a higher spread of income. 27 Jessop (1999), p. 355 28 Starke (2008), p. 76-77 29 Starke (2008), p. 94 30 Harbridge and Walsh (2002), p. 206 7

In sum, there was both a reduction of formal welfare benefits (lower payments, abolishments, and tightening of eligibility), as well as the guarantee of full employment and high wages (removal of employer benefits, higher relative wage flexibility). On the basis of these findings, this paper will now return to Esping-Andersen s welfare typology, and compare New Zealand s welfare state in the post-war period with its welfare state in the mid 90 s. Comparing the post-war with the post-reform period In the analysis of New Zealand s welfare state in the post-war period, it was argued that although the structure seemed close to what was seen in the liberal ideal-type, there were some major inconsistencies: The highly equalizing aspects of the Court of Arbitration, the generosity of the means based transfers, and the existence of some universal benefits. These factors led to a highly redistributive society, and the paper argued that they created two separate safety nets. In the mid 90 s, on the other hand, the Arbitration Court had been completely abolished. As nicely put by Castles: If the keystone of the institutional arch of the wage earners welfare state used to be the institutions of wage control which regulated and pacified the conflict of labour and capital, then the Employment Contracts Act marks the end of the wage earners welfare state in New Zealand 31. In other words, the first safety net of the New Zealand welfare state had been completely removed. Moreover, by reducing the means-based payments, tightening their eligibility, and removing universal benefits, the second safety net had been lowered dramatically. By no longer ensuring full employment, more people would now be dependent on the second safety net, which in turn would supply much lower payments than before, thus ensuring a less equal society. In sum, this paper argues that New Zealand s welfare state developed from having a liberal structure and a social democratic outcome, to having a liberal structure and a liberal outcome. The lurking parameters which were inconsistent with the typology no longer existed, and the New Zealand s welfare state was now characterized by low levels of decommodification, as well as relatively low means-tested assistance, thus clearly establishing it as a liberal welfare regime. As one would expect, an upwards trend in absolute poverty rates along with income inequality occurred from the mid-late 1980 s and continued till the mid 90 s 32. 31 Castles (1996) online 32 Starke, 2008, p. 150 8

Conclusion This paper has analyzed how the foundation New Zealand welfare state changed from the post-war period compared to the mid 1990 s, as well as why the nature of the transformation was as radical as it was. First, the paper used Esping-Andersen s welfare regime typology to determine the characteristics of the New Zealand welfare state after World War 2. It was found that while the structure of New Zealand welfare state appeared to be liberal, with regard to means-tested welfare benefits, its outcome was very close to what would be expected from a social democratic ideal type. It was concluded, that this outcome was a result of the welfare state being built upon a foundation of high and equal wages through the Court of Arbitration, as well as rather generous selectivist welfare benefits. Secondly, the paper used Jessop s scheme of capital state development, to analyze how the welfare state of New Zealand of became unstable, and how it led to the implementation of neoliberal economic and social reforms. The study concluded that there was a high resemblance between the ideal KWNS and New Zealand in the post-war period, as well as clear connections between the expected crisis of the ideal KWNS, and the troubles New Zealand faced prior to the economic reforms. Additionally, it was concluded that by implementing the neoliberal reforms, New Zealand approached the ideal type SWPR. Lastly, on the basis of the previous findings, and by again using Esping-Andersen s typology, this paper analyzed New Zealand s welfare state in the mid 1990 s, and then compared it with New Zealand s welfare state in the post-war period. It was found that while the structure was still close to what was expected from a liberal ideal type welfare model, the outcome of New Zealand s welfare state was no longer social-democratic in nature. This was a result of a complete abandonment of the Court of Arbitration, which led to the end of the wage earners welfare state, as well as dramatic cutbacks on means-tested welfare benefits. In sum, the reasons behind the radical transformation of the welfare state of New Zealand became quite apparent, as the formal cutbacks in welfare benefits, along with a complete abandonment of the foundation upon which it was based, led to rising absolute poverty rates along with income inequality. 9

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