For the past 15 years, the New Zealand government has initiated major efforts to reduce persistently large inequities in achievement outcomes in literacy education, including the development of a national literacy strategy. The aim of this study was to provide an analysis of the factors that have contributed to the failure of this strategy and what can be done to overcome the problem. We began by presenting evidence in support of the claim that the national literacy strategy has failed, drawing on data from the PIRLS 2011 study and the latest annual monitoring report of Reading Recovery (RR) data. We then identified three interrelated factors as contributing to the failure of the national literacy strategy: (1) a constructivist orientation toward literacy education, (2) the failure to respond adequately to differences in literate cultural capital at school entry and (3) restrictive policies regarding the first year of literacy teaching. In the final section of the paper, we reviewed research in support of what we maintain is the most effective strategy for reducing the literacy achievement gap: the use of differentiated instruction from the outset of formal schooling that takes into account interactions between school entry reading-related skills (high versus low literate cultural capital) and method of teaching reading (constructivist versus explicit approaches). We also argued that RR should be replaced with an intervention program that is based on contemporary theory and research on reading and targets those struggling readers who need help the most.