Can orthodox stabilization and adjustment work? Lessons from New Zealand, 1984–90

Most debate about the efficacy of orthodox stabilization programs, such as those of the International Monetary Fund, has been fruitless. First, rarely are these programs fully implemented or sustained for long periods. Second, defenders and critics of the programs hold differing premises about the nature of capitalist economies. The debate is therefore not about the appropriate balance of supply-and demand-side measures but, rather, about what sort of supply- and demand-side measures will address the supply- and demand-side problems that each group perceives. The results of an orthodox stabilization program which incorporated demand- and supply-side elements and which was fully implemented and sustained by the New Zealand government from 1984 to 1990 reveal the limits to orthodox programs. New Zealand, a primary product exporter, suffers from a structural imbalance of payments and from an external debt burden equal in scale to that of the Latin American and other highly indebted less developed countries (LDCs), but it does not have the serious supplyside constraints on growth that critics claim typify underdeveloped economies. This makes New Zealand an appropriate test of the typical orthodox stabilization program. Despite the fact that its administrative capacity, political will, domestic support, and access to external resources were far in excess of those of the typical would-be LDC stabilizer, New Zealand achieved only a precarious macroeconomic and international payments stability. Moreover, as the case of New Zealand demonstrates, inflation control and financial liberalization policy components of orthodox plans have contradictory consequences for payments balance. This suggests that long-term stabilization, in New Zealand and elsewhere, cannot be achieved solely by internal reforms.