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I. Introduction 1
A. Overview
TRIGGERED BY A constitutional and foreign exchange crisis in July 1984, New Zealand launched into a sequence of economic reforms which David Henderson (1995), an experienced OECD observer, has called "one of the most notable episodes of liberalization that history has to offer." These reforms encompassed both macroeconomic stabilization and structural change. 2 This essay summarizes key aspects of these reforms and attempts to draw some conclusions about the lessons to be learnt from the New Zealand experience.
Table 1 provides some summary information on New Zealand. Year-by-year movements in key macroeconomic indicators are illustrated in Figure 1. The underlying data can be obtained from the authors. The Appendix provides a comprehensive chronology of the reform measures. Figure 2 depicts the sequence of the reform program.
The early pace of the reforms reflects in good part the deep-seated nature of the initial crisis, widespread recognition, particularly in the business community, of the need for change, strong intellectual and administrative support from key public sector advisers and New Zealand's constitutional arrangements. In New Zealand a governing party with a clear parliamentary majority can legislate its program with few constitutional impediments. The major nonconstitutional constraints on the executive are internal party unity, electoral support, and the disciplines imposed by external financial flows.
Section B in this introduction briefly describes the New Zealand economy prior to the reforms. Section C reviews the scope and sequence of the post-1984 reforms. It also summarizes the macroeconomic outcomes to date. Section D discusses the intellectual underpinning of the reforms.
Space precludes detailed consideration in this paper of all aspects of the New Zealand reforms. The subsequent sections of this paper review the main features of the reforms and comment selectively on a number of aspects which are likely to be of international interest.
Section II reviews monetary and macroeconomic policy and the financial market reforms. Section III discusses the transformation of the public sector. Section IV covers the more recent labor market and social welfare reforms. Section V looks at the effect of the program in creating a more competitive business environment. Section VI draws together our conclusions.
B. Pre-Reform Background
Annexed by treaty with Britain in 1840, and relying heavily on trade with that "mother...