Economic Adjustment: Policies and Problems

Economic Adjustment: Policies and Problems ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution Economic Adjustment: Policies and Problems Edited by Sir Frank Holmes Papers presented at a seminar held in Wellington, New Zealand, February 17-19, 1986 International Monetary Fund • 1987 ©International Monetary Fund. Not for Redistribution © International Monetary Fund, 1987 Reprinted July 1989 Library of Congress Cataloging-in-Publication Data Economic adjustment: policies and problems: papers presented at a seminar held in Wellington, New Zealand, February 17-19, 1986 / edited by Sir Frank Holmes. p. cm. Bibliography: p. ISBN 0-939934-98-1 1. Oceania—Economic policy—Congresses. 2. Korea (South)— Economic policy—1960—Congresses. 3. New Zealand—Economic policy—Congresses. I. Holmes, Frank Wakefield, Sir, 1924— II. International Monetary Fund. HC681.E28 1986 87-30382 338.99-dcl9 CIP Price: $16.00 ©International Monetary Fund. Not for Redistribution Foreword Economic adjustment continues to be a major issue demanding the attention of the authorities of developed and developing countries alike. This volume, which contains the proceedings of a seminar held in 1986 in Wellington, New Zealand, focuses on the adjustment problems faced by countries in the South Pacific, and particular attention is devoted to the situation of the small island economies in the South Pacific. One of the most important aspects of adjustment for these countries, as well as for New Zealand and Australia, is the formulation of liberalized trade and exchange policies in the face of increasing worldwide protectionism, and a number of participants in the seminar addressed themselves to this issue. As is suggested in several of these papers, many of the problems of adjustment are not unique to the South Pacific region. Accordingly, these papers also consider general adjustment policy issues that are ap- plicable to a wide range of economies. Specific examples are provided by two case studies of the adjustment effort in a developed and a developing economy. In the past few years, the International Monetary Fund, in collabora- tion with the World Bank, has become progressively more involved with the adjustment efforts of its member countries, especially the developing countries. This seminar, which was jointly sponsored by the Fund and the Reserve Bank and Treasury of New Zealand, is a part of the Fund's continuing effort to provide a forum for an open discussion and exchange of views about the role of international financial institutions in the adjustment process. Michel Camdessus Managing Director International Monetary Fund v ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution Acknowledgements One of the most important functions of the International Monetary Fund is to promote informed discussion on issues of fundamental signifi- cance for international financial stability and economic development. This volume contains papers from a seminar that the Fund co-sponsored with the Reserve Bank and Treasury of New Zealand in Wellington in February 1986. At this seminar, staff members of the Fund and the World Bank came together with a group of central bankers, officials, financiers, researchers, and journalists from New Zealand, Australia, Korea, and several South Pacific countries. The papers included in this volume stimulated constructive discussion on the policy options available to those countries compelled to undergo economic adjustment and on the problems that adjustment brings. Appropriately, given the origin of the participants, particular attention was given to developments in the Pacific. Case studies were presented of adjustment in New Zealand and Korea, and a special session was devoted to the design of adjustment programs in small economies. However, the general papers on trade policy, private capital and aid, fiscal and monetary policies, exchange rate policies, and long-term structural adjustment drew on experience from a wide range of economies throughout the world. Thus, they should be interesting and rele- vant to people concerned with issues of adjustment everywhere. The technique of appointing leading discussants was helpful in focus- ing attention on key issues and provoking useful interchanges among the participants. The value of the seminar was also enhanced by good orga- nization by officers of the Fund, the Reserve Bank, and the Treasury, and in particular, through the efforts of Graham Newman, Grant Spen- cer, Alison Scott, and Jean Kerr. Sara Kane, of the Fund's Editorial Di- vision, assisted in the editing of this volume from draft to publication. Sir Frank Holmes Wellington, October 1987 vii ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution Contents Page Foreword v Acknowledgements vii Introduction Sir Frank Holmes 1 1. Trade Policies and their Impact on Individual Economies P.J. Lloyd 8 Comment Cho Soon 30 2. Economic Adjustment in New Zealand: A Developed Country Case Study of Policies and Problems Ralph Lattimore 34 Comment Colin James 85 3. A Case of Successful Adjustment in a Developing Country: Korea's Experience During 1980-84 Bijan Aghevli and Jorge Marquez-Ruarte 91 Comment Sang Woo Nam 114 4. The Role of Aid and Private Capital Inflows in Economic Development Helen Hughes 120 Comment Christopher Findlay 147 5. Fiscal and Monetary Policies: Their Role in the Adjustment Process Grant H. Spencer and Robin T. Clements 154 Comment Christopher Higgins 185 ix ©International Monetary Fund. Not for Redistribution X CONTENTS Page 6. The Role of Exchange Rate and Other Pricing Policies in the Adjustment Process Peter Wickham 192 Comment David Mayes 210 7. Long-Term Structural Adjustment Policies Stanley Please 217 Comment Te'o I.J. Fairbairn 232 8. Some Aspects of Economic Adjustment in Small Island Economies Bruce J. Smith 237 Comment Peter Nicholl 263 Appendix 273 The following symbols have been used throughout this book: to indicate that data are not available; — to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist; - between years or months (e.g., 1983-84 or January-June) to indicate the years or months covered, including the beginning and ending years or months; / between years (e.g., 1983/84) to indicate a crop or fiscal (financial) year. "Billion" means a thousand million. Details may not add to totals shown because of rounding. ©International Monetary Fund. Not for Redistribution Introduction Sir Frank Holmes When I was invited to be moderator for this seminar, I looked in my dictionary to see what the job involved. I was obviously not being asked to be "president of an ecclesiastical body of the Presbyterian Church," though I have no doubt there will be some dogma (economic, if not religious) in our discussions. I am not an "examiner for Oxford Moderations" (though as editor of the proceedings, I am told to take a critical view of the papers). I could be called on as "arbitrator or media- tor," but I trust that you will not put my skills in that role too severely to the test. But I do accept gratefully the opportunity to be your "presiding officer." And I trust that I can help, not hinder, constructive discussion and your general enjoyment of our time together. My most arduous responsibility comes now, when I must take you around the Pacific in 15 minutes, generalizing heroically about recent economic developments. I turned for help to a recent study by ANU's [The Australian National University] Australian-Japan Research Cen- ter. Tables 1,2, and 3 indicate that the Pacific region's share of world output and trade has been growing in the past two decades. Japan and other northeast Asian economies have done best, sufficiently so to offset the relatively laggard performance of North America, Australasia, and, until recently, ASEAN (Association of South East Asian Nations) (Table 1). In the process of expansion, most economies have become much more export oriented (Table 2), with the significant exceptions of Australia and New Zealand. The interdependence among the region's economies has also grown (Table 3). The share of trade going to other Pacific countries ranges from about 50 percent for the United States and 55 percent for Japan to above 70 percent for ASEAN and 75 percent for the People's Republic of China. Reorientation of trade into the Pacific has been strong for China, Australia, and especially New Zealand, which has perforce dramatically 1 ©International Monetary Fund. Not for Redistribution 2 Table 1. Share of World GNP, Exports, and Imports for Selected Pacific Economies, 1962,1981,1990 (In percent) World GNP World Exports World Imports Actual Actual Projected Actual Actual Projected Actual Actual Projected 1962 1981 1990 1962 1981 1990 1962 1981 1990 North America 31.0 28.3 26.7 21.7 17.0 16.5 17.3 15.1 17.6 Japan 4.2 9.9 10.7 3.9 8.8 7.6 4.5 6.1 5.4 China, People's Rep. of 2.2 2.3 3.3 0.6 1.2 1.6 0.5 0.8 1.5 Other Northeast Asia 0.4 1.2 1.8 0.7 3.3 5.5 1.5 3.6 4.5 ASEAN 1.9 1.7 2.0 3.3 4.1 4.6 3.3 3.8 4.0 Australia 1.2 1.5 1.4 1.9 1.2 1.4 1.7 1.3 1.4 New Zealand and other Pacific 0.3 0.3 0.3 0.7 0.4 0.4 0.6 0.4 0.4 Total Pacific 41.2 45.2 46.0 32.8 36.0 37.5 29.4 31.2 34.8 Western Europe 28.3 27.4 27.5 45.8 42.8 41.4 50.7 42.5 42.9 SI R FRAN Source: For 1962 and 1981: Anderson, K., et al., "Pacific Growth and its Prospects for Australian Trade," Pacific Economic Papers No.

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