Asia, New Zealand & the International Monetary Fund

Keith Rankin, 1 June, 1998


The Asian economic crisis of 1997-98 has posed some interesting questions for the economics profession in general and the International Monetary Fund (IMF) in particular.

The IMF came into being as one of the post-war "Bretton Woods" institutions. Its mandate was to provide emergency finance for countries struggling with severe balance of payments problems. It became, more or less, the receiver to "bankrupt" nations. And it was dominated by its shareholders, the largest western economies.

The IMF came to take the doctrinaire view that nations became insolvent because of the largesse of their governments. Thus, in return for financial accommodation, the governments were obliged to pursue a severe dose of "microeconomic reform", monetarism and expenditure restraint. The nations of Latin America and Africa in particular (also Great Britain in 1976) had no choice but to run their national economies to fit the orthodox western (esp. American) view of the world economy.

In Asia, as was strongly noted at the IMF's recent annual meeting in Washington DC, the IMF model seems to be unworkable. The governments of Asia - of South Korea in particular - had already played the correct game. The financial problems were rooted in the private sector.

But not in the private household sector. Asians were and are famous for their high rates of personal savings. East Asia had severe balance of payments problems despite rather than because of Asians' savings behaviour. (It may be argued that lower saving rates would have served them better. See Savings: a Social Vice?). The problems arose because investors in the west saw Asian economies as being miracle economies, and they invested much of their money in Asia, believing that Asia offered some of the best short-run returns on offer. Thus Asia, with a capital account surplus driven up by bullish sentiment in the west, ended up with an accumulation of current account deficits [1] and a whole lot of poor quality investments.

Reports coming out of Australia [2] suggest that many economists there believe that New Zealand will be the next Asia-Pacific economy to become insolvent. While New Zealand faces the same predicament as the insolvent Asian economies [3], the ironies for IMF are greater. New Zealand's governments have already followed the IMF prescription to the letter; that was the choice of the ruling elite in the decade from 1984. Yet New Zealand suffers from exactly the same balance of payments problem as the Asian economies in crisis, and for largely the same reason: excessive attractiveness to foreign capital.

Because New Zealand is both small and a darling of the western financial community, the lines of credit advanced to New Zealand may be much longer than those given to Asia. So the image of financial health that we try to present to the rest of the world may hold for a while yet; indeed may hold for long enough for New Zealand to fix up the problem of its own making. [4]

Whatever, if the IMF does come to Wellington, they will have nothing to teach our Government. Rather, New Zealand's experience may prove to be an important lesson to the Fund in particular and to the international financial community in general; the lesson that the orthodox model of public finance is simply wrong.

New Zealand's experiences of "razornomics" can show the international community that Government spending is not the cause of the national insolvency problem, that capping Government spending is not the solution, and that the real solution lies in creating a better balance between the public and private domains of capitalism. [5] [6]


  1. The current account of the balance of payments is always the opposite of the capital account. The balance of payments is always zero, by definition. A "balance of payments problem" generally means accumulated deficits on current account, meaning that for a number of years in succession, imports plus profits/interest to foreign residents exceeds exports and investment receipts from foreign residents. (See The Balance of Payments Deficit) [back]
  2. Headline in The Australian "NZ next domino to fall in Asia meltdown", based on "a couple of sentences in a report issued by the Asia Pacific Economics Group in the Australian National University (ANU)" [Ian Templeton, Sunday-Star Times, 31 May 1998]. [back]
  3. An interesting book that sees many similarities in the historical development of the Australasian, Argentine and South Korean economies is In the Dominions of Debt; Historical Perspectives on Dependent Development (1989) by Herman Schwartz (Ithaca: Cornell University Press). [back]
  4. A recent article in the NZ Listener by Margo White - "Counter Culture: has New Zealand's 'economic miracle' ended its free ride in the foreign press?" - suggests that New Zealand is starting to become a model for what others should not do. The perception of New Zealand as a miracle economy has burst, it seems. [back]
  5. Relating to the future prescription, Anthony Giddens recent comments in the New Statesman are pertinent. Ian Templeton (Sunday-Star Times, 24 May 1998) reports them thus:
      "Is market fundamentalism winning through everywhere? Anthony Giddens, director of the London School of Economics and Political Science, writing in the New Statesmen, says it is surely plain 'that it isn't and it can't'.
      "The great mistake, he says, of neoliberalism, which it shares with the libertarians, is to equate deregulation with freedom. 'The neoliberals (unlike the libertarians) don't make this mistake in the area of morality - why should things be any different in the economic domain? They aren't: economic regulation is often the condition of both freedom and prosperity. Moreover deregulation in one economic area often simply transfers the need for regulation elsewhere, to another context such as the environmental one'.
      "[He] says in question here is the creation of what he calls a "new" mixed economy. Unlike the old one, the new mixed economy doesn't refer primarily to a balance between state-owned and primary industries. It refers to a balance between regulation and deregulation; and between the economic and non-economic in the life of the country."
  6. (14 June) An article in The Economist ("The end of privatisation?"; 13-19 June 1998) reinforces the idea that regulation enhances competition:
      "Many people believe that the most recent privatisations do not make sense, because it is hard to introduce competition in some industries, such as rail. But this ignores the role of regulation in mimicking competition-something that has improved the electricity and gas industries, even though the introduction of real competition is only now being completed." [back]


© 1998

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