Caygill defends reforms

Press, 26 September 1989, Page 6

Caygill defends reforms

Wellington reporter The Minister of Finance, Mr Caygill. yesterday hit out at critics of the sequence of economic policy changes under the Labour Government, saying no country had followed the textbook method of economic reform.

“I think the crucial difference between socalled ‘ideal’ adjustment sequences and those we adopted was the overwhelming need we saw to establish credibility and signal clearly mediumterm intentions, to allow expectations to adjust,” he said in an address in Washington.

“Such considerations complicate the usual analysis of optimal reform paths.

“These theoretical analyses are often based on implausible models of the behaviour of the State and its citizens.” Some economic commentators, including the prestigious magazine, “The Economist,” have criticised the Government for freeing up financial markets before moving on the labour market.

This argument is based on the belief that labour markets take longer to adjust than others, and so need to be deregulated first for maximum gains over time.

Such a more gradual approach would have risked losing the momentum for reform to opposition from pressure groups, Mr Caygill said. “Perhaps this supports initial reform focused on those policies which can be implemented quickly and where expectations can be expected to adjust quickly, such as the financial sector.”