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The New Zealand economy has been remarkably resilient
over the past year, particularly given the background of a
world economy in mild recession. Economic activity gradually
gathered strength in 2001, after having been held back in the
second half of 2000 by deteriorating confidence, higher
energy prices and rising interest rates. The impact of slowing
external demand and subdued investment was more than offset
by the vigorous expansion of consumer spending, supported
by robust employment growth and rising export
incomes. ...
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The New Zealand economy has performed well since bouncing back from
the effects of 1997’s Asian crisis. Growth rates were above 5 per cent per year
through 1999 and early 2000 and, after a brief pause in 2000, continued to hold up
reasonably well last year. The country has been riding on a terms of
trade boom, as the prices of its major exports were out of line with general global
commodity prices until late in 2001. It has also enjoyed the rare combination
of having a weak exchange rate at the same time as high export prices, so
prices in local-currency terms were extraordinarily favourable. ...
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Both monetary and fiscal policies are presently moderately supportive of economic activity. Interest rates were lowered gradually starting in the first half 2001, as it became progressively clearer that the imported inflationary pressures that had caused the headline rate to rise were being transmitted only to a limited extent to domestic prices and as signs of weakening global demand emerged. Additional rate cuts took place after 11 September, as uncertainties concerning the global situation became more pronounced. Even so, the easing of monetary policy was cautious, in view of the high degree of capacity utilisation and low unemployment. This approach was successful in stabilising domestic confidence, while maintaining underlying inflation under control. ...
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New Zealand began an ambitious fiscal reform in the late 1980s, trying to
boost the quality and reduce the level of public spending. This involved a change
in the role of the state, re-engineering the public sector and, a few years later, creating
a transparency-based framework in an attempt to impose better top-down
expenditure control. On the whole, these moves have been successful. Reforms
began with one of the OECD’s most aggressive corporatisation and privatisation
programmes, and this, combined with an efficiency drive, reduced general government
outlays from more than 50 per cent of GDP in 1986 to less than 40 per cent at
present....
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The growth performance of the New Zealand economy in recent years compares favourably with that observed until the mid-1980s, when the country embarked on a comprehensive programme of macro-and micro-economic reforms. These reforms have had a profound impact on macroeconomic stability and on the overall efficiency of the economic system, but it has taken some time for the improvement to show up in the productivity statistics. The initial effect of the first wave of reforms on output was contractionary, as part of the physical and human capital became obsolete. Then, for a few years around the mid-1990s the country achieved high rates of GDP growth thanks to a rapid expansion of labour inputs...