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APR 11

Differentiated products, not commodities, the path to export success

High commodity prices are seen to justify rises in the New Zealand dollar. Reserve Bank Governor, Dr Alan Bollard, noted in a speech recently that agricultural export prices are likely to remain strong for some time and the Bank expected these higher terms of trade to be reflected in the exchange rate.

However, the high commodity prices that help some sections of the economy will do little to generally to promote a turnaround towards an export led economy. Those exporting into the United States and Europe are struggling with lower returns from the high currency and comments from our Reserve Bank indicating comfort with ever higher exchange rates push those rates even higher.

Exports by level of processing 2010 (NZD)

Primary Products - Unprocessed Primary Products - Processed Manufactures - Simply Transformed Manufactures - Elaborately Transformed Miscellaneous, Unclassified and Confidential Trade
$14.1 billion $15.9 billion $4.1 billion $7.2 billion $2.2 billion

As the table shows, most of New Zealand’s exports are not the unprocessed commodities that might fundamentally justify higher exchange rates. Export growth in the processed primary and manufacturing sectors require investment in product development, new plant and equipment to improve capacity. A high and volatile currency will increase the uncertainty of return, pushing back against export focused investment.

Sector Sector GDP($millions) Employment GDP per worker ($)
Tourism 6,500 182,400 35,636
Manufacturing 16,466 248,600 66,235
Agriculture, forestry, fishing and mining 10,055 157,100 64,004
Others 99,646 1,582,500 62,967

This table shows that sectors outside the soft commodities are again more important in terms of GDP, employment and as a sound foundation for the service sector.
The Government has largely washed its hands of this issue. Finance Minister Bill English said in response to the latest rise of the dollar that a high New Zealand dollar had been a headwind for the economic recovery "right from the start".

"And that’s been driven to a large extent by policy in the US, the UK and Europe," he said.

"We’ve been fortunate to have at the same time, and related to the high currency, very high commodity prices, which are higher than they’ve ever been. So we can see the export sector is making progress, it’s going to become profitable as it gets its debt levels right," English said.

The fact is that anyone succeeding with the high dollar is succeeding despite the Government and the Reserve Bank policy framework. Most countries have taken steps to prevent significant currency fluctuations whether through quantitative easing in the United States and the United Kingdom, capital flow restrictions in Canada and Brazil or direct currency management in China and Singapore.

There are always going to be bright sides, and right now they are commodity prices and a favourable exchange rate with Australia, but macroeconomic policy changes are needed to promote growth across all export industries if we are to see a low stress balancing in the current account.

tags: current account, alan bollard, bill english, exchange rate
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