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JAN 12

Accountability needed on poor economic performance

3 comment(s)

Over the past couple of years our apparent resilience to the financial crisis and optimistic forecasts of economic growth have been used to justify the Government’s status quo approach. Record high commodity prices have meant that primary industries have grown somewhat despite a high exchange rate decimating returns. In addition, consistently unrealistic economic forecasts from Treasury have presented the downturn as an aberration which is on the verge of turning around - in reality we have been ‘on the verge’ for a few years now and we are no closer to an actual rebound. It is worth noting in a recent article from the Bank of England the comment was that economic forecasts exist to make astrologers look good.

Essentially, the factors beyond our control have gone comparatively well while an indifferent approach to growth in the real economy from the Government and its officials has meant that New Zealand has missed out on growth opportunities.

For the traded sector to grow the Government needs to provide a stable trading environment and encourage innovation to a level at least on par with other jurisdictions.

A look at this Trade Weighted Index graph shows that there has not been a stable trading environment. The tradable economy’s interests have once again been ignored in the past year when setting monetary policy.

The Grant Thornton International Business Report conducted in December showed that four percent fewer firms intended to invest in research and development than in December 2010. With little confidence in future earnings and no incentive to invest the money is that really a surprise?

In fact investment in non-productive assets classes are still incentivised by the Government – where other Governments offer R&D tax credits, grants for international marketing and fast depreciation allowances, New Zealand instead promotes land and buildings.

2012 needs to see a change in focus. Reducing debt cannot be the only focus – we also need to find a way to earn more through exports. What needs to be done? Well for a start target non-tradeable inflation:
• Use Loan to Value Ratios to control credit volumes; and
• Specify the amount of savings (deposits) banks are required to raise in New Zealand to limit offshore exposure.

Had this been done 10 or 20 years ago debt levels and debt servicing costs would have been lower even if average interest had been higher: overall the New Zealand economy would now be better balanced, with higher wages, more jobs, more savings and better housing affordability.

tags: traded sector, twi, loan to value ratios, monetary policy, innovation
Walter Kunz - 23 January 2012 at 16:10 PM
NZEconomic industry mix distorted.

The Real Estate industry in New Zealand is proportionally to others far too dominant.


Here in comparison: Singapore

There is no wonder why prices are high in New Zealand. Our economy isn’t balanced, but one sided not diverse enough. As a consequence dominant industry sectors cause high prices – e.g. agriculture products and real estate become increasingly unaffordable for Kiwis.

In a monopolistically competitive market, firms can behave like monopolies in the short run, including by using market power to generate profit. In the long run, however, other firms enter the market and the benefits of differentiation decrease with competition; the market becomes more like a perfectly competitive one where firms cannot gain economic profit. In practice, however, if consumer rationality/innovativeness is low and heuristics are preferred, monopolistic competition can fall into natural monopoly, even in the complete absence of government intervention.

Walter Kunz - 23 January 2012 at 16:19 PM
In addition to above 23.1.12 16:10pm: In current difficult times, I don’t understand why the government doesn’t allocate infrastructure orders increased from NZ companies / workforce. Solid manufacturing is essential for any country with high living standards.
John Walley - 26 January 2012 at 13:45 PM
Agree Walter - look what happened today...

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