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FEB 13

It's short sighted to ignore impact of our rising currency

The first day of the Parliamentary Inquiry into Manufacturing revealed a united view as to what is the biggest threat to New Zealand’s exporting manufacturers, the exchange rate. In a small country scale is the challenge; to compete in a global context the investment that flows from scale is mandatory. The more focused the niche, the greater the pressure to operate in export markets. Export comes early on the growth curve for New Zealand firms. Uncertain returns for export efforts throw a shadow over investment decisions; without investment firms are unlikely to grow.

A recent New Zealand Herald editorial; Calls to focus on exchange rate should be ignored had it wrong. At the heart of this article lay the dogma that exchange rate variations are inevitable, something to be tolerated and accommodated but least of all managed. Yet much of the extant monetary and fiscal policy in the world suggests the contrary, currency wars would be a myth and perhaps all would be well with inflation targeting. Other jurisdictions are in full currency conflict; USA printing money until employment falls to less than 5.5%, Japan, Switzerland, China, UK and others are well beyond a single lever (interest rates) and a single target (inflation). The world has changed and New Zealand needs to take notice.

We cling to the same predictable policy framework while our currency appreciates and the dilemma facing our exporters remains; withdraw from offshore markets or remain in the hope that cross rates will return to more benign territory. For the few with some scale they will exercise their option to relocate outside New Zealand, for others they will close, some will hang on in hope of improvement. Generally that is bad news for the development of New Zealand. The Reserve Bank and Government can claim there is nothing to be done and politically even if there was, helping exporters would cost everyone else.

So why should anyone else other than manufacturers and exporters care about their particular fate? They are only a small part of the economy, exports represent 30% of gross national product and manufacturers employ only 10.9% of the workforce. The RBNZ economic models fully overlook elaborate manufacturing; they don’t care so why should anyone else? If manufacturing exporters need to make more margin they can just put up their prices and get more efficient?

Manufacturing raises the efficiency of our economy, monetises the innovation of our people, drags through investment in the rest of the economy ($1 value added in manufacturing creates $1.4 value in other sectors) and a job in the manufacturing sector requires more jobs in the rest of the economy (100 manufacturing jobs support 291 jobs elsewhere).

Economies that have resisted the postindustrial myth, for example Germany, Scandinavia and Switzerland have done better than those that by design or neglect shifted have the dirty bits offshore. Making things is becoming the new normal for successful innovative economies. But making things efficiently starts with investment and it is that investment that is starved by policy settings, robbing our exporters of a reasonable and predictable margin.

The claim that “there is nothing to suggest that New Zealand’s present approach is wrong” depends on the questions you ask. There is no doubt that price stability is vastly important to a successful economy, but has price stability alone delivered to our expectations? Have our growth rates been satisfactory? Is our external position, current account, acceptable and sustainable? Does the public service, infrastructure, welfare, health and education provision meet the standards we expect, or the standards offered by other economies? If we are less than happy with our economic outcomes, and what we have are also under threat, we need to do more than sit on our hands.

The editorial correctly says that New Zealand should become an exporter of high value products and in so doing our economy will be transformed. Unfortunately under current settings, even high value manufacturers we have can’t anticipate the margin to invest.
The editorial goes further and suggests the construction sector will be boosted by the Christchurch rebuild, but keep a sense of proportion, the NZ$30b rebuild impulse will be spread over a decade while exports amount to around NZ$60b each and every year. A focus on facilitating and promoting exports will have a larger and longer lasting positive effect on our economy.

We believe it is irresponsible and short sighted to ignore the debilitating effect the appreciating currency has on the investments made by our exporters and manufacturers. Exporting and support for the exporting sector needs to become a way of life in New Zealand – everyone one of us, one way or another is dependent on the success of our exporters.

Lower cost fuel, flat screen TV or what have you are less attractive when you don’t have a job.

This article was posted as an opinion in the NZ Herald - link found here.

tags: exchange rate, currency, nz herald, manufacturing, exports, investment
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