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MAR 13

What matters in the economic debate?

This article was originally published as an opinion piece for the New Zealand Herald, found here.  


We have a Government in manufacturing crisis denial and claiming anyone who disagrees is manufacturing a crisis. Business NZ, EMA and associated brands like Export NZ claim the overvalued currency does not matter to exporters and best they buckle down, sell on benefit and get productive. We agree that productivity and selling on benefit are necessary but we go further and say they are not sufficient and that the exchange rate is the critical factor in decisions around productive investment and as a consequence, export growth.

We can’t all be right, so why is all this happening? Is it all down to particular perceptions, what you see depends on the hill you stand on, and what you hear is who you choose to talk to? Or is there some deeper truth that should inform policy? And who has access to that deeper truth? Exporters, commentators, media, politicians, economists, officials; given the choice would it not be smart to listen to those firms who export much of their output to global markets on a daily basis, the firms who will decide to invest or not? Who else would you listen to?

The fact is we have long faced four intractable problems; a structural current account deficit, low productivity, low savings rates and low investment rates. Without a solution to these problems the only future for New Zealand is foreign ownership and lower wages. The struggles of the manufacturing and export sectors foreshadow what is to come for our entire economy. Given most agree these are our core problems it is hard to see why, other than vested interests and fear of change, the status quo should be defended. The journey towards a solution begins with the first step of acceptance that things must change.

If we begin with the end, what sort of economy would we elect to be? What would be the features and characteristics of that economy? Diverse, complex, valuable and sustainable come easily to mind. Much more difficult is charting a course from the midst of our problems to that future state. Any argument for change triggers the fear and entrenched interest defence, usually the wild claims follow.

Statement like “there is no magic printing press in the sky” demonstrates a lack of understanding how the money supply operates, “we don’t have the money to intervene in currency markets” fails to recognise the structural difference between trying to hold up a currency where foreign currency is required, compared to lowering the value of a currency where the central bank has an infinite capacity to intervene. Others like “get efficient and sell on value” or “imported raw materials are cheaper”, “the cross rate with Australia is good” all demonstrate the absence of practical experience and an ignorance of arithmetic.

We have the politics, “manufacturers and exporters are looking to lower real wages” setting one group against another, when the facts are the pass-though of exchange rates to consumers is attenuated and delayed. A recent ANZ survey even showed that 3 out of 5 importers are planning to increases prices, even with an expectation of further currency appreciation.

As a nation we need to aspire to a vision beyond foreign ownership and low wages. We need a policy framework that builds towards that vision, based on practice not opinion or theory. Poor returns result in lower investment; lower investment in turn lowers productivity, lower productivity results in lower earnings and lower wages. Recognise this? Want something different? Is it worth the effort to strive to make New Zealand the Switzerland of South?

Does running a policy framework that sees the New Zealand dollar currency trade in one day exceed the annual merchandise trade make any sense at all? In a world awash with asset speculation does it make any sense to promote the practice? In a world that values innovation and complexity does it make any sense to stand back and witness the commoditisation of our economy?

The question is often raised “can manufacturing survive in New Zealand?” a deeper question would be “can New Zealand survive as a modern advanced economy without manufacturing?”

I think not; time to change.

tags: manufacturing, exporting, current account deficit
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