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MAR 13

What is more important: cark parks or exchange rates?

The following article featured in the March edition of NZ Manufacturer magazine.  

It is a worry how much blind defense of the status quo flows from business leaders who claim to represent manufacturers and exporters. In a recent article in NZ Manufacturer magazine, Kim Campbell, Chief Executive of the inappropriately named, Employers and Manufactures Association (EMA) outlined his views around “why the manufacturing inquiry was misguided.” The comments offer nothing to support the future of the manufacturing sector other than a patronising pat the back, everything is OK cheerleading and the dismissal of those who are suffering as misguided, inefficient or simply not adapting.

The claim that anyone who attended the inquiry would be left “dissatisfied with what they achieved” presumes to characterise the outcome, although not yet written, let alone published, and understand expectations of those who submitted. Both are nothing more than uninformed opinion masquerading as fact. The submitters I spoke to anticipate a high quality report based on their submissions and will inform the policy debate; I doubt anyone from the EMA read any of the submissions or talked to any of the submitters. Unlike the certain dogma of the status quo, those at the Inquiry do not know all the answers, but they do know there is a problem.

Increasingly our current policy settings are seen as unsustainable. An overvalued currency is squeezing producer margins and investment is flowing to the unproductive housing and asset based activities, causing lasting damage to our exporters and inflating our current account deficit. If we want to solve these issues the Reserve Bank Act (RBA) must be updated, anyone who doubts this should read In the Wake of the Crisis. Politics is moving; in a speech recently David Shearer committed to review RBA when elected. The difference here is Labour have openly acknowledged that export investment is needed for the future of our economy; current policy settings are driving investment away from the added value export sector.

The claim that the submitters to the inquiry were calling for subsidies was a bit rich, particularly in light of the position the EMA took on the subsidy associated with CBD parking. That policy change was always going to be dead on arrival, all grandstanding nonsense.
For a business leader who claims to represent manufactures, dismissing the difficulties that many firms are currently experiencing is depressing. I hope their own members give them a hard time on this, but then again their focus is obviously towards the CBD.

The challenges of the past are well understood by those who submitted to the inquiry, many lived and worked through them all. The trick for firms is to learn from the experience and manage the risks that can be managed; the trick for policy makers is to avoid adding to the grief inflicted by global forces. This means promoting investment in productive activity. A policy framework that exacerbates the loss of productive activity reduces wages, lowers savings and inhibits productive investment – there is no good news here. We need policy settings that promote productive investment and innovation, which goes on to provide the higher earnings that ultimately support higher savings.

Characterising a single market, Australia, as our salvation is disingenuous; sure, as buying materials in US$ and selling to Australia or New Zealand markets for Australian or New Zealand consumption is good at the moment, but sales in US$ or internal sales for resale into US$ markets are suffering both volume and margin pressure. For high tech elaborately transformed exports, the US$ cross is the biggest issue faced by exporters by an order of magnitude. The contraction in elaborately and simply transformed export manufactures in real terms over the last decade coupled with absent investment in the productive sector is a clear indicator of this sensitivity to the US$ cross.

The idea “A silver lining from the high exchange rate is that this is a low cost time to re-tool.” is correct, imports are cheaper but who in their right mind will invest in capacity expansion when earnings are depressed for the same reason. What I hear from manufacturers is, I will invest when I have too because something is clapped out but for capacity expansion, not worth the risk.

Anyone understanding a range of export activities knows that some business models are affected more or less than others but constant reference to the most fortunate does not fix the problem the others must face. For them, an increase in the exchange rate has a direct and significant effect on margins, as price increases are not an available response in a competitive market: currency hedges run out, borrowing is restricted, and there is no lasting solution.

The claim that an absent response to “technological change” is to blame for the difficulties faced by our exporters is arrant nonsense. Such a claim demonstrates virtually no communication with elaborate sector firms, even a superficial interaction would show that most lead innovation as they must to stay up with the game. Sadly, ground is being lost following the lack of investment as a result of poor returns, which gets fixed once the exchange rate issue is addressed.

If Government chooses to, there are ways to influence our exchange rate. We are seeing this more and more around the world, with countries chasing devaluation of their currency to protect and grow their export sectors. It is not impossible; it does require the will, and the recognition of the need to support the added value sector. This goes a long way beyond intervention in the currency spot market toward a deep structural change in the way our economy is managed.

• Mixing the use of interest rates and macro-prudential tools.
• Changes to the Reserve Bank Act to include more than just inflation objectives.
• A balanced current account as a policy target.
• Capital gains tax to balance investment incentives.
• Accelerated depreciation.
• R&D tax credits.
• Preference of New Zealand firms in Government procurement.
• More information can be found here.

We face persistent and significant problems, a structural current account deficit, falling productive investment, poor productivity, low savings – any valid policy framework must demonstrate how these issues will be addressed.

Unless we can grow our investment in the productive sector New Zealand will be owned by foreign interests and New Zealanders will be paid what those interests determine to pay.

tags: ema, exchange rate, manufacturing, nz manufacturer, car parks
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