Comment for INBusiness

The paradox that is New Zealand’s economy

by

Dr Ganesh Nana

Chief Economist

How does this quote sound to you?  ”Growth in New Zealand will be propelled by technological change, investment and higher productivity.”  To me it sounds eminently sensible.  Or, how about this quote: “Looking beyond our present circumstances, our future depends on our ability to export.”  This, too, also strikes me as indisputable.  Actually, to me they both verge on stating the bleeding obvious.

But, try this one for thought:  “New Zealand is paradoxically at the forefront of the OECD in adopting policies in many areas that have been shown to lead to high per capita income, and yet it still ranks toward the bottom end of the OECD’s productivity league.  ….  But, the root of the problem is a structural deficiency in the capacity to produce tradable goods and services.”

Wow, this one sounds heavy!  Allow me to forward my translation.  This essentially says that we (as in New Zealand) have done what we’ve been told to do in putting in place policies that have worked elsewhere. But these policies haven’t solved our productivity problems.  And, “paradoxically” is probably code for: ‘we really don’t know why’.

I could venture to shed some light on this mystery.  For starters, perhaps the policies that have worked elsewhere aren’t appropriate for a small, open economy with a large primary base persistently facing trade barriers?  Next, might the “structural deficiency” have something to do with the lack of investment in the export sector?  And, in turn, I can’t help wondering whether the lack of investment in the export sector has something to do with inappropriate interest rate and exchange rate settings?

But, rest assured, as we are at the forefront of the OECD in adopting the ‘right’ policies, we will gladly remain paradoxically mystified.

The first two quotes come from the Budgets of 1978 and 1980.  Yes, exports, investment productivity et al were recognised as central 30 years ago, if not earlier.  Yet 30 years later we remain unable to grasp the bleeding obvious by putting these at the front and centre of our economic policy framework.  Rather, we prefer the policies that keep us at the forefront of the OECD.

Consider the questions at the bottom of this page.  How would you respond to them?  More than 2 Fs?  Congratulations!  You’re training as a financial commentator is well advanced.  Or, was it more than 2 Js?  Then the mass-media journalist in you is showing through!  More than 2 Gs and you’re probably gunning for the Governor’s job.  More than 2 Es, then you’re obviously after my job – feel free to send me a CV and I’ll file it accordingly.

My motivation for these examples, admittedly exaggerated to make a point, is that we have a community fixated by house prices, petrol prices, and the perennial fixed-versus-floating mortgage question, as opposed to a New Zealand aware of business interest rates and the export sector.

Further, we now have a generation of economists and commentators that appear to know all about the intricacies of yield curves, swaps, spreads, leverage buyouts, bonds, bills, hedge funds, and credit ratings.  But, they appear to have little regard to the importance of lambing percentages, transport connections, machinery requirements, communication corridors, technology take-up, slaughter weights, average daily spend of visitors, skill acquisition, milk solids per cow, sheep numbers, or apprenticeship needs.  Nor, is importance attached to how long it takes to train a scientist, or to establish an appropriate spread of ages in a forest to enable sustainable harvesting.

The extreme was exhibited by a currency analyst the other week who commented that ‘fundamentals don’t matter’.  To me, such a comment is overwhelming evidence of the failure of the money and finance markets to serve the real economy centred on the needs of producer and service entrepreneurs.

Our adopted policy framework has seen our trade balance deteriorate from a surplus of 1.5% of GDP to a deficit of 1.6% of GDP over the past 20 years, non-housing investment stall at approximately 16.5% of GDP and net foreign debt reach 90% of annual GDP.  But, as if to underline that the fundamentals don’t really matter, we have managed to improve our credit rating, from AA- some 20 years ago, to AA+.  Or is this outcome better described as paradoxical?

Perhaps, it is finally time to put what was obvious to some at least 30 years ago, at the front and centre not only of our economic policy framework, but also of our economic commentary.  Lest we continue our paradoxical performance.

1)   The core challenge facing the New Zealand economy is to:

G)  find an additional tool with which to control inflation

J)   ensure house prices don’t fall or rise too quickly

F)   expand both the depth and breadth of our finance markets

E)   improve our ability to build export businesses.

2)   Confronted with burgeoning Crown debt you advise the Minister to:

G)  reduce spending to minimise the inflationary consequences

J)   avoid imposing a capital gains tax, fearing its impact on house prices

F)   call in S&P for a special briefing to avert a credit downgrade

E)   direct efforts to improve productivity through a concerted expansion in infrastructure investment and in the skills training sector.

3)   When a 17-year old nephew asks you for a loan to buy a car you:

G)  suggest he learn how to save, as borrowing just fuels inflation

J)   point out that petrol prices will soar above $2/litre again soon

F)   note that he should really be borrowing for a house, because real estate is always a good bet

E)   run (fast).

4)   Economics first, and foremost, is about:

G)  controlling inflation

J)   monitoring the affordability of house prices

F)   buying and selling anything and everything

E)   developing, enhancing, maintaining and utilising human and non-human resources to enable individuals and communities to prosper.