Boosting export sector only way out of malaise

The high New Zealand dollar is no cause for celebration, writes Peter Lyons.

We are living in a world of zombie economies including our own.

These economies are characterised by high debt levels, stagnant or shrinking economies and policies of austerity that offer no solution.

Finance Minister Bill English is promising a budget of little hope. He offers austerity almost with relish. It fits his ideological bent towards smaller government. A further unexpected $1 billion budget shortfall precludes any positive spending initiatives. Meanwhile the governor of the Reserve Bank wrings his hands over the high New Zealand dollar which is shredding our export sector. He has maintained this ineffective stance for a number of years.

Positive economic management appears beyond the scope of our policy makers.

New Zealand has been in or on the verge of recession since 2007. Most of the Western world has followed a similar path.

Britain has recently fallen back into recession. Economies such as Greece, Spain, Ireland and Portugal, which are locked into the euro zone, are virtual basket cases.

This lengthy downturn is the hallmark of most debtor nations.

These are the countries that have been operating persistent current account deficits over many years. They have funded their lifestyles by borrowing from the creditor nations.

These debtor economies resemble fish struggling vainly on the end of a hook. They are struggling to reduce their debt levels in the face of shrinking economies and rising unemployment. This is a difficult, if not impossible, task. The quickest way to reduce national debt is through economic growth.

Despite numerous references to green shoots, any sustained economic growth is failing to materialise. There are good reasons for this.

The problem in the debtor countries is a lack of effective demand. The global financial crisis (GFC) of 2007-08 did not reduce the ability of these countries to produce. What it did was to suck demand out of these economies as consumers cut back spending and tried to reduce debt.

There are four main sources of demand for any economy: consumption spending by households, spending by businesses, spending by governments and spending by foreigners on a country's exports.

Prior to the GFC, Western consumers had gone on a massive spending spree fuelled by easy credit provided by the creditor nations. The creditor nations such as China, Germany and much of the oil-rich Middle East had large trade surpluses which they lent back to the debtor countries. It was like a shopkeeper extending unlimited credit to his customers. Western consumers and governments are now frantically trying to reduce their debt levels.

For this reason a sustained recovery is not going to be driven by consumption spending.

Businesses are also unlikely to spend on new factories or machinery while domestic demand remains anaemic. In New Zealand, Mr English has made it clear that government spending will not be used as a stimulus for economic recovery.

This leaves the sale of exports as the only realistic driver of any long-term economic recovery.

This brings us back to the problem of the soaring New Zealand dollar. A high New Zealand dollar makes our exports less competitive and reduces profit margins for exporters.

The governor of the Reserve bank, Alan Bollard, has acknowledged this problem repeatedly. Market commentators have suggested there is little he can do about it given that "the market has spoken".

This is nonsense. There is much he can do if he is serious about addressing the issue, and brave enough.

The high New Zealand dollar is largely due to the predictability of our monetary policy.

We are seen as a safe haven during turbulent times largely because of the predictability of our interest rate settings due to our obsession with keeping inflation between 1%-3%.

If Mr Bollard was to go feral and unexpectedly slash the official cash rate it is likely this would have a dramatic effect on the exchange rate. This would not be a painless exercise.

A significantly lower exchange rate would bolster our export sector which is the only realistic route out of the current malaise. But a lower exchange rate would dramatically expose the fact that we have been living beyond our means for a long time. The prices of tradeable goods such as meat, dairy products, petrol and electronics would rise. Cheap overseas holidays would be a thing of the past.

Bank economists point out that if Mr Bollard took this path it could unleash further housing inflation. He has the tools to prevent this through the recently introduced core funding requirement for banks. We owe the banks no favours. It was their excessive lending practices here and abroad that contributed to this mess in the first place. They were quick to hide behind the government guarantee scheme when things turned ugly. If things turn ugly again the last thing we want is for their debts to become government debts, as occurred in Ireland and Spain because their banks were "too big to fail".

Our economy is drifting in very dangerous shoals. The only plausible avenue to sustained growth will be export-led. The high value of the dollar precludes this. Unless we act now the painful process of rebalancing our economy will be forced upon us at some future stage. At that point the pain will be even greater.

Peter Lyons teaches economics at St Peter's College in Epsom and has written several economics texts.

 

 

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