VIEWPOINTDr Ganesh Nana – Chief Economist, Business and Economics Research Ltd (BERL)
For far too long, the export sector has been left to burn on the altar of international best practice and the monetary doctrine of “inflation is bad”. It is time for a change.
Want to know how important exports are to the New Zealand economic development framework? Refer to the latest Budget. The word exports got mentioned six times. That compares with debt, which stole the show at 34 mentions.
But it is not just in this Budget. Have a look at the fundamental basis of NZ’s economic policy framework for the past 20 years. I talk of none other than the Reserve Bank Act of 1989. Exports get zero mention there. What about the associated Policy Targets Agreement? Nope, not there either!
Surprise you say? Well, it shouldn’t. Simply put, New Zealand’s economic policy of the past 20 years has, at best, paid lip service to the needs of the export sector. Rather, the need to rein in the spectre of inflation has been paramount indeed. At times, this pre-eminence has been carried to ridiculous levels. For example, even when inflation has been tamed and the specified target has been met, we have witnessed the ritual parade of financial market commentators pointing to individual items whose inflation rate was above average. Actually, a rudimentary grasp of School Certificate arithmetic (okay, NCEA level 1 mathematics) would tell you that there will, by definition, always be some prices that rise at a faster pace than the average, and that some will rise slower than the average. That is the very nature of an ‘average’ figure. Pointedly, any focus on those items whose prices rises have been at a rate below the average has been conspicuous by its absence.
Through the mid-2000s, the above average rise in house prices has attracted most attention. Economic policy was being encouraged to set interest rates higher in response to these inflationary conditions. Perversely, when it was clear that such settings were not only crippling the productive (including the export) sector, we persevered in pursuing higher interest rates. Further, when it was clear the policy was patently ineffectual in dealing with house price inflation, we continued with higher interest rates. Evidence showing that higher interest rates were indeed exacerbating house price inflation – by attracting funds from abroad and so facilitating an expansion of credit available to mortgage borrowers – did not make any difference to our policy. The, there is no alternative argument held sway.
KILLING THE PATIENT
All the while, the export sector was left to burn on the altar of international best practice and the monetary doctrine of inflation is bad. Inflation is indeed cancerous to an economy. But, curing the disease by killing the patient doesn’t sound to me like a great idea.
Might it not be better for our leaders, officials and commentators to enlighten the populace that we need to shift from a country fixated on financial markets and house prices, to one focussed on creating wealth via establishing and maintaining competitive export oriented business enterprises. The export sector should be nurtured as the engine of advancing prosperity and its considerations should be paramount in our search for solutions.
So let us not continue repeating past mistakes. The likelihood of repeating the mistakes of the past should, rightly, haunt us. To err may well be human. But, to not learn from past errors is just plain unprintable.
An alternative (like the Singapore exchange rate regime) would be a managed exchange rate. This is neither quick nor easy. My critics say we can’t fix the exchange rate. But read carefully. I wrote ‘managed’ not ‘fixed’. There is a difference. And no I am not repeating the mistakes of the past, because I am definitely not suggesting ‘propping up an uncompetitive exchange rate’.
Whatever the options, there must be a better way to run an economy. One where income-earning exports are not suffocated by a high and volatile exchange rate. One where productivity-improving investment in resources is not strangled by punishingly high interest rates.