Economist Brian Easton looks at half a dozen external economic issues that will greatly affect this country

Economist Brian Easton looks at half a dozen external economic issues that will greatly affect this country

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.


Always to islanders danger

Is what comes over the seas

‘Landfall in Unknown Seas’ (Allen Curnow)

Six economic issues external to New Zealand, which will greatly impact upon us.

1.         The Diminishing Global Dominance of the US.

Since 1941 America has dominated the world economically and politically. Probably it could have done so from an earlier date but it chose not to. The narrative has it successfully contesting for global power - Russia/USSR, Japan, Europe/EU and now China. Less obvious is that it its dominance is diminishing as other powers have become better organised (EU) or economically stronger (China).

Smart American observers are aware of this diminution. Obama was struggling with maintaining American world leadership with diminished power. Trump acknowledges the issue with his ‘Make America Great Again’ but his analysis – that it has been weak presidents – is shallow. His solution of isolationism and bullying will fail. The approach of the next president is uncertain. Sadly the US Senate is likely to remain isolationist (even if it has a Democrat majority).

Global leadership involves a moral dimension, albeit with attention to one’s own interest. Sometimes the captain has to take a hit for the team. Perhaps the best example is the postwar Marshall Plan when the US transferred vast resources to Europe to facilitate postwar reconstruction. Certainly there were direct benefits to American business, but they could have been gained with less generosity.

China’s global traditions have been imperial without moral leadership. Nor should we expect it or some other country to be the hegemon succeeding America. Rather we are entering a multipolar world of contesting large players which presents an enormous challenge to bit players like New Zealand. Lee Kuan Yew reminded us that whether the elephants make love or war, the grass gets trampled on. There is no longer a dominant elephant with an interest of ensuring healthy grass.

2.         Global Warming, Climate Change and Rising Seas

Global warming began with nineteenth century industrialisation based on burning coal. In the last century, New Zealand’s sea level has risen 30cm on average – ‘average’ because seismic activities has shifted the levels of our coastline differently. (When I am by the sea I think of a rise of another 30cms – it will take less time in the future.) The climate change from a warmer world also includes more common storm surges, which compromises our shores even further.

Global warming is the best understood of the trends described in this column. It well-illustrates that whatever we do, the great influence it has on us is from activities offshore.

3.         The Global Financial Crisis and the Changing Economic Paradigm

The truest words about the GFC were spoken by Alan Greenspan who presided over the ‘Great Moderation’ as Chair on the American Fed (central bank). ‘I made a mistake in presuming that the self-interest of organisations, specifically banks, is such that they were best capable of protecting shareholders and equity in the firms ... I discovered a flaw in the model.’

But what is the alternative model? The whole world is abandoning the neoliberal paradigm, but the replacement is unclear with the economic profession all over the place: ‘if you know the answer, you have not understood the question’. There is some comfort that in the 1930s many economies were pursuing Keynesian policies before Keynes published The General Theory which provided their theoretical underpinnings.

New Zealand will be influenced in two ways. First, we are not intellectually isolated from the rest of the world, even if I grumble that, like colonials, we adopt overseas approaches without adapting them for our local particularities. Second, our heavy offshore borrowing hooks us into the world financial system. What happens there, impacts here.

4.         Secular (Longrun) Stagnation

There is a view that economic growth is going to stagnate in the rich world. The near zero real interest rates are evidence, indicating that businesses do not see significant investment opportunities.

Not everyone agrees. Much of our policy rhetoric, as elsewhere, is that we should be increasing productivity.

There is even less agreement about the causes of secular stagnation. Among the most prominent are

            - there are no new stunning technologies equivalent to those which drove economic growth in the past;

            - if there are new technologies, they are difficult to commercialise – unlike those in the past. (That could mean we get improvements in our wellbeing which do not appear in the economic growth statistics.)

            - key resources are running out;

            - the affluent in the rich world are not as interested in a standard of living based on accumulating and consuming more material goods than as they had in the past; they can afford to value other things such as a cleaner environment and nonmaterial wellbeing.

This does not mean that poorer countries will also stagnate. By adopting better existing technologies they will lift their material output converging towards – but not necessarily attaining, or if so only very slowly – the material living standards of the rich.

At least two implications for New Zealand. Our intellectual inertia, which puts us behind what is happening overseas, means we may uselessly pursue economic growth policies at a cost of a better quality of life.

But second, the trends may be more in our favour than for other rich countries. Rising material income in poorer countries increases the demands for the foods we supply, rasing their prices relative to manufactures. (This has been happening already for about 40 years.) We may not be able to lift farm output much, but rising prices for many of our farm products will benefit them and ultimately New Zealand as a whole (if we do not blow it with stupid economic responses).

5.         Covid and Global Connectedness

It is difficult to predict the course of the Covid pandemic, and in any case there will be more of them. Covid-19 is the fourth this century – a particularly vicious one.

It has drawn attention to the importance of connectivity. (An illustration is that the lockdown would never have worked, had we not had the broadband roll-out.) Currently there is global disconnectedness especially where people movements and related activities (such as airfreight) are involved, but also in some supply chains.

There are strong protectionist pressures to reduce global connectivity. This week’s instructive example is the British Internal Market Bill. Human borders are artificial – we are lucky not to have any. The attempt to deal with the border between the Republic of Ireland and Northern Ireland as the United Kingdom exits the European Community would be funny is it was not (potentially deadly) serious.

6          Threats to the Ability of Nations to Regulate

The essence of global regulation has been the actions of a confederation of nations. They have been under pressure in regard to capital flows and tax avoidance. Social media has added a new dimension with its impact

            - on information flows which may not be in the public interest and difficult to counter;

            – intellectual property including that which is undermining traditional media and the integrity of the public debate.

We are at the end of the line with little influence except to encourage the big players to be active and to be a fast follower.

 Conclusion

There is my list of outside influences. What struck me is that except for climate change, they are not at the heart of the election campaign, nor can I think of any central public institution engaged with them (although some government departments struggle with various aspects).

I remain comfortable with the central theme I set out in In Stormy Seas and repeated in Not in Narrow Seas. Overseas influences greatly impact on New Zealand’s destiny. We cannot do much about them but how we handle their impact domestically is crucial for our future wellbeing.


Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

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15 Comments

A famous quote from Taoism <易经>
“以不变,应万变” -- cope with shifting events by sticking to a fundamental principle

As for NZ,
1. be pragmatic but not ideological
2. be a follower but not a front-runner on any global issues
3. be prepared to make Chinese as a compulsory second language for all pupils and above

As for a NZer,
1. buy as many properties as one can in AKL, Hamilton, Tauranga, Wellington

I am not being racist but Why should we make Chinese as second language? Chinese should make English as their first language. Any one come to New Zealand must be able to speak English PROPERLY.
The time for China and CCP is running out. Taiwan is gone forever and Tibet is next to go.

You are not being racist.

You are simply being blind about the future.

Better that we make our views plain, and find alternative markets, reducing China's ability to punish NZ for using our right to express our opinions.
Pragmatism does not mean our country will stand by and ignore inhuman actions like forced sterilisation, reminiscent of the Nazis, being used on populations under the control of the Chinese.
China may long be a partner of NZ, but an increasing number of people see the risks of allowing China to become too influential, given their brutal responses to opposition. Our fundamental principles are clearly very different to China's, we can behave like a free society.

As the world becomes more unstable (eg after the US elections, whoever "wins", the other lot will not accept the result; meanwhile in China, food is running out....), then NZ's food production becomes more and more valuable. Perhaps we should rethink our anti-farming theories?

Maybe Auckland is just a giant waste of space, after all? Is urban productivity an urban myth? A special case, not a general rule?

https://www.forbes.com/sites/salgilbertie/2020/07/28/china-food-crisis-r...

He misses the biggest threat of all:

The Limits to Growth.

We are now grossly overshot, resources are grossly depleted and grossly degraded (which he merely mentions as an 'option'- go figure) and we are 'entering a period of repercussions'.

powerdon
Agreed a major issue.
Interesting, I think it was the "Club of Rome" who were calling the same thing in the 1970s and many of their deadlines- such as on oil - have well passed. I think Malthus also raised the limits to population and resources in 1798.
However, agree that under the current economic and productive systems as we know they are clearly unsustainable.

It will take a few more Black Swans to reverse the trend of chasing after growth. Covid is the start. It is telling the humans that it is possible to live with less of everything and less of activities too, thus slowing the destruction of nature.
Human lives lost is an indication of how vulnerable we are to any trips and traps by Mother Nature.
This is the time of Wise Leadership, which sadly is absent.

P8 - Malthus and the MIT crew behind the Limitsa to Growth, indeed ' got it'.

The lag times seem be beyond most folk to understand - Easton amongst them. Folk don't understand that with a finite resource, if you use it daily, it ends supply. The fact that en route, you dicovered more than you previously had (of the finite supply) doesn't mean 'there's more of it'. So many folk seem to be cranially wired not to see. Must have worked for hunter-gatherers, doesn't do too well on an overdrawn planet.

Interesting perspective. I disagree with point 1. China has its game plan. The West Inc need to arrange theirs in a hurry and cut out the great surge from the East. The US is in decline, the EU experiment isnt benefiting too many folks outside Germany and both these blocks dont have a strategy in place to contain China.

The other point to note is localization. Money that would otherwise have been spent abroad is sloshing around in domestic economies ~ where they have a supply and delivery chain in place.

This is not only being affected by the lack of international travel, it's also being driven by the work from home, stay local changes we are seeing ~ across the world.

This is going to affect commercial (retail and office) and city centre property property and pushing dollars into local economies and selectively growing local businesses.

Remember a recovery may leave your GDP in the same place as a year ago but there are many winners and losers. It's the same GDP but distribution can radically alter.

"The West Inc need to arrange theirs in a hurry and cut out the great surge from the East"

you sound like the kinda guy who will smash his neighbor's windows simply because they do better.

"you sound like the kinda guy who will smash his neighbor's windows simply because they do better."
We are happy for next door neighbor who do better with high moral values, not like CCP. CCP has to pay price for spreading virus with all immoral values.

Why blame the CCP for our problems. The blame lies fairly and squarely with our own Governments, both past and present, for eroding our quality of life with nearly six figure net annual immigration gains and propping up the property market through unfair (non) tax policies on property, forcing interest rates down to artificially low levels and eye watering amounts of QE. Let us think of our younger generation and the huge problems (traffic, pollution, housing affordability, the wealth gap etc.) that all this lunacy will cause. Continuing down this road is just condemning 95% of our young to a seriously diminished quality of life.

In its path to the top, China will be making the same mistake Britain and the US did climbing up.
Then it will be game lost for them too, may be in a few decades, may be by end of this century.
But in the meantime, watch China take over the remaining recalcitrant islands in their corner of the world.
Taiwan better be ready.
May be the next Big War will start in East Asia and not the Middle East ?

Brian is overlooking a potential catastrophe in China - the 3 Gorges Dam. The dam on the Yangtze is the worlds largest is 185m High and has approx 800 Kms of water behind it and 600 Million people living along it Banks downstream to Shanghai flowing through major areas of Industrial and Agricultural production. Current unofficial reports have inflows of 72,000 Cumecs a second and outflows pf 46,000 Cumecs and in the last 24 hours water level has increased 1m, and the dam is 5 M short of official danger level assuming the river bed has not become higher due to silt accumulation - rain continues to fall heavily in the catchment area.
Huge Monsoon rains are the cause and when spillways were unable to cope with inflows sluices were opened and some areas downstream were flooded with infrastructure damage significant. There is clear evidence that the concrete blocks have already moved with a satellite picture showing a kink in the Dam and more recently circles of water appeared on the downstream side indicating the foundation was being hollowed out allowing water to pass beneath the dam and vortex upwards.
If the dam breaches the consequences are enormous and sufficient warning to evacuate impossible or impractical so a major catastrophe possible even likely and help will be required on an unprecedented scale required so politics and blame are irrelevant as its the average Chinese person that deserves all the help the world can provide, food and clean water will be essential and fast, Covid 19 restrictions must not be allowed to interfere if this happens and I truly hope it does not.