By Neville Bennett
There is increasing evidence that New Zealand is ailing.
The symptoms are a high exchange rate, excessive foreign debt and a decline of the manufacturing sector.
This is often called the Dutch Disease which is defined as a development that results in a large inflow of foreign currency, which in turn causes an appreciation of its currency, making its manufactures too expensive for others to buy.
The model is not entirely appropriate for NZ because if it is agriculture or mining which is causing the boom, there tends to be large movements of labour and capital into that sector of development.
At present there is not much movement of labour into dairy, but there are large movements of capital into land. I would like to see some debate in the future on what the optimal size of the dairy production is. I believe that milk for powder and casein (but not for high value-added cheese) brings enormous dis-economies in its wake (pollution, excessive water-use, pounding of road and bridges by super-tankers, power use in drying etc).
My focus today is what a high exchange rate does to an economy.
The Dutch Disease concept is a viaduct for ideas on the 'resource curse' and other stimuli to a high exchange-rate.
We have a high dollar which is not only encouraging our industry to migrate overseas, but which is also making imported goods very cheap. Our manufacturers face unfair competition because the exchange rate is too high.
The consequence is that, like many western economies, New Zealand is hollowing out and losing a vital part of its economic structure. Many skilled people in the secondary sector are being displaced and the sad fact is that if the dollar ever plunged again the fitters and turners, machinists etc. will have lost their skills.
There is a classic case today where the people making railway carriages in Dunedin are being laid off because imported carriages were marginally cheaper. If the dollar was fair value we would most likely have kept their jobs, skills, and demand in Dunedin would be higher. We will have some difficulty in carriage making in the future.
It is unorthodox these days to talk about the need to keep a cadre of skilled workers. We are supposed to accede to a market-driven society in which the skills needed are market related. This is unconvincing: the tide may change and a low dollar could again give comparative advantages to some manufacturing.
The second argument is that nations need capability in all sectors over the long haul.
Our currency’s value is crucial to a large tradable sector of the economy. Around the year 2000, the dollar plunged to around 40c and this had the effect of encouraging exports and discouraging imports. The period was good for exporters. We are now at 80c+ which discourages exports and encourages imports.
Why should it stop at 83c, or 93c, or even parity?
Nothing is being effectively done to curb the soaring dollar. It is currently around 82c and many experts see 85c before the year is out. It could conceivably go to parity with immense collateral damage. Yet basically authorities say nothing can be done.
John Key recently said intervention was ineffective. I agree!
I agree that the Reserve Bank has no chance that intervention, buy selling and buying the dollar of being effective. I would like to see an analysis of the Bank’s intervention efficiency. I doubt it brings the dollar down for any reasonable duration. I have a plan to bring the dollar down.
The Neville Bennett Plan
The IMF has reversed its policy position on ways to control capital flows. There are many research papers on its website. Here is a link to one which argues that a policy of control is often necessary for Emerging Economies. Several countries like South Korea, Brazil, Malaysia and Turkey are using controls.
But controls have to be combined with supportive fiscal and monetary policy.
1. Fiscal policy
Much of the capital inflow over the last decade has been used to fund housing and farm land. Debt was adopted because the tax system lacked a capital gains tax. Large profits have been made as asset values appreciated. A capital gains tax would act as a disincentive to this kind of investment, and it would also change expectations that values were always going to rise.
A land tax would also encourage investment in more productive areas. Investors would hold only enough land for their needs as the holding cost would deter large accumulations. At present accumulation is rewarded with rising prices and no holding cost. This is distracting capital from industry.
2. Monetary policy
Interest rates should be set to encourage full employment of labour and capital without undue inflation, like the US Federal Reserve.
At present they are too often set to control the housing market. Good fiscal policy would almost remove concern about excessive rises in house and farm prices.
There are ways to 'sterilize' export receipts which are a little arcane but discussed in the IMF link above.
3. Financial Transaction (Tobin) Tax
The IMF supports a Tobin tax on foreign exchange transactions. These are mostly short-term in nature and cause concern that 'hot money' switching rapidly through several economies might bring instability. A tax would dampen flows and be a good source of revenue. I have supported the tax for some time.
4. Inflow Taxes on Capital Flows
This is an essential part of the tool box suggested by the IMF. Again it strikes against the short-term speculative inflows that account for much of the trading in the New Zealand Dollar. It is unlikely to deter “good” foreign investment, like direct foreign investment into industry or services.
5. Minimum-Stay Requirements
This is another IMF policy designed to deter hot money but still encourage valuable long-term foreign investment.
The continuing volatility in the dollar has deleterious effects on the economy. At present it is surging to very high levels and most experts expect its appreciation will increase with the commodity boom, earthquake receipts, future monetary tightening and a falling US dollar.
Our PM and Governor of RBNZ have said nothing can be done.
The IMF believes something can be done.
My plan includes a CGT, Tobin Tax, Inflow Tax, and minimum-stay requirements. I think it important to keep the dollar in a range close to fair value and my plan should assist in this.
* Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR.