Becoming the Niue of the OECD, Part I

The Present Winter of Our Economic Discontent

A growing number of voices are telling us that the New Zealand economy is in trouble. We do not mean that we are currently in the worst recession in thirty years. Rather, it is that we have lost the ability to weather economic storms easily. When they come, the battering is far worse than it ought to be; and when it is over, it leaves us even more vulnerable and exposed to the next upheaval.

The NZ economy has some real and persistent structural weaknesses. This means that it is like a Caribbean island in the face of a hurricane. As the storm passes through, say Barbados or Jamaica, it wreaks terrible havoc, with substantial loss of life. But in more developed countries the damage is far less. By the time the hurricane reaches the US, the death and destruction is mitigated, even though the storm can have become stronger. The housing is better constructed to withstand storms, the economic infrastructure is more substantial, and more capital resources are available to repair damage quickly.

The structural weaknesses and imbalances in the New Zealand economy make it exposed and vulnerable. We are confronted with strong biting winds which erode our economic health, tear at the fabric of our society, and leave us shivering with cold. Nothing we do seems to have much impact at all—at least in a positive sense. The present government, despite claiming to be focusing on the problems, appears confused and disorientated.

We are now in the grip of vicious downward spirals. For example, we are running a persistent current account deficit and government debt is ballooning. These twin deficits should mean that the currency drops substantially, enabling the productive tradeable sector to recover and earn its way out of recession. But no. The currency stays stubbornly high, compounding the problems still further.

Goodhart's Law means that the Reserve Bank's monetary policy has become effectively useless. The market has simply factored in the manipulation of the short term interest rate by the RB, and worked around it. The Bank can aggressively lower short term interest rates, but longer term lending rates remain high, acting as a drag on a substantial economic recovery.

Economic growth in the country is driven more by consumers than by producers. Most of the consumption is facilitated by debt, not by savings. So, it is a double whammy. Savings rates remain low and capital remains scarce. Wage rates are uncompetitive on a global scale: the average employee in New Zealand costs too much for the amount he or she produces.

These problems are well known and oft pointed out. However, the solutions being offered are a dog's breakfast, to put it mildly. We have calls for the Reserve Bank Act to be rewritten; introduction of a capital gains tax; legislative barriers against investing in housing; directions for all of the Cullen Fund to be invested within New Zealand; banks to be directed to provide more long term capital to farming; prohibitions and increased regulation of international investment in the country—and on, and on.

All of these reflect a knee-jerk, piecemeal, government-centric myopia that will not address the real structural problems of the economy and will simply create more significant distortions. Yes, it's exactly what we need. Nevertheless it is always ironically amusing to see how “right-wing” folk are more than ready to look to central government intervention, more rules, more regulations, and more “tilting the playing field our way” when times are tough in the boardroom.

In order to come to grips with the issues we have to identify what economic ill winds are blowing that are here to stay. It is essential that all policy settings must work with these winds, not against them. For decades now successive governments and interest groups have thought they can ignore these polar blasts with tricky little manoeuvres of one kind or another. Meanwhile, the country has continued to drop further and further down the OECD rankings.

Why should this matter? It matters because it becomes one more vicious circle. As New Zealand falls more and more behind, it becomes a less attractive place in which to work and in which to invest, which leads us to fall yet still further behind, and so on. Over time New Zealand will become like the Niue Islands of the OECD. Our economy—and therefore our standards of living—become progressively more and more hollowed out.

The end game is that we will have to go cap in hand to Australia, petitioning to become an Australian state—which is to say, that we will need to become an Australian protectorate. But that will simply exacerbate the problem over time—just as Niue's problems have become worse as a protectorate of New Zealand.

But in order to reverse this downward spiral in which we find ourselves the nation will need to face up to the real world. But that will require moral courage, truth, integrity, hard work, and self-discipline by everyone—for the remedies will be painful, humbling, and unpalatable. The brutal truth is that the world does not work the way New Zealanders largely think it ought to. This means that our economic problems are largely of our own making; they are the outcome of a stupid, self-indulgent, proud world-view.

What is the likelihood of such a reversal occurring? Pretty low, we would have thought. But let's not fool ourselves into thinking that because Nero can play his fiddle, the fires will stop burning. They will not stop.