Successful managers act when it becomes evident that change is needed – and that is just as true of managers of the economy as it is of those who manage individual businesses. The evidence is now mounting that the creation of a single global economy has produced results, for both the global and national economies, that are far short of optimal. The time has surely come to consider that evidence and respond to it.

In a single global economy, the herd mentality of international investors means that they all chase the same opportunities, imposing unrealistic expectations on the recipients of investment capital, disabling those who are denied it, and creating a lurching stop-start process for the global economy as a whole.

That is why the last 25 years have been marked by a series of crises (particularly in Asia, South America, and Eastern Europe), by huge flows of “hot money”, by widening imbalances between rich and poor countries (the poor have actually got poorer), and by a dangerous dependence on the willingness of the rest of the world to finance an unsustainable American deficit. That is why, too, commentators like Joseph Stiglitz, Paul Krugman and even George Soros, are leading the charge for a reform of the world’s financial institutions and the way they operate.

There has so far been less interest in changes that might be introduced at the national level. Yet the results of globalisation have been just as damaging for national economies like New Zealand as they have for the global economy as a whole.

New Zealand has been one of the most enthusiastic participants in the global economy – but, given our small size, the results have been all too predictable. A bigger proportion of our economy is owned overseas than in almost any other advanced country. Repatriated profits and the high interest rates needed to finance our current account deficit weigh heavily on and inflate that record deficit. Most important commercial, industrial, investment and employment decisions are now made in overseas boardrooms. Wage rates are forced down to meet Chinese benchmarks. The insistence by overseas owners on “externalising” costs means that we have less capacity to make necessary social, environmental and infrastructural investment. Economic inequalities have widened dramatically.

International investors demand that the fight against inflation should be entrusted to a monetary policy that commits us to an interest rate and exchange rate roller coaster. Yet, while manipulating interest rates is less and less effective as a means of restraining inflation (particularly in the housing market), an overvalued exchange rate and the high interest rates needed to sustain it continue to inflict their familiar damage on the productive economy on which our prosperity depends.

There is no shortage of possibilities for changing tack. The issues are political, not technical. What is needed is the courage to buck the current orthodoxy. Fiscal policy, both to regulate demand and to influence the patterns of saving and investment, would help us to control inflation, while helping rather than damaging the real economy. Selective credit controls, investment incentives, and savings schemes would help stimulate domestic investment and increase New Zealand ownership and control over our own economy. Requiring more responsible performance and a greater commitment to New Zealand from overseas investors would limit the transfer of decision-making power from our political and business leaders to overseas boardrooms.

No one is suggesting putting up the shutters. But, if we are to escape the policy dead end in which we are now trapped, improve our long-term economic performance, and restore a proper degree of democratic self-government, then we must surely reclaim – in conjunction with other like-minded countries – control of our own economic destiny, before it is too late.

Bryan Gould
9 December 2006

This article will be published in the February issue of Management.