• Let’s Hear It For The Macro Economy

    The decisions announced last week by Fisher and Paykel and the ANZ Bank to relocate parts of their operations overseas grabbed the headlines and sent a shock wave through New Zealand industry. What may not be so apparent, however, is that the factors that led to those decisions have been part of our day-to-day experience over 25 years – and they continue to inflict their damage on all of us on a daily basis.

    Last week’s news, in other words, is just the tip of an iceberg – just the latest high-profile instalment in the slow-motion but inexorable crumbling away of our economy. Very few understand the damage that has been done to our economic fortunes by the literally counter-productive effects of current policy settings over a quarter of a century. Very few accept that – as long as our macro-economic policy relies on the highest interest rates in the developed world and a grossly overvalued exchange rate – it is inevitable that there will be more news stories like last week’s.

    Faced with current policy, even the strongest and most successful of our enterprises are less able to grow and compete than they should be. They do not generate the return on investment that they need to re-invest in future success. Because they are not profitable and competitive in international terms, they are always vulnerable to being bought up at bargain basement prices by foreign buyers or tempted to move their operations overseas. And when the tough times come, they are less able to withstand the shock – rather like tall trees with weak root systems that surprise everyone by keeling over in a high wind.

    Weaker enterprises simply close down or fail to get off the ground. Innovation and productivity improvements are inhibited. The economy as a whole is less able to invest in future capacity. Our brightest talents go overseas or seek opportunities elsewhere than in productive industry. Instead of growing and becoming more efficient at the margins, we see loss of performance and decline.

    Most of these instances fail to make the headlines but they are constantly happening nevertheless. When these debilitating effects are felt over decades, as they have been in New Zealand, the culture itself changes. People become risk-averse, lose interest in new wealth creation and concentrate on safe investments like housing or on manipulating existing assets in the money markets.

    We have lived with this for so long that we no longer realise how sharp has been our comparative decline and how precarious is our ability even to sustain our current disappointing performance. We are fed a constant diet of assurances that our problems are nothing to do with policy; indeed, some apologists for monetarist orthodoxy urge us to push further down a track that we have already travelled further and longer – with correspondingly worse results – than anyone else.

    Others tell us that we must simply accept that other economies are more efficient and have lower costs than we do. But, if that is the case, why do we make matters worse by deliberately ensuring that we destroy our own ability to compete?

    Perhaps the most commonly touted advice is that no change in macro-economic policy is required and that what we must do instead is boost innovation and productivity by spending more on education and research.

    As a former university Vice-Chancellor and the incoming Chair of the Foundation for Research, Science and Technology, I am the last person to question the need for more investment in education and research. That investment is an essential element in improved economic performance. But how is that investment to be made, and how is it to be made effective, if the tide of macro-economic policy is running so strongly against innovation and productivity improvements?

    Those who offer this advice are still, it seems, prisoners of the comfortable illusion propagated by monetarist theory that monetary policy has little or no impact on the real economy. We know now beyond doubt that this is simply not true; to believe otherwise is a triumph of ideology over practical experience.

    If our producers struggle simply to stay afloat, because the policy settings ensure that they are inadequately profitable and competitive, where is the extra resource to come from to turn things around? How are they to afford the new equipment and technology, the new product development, the skill training for their workforces, the marketing to develop overseas opportunities, the improved after-sales service and all the myriad and hugely expensive elements that go to make up a successful campaign in international markets, including our own? Neither the New Zealand investor nor the taxpayer can produce those resources out of thin air.

    The need now is not for glib advice but for positive action. That action must take as its starting point a recognition that the current macro-economic policy settings must change if micro-economic measures are to be as effective as they should be. The search for a better way – and in particular, a better way of controlling inflation – will not be easy but it must not be shirked.

    Bryan Gould

    20 April 2008