Monetary Orthodoxy

Our overvalued exchange rate threatens the survival of our non-food manufacturing sector. Our new Reserve Bank Governor, Graeme Wheeler, has been signed up to the same monetary orthodoxy of his predecessors – to keep inflation within a tight band largely by the exercise of Official Cash Rate adjustment powers. Without additional tools, he is essentially powerless to influence our exchange rate. Many serious economists, from IMF to Royal Bank of Canada, from NZIER to JB Were, argue strongly for new mechanisms to prevent the disembowelling of our manufacturing sector due to a TWI exchange rate that has risen 10% in a year, and is figured to rise further. The only exception where trade is still viable is Australia.

I have worked in the non-food manufacturing sector all my life, and, while not an economist, have followed this constant argument between the tradable goods producers and the consumers. From the latest statistics (2009), non-food manufacturing is significant at $14 billion contribution to GDP, ahead of food and beverage manufacturing at $9 billion, and the same as primary sector. So the total of tradable goods was $37 billion or 20% of the economy – everything else was services, government and construction. $23 billion is nowhere near enough – we know we must diversify beyond our dangerous dependence on land-and-water-based commodities.

It is the tradable goods sector which is at the sharp end of the economy. It earns the nation’s foreign exchange by being internationally competitive. And its businesses, owners, employees and creditors take a terrible hit when competitiveness is destroyed by exchange rate hikes – these days, often triggered by Quantitative Easings, bailouts or market manipulations in major currencies. And we are told that the Reserve Bank can do nothing about it.

I wonder if there is a parallel with the situation 80 years ago, when we were told by Coates and Forbes that the Gold Standard and balanced budgets orthodoxy must be applied, no matter the carnage. The world stopped. But a bloke called Maynard Keynes thought differently, the brave adoption of whose concepts led the world into pump priming, a New Deal and a gradual climb out of Depression. Our purist approach, which Dr Bollard boasts is copied by 23 other countries, admits of no new thinking. Mr English appears to run the argument that, as pastoral farming adapted successfully to free markets and a floating exchange rate, so can manufacturing. So, just harden up, OK!

If there is no hope of changed exchange rate policy, we are left with several slow-fix options, most of which have been canvassed for decades. The Porter Project of 1989, the Knowledge Wave of 2001, the Catch Australia by 2025, and the other worthy think-tanks were milestones of ignored advice. We even ignored Sir Paul Callaghan’s great wisdom and strategic optimism .

Listed are some magic bullets: –

  • Sustained strategic leadership by Government
  • 100 Entrepreneurs
  • Productivity through Innovation and Lean
  • Relevant world class Education towards a Knowledge Economy
  • Competing through Design, Science and Technology
  • Industry clusters
  • Marketing and product development skills deployed into global niches
  • Mimic smart little countries (Denmark being a favourite exemplar)
  • Fiscal tools
  • Macro-prudential tools
  • Specific tools to hose down property booms
  • Improved savings performance
  • Trustworthy capital markets and a sophisticated equity investing society
  • Kiwi society liking Enterprise

Will our manufacturing sector survive till we fundamentally change the way we think and act? Maybe you email me over the next month, and tell me your least-bad survival solution for an individual New Zealand manufacturer. (Please advise if I can publish what you say, with attribution). From your inputs, we will tackle the “What’s Best to Do” next month.