Listener 4 July, 1998.
Keywords: Growth & Innovation; Macroeconomics & Money;
“Small open economies are like rowing boats on an open sea. One cannot predict when they might capsize; bad steering increases the chances of disaster and a leaky boat makes it inevitable. But their chances of being broadsided by a wave are significant, no matter how well they are steered and no matter how seaworthy they are.” Joe Stiglitz, World Bank chief economist.
Great quote! It well captures a central tenet of my book In Stormy Seas, using a similar metaphor. And New Zealand has been through some stormy seas in recent weeks. The steersmen have not always helped. Prime Minister Jenny Shipley said that the sharp fall in the exchange rate would be “self correcting,” with no explanation her about what she meant. Keynes said, “economists set themselves too easy a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.”
Since the 1984 major currency crisis the economy has been redesigned to cope with such shocks. The pure floating of the dollar means that the Reserve Bank does not lose foreign currency defending it. The government’s negligible foreign-currency debt means its balance sheet is near neutral to the fall. But by protecting itself, the government has exposed its passengers. Some are sick in the bilges as their interest rates rise; others wash overboard into unemployment. But even if boat fills with water and breaks up, we will be able to cling to the floating wreckage.
Should the government provide greater protection? Could it? The government could have had stabilizers in the keel, and a tarpaulin for us to hide under (the nobs are already inside the cabin). But arguably, such a boat could be more vulnerable to the seas, the government accounts more easily pushed into the red.
A different issue is whether the boat should have been in this storm at all. Are we suffering the tail of the hurricanes lashing East Asia? A week before the currency crisis, an Australian economist emailed me that they were worried their currency would be attacked because foreign investors thought it was linked to the weak New Zealand economy. That they predicted the crisis gives their argument more credence than ours, that it is all the Australian’s fault. But if the design has been to protect the boat – if not the passengers – from currency squalls, it seems less able to cope with long term voyages. The underlying cause of the pressure was (as the Australian economist reported) our deteriorating balance of payments with a current account deficit well outside the zone of sustainability. The boat has been shipping water something dreadful. It would have been earlier, except favourable terms of trade (trade winds?) temporarily boosted export revenue relative to imports. We have virtually given up navigating, with the steering on automatic pilot. Sometimes it is onward into the storm, instead a bit of strategic tacking around it. (Peter Blake for prime minister?)
The policy debate (see below) implicitly assumed that the boat could weather this currency crisis. The contestants for captain were arguing over the structural strategies – like savings and what should be done about exporting.
I am reminded of the 1984 short term currency crisis which, even unto this day, Captain David Lange and pilot Roger Douglas confuse with long term structural change. Their muddled response led to a redesign to the boat which has taken such a hammering in recent weeks. Hopefully we wont repeat their mistake of allowing policy agendas to be imposed which have nothing to do with the currency crisis, and often have even less to do with the structural one.
At the helm
Nigel Lawson, Mrs Thatcher’s one time Chancellor (Treasurer) remarked “when you go to sea its a matter of chance what the weather is like. Nevertheless you can navigate through the storm with a greater of lesser skill.” How did our navigators do?
Prime Minister Shipley caused anxiety by announcing that there was nothing in the current economy “that leads me to alarm.” My acquaintances wanted the impression Shipley was in charge, not just reassurance. She did not sound well briefed. (She is superb when she is.) I commend the British practice (also of Bill Rowling and Rob Muldoon) of the prime minister having a weekly discussion with the Secretary of the Treasury.
Treasurer Winston Peters caused considerable confusion by talking about savings. He was probably well briefed, but the proposed policy responses were unpalatable (cutting government spending, higher user charges, higher taxes, and more privatisation). Savings are about long term structural strategy, and Peters was implying that there was little that could be done, or need be done, immediately.
Labour’s Michael Cullen and Alliance’s Jim Anderton both took up the theme, arguing that the July tax cuts should be revoked (impracticable) and exports should be encouraged (long term). The most fatuous contribution came from Act which called on Peters to resign. They were politicking, but imagine the response of overseas investors who heard a country’s Treasurer had resigned in the middle of a currency crisis.