Category Archives: Macroeconomics & Money

Microeconomic Reform: the New Zealand Experience

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Microeconomic Reform and Productivity Growth: Workshop Proceedings, proceedings of a conference “Microeconomic Reform and Productivity Growth”: 26-27 February 1998. (Productivity Commission and ANU, 1998) p.155-181.

Keywords: Growth & Innovation; Macroeconomics & Money; Political Economy & History;

Prologue

This being the first occasion which I have visited the Australian National University since the death of Professor Fred Gruen, may I briefly pay him a tribute. When we first met, Fred was suspicious of my approach, thinking I was anti-market. Over some long discussions he came to recognize I have a deep Marshallian respect for the market, even though we might not always agree on the details of policy. I would have appreciated a continuation of our intermittent dialogue with his response to this paper. It would have been thoughtful and shrewd. I would have responded in my revision, each of us shifting our position in the light of analysis and facts. I am sorry he is not here, except in spirit.

Introduction

Economic reform in New Zealand has been unusually comprehensive and thorough. For the scientist it provides a test of the theory which underpinned the reforms. The overt theory was essentially that which is known in Australia as “economic rationalism”, the consistent application of modern neo-classical market theory. At the practical microeconomic policy level this has been the withdrawal of government interventions which preferred one firm, industry, or sector (relative to others), in favour of market regulation of economic activity. Thus import licences have been abandoned, tariff levels steadily reduced, subsidies and tax incentives withdrawn, the tax regime made more uniform with exemptions barriers to entry eradicated, corporatization and privatisation of government trading activities, and greater reliance on competition law.1 There remain some (now much lower) tariffs, a few special taxes, occasional interventions, and so on. Nevertheless the extent of the microeconomic reforms is such to that they become a test of the theory which underpins them.

The Year Of the Paper Tiger: Asia Is in Economic As Well As Financial Crisis

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Listener 14 February, 1998.

Keywords: Growth & Innovation; Macroeconomics & Money;

This column gets written about a month before it is first read. So there is a discipline to avoid instant comment which will prove facile a few weeks later. But the lead time also limits commenting on a rapidly unfolding scenario, as is occurring in East Asia. I have not been one to assume that the current bailout of this or that country by this or that institution will be the last, nor that the bailout will resolve quickly some underlying problem.

In Stormy Seas: The Post-war New Zealand Economy

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Otago University Press, 1997. 343pp.

A detailed look at the New Zealand economy in the twentieth century, and in particular its course since World War II. This is not just a history but a narrative about a problem’, defining, and ‘hopefully contributing to an understanding that will aid to its solutions’.

In Stormy Seas asks pertinent questions about some of our favourite national myths. The intial chapters examine the ongoing debate about the New Zealand economy, looking at such factors as external impact and internal response, the business cycle and growth, and problems of financing investment. Structural transformation, the farm sector, industry and energy, efficiency and flexibility, and ‘the market’ are all explored before the book closes with a discussion of the aftermath of Rogernomics and the decade of greed. (Publisher’s blurb)

Ups and Downs: Is the Reserve Bank Managing to Control the Exchange Rate?

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Listener 20 September, 1997.

Keywords: Macroeconomics & Money;

When a decade ago this columnist talked about the Reserve Bank of New Zealand (RBNZ) “quasi-targeting” on the exchange rate, the conventional wisdom said that this was a nonsense. Over the years that quasi-targeting became increasingly explicit, as illustrated by the RBNZ’s Monetary Conditions Index. The MCI, as it is known, combines a short term interest rate and the exchange rate (measured by a trade weighted index – the TWI), to give a quantitative indicator of the RBNZ’s assessment of monetary conditions. The RBNZ even sets a range in which the MCI should hover. As I write the index is meant to be between 775 and 875, although it is likely to be changed with the new monetary policy announcement by the RBNZ, this Thursday (18th).

In the Dark: The State Of Research into the Economy Is an Embarrassment

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Listener28 June, 1997.

Keywords: Macroeconomics & Money;

The economy seems to have been in a growth slowdown. It is not easy to tell its current state because the data is incomplete. But as best can be judged, the upswing phase of the business cycle following the long recession of the late 1980s is over, and the economy is now expanding at a modest rate. The upswing was heralded by ideologues as a permanent and sustainable. The more cautious commentators recognised that this was a cyclical recovery, and economic growth would then slow down. It has. What does that tell us about the long term prospects of the economy?

Twist and Shrink:

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Australia’s Experience of A High External Deficit Has Relevance Here.
Listener: 1 March, 1997.

Keywords: Macroeconomics & Money;

John Edwards, adviser to the Paul Keating when he was Australian Treasurer and Prime Minister, is far too uncritical of his former boss to make his Keating: The Inside Story a great biography. But if the book lacks insight into Keating’s persona, Edwards – an economist and currently Chief Economist for Société Générale in Sydney – provides a fascinating account of the economic policy making.

Ignoring the Critics:

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One Recent Economics Publication Offers Diversity, Another Ideology.
Listener: 15 February, 1997.

Keywords: Macroeconomics & Money;

Over the years I have collected a bibliography of about 500 books and article on the economic reforms since 1984, reflecting numerous accounts of what happened. It is not comprehensive – simply the items I have referred to in my writings. By a judicious selection one can select a subset of these references which demonstrates the muldoonist analysis of the reforms was correct, or a marxist one, or a crude keynesian, or a social credit one, or whatever. You would not have to do that for a new right account of the reforms. Instead you would go to a recent article “Economic Reform in New Zealand 1984-95: The Pursuit of Efficiency” by Lewis Evans, Arthur Grimes, David Teece, and Bryce Wilkinson, published in the Journal of Economic Literature.

The End Of the Golden Wether

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The economic earthquake, thirty years ago this week, continues to shape New Zealand.

Listener: 14 December, 1996.

Keywords: Growth & Innovation; Macroeconomics & Money;

On 14 December 1966 the Wool Commission found itself buying in bales of wool offered for auction. This arrangement had been devised in the early 1950s to provide a floor price for wool, evening out the troughs in the fluctuations for the commodity whose price was set mainly on the auction floor. Each year a floor price was set. When offers were below this level the Commission would bid – on occasions even make small purchases – to push up the price to above the set floor level. But typically their involvement was minuscule.

Going to the Wall

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The Cook Islands is in Crisis – its Economy Awaits Major Structural Change
Listener 2 November, 1996.

Keywords: Macroeconomics & Money

While “hitting the wall” is a phrase beloved by politicians and journalists, it is not a rigorous notion. If it means a crisis which is so drastic that there had to be major policy change, New Zealand did not hit the wall in 1984. There was a currency crisis, in which some people panicked, while others magnified it out of proportion to justify their policies and their grab for power. However the Cook Islands has not just had a currency crisis. It is facing the need for major structural change. Their economy might be said to be hitting the wall. In comparison, New Zealand’s was the bump of a dogem.

Governing the Governor

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Should the Governor of the Reserve Bank Be Elected, Or is the Bank Just A Tool of Parliament?
Listener: 21 September, 1996.

Keywords: Macroeconomics & Money;

Would you rather be voting for the Governor of the Reserve Bank than the parliament? A yes probably rests on the belief that the governor is more powerful than the prime minister. Irrespective of whether he is, his power comes from parliament, and he or she is but a eunuch without parliament’s command.

Ex-Fortex

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Newspaper commentators failed to reveal that the former company of the year was in dire straights.
Listener 18 May, 1996.

Keywords: Business & Finance; Macroeconomics & Money;

The Fortex Group, a South Island meat company went into receivership in March 1994. Two years later its managing director, Graham Thompson, was jailed for six and a half years. General manager Michael Mullin had been jailed for four years. The newspaper files which record how the company became the darling of meat industry commentators, give little hint that the company was in trouble, until right at the end. (Unsourced quotations come from journalists, who would prefer not to be remembered.)

In the Balance

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There Has Not Been A Balance of Payments Crisis for Over A Decade. Will Our Luck Run Out?
Listener: 6 April, 1996.

Keywords: Macroeconomics & Money;

It is that time in the economic cycle when the more experienced economists begin muttering “balance of payments crisis”, albeit with a question mark. Such crises occur when the current revenue the country obtains overseas (mainly from exports) is much less than the current payments the country makes (for imports and foreign debt servicing) to the extent that foreigners are no longer willing to lend sufficient capital to cover the deficit.

Action and Reaction

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Do We Need A Reserve Bank in New Zealand?
Listener: 10 February 1996

Keywords: Macroeconomics & Money;

The inability of the American government to manage its budget is notorious. In the early 1980s the Reagan administration and the US parliament cut taxes, raise military spending, and end up with a huge government deficit. As I write, over a decade later their successors, Bill Clinton and Congress led by Newt Gringrich, are still struggling with that heritage hoping to eliminate the deficit in another seven years. While the deficit stimulated the US (and world) economy during the 1980s, the rising debt as a proportion of GDP, poses a threat to the viability of the US and world economy. The President and the Congress know this, but they have not be very good at doing anything about it.

Hype and Bust: a Sorry Tale Of Past Mistakes Contains Future Lessons

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Listener: 14 October, 1995.

Keywords: Business & Finance; Macroeconomics & Money;

Olly Newland’s Lost Property: The Crash of ’87 … and the aftershock is worth reading especially if you are thinking about investing in financial markets. It describes the founding and fall of his Landmark property corporation. The book cover describes the man as “one of the darlings of the New Zealand scene [in 1987] … wheeler dealer supreme. Banks almost (sic) queued at his door to lend him money; the media for his advice and comment. He had to field many requests to speak to investor groups.” Newland, would not be so immodest, but it is certainly true that there was a time when businessmen like him were flavour of the month.

Parity and Bust: Dollar for Dollar Is Not a Good Deal

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Listener: 19 August, 1995.

Keywords: Macroeconomics & Money;

The proposal for “parity parties” when the New Zealand dollar equals the Australian dollar in market value is typical of the bizarre economic thinking by some in the financial sector. The last time parity was attained was in November 1967. Since then consumer prices have risen 12.8 times (i.e. 1180 percent) in New Zealand, while they have risen 8.1 times in Australia. While the consumer price index is not a perfect measure of inflation, the gap between our price levels remains substantial. An OECD study in 1990 found the New Zealand dollar could buy the same as 86 Australia cents. Allowing for the differential inflation rates since the figure is probably about 88 cents today.

An Unstable World Economy?

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How Does the State of Major Economies Affect Us?

Listener: 5 August, 1995.

Keywords: Macroeconomics & Money;

The world economy is not in robust state. Some of leading commentators are muttering about the fragility of the Japanese economy and stagnation in the US one. There is usually one major economy which is worrying, but my concerns here are more about the fundamentals, most notably the very high world real interest rates.