Gareth Morgan, Director of Gareth Morgan Investments
The vexing issue facing many monetary authorities around the world over late 1990, has been whether to tighten monetary policy to counter the inflationary trends that are arising, most recently fuelled by oil, or whether to ease monetary policy to counter recession. In Japan and Germany there has been strong economic growth so the decision is a relatively easy one to tighten monetary policy. But in the US and Australia and now threateningly in Britain, the spectre has been one of looming recession, so the authorities are easing.
For New Zealand, a rolling recession is well established and inflation, while down to 5%, is well short of the objective of 0-2%. Recession reflects the difficulty of the task to break from the high inflation, poor balance of payments mode that the UK and Australia especially, still court, and via microeconomic reform generate an environment of competitive industry. There is some evidence of firms emerging which have international strength, and the necessary foreign ownership of New Zealand business assets has increased markedly. But with so much of the country’s foreign exchange earned from primary produce, the international prices of which have turned down and look to sink further, the scope of the task to produce a net improvement in the current account is still daunting.
Of course this has further fuelled the tiresome cacophony of calls to devalue the currency, de-emphasise low inflation, and “restore business confidence”. The vested interests yearn for a windfall of domestic demand to descend from heaven, or at least from the Beehive, reversing the erosion to profit results that inadequately skilled managerial performance is reaping in the deregulated economy. The inability of some to accept that New Zealand economic conditions had to change given the long slide in growth that had set in, and then to act adequately to adjust their business or politics to an internationally competitive environment, remains the biggest drag on New Zealand’s recovery.
In a world where business is required to achieve excellence, there is no such thing as demand or confidence constraints. The market is global and we as suppliers, are infinitesimal. We continue though, to be dragged back by businesses that rely solely on New Zealand domestic demand to sell their produce and refuse to internationalise. Only when sufficient numbers of these managers are concentrating upon what an internationally competitive environment requires of them, will a satisfactory and sustainable economic performance be forthcoming.
That is not to say that the government doesn’t have a role to play. By reducing drastically its size, rather than simply the deficit; by eradicating inflation; and by removing legislative protective barriers in all markets- labour and goods- the government can encourage higher domestic savings and efficiency of investment, meaning that the cost of capital can fall and its application become sufficiently productive. Slow growth isn’t that high a price to pay in the meantime. Policy demagoguery from little political pricks cannot be allowed to encourage business to eschew the internationalisation road.