Devaluation Might Not Solve N.Z.’s Payments Problems

Press, Volume CI, Issue 29820, 12 May 1962, Page 13

Devaluation Might Not Solve N.Z.’s Payments Problems

The most disturbing of New Zealand's balance of payments problem was that it was not just a temporary one but rather part of a chronic longer term situation, said Dr. J. T. Ward, senior lecturer in agricultural economics at Lincoln College, -peaking to the poultryfarmers’ refresher course at Lincoln.

Dr. Ward said that there had been a deficit on current account in five of the last six years, amounting to a total of more than £llom.

After reviewing the prospects of New Zealand's main i.ems of primary produce he said that it was evident that the solution was unlikely to be found in increases in the prices of traditional agricultural exports.

Of the methods of coping with the situation, Dr. Ward raid that one of the most controversial would be devaluation of the currency. The International Monetary Fund made provision for devaluation whenever a member country was confronted by a fundamental disequilibrium in its balance of payments. This was characterised by a chronic balance of trade deficit and an internal cost structure out of line with other countries, both of which symntoms were evident in New Zealand.

The mechanism by which devaluation would work to restore equilibrium was that imports would become more expensive in New Zealand currency, reducing demand for them and expenditure in

sterling, and exports would earn more in New Zealand currency and if the correct sales policy was adopted could be priced more competitively in sterling to expand sales overseas. Unempleyment

A rise in the price of imports might “choke off" demand but it might well lead to unemployment. Dr. Ward said that the present level of private imparts was about —som and anything below that could lead to unemployment. If labour and capital could be rapidly shifted to expanding export industries all would be well, but would exports expand?

The major problem facing the country’s traditional exports was oversupply in the British market. Any reduction in price made possible by devaluation would not lead to a large increase in demand. Moreover, present political and economic policies in that market aimed at restricting supply and raising price. In the short term, therefore, devaluation might not bring about an improvement in balance of payments as readily or as smoothly as might be liked. In the long run the aim of national policy had to be to secure an overseas trading position which, with the internal structure of the economy, would ensure a more rapid rate of economic growth than had been achieved in the last decade. The dependency of secondary industry on increasing imports of raw materials threw doubts on whether this could be achieved by further diversification. Unless exports. which were likely to remain predominantly agricultural, could be expanded it would not be possible to secure toe flow of raw materials required.

Dr. Ward said that the expansion of export trade, upon which future living standards depended, needed to be based in the first place on the maintenance of as large a market as possible in the United Kingdom. The New Zealand Government should exert its maximum pressure to ensure this in the light of Britain’s own agricultural

policy and her application to join the Common Market. “I think that they should have put greater pressure on the British Government than they appear to have done to maintain their present share and even secure a larger one,’’ he said. The outcome of Britain's negotiations to join the Common Market were sure to be less favourable to New Zealand than the right of unrestricted duty-free entry to the British market which this country had enjoyed since Imperial preference was established 30 years ago, and this could be the case even if she did not join. New Markets

At the same time further and continuous efforts should be made to seek new markets for traditional farm products in Japan, South-east Asia, America and other countries, and if these and other new markets were to be exploited a greater diversification of exports might be necessary. Increasing the export of dried milk and other milk products, beef, pig meat and poultry products, timber and pulp, frozen and canned vegetables might be worthwhile. “The development of new markets and the diversification of exports would be facilitated by devaluation because our products would be more competitively priced overseas. Moreover, increased earnings in New Zealand currency would encourage further investment and production in agriculture which is likely to continue to provide an overwhelming proportion of our exports.” Mr A. T. G. McArthur asked whether it might not be possible to make a package deal by which an organisation subsidised by Western countries would be able to sell agricultural products at reduced prices or even give them away to underdeveloped countries.

While this might be a temporary solution. Dr. Ward said, the long-term solution was an improvement of living standards in underdeveloped areas so that they could trade themselves.