The Press WEDNESDAY, NOVEMBER 22, 1967. Parity With Australia

Press, Volume CVII, Issue 31533, 22 November 1967, Page 16

The Press WEDNESDAY, NOVEMBER 22, 1967. Parity With Australia

By reducing the value of the New Zealand dollar to that of the Australian dollar, the Government has given the export industries a much-needed increase in incomes; it has also made all imports dearer. Provided the extra incentive to export and the discouragment of imports are allowed sufficient time to work through the economy, the balance of payments should be considerably healthier by this time next vear Unaided, devaluation can achieve little. The recalculation of last year’s trade figures, printed on another page, shows that substituting the new exchange rates for the old produces an alteration of a mere $3 million in total trade of some $l5OO million. These figures are academic, of course, for if the new exchange rates had been effective in 1966 trade would not have followed the pattern that it did. The table is useful, though, in indicating the proportion of New Zealand’s trade with the countries which have not devalued —principally the dollar countries, Australia, South Africa, and Japan—and with those countries which have devalued slightly less than New Zealand —mainly the United Kingdom. Devaluation should steer some of New Zealand’s exports from the latter group towards the former, discourage imports from the former group in favour of the United Kingdom.

Unfortunately, the task confronting the country’s traders is not as simple as it might seem. It does not help the Dairy Board, for instance, to know that butter now retails at 75 cents (in New Zealand currency) in the United States and only 34 cents in the United Kingdom, for the United States will not allow our butter to be sold in that market. The wool trade’s task in reassessing the market for New Zealand wool is even more complicated. What will be the combined effect of' the new exchange rates on the price of raw wool, which fetched, say, 20c at auction in New Zealand last week? This wool cost American and Japanese buyers 28c in United States currency last week; assuming there has been no change in their instructions, these buyers will be prepared to buy similar wool in New Zealand this week at 28c (U.S.). For Bradford buyers the situation has changed. Last week they paid 24d for this wool; this week, to match the United States and Japanese buyers, they would have to pay 28d. Their principals, if they are manufacturing for the United Kingdom market, will probably instruct them to buy less wool, so the Bradford buyers will reduce their bids; and so will the United States and Japanese buyers. But if the Bradford firms are producing for export—or can switch to export production—they may now be prepared to pay 28d. In either event, the New Zealand price should rise—by up to 3.3 cents for wool worth 20c per lb last week. All New Zealand’s imports will cost more, but those from the United Kingdom will rise only 5 per cent while those from most other countries will rise 25 per cent. It will pay importers to switch their orders, where possible, from the United States, Canada, Japan, the European Economic Community, or Australia, to the United Kingdom. There are better opportunities for switching imports than exports; New Zealand can expect to see more Vauxhall cars, for instance, and fewer Holdens next year. It should be noted, though, that the effect on import payments is immediate and certain: all import prices will rise, some more than others. And while it is certain that export returns will show some increase, it is by no means certain that they will rise by the full extent of the devaluation.

Another certain increase in New Zealand’s costs is the freight charge on exports—s9o million two years ago, and probably nearer $lOO million per annum today. This item will rise at least $5 million in the next year. Other items in the “invisible” category are more difficult to analyse. Improvements in tourist earnings should offset the freight increase and increases in several other payments, such as interest on overseas loans.

The much-needed improvement in New Zealand’s balance of payments will not come about automatically. The diversion of exports to more profitable markets will call for vigorous promotion of new products in new markets; and this will not be achieved overnight. Australia is the best prospect for many products, particularly timber, pulp and paper, foodstuffs, and a wide range of other manufactures. The opportunities now opening will be frittered away if internal costs—apart from those directly attributable to devaluation—are not held in check. As the Industrial Conciliation and Arbitration Act is written, the Arbitration Court would have little option but to grant a wage increase next year, for yesterday’s devaluation will add about 4 per cent to the cost of hying. A wage rise of this order would wipe out virtually all gain from trade at the new rate with the United Kingdom, New Zealand’s main trading partner. The Government must seriously consider a “ pay pause ” for 12 months, or until the balance-of-payments deficit becomes a surplus.

The politics of devaluation are as difficult as the economics. Australian farmers have lost, New Zealand farmers have gained, froth the devaluations. New Zealand manufacturers will have to pay more for their imported raw materials and for their machinery. Although they are now offered new advantages in export markets, the increased protection they will enjoy in their domestic market might be a dangerous distraction from their main task. For the wage-earner, faced with increased living costs, there can be no immediate gain except the assurance that all will benefit in the long run from a more soundly-based economy. Employment prospects will improve; and many who would otherwise have been unemployed next year will have jobs. In spite of the pressure on the New Zealand dollar since early this year, the Government had resisted several opportunities to devalue: the “ mini-Budgets ” on February 10 and May 4, the “main” Budget on June 22, D.C. Day (July 10), and the day the floor price for wool was reduced (October 13). The devaluation of sterling was more than a new opportunity to reconsider our exchange rate; it was an imperative call to do so. Did New Zealand need to devalue any more than the United Kingdom’s 14.3 per cent? The question may have only academic interest now; but the pressure on the Government to allow wages, salaries, and other costs to rise will be the greater because of the greater degree of devaluation.