Monitors of the economy

Press, 15 June 1982, Page 18

Monitors of the economy

The fifth report of the Economic Monitoring Group to the Planning Council does not give the .country much cause for rejoicing. As a good economic report should, this report surveys most aspects of the economy — unemployment, investment, inflation, the prospects for growth, and the balance of payments — a depressing aspect of the economy on which the report dwells most. The balance-of-payments figures, which happened to be released on the same day as the Economic Monitoring Group’s report, demonstrate that New Zealand is in dire straits and thereby justify the emphasis given by the group to this part of the economy. The deficit in current account for April was $ll3 million and for the year which ended in April was $1,154 million.

There is ample reason for tackling the balance-of-payments question. If New Zealand constantly spends more than it earns it does not have the money to invest; without investment it cannot develop, and without development no extra jobs will be created. The same effects come about through heavy borrowing and the need to service debts. Together these factors make up what is known as the balance-of-payments constraint. New Zealand history shows few years in which, the country has earned more than it has spent. If New Zealand managed to conquer the balance-of-payments problem it would have gone a i.nig way towards curing some of the other His that afflict the economy. The problem has been identified countless times before and various remedies have been suggested. The Economic Monitoring Group was not content with repeating what has become obvious but has cited some options and has suggested new perspectives for the economy. <

The Government, in encouraging' exports, has long been grappling with the balance of. payments. The Economic Monitoring Group suggests that emphasis should also be given to import substitution schemes. Such a cry has not been heard in that form for a long time. The report asked why such emphasis had not been given and suggested that earlier import substitution schemes had been regarded with some disfavour and that the public reaction, still lingered. But the import substitution being suggested by the group was different. The group was arguing that much of the import

substitution now practised was for finished products and that further thought should be given to import substitution for intermediate goods. The thought that New Zealand should have got itself into a situation in which it depends heavily on imports of materials or semi-finished goods so that it can finish them is an interesting one. The possibility that New Zealand could consider finding the raw materials or substitute materials (ceramics instead of plastics is one of the group’s , suggestions) for its manufactures leads to exciting possibilities that the materials could, be used for a number of products. New Zealand might in time develop industries in depth.

Also important in the Economic Monitoring Group’s report was the ..part about the options over the control of the exchange rate. This suggested that one option would be for New Zealand to continue with its policies unchanged, for the present constraints to continue. A second option is that the present creeping inflation could be accelerated to a crawl.

The argument is that the exchange rate could be lowered to improve, and not just maintain, New Zealand’s competitive position. A third option is that there could be a major devaluation without changing other economic policies such as export incentives and Supplementary Minimum Prices; the costs of inflation would be intensified. The group’s fourth option is for an import surcharge scheme — a. measure advocated by the Labour Party last year. This policy increases the cost of imports but does not make New Zealand’s goods cost any less; some may cost more because of their imported content. The import surcharge would get New Zealand into some trouble with its trading partners. The fifth option is that of a large devaluation coupled with the substantial disrnantling of export incentives; and protection should be reduced or modified. The group appears to think this would be the best over-all strategy, but since devaluation is a-matter , on which the Prime Minister (Mr’Muldoon)' is sensitive, the group is prudently not-an outright advocate of this course. At least the group spells put some options and has already contributed to the necessary thinking that has to be done about the country’s future.