False signals for the economy

Press, 19 September 1985, Page 14

False signals for the economy

By

W. ROSENBERG,

formerly Reader in Economics at the

University of Canterbury

On a day (September 10, 1985) when we read in “The Press” that Treasury bill interest rates exceeded 25 per cent, that prices in the once booming New Zealand dollar Eurobond market are coming under increased pressure, that exporters warn of job risks for 20,000 people, that grocery prices, increased by 15.3 per cent in the last year, and that Broadbank’s pre-tax foreign exchange losses exceed $23 million, it is time to look at the false signals by which our team of economic engine drivers allows its train to rush towards catastrophe. The guidance of the economy follows false or irrelevant signals. Our train drivers, schooled in observing these false signals, ignore the real indicators which should tell them they are on the wrong way. The chief engine driver, the Minister of Finance, Roger Douglas, outlined what his signals would be in his Budget speech in November, last year, to a public largely befuddled in economic matters. On page 4 of his Budget statement he said: “The Government intends to continue an active debt policy. This will be the prime vehicle for ensuring that growth in the money supply is consistent with real economic growth in the ecnomy, a low rate of inflation, and adjustment to a sustainable balance of payments position.”

And on page 25 he said: “The Government’s commitment to a permanent reduction in the deficit during the next three years should act to reduce pressures on both inflation and interest rates. The combination of firm monetary policy and reduced public sector borrowing will give added confidence to the export and importsubstitute sectors so that the gains in competitiveness produced by the devaluation will be sustained.” The funding of the public debt by tender — “active debt policy” — is turning out an unmitigated disaster. A Government which must pay 25 per cent to rich bankers and overseas financiers, who have available the huge funds required to finance the public debt, wastes taxpayer’s funds. Between October, 1984, and June 20, 1985, the Government “tendered” $2700 million of public debt at rates which rose from 14 per cent to 16 per cent. The annual cost will be another $4OO million payable by the taxpayer (mainly wage and salary earners) to bankers, financiers, and others. The recent $5O million, 48-day Treasury Bill at 25 per cent will earn these people — and presumably many of them are foreign financiers — hence the “strength” of the New Zealand dollar — $12.5 million at an annual rate. Since much of what is lent to the Government is foreign money attracted to our shores by high interest rates, Mr Douglas’s “prime vehicle” for economic

growth, for low rate of inflation, and for balance of payment sanity, has exactly the opposite effect. The gross inflow of foreign money — $10,300 million during the year ended April, 1985 — attracted by the false “signal” of high interest rates has raised the exchange rate, so that “The Press” reported on September 10, that an Australia dollar was worth 78 cents New Zealand, compared to 73 cents in July, 1984.

Celebrations about the “success” of closer economic relations with Australian are somewhat premature when Mr Douglas in November, 1984, could say:

“The devaluation in July could not be prevented and was long overdue. It has significantly improved the competitiveness of export industries and local industries that replace imports.” Now — due to the forces of what Mr Douglas and the Treasury call reverently “The Market” — if Mr Douglas’s economics were correct in November, 1984, the revaluation in July to September, 1985, will significantly damage the competitiveness of export industries and local industries that replace imports.

As to imports, even devaluation did not reduce these; and “invisibles” mainly the cost of borrowing to pay for excess imports and for paying the interest on past debt, have sky-rocketed with devaluation. The most recent balance of payments publication, a Department of Statistics release on September 4, must shock readers, except — presumably — the un-

flappable team of economic engine drivers who drive ahead ignoring all true signals of distress. This showed that the deficit on the Current Account for the year ended June, 1985, was $2662 million, up from $2017 million twelve months previously. The main increases were: • Imports, at $12,444 million, were up $3436 million; © Miscellaneous services, at $llO4 million, were up $307 million;

• and debt service and profit remittances at $2195 million were up $5BB million. Actually, since exports also grew, the deficit on merchandise trade was $520 million in 1984 but $1135 million in 1985. Instead of using a surplus on merchandise trade to pay for our “invisibles” — royalties, commissions, interest and profits due, and travel abroad, all of which are rising dramatically — we have an excess of imports over exports. With the revalued exchange rate this must become even worse. Indeed the latest July-year figures for 1985 show a merchandise deficit of more than SNZIOOO million. If an invisibles deficit of $2500 million is added to that, New Zealand’s external position can be described as nothing short of disastrous. It is in this situation that the Government celebrates C.E.R., abolishes import controls, and now plays with the idea of reducing, if not abolishing import duties. Clearly the “market” signals, of the exchange market are worthless

when it comes to the objectives which our train drivers have put ahead of them: reaching the terminus of steady growth, business certainty, full employment, and price stability. If devaluation as a market signal was considered so basic, what are we to think of a market which revalues our exchange rate in these conditions?

Clearly, external and internal “market” signals are frequently incompatible. Unless the economy is somewhat insulated from the torrents of world instability by import and exchange controls, tariffs, and the like, the future must be one of ever growing debt, ultimate international insolvency, and in the meantime a fool’s paradise of inflationary “prosperity” financed by foreign capital inflows at up to 25 per cent interest rates.

That farming is and remains New Zealand’s most internationally competitive and also its largest single industry seems to have been all but forgotten in this fool’s paradise, where, in Mr Douglas’s words: “Interest rates have risen following the removal of the controls and the resumption of a credible debt programme. The removal of the interest rate controls, together with a number of other outdated restrictions represents significant progress in encouraging a more efficient financial sector.”

If these are the only means to create a more efficient financial sector, New Zealand will do better without such “efficiency.”