Adjusting to economic change in N.Z.

Press, 25 February 1986, Page 18

Adjusting to economic change in N.Z.

The success of the Government’s economic policies will depend ultimately on the reactions of individual New Zealanders to the new economic climate, according to the Minister of Finance, Mr Douglas. He was replying to an editorial printed in “The Press” on February 20, which said that business pessimism should be offset by an explanation of how the Government expected the economy to improve after the present recession.

Mr Douglas said that the downturn identified by the New Zealand Institute of Economic Research’s quarterly business opinion, survey had been predicted for more than eighteen months. “As the survey points out it is difficult to tell the extent to which there is a rising trend in the rate of economic growth around which this recession is taking place,” he said. “The changes going on in the New Zealand economy fall into two classes: The economic changes, which are relatively easy to describe, and the changes in people’s attitude and approach which are probably just as important but harder to pin down. “The economy is adjusting in many ways to the changes of the last eighteen months. We are

moving through a period when inflation is falling rapidly. Over the last six months inflation has fallen more rapidly than in the first six months of the previous Government’s wage and price freeze,” Mr Douglas said. “The business opinion survey indicates that manufacturers are experiencing a reduction in inflationary pressure and tend to be absorbing increased costs, rather than passing them on. This is a reflection of the more competitive economic climate being faced by manufacturers as import licensing is phased out and tariffs are cut.

“Investment, especially in plant and machinery is still relatively high for similar stages in past business cycles. “The business opinion survey also confirms that a fall in lending interest rates is expected over the next three months which is consistent with a fall in inflationary pressure and a drop off in demand for credit,’ he said.

“It is clear that many businesses are rationalising their operations in a variety of ways to adjust to increased competition. The level of takeover activity in the sharemarket partly reflects new, more aggressive management teams who are using existing business assets more effec-

tively," he said. Mr Douglas said that the editorial had focused on increased exports as a sign of success of an economic strategy. “To some extent this is mistaken, and, indeed is partly responsible for some of the mistaken policies of the previous Government.

“Increased exports are a drain on the economy if their added values are very low or negative. Unfortunately past policies, especially in the agricultural area brought forth much extra production that has a low or negative added value. An extreme example was the 60,000 tonnes of mutton that had to be rendered down in the last meat season. Similarly, misguided policies which stressed foreign exchange savings at any cost resulted in the Think Big mentality and we are now seeing the costs of that. To the extent which farmers and manufacturers are not producing things at a loss because a subsidy or some other form of assistance is telling them to do it, then the nation will be better off.

“In agriculture, it is clear that farmers are now very carefully relating their costs to return. The whole industry is becoming more responsive to the needs of overseas consumers, diversifying the range of different products

and diversifying markets,” Mr Douglas said. “Unfortunately the costs of adjustment tend to obscure the positive changes that are going on. It is unavoidable that to a certain extent the costs of adjustment fall unevenly on different sectors and different individuals and businness in different sectors. This is simply a reflection on the different amount of adjustment needed in different activities.

“Nevertheless the positive changes are pervasive. As I talk to business people and exporters around the country it is evident that many are now mastering the new rules of the game. They are spotting new opportunities and new market niches and investing heavily to develop them. “In many ways the most important change has been in attitudes. The tendency for people to come to the Government to solve a problem is falling away and instead people are sitting down to work out their own solutions to their problems,” he said.

“The deregulation of the financial sector has already had major benefits for lenders, borrowers and consumers. For example margins on foreign exchange deals have fallen to a tenth of what they were; marg-

ings between lending and borrowing rates have been squeezed and will be reduced even more as new banks are established; consumers are being offered financial services more closely tailored to their individual needs; and business will be offered increasingly more competitive banking deals,” he said. “In the public sector, the Government is undertaking major reforms to improve efficiency. “The focus is on improving the accountability of public service managers; improving flexibility; separating the trading activities away from other functions of government; and requiring trading activities to operate more commercially. “The Government’s policies have always been aimed at the medium term — there are no quick fixes,” he said. “Individual New Zealanders are already adjusting and prospering in the new economic climate. The Government can only create the right environment in which people can plan, Invest and work. We cannot buy prosperity. Ultimately it is the reaction of individual New Zealanders to get up and have a go which will determine how successful the Government’s policies are,” he said.