Reserve Bank supports call to quicken economy reshuffle

Press, 30 July 1986, Page 9

Reserve Bank supports call to quicken economy reshuffle

Wellington reporter

The call from farmers and manufacturers for the Government to broaden and quicken its economic restructuring has gained support from the Reserve Bank.

In its annual report, the bank points to a need for quicker change to a more competitive economy as the best cure for the pain of adjustment being felt in some sectors.

The bank cites the wage-fixing system as an

area which has so far been resistant to change.

It advocates a move towards wage setting which makes economic realities within individual businesses “explicit in terms of wage packets.”

That would ensure that labour is more likely to move into the industries and geographic areas where it can be used most productively, the report says.

Such a wage-setting system would help remove

the perception of a “going rate” in a particular round of negotiations. The bank points to the 1985-86 wage round as one dominated by historical relativities and the level of settlements in trend-setting awards. Historically, uncontrolled wage settlements in many areas of the economy have simply compensated workers for inflation with a sta'ndard margin on top. The bank says that in the last wage round, 63 per cent of awards were settled at 15.5 per cent to 16.5 per cent, with only 3 per cent beneath that In addition, the bank argues against awards based on national occupational groupings, irrespective of regional or enterprise differences.

“In the face of a more competitive, less regulated environment, such inflexibility is not only out of place, it is also likely to be prejudicial to the success of the Government’s over all economic strategy.” The bank blames , some of the most difficult prob-

lems that have so far emerged . from that strategy on an unevenness of policies.

“Some sectors of the economy have been insulated by the maintenance of various price rigidities and distortions which have been less amenable to change.” The bank points to the impact of a slower than previously expected decline in the fiscal deficit on interest rates during 1985-86 and relatively high costs for farmers facing a fall in their returns as other examples of uneven adjustment under Government policies.

The bank says firm conclusions cannot be drawn yet on the effectiveness of the Government’s firm monetary policy in reducing inflation.

There is little sign that the firm policy has had a direct impact on inflation through people’s expectations on the future rate of price rises, the report says.

Wage settlements in the 1985-86 round seemed to be-well above the level

they should have been given monetary policy, and that may mean the latter will bring about reduced economic output and employment quicker than it will lower inflation, the bank concludes.