N.Z. at the bottom

Press, 24 December 1986, Page 16

N.Z. at the bottom

The Government has been saying for a long time that New Zealand has slipped badly in terms of living standards in comparison with other countries. If the assessment of New Zealand’s economic growth done by the Organisation for Economic Co-operation and Development is accurate, living standards in New Zealand are unlikely to rise quickly. In a list of the smaller countries which are members of the 0.E.C.D., New Zealand now ranks at the bottom when measured in terms of the rate of growth of gross national product.

In 1986 the New Zealand economy actually declined by 0.75 per cent. In 1985 the increase in G.N.P. was 1.2 per cent. For 1987, the O.E.C.D. forecasts a growth of only 0.5 per cent. By contrast, Australia’s predicted growth for 1987 is 3.25 per cent. Its growth for 1986 was 1.25 per cent, and in 1985 the Australian gross national product rose by 4.4 per cent.

The reasons for New Zealand’s poor performance are not hard to find. New Zealand’s terms of trade have been progressively slipping. The terms of trade measure the prices fetched by New Zealand’s exports against the prices of imported products. The index usually used takes a base year, in this case 1957, and gives a value of 100 to trade in that year. Under this index, the Department of Statistics gives a provisional figure of 71 for 1986. In practical terms, this means that it takes more of New Zealand’s exports to buy the same amount of goods from abroad. Like most other agricultural producers, New Zealand is a price-taker, not a price-maker. New Zealand is not in a position to dictate the world price of wool or lamb; the makers of say, Japanese cars, are much more able to dictate their prices to consumers. Added to that, New Zealand’s rate of inflation is three or four times the rate of inflation of its main trading partners. This, too, cuts savagely into New Zealand’s ability to trade its way out of its difficulties.

New Zealand has been a heavy borrower

in recent years for big energy projects. Borrowing for development is not foolhardy in itself. The trouble comes when the projects do not produce sufficient revenue, or save sufficient foreign exchange, to service the debts. Perhaps the energy projects will eventually pay off, although the world price of oil would have to rise so far for some of them to be profitable that other huge trade problems would arise. The high Budget deficit has related effects. One is that it causes high interest rates. In turn, this attracts capital to New Zealand, and this, in its turn, has the effect of driving up the value of the New Zealand dollar and makes it harder for New Zealand to sell its exports. There has also been a fall in investment in agriculture. New Zealand has also been plagued in the past by a high rate of tax on incomes and the protection of certain industries, which has distorted the economy. New Zealanders have not saved as much as they should to invest in their own economy; and spending for consumption generally adds to the country’s bill for imports. Some of these factors in the economy are changing. Sometimes the idea of change itself creates an illusion that the difficulties are all in the past. If there was a period in which New Zealand went wrong badly it was during the 1970 s after the world price of oil increased rapidly. New Zealand is now among the last of the developed economies to adapt to the major changes that occurred, though some countries have taken a long time to right their economies. The last two years have not been good for New Zealand in economic terms, in spite of the boom enjoyed by some people and some businesses; the coming year looks scarcely any better. Predictions about the years after 1987 cannot be made with confidence; but on the experience of other countries with plights similar to that of New Zealand, it would be unwise to expect an early reprieve. New Zealand may well be at the bottom of the table of economic growth for some years yet.