Deregulation in wrong order —‘Economist’

Press, 30 November 1987, Page 35

Deregulation in wrong order —‘Economist’

London correspondent New Zealand’s experience has shown that there is a right and a wrong order for deregulating a nation’s markets, according to the authoritative “Economist” magazine. In a special four-page feature on New Zealand’s economy, the magazine says that the Government’s brave dash from controls is coming well, but slowly.

The magazine features a photograph of the Minister of Finance, Mr Douglas, at his south Auckland pig farm, along with a picture of a moa with the caption, “New motor for the moa.”

The magazine says New Zealand’s experience shows that when inflation was high, it was unwise to liberalise financial markets until the Government had its budget deficit under control.

The magazine says that financial deregulation was supposed to assist New structural adjustment by ensuring a “correct” exchange rate. “But, as America also found to its cost, heavy Government borrowing, plus high interest rates, can lead to an inflow of foreign capital and a painfully high real exchange rate.

“This sends the wrong signals to producers. Deregulation has helped the release of resources from inefficient activities, but macroeconomic policy blurs the message as to where they should be redeployed.” Exporters and producers of import substitutes were discouraged from investing, says the magazine. The “Economist” says the Minister of Finance, Mr Douglas, might have done better to have kept a grip on the exchange rate until he had the Budget deficit under control. “The second lesson is that it is best to start deregulating in the market which responds most slowly. “Prices of financial assets react more quickly than prices in goods and labour markets, so premature financial deregulation risks excessive increases in interest rates and exchange rates while other markets remain os-

sified.” The magazine says that the ideal sequence was probably reform the labour market first, then lower trade barriers, and last of all, cut the financial sector loose. “Done that way — rather than the exact reverse — Mr Douglas might today be less vulnerable to New Zealand cynics who say that he will create a perfectly liberated economy but with no industry left to enjoy it” The magazine says it is ironic that just as New Zealand has discovered floating exchange rates, the big industrial economies are groping their way back towards a more managed system.

“The Government could influence the value of the Kiwi dollar without easing its grip on inflation if it pursued a tighter fiscal policy; interest rates would then be free to influence the exchange rate,” it says. The magazine says a gap may be opening up within the Cabinet on the role of exchange-rate intervention, with the Minister of Trade and Industry, Mr Caygill, hinting that now single-figure inflation was in sight, the Government need not be so reluctant to intervene. However, the “Economist” says the popular view that if the exchange rate fell then everything would be all right was a myth. “New Zealand’s problem is that years of economic isolation have made many industries grossly inefficient,” it says. "The power to improve its competitiveness lies just as much with its management as with the Government.” •

The magazine says that Rogernomics has bruised New Zealand, with the course towards deregulation being sudden.

“Like Britain’s own therapy against inflation and inflated expectations, there might, with hindsight, have been a marginally more comfortable way of doing things.” The “Economist” says the lesson to other countries from New Zealand is not to avoid adjusting to an unfair market, but to avoid losing touch with it in the first place.