Kicking out the jams

Everyone is talking about economic recovery – but where is the transformation we were supposed to make?

Hasn’t the news been comforting over the last couple of months: a welcome flicker of growth, an upward movement in prices for our commodities, a recovery in the value of the superannuation fund investments, some confidence returning in the share market, and – oh, dear – signs of life returning in the property market.

The recession is over, says America’s chief banker Ben Bernanke. “We and the world appear to be on our way to recovery,” says our Reserve Bank governor Alan Bollard. Well, that is good news, but we are not out of the woods, yet. Far from it.

The world banking system has survived a crisis that could have plunged us all into another Great Depression – but it will be a long time before the world returns to anything close to business-as-usual.

Nevertheless, the good news is enough to inspire a new debate – most directly in the United States, and, in a more coded way, here – about the need to start winding back the government economic support and the budget deficits that dragged crashing economies back from the brink.

Here, we are seeing a resurgence of the old inter-generational theft argument. We are eating our bacon rather than saving it – and our children and grandchildren will have to pay the butcher. Watch how ACT will move to exploit this ground.

When Finance Minister Bill English talks of borrowing $400 million a week to pay the government’s bills, he is quietly fuelling the fire. When he adds it will take about four percent of any economic growth over the next four years just to pay the interest costs of the additional borrowing, he makes the burden sound impossible.

Of course, English is raising this issue to focus minds in the public sector on the task of living with little or no additional funding for the next three to five years – after a five year period in which government spending ballooned by 50 percent, or twice the rate of economic growth.

The numbers are chilling – but how accurate are they? No doubt they are conservatively calculated on the best information available to the government today, but both IRD and Treasury have erred in their forecasting in the past. Reading the future path of the world is an unenviable job.

One thing is clear: freezing government spending is far easier than re-prioritising it to stimulate an export-led recovery.

Remember John Key’s advice to the Wall Street Journal early this year: “We don’t tell New Zealanders we can stop the global recession, because we can’t. What we can tell them is we can use this time to transform the economy to make us stronger so that, when the world starts growing again, we can be running faster than other countries.”

But when does the broader transformation start and what role should the government play?

If the public sector has been bloating over the last five years, our export sector has been stagnating. Dairy, meat, forestry, and wool, generate around 65 percent of our export earnings. Each one of these sectors is challenged by internal structural log-jams that will handicap their contribution to an export-led recovery.

The dairy sector is mired in a debate over funding the future growth of Fonterra. The meat sector carries the burden of its excess processing capacity. Forestry has stalled in the endless debate over its treatment under the Kyoto-inspired emissions regime. Wool marketing systems have lost the confidence of farmers.

Kicking out the jams in primary production should be a priority task for a government seeking an export-led recovery. America could see that it needed to reform its stagnating but hugely significant automobile industry. An attack of similar zeal on the barriers to growth in our agribusiness sector surely merits more high priority consideration than it has been given to date.

Instead of getting depressed about the strengthening New Zealand dollar exchange rate, exporters and the government need to think about what is increasing its value against other currencies. The Reserve Bank offers this explanation in its latest monetary policy statement:

“Commodity currencies – those of economies which are significant producers and exporters of basic industrial materials and foodstuffs – have generally posted the strongest gains against the US dollar since the lows in global equity markets in March.

“With traders seeing these economies as being particularly sensitive to global development, increased confidence that the world economy is stabilizing and recovering has translated into relatively strong gains in these currencies. This appears to be overwhelming any concerns about the individual circumstances of these economies.”

The bank and the traders may be wrong, just as the forecasters of the government’s deficit and borrowing needs may be wrong. But there are some very obvious problems handicapping the performance of New Zealand agribusiness that should be addressed immediately. The bottom line is that food, forestry and fibre production still offers our best bet for an export-led recovery.