From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Wed Jun 06 2007 - 14:50:15 EDT
(New Zealand-born scholar/politician and former British Labour MP Bryan Gould http://www.bryangould.net/bryangould/id11.html ponders the economic results of New Zealand's neoliberal experiment. He recently published a polemical book on it, called "The Democracy Sham" http://www.bryangould.net/bryangould/id12.html) "New Zealand has been one of the most enthusiastic participants in the global economy - but, given our small size, the results have been all too predictable. A bigger proportion of our economy is owned overseas than in almost any other advanced country. Repatriated profits and the high interest rates needed to finance our current account deficit weigh heavily on and inflate that record deficit. Most important commercial, industrial, investment and employment decisions are now made in overseas boardrooms. Wage rates are forced down to meet Chinese benchmarks. The insistence by overseas owners on "externalising" costs means that we have less capacity to make necessary social, environmental and infrastructural investment. Economic inequalities have widened dramatically. http://www.bryangould.net/bryangould/id28.html In theory, it was all so simple. Since inflation could not happen if the money supply was held stable, all you had to do was control the money supply and - no more inflation! The productive economy would rapidly adjust to the new monetarist discipline and would benefit - along with everyone else - from low inflation. True, early attempts to define the money supply ran into trouble, when money turned out to be a surprisingly slippery concept. The attempt to measure the money supply was therefore abandoned, and reliance was placed on the crude instrument of controlling money's price. The simple task of raising or lowering interest rates as appropriate was handed over to bankers who could be relied upon not to be swayed by the inflationary pressures to which elected politicians were subject. Raising interest rates, though, turned out to be far from painless and had a real and debilitating effect on many parts of the economy, not least on the wealth-creators as opposed to the wealth-owners. It was also, as a counter-inflation instrument, slow-acting and poorly focused. But, despite these obvious downsides, it did seem to work, even if it took a long time and did a lot of damage in the process. That is, until now. [Reserve Bank Governor] Alan Bollard has been raising interest rates for a couple of years now, but the housing market remains stubbornly buoyant, bank lending is correspondingly rising, domestic consumption refuses to die back, imports continue to surge, our current account is in record deficit. No one can be confident that these inflationary pressures will abate. So, where to from here? Current orthodoxy allows the Reserve Bank few options. The Governor is now caught in a trap of his own making. If he raises interest rates yet further, this will in turn lift the exchange rate, sending our current account deeper into the red. The productive economy, on which our prosperity depends, will suffer further damage. Most worryingly, if recent experience is anything to go by, inflation will go on unchecked, whatever damage is done to the real economy. If interest rates cause the dollar to rise, consumption will be stimulated. People will go out and spend on cheap imports for as long as every dollar will buy up to 20% more than it should. And they will stick with investing in houses rather productive industry for as long as monetarist orthodoxy and an overvalued dollar depress profits and growth in those industries and while high interest rates offer a better short-term return. In vain will the Governor lecture New Zealanders on their failure to save and their predilection for investing in houses rather than in productive capacity. He has no one to blame but himself. Economics is a behavioural science. People do not respond to lectures, but to economic realities. And the longer he persists, the worse his predicament becomes. The weaker our productive economy and the bigger our current account deficit, the more we need high interest rates to attract overseas "hot" money to finance it. And since even that inflow will not fill the gap, we have to sell off yet more assets to foreign owners, making our current account worse with the double whammy of increasingly high interest payments and larger volumes of profits repatriated overseas. All of this might just about be tolerable if the medicine was working - but it isn't. Interest rates are no longer effective as a counter-inflation instrument. Indeed, they might even be adding to inflationary pressures. The initial impact of higher interest rates is of course to raise prices, not reduce them. The counter-inflationary effect is expected to come from restraining bank lending - by far the most potent inflationary factor in our economy - by making it more expensive. But what if borrowers simply absorb the increased cost and carry on regardless? That is indeed what seems to be happening. This is partly because of the high proportion of New Zealand borrowers who have fixed rate mortgages, so that they are insulated for a time against rate increases, and partly because the continued strength of the housing market has taught home-owners that increased mortgage payments are only a minor offset compared to the constant capital appreciation against which they can borrow at the bank. Higher interest rates simply become another cost increase which is painlessly absorbed into the cost and price structure of the housing market - and the overvalued dollar also chips in by raising the price of New Zealand assets against assets held overseas. http://www.bryangould.net/bryangould/id26.html We should consciously rebuild a sense of the value of our democracy, not in the abstract but as a practical guarantor that decisions will not be taken over our heads by distant, unrepresentative and irresponsible forces. That means, among other measures, having the courage to insist that our governments restrict the freedom of overseas investors to buy up whatever they choose, so that we cease to have any say over what is done in our own country. It means reclaiming the freedom to set our own requirements as to how and in whose interests our economy should be run, and what laws should protect our citizens, so that those wishing to operate here comply with our wishes rather than the reverse. It means placing economic policy under the control of our elected governments rather than bankers. It means acknowledging that governments have a vital role in identifying important issues and acting to deal with them, rather than leaving them to the global market to decide. As we begin the fight-back at home, we should also work with other like-minded countries and governments to change the way in which international financial institutions work, to establish rules to govern international investment, and to control the flows of capital so that the power of international capital to defy and override elected governments in their quest for profit at any cost is limited. We must ensure a fairer distribution of capital around the world and promote international cooperation in the interests of humanity rather than of maximising profits for a few." http://www.bryangould.net/bryangould/id31.html For sell-off statistics on foreign investment in New Zealand, see http://canterbury.cyberplace.org.nz/community/CAFCA/OIC.html For more economic analysis of New Zealand, see e.g. http://www.eastonbh.ac.nz/ http://www.ak.planet.gen.nz/~keithr/index.html http://keithrankin.co.nz/topics/ Household debt statistics http://www.msd.govt.nz/documents/events/strategic-social-policy/symposiums/05-June-09/05-June-09-background.doc Foreign debt statistics http://www.stats.govt.nz/analytical-reports/monitoring-progress/economic-growth/financial-position.htm and http://www.rbnz.govt.nz/statistics/extfin/e3/he3.xls
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