Candle in the Wind?
It may be Christmas, but for many companies it is not a happy time. Companies are facing more challenges than they can
cope with. The ability to cope is complex, there is no ‘one-size-fits-all’ solution. What is important to one may not
matter to another and what matters today may not matter tomorrow. So in both type and time there is no ‘off-the-peg’
fix.
We have seen capital flows outstrip trade flows in terms of exchange rate impacts. Trading banks borrow offshore to
satisfy local borrowing demands to enable the purchase of yet more property. For over a year and half commentators have
been saying the currency must fall soon – when? The headache is worsening for New Zealand exporters as the local market
comes under pressure from low cost countries off the back of an overvalued currency.
The risk for small to medium sized, elaborately transformed manufacturers in New Zealand is now in the “far to risky to
bother” zone. This increasing risk has massive consequences for the productivity of the New Zealand economy in the long
run.
Convention suggests nothing can be done, capital and trade does what it will and there is next to nothing a small nation
can do about it. If this is the case then we really are a ‘candle in the wind’.
It might be regulators can do nothing about global flows of capital and trade but they can change local policy, for
example, taxation support for companies committed to research and development, early stage investment in start up
companies or faster depreciation rates on productive plant. This could help relieve the worst impacts of the volatility
of the New Zealand dollar.
Other policies might change the demand for debt, the most obvious issue in this area would be tax on capital gain and
correct some of the imbalances in the economy. What is it New Zealand knows that the majority of OECD countries, who
have capital gains tax, doesn’t know? Until New Zealand can get a grip on these issues, increases in labour productivity
will not fix the problem. One local manufacturer invested to increase throughput from 1200 to 5000 units per person over
four years, only to see returns decimated by the exchange rate over the same period. Is it worth the risk? Would you
invest in such circumstances? More and more manufacturers are saying ‘no’ and the productivity of the New Zealand
economy will suffer as a result.