[Brash-Report] From National's Finance Spokesman
DON BRASH WRITES
No. 19, 15 October 2003
The old ant and the grasshopper parable, updated for New Zealand in 2003, has been sent to me by several readers
recently. It's so uncomfortably close to describing many current New Zealand attitudes that I've decided to circulate it
further. Apologies to those who've already seen it, although I believe it justifies a second reading! Those who have
already read it several times may wish to skip straight to the discussion on the New Zealand dollar exchange rate, which
follows it.
The Ant and the Grasshopper - the classic version The ant works hard in the withering heat all summer long, building his
house and laying in supplies for the winter.
The grasshopper thinks he's a fool, and laughs, dances and plays the summer away.
Come winter, the ant is warm and well fed. The shivering grasshopper has no food or shelter, so he dies out in the cold.
The modern New Zealand version
The ant works hard in the withering heat all summer long, building his house and laying in supplies for the winter.
The grasshopper thinks he's a fool, and laughs, dances and plays the summer away.
Come winter, the ant is warm and well fed.
The shivering grasshopper calls a press conference and demands to know why the ant should be allowed to be warm and well
fed while others less fortunate, like him, are cold and starving.
The TV crews show up to provide live coverage of the shivering grasshopper, with cuts to a video of the ant in his
comfortable warm home with a table piled with food.
New Zealanders are stunned that, in a country of such wealth, the poor grasshopper is allowed to suffer so while others
have plenty.
The Greens, the trade unions and the Coalition Reaction Against Poverty demonstrate in front of the ant's house.
TV1 News, interrupting a cultural festival special from Ngaruawahia with the breaking news, broadcasts them singing "We
Shall Overcome."
Dun Mihaka rants in an interview with Pam Corkery that the ant has got rich off the backs of grasshoppers, and calls for
an immediate tax hike on the ant to make him pay his 'fair share'.
In response to polls, the Labour Government drafts the Economic Equity and Grasshopper Anti-Discrimination Bill,
retroactive to the beginning of the summer. With the help of United Future and Jim Anderton's rump, the Bill is quickly
passed into law.
The ant's taxes are reassessed and he is also fined for failing to hire grasshoppers as helpers.
Without enough money to pay both the fine and his newly imposed retroactive taxes, his home is confiscated by the
government.
The ant moves to Asia, and starts a successful company.
The TV stations later show the now fat grasshopper finishing up the last of the ant's food though Spring is still months
away. Meanwhile, the government-owned house he is in, which just happens to be the ant's old house, crumbles around him
because he hasn't maintained it - 'not his responsibility' say the social workers who are responsible for the
grasshopper's welfare.
Inadequate government funding is blamed, so Margaret Wilson is appointed to head a commission of enquiry that will cost
$10 million and take two years.
Before that is finished, however, the grasshopper is dead of a drug overdose, and a regular contributor to the NZ Herald
blames it on the obvious failure of the Government to address the root causes of despair arising from social inequity.
New Zealand - the way we want it??
The New Zealand dollar exchange rate
Over the last year or so, the New Zealand dollar has risen very strongly against the US dollar and somewhat against many
other currencies. This is understandably causing huge concern for exporters and those competing with imports, with many
companies having to scale back their activities and some being forced to close down. In recent months, I've spoken to a
lot of exporters who are hurting badly - and it has been a pleasant change not being the guy blamed for this situation!
But, I am often asked, why doesn't the Reserve Bank do something about the situation? Unfortunately, it's not at all
clear that the Reserve Bank can do anything about the situation.
Yes, the Reserve Bank could reduce interest rates further, perhaps to put them on a par with those in Australia (where
the official cash rate is 0.25% lower than in New Zealand). But the notion that it is New Zealand's relatively high
short-term interest rates that are the main driver of the exchange rate is considerably over-simplified. Australia and
Canada both have interest rates that are lower than New Zealand, yet both currencies have risen more against the US
dollar this year than ours has. In Japan, interest rates are (for all intents and purposes) zero, yet even the yen has
appreciated against the US dollar this year - despite those extremely low interest rates and massive intervention in the
foreign exchange market by Japanese authorities to prevent this happening.
Back in 2000, when I was still Governor of the Reserve Bank, short-term interest rates were raised from 4.75% to 6.5%;
despite that, the New Zealand dollar fell to its lowest level in history, around 39 US cents. The Australian Reserve
Bank and the European Central Bank had very similar experiences that year, with interest rates going up but their
currencies going down against the US dollar.
The underlying reality at present is that the US dollar has been falling against most currencies, including ours, and
many observers expect that to continue for some time.
So, if reducing interest rates isn't guaranteed to ease the upwards pressure on the exchange rate, what else might be
done' In principle, there are two other options. First, we could adopt some other currency, perhaps the US dollar. That
would certainly avoid fluctuations between the New Zealand dollar and the currency we adopted as our own, but it would
be no panacea. If the foreign currency we adopted was rising against most other currencies, our economy could be knocked
around badly - ask anybody from Argentina about their experience in the last few years!
Alternatively, we could move away from our 'clean float' (with no controls on capital movements and no Reserve Bank
intervention in the foreign exchange market) to a 'dirty float' (with some controls on capital movements and the Reserve
Bank trying to moderate the fluctuations in the exchange rate). Sounds a pretty attractive option at first glance but
(a) with a very sophisticated financial market in New Zealand now it would be hard to make capital controls work
effectively, and (b) intervention in the foreign exchange market involves considerable risks with absolutely no
guarantee of success (ask the Japanese).
Business New Zealand issued a Special Business Update earlier in the month that, in my view, got it absolutely right:
Monetary policy is not the silver bullet it is made out to be. Its key role is to underpin sustainable economic growth
by maintaining price stability, allowing other policy levers to work more efficiently and encouraging the private sector
to invest, spend, and save with confidence.
So what can be done to help manufacturers and exporters become more competitive and cope with a higher exchange rate
against the US$?
-What is needed from Government is a stronger commitment to growth promoting policies.
After listing the growth-enhancing policies needed, policies with which I am in full agreement, Business New Zealand
went on to lament that the Government has gone quiet on its earlier ambition to see our economy grow at a rate that
would return us to the top half of the OECD.
Too many Government policies are working against this goal (of faster growth), with too many initiatives adding costs,
reducing flexibility and impacting adversely on manufacturing and exporting competitiveness. The Land Transport
Management Bill, the Holidays Bill, the review of the Employment Relations Act, implementation of the Kyoto Protocol are
just a few examples of a programme that will do more harm to business competitiveness over the long haul than exchange
rate volatility ever will? The Government's failure to live up to its growth rhetoric and its policies that harm
business competitiveness are what manufacturers and exporters should really be getting upset about.
I totally agree.
Don Brash