Book Reviews | Gordon Campbell | News Flashes | Scoop Features | Scoop Video | Strange & Bizarre | Search


Keith Rankin: Riding The Economic Bi-Cycle

Riding The Economic Bi-Cycle

Keith Rankin, 6 June 2002

The New Zealand dollar has risen 22% in just over 8 months. The agent that revived the New Zealand economy - the low dollar - is no more. The New Zealand economy is switching from one cycle to another.

This is the bi-cycle (or counter cycle) economy.

The revival of the tradable sector has been in large part responsible for the rising dollar, much as a racehorse with a light weight on its back expects to have that weight increased when it starts to win. However, it is Reserve Bank's "stabilisation" policy that has converted a small problem into a very large one. In signalling to the world - through rises in its official cash rate - that betting on the $NZ is a sure thing, the number of punters backing the $NZ have multiplied several-fold.

There are two kinds of damage I want to comment on.

First, the most spectacular growth industry in New Zealand at the moment is educating Chinese students. New Zealand has a price advantage over its rivals, and - since 11 September 2001 - a substantial non-price advantage.

Auckland is probably close to its limits in catering to international English-language students. (Although, given the size of mortgages in Auckland, the supply of homestay accommodation may be quite elastic.) It is appropriate that some signals are given that will slow down the rate of growth of this sector. But the last thing we want is a collapse of this service industry that is as dramatic as its rise.

The demand in China for foreign education is what economists call both 'price elastic' and 'income elastic'. ('Elastic' just means 'sensitive'.) Hence the growth of incomes in China has enabled many more Chinese to consider foreign education. But then a possible 30% rise in the price by the end of this year compared to October 2001 may be just too much for those at the price sensitive end of the market that come to New Zealand.

Perhaps more importantly, many of the students already here may have to return after just one or two semesters; ie just as they are settling down. The exchange rate is likely to do more harm to this 'golden goose' than any stories about sub-standard schools or scrooge-like homestays. Teaching Chinese students about the $NZ exchange rate is much more than an academic exercise for them. These students are very vulnerable people whose insecurity is exacerbated every day that the kiwi dollar continues to rise.

If too many of these students are forced to leave because their parents can no longer afford to send money, then a large proportion of the new language schools would fail, possibly creating a huge scandal in Asia, especially but not only in China.

This brings me to my second more general point. The 'counter-cyclical' monetary policy of the Reserve Bank stabilises nothing, and destabilises much. The Reserve Bank creates a counter-cycle which is as destabilising as the business cycle that it is trying to counter.

Aggregate data such as GDP (gross domestic product) may well neither rise nor fall as much as it would if the Reserve Bank adopts a non-interventionist policy. Close examination however shows that the two halves of the New Zealand economy - the tradable sector and the non-tradable sector - each experience cycles. These cycles work like a see-saw; when one sector is up, the other is down. At the moment we are on the fulcrum; the boom in the tradable sector over the last 4-years is giving way to a boom to the non-tradable sector, and a bust to the tradable.

The tradable sector is anything that is produced for the world market; ie exportable products, and goods and services produced in New Zealand in competition with imports. The non-tradable sector includes wholesaling and retailing, most professional services, government, most healthcare and education, and most of the finance sector. Importers (eg The Warehouse) are not part of the tradable sector. They are not in direct global competition with, say, Walmart, the biggest chainstore in the world of its type. In fact, importers' interests are diametrically opposed to exporters' interests.

We have become quite used to these destabilising countercycles. In the middle of each decade since the 1980s, the urban non-tradable sector (read Auckland and Wellington) boomed as the $NZ went up. At the cusps of each decade, the reverse happened, with the rest of the country shifting into overdrive and Auckland stagnating.

It is now different. At last, through its dominance of New Zealand's international education industry, Auckland is paying its way. It has joined the tradable sector. It may not only be our Chinese guests who will get a nasty shock if the dollar continues to rise in the way the Reserve Bank has virtually promised punters that it will.

It would be more useful for the New Zealand economy if the Reserve Bank acts to stabilise interest rates and the exchange rate, and forgets about using them as pawns in the process of stabilising the price level and the GDP.

© 2002 Keith Rankin

© Scoop Media

Top Scoops Headlines


Werewolf: Living With Rio’s Olympic Ruins

Mariana Cavalcanti Critics of the Olympic project can point a discernible pattern in the delivery of Olympics-related urban interventions: the belated but rushed inaugurations of faulty and/or unfinished infrastructures... More>>

Live Blog On Now: Open Source//Open Society Conference

The second annual Open Source Open Society Conference is a 2 day event taking place on 22-23 August 2016 at Michael Fowler Centre in Wellington… Scoop is hosting a live blog summarising the key points of this exciting conference. More>>



Gordon Campbell: On The Politicising Of The War On Drugs In Sport

It hasn’t been much fun at all to see how “war on drugs in sport” has become a proxy version of the Cold War, fixated on Russia. This weekend’s banning of the Russian long jumper Darya Klishina took that fixation to fresh extremes. More>>


Binoy Kampmark: Kevin Rudd’s Failed UN Secretary General Bid

Few sights are sadder in international diplomacy than seeing an aging figure desperate for honours. In a desperate effort to net them, he scurries around, cultivating, prodding, wishing to be noted. Finally, such an honour is netted, in all likelihood just to shut that overly keen individual up. More>>

Open Source / Open Society: The Scoop Foundation - An Open Model For NZ Media

Access to accurate, relevant and timely information is a crucial aspect of an open and transparent society. However, in our digital society information is in a state of flux with every aspect of its creation, delivery and consumption undergoing profound redefinition... More>>

Keeping Out The Vote: Gordon Campbell On The US Elections

I’ll focus here on just two ways that dis-enfranchisement is currently occurring in the US: (a) by the rigging of the boundary lines for voter districts and (b) by demanding elaborate photo IDs before people are allowed to cast their vote. More>>

Ramzy Baroud: Being Black Palestinian - Solidarity As A Welcome Pathology

It should come as no surprise that the loudest international solidarity that accompanied the continued spate of the killing of Black Americans comes from Palestine; that books have already been written and published by Palestinians about the plight of their Black brethren. In fact, that solidarity is mutual. More>>


Get More From Scoop

Top Scoops
Search Scoop  
Powered by Vodafone
NZ independent news