Top Scoops

Book Reviews | Gordon Campbell | Scoop News | Wellington Scoop | Community Scoop | Search

 

The Election & the Provincial-Metropolitan Divide

The Election, the Provincial-Metropolitan Divide and the Exchange Rate


by Keith Rankin
22 September 2005

Many commentators have noted that there were two elections on Saturday. The provincial hinterland voted National; ie they voted for a change of government. Auckland, Wellington, Christchurch, Dunedin and Palmerston North voted for no change.

There is a simple reason for this. About 45% of New Zealand workers earn their living in the tradeable sector of the national economy. The remaining 55% belong to the non-tradeable sector. A greater proportion of the provincial population identifies, in particular, with the export economy. The non-tradeable sector however thrives on cheap imports.

The tradeable sector is any business which competes in the main with overseas producers: eg farming, other primary production and manufacturing. Many services are now in the tradeable sector – eg English language education – although as yet few service producers identify with the tradeable sector. Retail services – a major source of employment in the larger cities – is definitely not part of the tradeable sector. K-Mart competes with Briscoes, not Wal-Mart.

Businesses in the tradeable sector sell at prices set in international markets. Businesses in the non-tradeable sector sell at prices set in domestic markets.

The tradeable sector prospers when the New Zealand dollar exchange rate is low; world prices then convert into many New Zealand dollars.

The non-tradeable sector – especially retailing – prospers when the exchange rate is high. Imports are cheap, and output prices are not constrained by global competition.

Through 2005 the New Zealand dollar has been substantially over-valued. Those who identify with the metropolitan non-tradeable sector think that's just fine. The provincial heartland of the tradeable sector is hurting. Most commentators in the bigger cities barely notice this hurt.

So, my theory is that the larger than normal divide between the regions and the cities is due to the over-valued exchange rate. No further explanation is required.

The problem that the exchange rate is causing was reinforced on Wednesday with the release of the June quarter balance of payments statistics. The annual current account deficit in $11.9 billion and rising. The September quarter is the weakest in New Zealand for exports, while being strong for imports, coming ahead of Christmas. By economic fundamentals the New Zealand dollar should be falling in value this month. But it's not. Since the London bombings on July 7, New Zealand has looked like a good place for global investors to park their money, especially given our internationally high interest rates.

Before Rogernomics (in the mid-1980s), the current account of the balance of payments was regarded as the most important indicator of New Zealand's economic health. Robert Muldoon's "Think Big" was an important initiative designed to reduce our balance of payments deficits.

With Rogernomics, the mantra was that a floating dollar would automatically cure a current account imbalance. The theory did not work, because it was not trade that determined our dollar's exchange value. However, we continued to believe that the current account was of no consequence. While we are exhorted to save more, our monetary authorities present us with price signals that require us to overspend on imports.

Most commentators who do bother to discuss the current account say that the dangerously high deficit is caused by our low savings rate. They say that anything that encourage us to spend more – eg tax cuts – will further aggravate the $12 billion current account deficit. They are wrong. The problem is the distorted price signals that arise from an exchange rate that is at least 20% over-valued.

The principal reason for our over-valued dollar is our high interest rates, set as monetary policy by the Reserve Bank. Too many commentators say that lower interest rates will stimulate spending on imports. They cite the current account problem as a reason for keeping interest rates high. They could not be more wrong. The problem can only be cured by reduced interest rates.

The exchange rate is both the main cause of our balance of payments crisis and of our increased metropolitan-hinterland political divide. High interest rates are the main cause of our high exchange rate. The Reserve Bank must lower interest rates in an orderly manner, before global financial markets drive our dollar down in a very disorderly manner.

*************

keithrankin @ woosh.co.nz


© Scoop Media

 
 
 
Top Scoops Headlines

 

27-29 Sept: Social Enterprise World Forum Live Blog

1600+ delegates from more than 45 countries have came together to share wisdom, build networks and discuss how to create a more sustainable future using social enterprise as a vehicle. Attending the Forum were social enterprise practitioners, social entrepreneurs, policy makers, community leaders, investors, activists, academics and more from across the globe... More>>

HiveMind Report: A Universal Basic Income For Aotearoa NZ

Results from this HiveMind suggests that an overwhelming majority of Kiwis believe that due to changing circumstances and inefficiencies in the current system, we need a better system to take care of welfare of struggling members in our society. More>>

ALSO:

Scoop Hivemind: Medical Cannabis - Co-Creating A Policy For Aotearoa

Welcome to the fourth and final HiveMind for Scoop’s Opening the Election campaign for 2017. This HiveMind explores the question: what would a fair, humane and safe Medical Cannabis policy look like for Aotearoa, NZ in 2018? More>>

ALSO:

Lyndon Hood: Notes On National’s Election Campaign, In Poem Form

Nationyl’s bitumen-ing / As they du du / Seed groweth / River floweth / Then ‘dozer drives thru / Highway ensu. More>>