[pf] NZ$1=US$0.43 now, was US$0.53: "Forget the doom and get ready for a

[Positive Futures list: from last weekend's New Zealand Herald.   D.]

Date: Thu, 31 Aug 2000 21:05:11 +1200
To: GreenViews<GV@greenLists.org.nz>
Subject: [GNGV]Forget the doom and get ready for a boom

http://www.nzherald.co.nz/storyprint.cfm?storyID=149132

Not a Banana Republic
   Keith Rankin, 25 August 2000
  {Keith Rankin is a political economist and economic historian from
Auckland, New Zealand. WWW: http://pl.net/~keithr/ }

The depreciation of the New Zealand dollar is good news. It is setting us
up for a decade of high economic growth and reduced dependence on foreign
credit.

So why all the gloom and doom? On August 12, The Herald reported National's
finance spokesman Bill English as saying "The weak dollar is making the
country poorer. When the exchange rate drops as significantly as ours has,
someone ends up poorer. Even exporters know you can't get rich on a weak
currency".

The problem is that a beating down of our currency feels much like an All
Black defeat. Indeed, now that both seem to be becoming a habit, it is easy
to feel that our nation is stuck in a rut.

It isn't. We don't have to believe Mr English. We should turn to our
history books instead, and see just what does happen when countries like
ours face a "currency crisis".

The Great Depression of the 1930s is a good place to start. Following the
election of a Labour Government in 1929, Great Britain faced two years of
crisis; a crisis that led to the collapse of the gold standard. By 1931,
the pound sterling had been overvalued for five years. Then, with Britain
unable to meet its liabilities, sterling floated free. It lost 40% of its
value against the $US and the Western European currencies.

The result was, for Britain, a period of sustained expansion. Although
triggered by the "collapse" of the pound, the British recovery also
depended on a low interest rate policy, an end to free trade (which reigned
from 1846 to 1931), and a liberal unemployment benefit.

The British recovery was an extraordinarily significant event, because it
led the world out of the worst economic crisis of the century. In contrast,
the American and French economies, remained grounded through the 1930s. It
was the British economic recovery that pre-empted a lurch towards
totalitarian solutions. (Unfortunately, the British recovery came too late
to prevent Germany's unfortunate experiment.)

In the years after 1926, New Zealand's pound, tied to Britain's, was
overvalued, to the detriment of our farmers. The Minister of Finance for
most of that time, William Downie Stewart, was a staunch supporter of the
strong pound. Despite widespread advice from independent economists that
the pound should be devalued, Stewart held out, and the depression deepened.

Early in 1933, Stewart resigned rather than sanction a devaluation. The New
Zealand pound was duly devalued by 25%. In the 10 years after the
devaluation, the national economy grew at an average rate of 7% per annum,
its fastest-ever growth spurt.

Fast forwarding to the 1960s, devaluations in Britain and New Zealand in
1967 were critical to the resolution of both countries' crises. Once again,
there was far too much unneeded angst surrounding these devaluations.
Commonsense decisions had been opposed out of a sense of misguided patriotism.

In the 1975-86 period, it was Australia's turn to get stuck in the economic
blues. Unemployment really was higher in Fraser's Australia than in
Muldoon's New Zealand. Then, in 1986, Treasurer Paul Keating, with a
well-timed masterstroke, called Australia a "banana republic". The
Australian dollar plunged. The Ocker economy took off on a growth spurt
that never really came to an end.

The huge unexplained differences in the economic fortunes of Australia and
New Zealand during the 1997-98 Asian crisis date back to the momentum of
Australia's post- banana republic economy. Contrast the inertia of our
economy since 1987.

In 1992, the British pound took a hiding reminiscent of 1931. The grossly
overvalued pound floated free from the European Monetary System (EMS). As
in 1931, Britain moved quickly into a sustained growth spurt. If George
Soros hadn't taken on the Bank of England and won, Britain would have got
stuck into the kind of dependency trap that we were stuck in through the
nineties.

In 1997, the currencies of Malaysia, Thailand and South Korea were
depreciated in what came to be known as the Asian crisis. Those countries
are in full recovery mode now. In each case, the crisis has turned out to
be a correction that had to happen; a blessing.

In 2000 it's our turn. This is the second wave in a currency correction
that began in May.

>From the financial reforms of early 1985 to Don Brash's failed attempt in
May to push up the value of our dollar, New Zealand has been living a
credit card economy rather than trying to earn a living. To pay for our
imports, we just paid one credit card by getting another.

The way out is through an exchange rate that enables us to service our
external debt from foreign exchange earnings, while replacing imports with
the products of our own labour.

There is no shortage of knowledge workers and other useful people who would
like to live and work in New Zealand, even at markedly lower levels of
remuneration than in the countries we compare ourselves with. All we need
to do is employ them with decent working conditions, and salaries high
enough to enable them to raise families while paying a mortgage.

The year 2000 is the beginning of a new era. The nightmare of 1984 is over.

© 2000  Keith Rankin

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sent on to Positive Futures by David.
(David MacClement) davd@ihug.co.nz 
http://www.emucities.com.au/member/davd/index.html#top
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