On Thursday I had a choice of evenings. I could go out for a drink with my attractive young visitor from the United Kingdom, or I could attend the annual general meeting of the New Zealand Institute of Economic Research.
For reasons that frankly elude me, I chose to go to the NZIER AGM. I was interested that they have an AGM, as I assumed they were a private company.
It turns out that the NZIER is in fact a non-profit incorporated society dedicated to economic research. Any “profits” they make they invest in teaching and promoting economics.
There has been a tendency by some on the left to try and demonise NZIER as part of the vast right wing conspiracy, producing reports to please their corporate paymasters.
Apart from the fact their 2009 NZIER economics award went to Brian Easton (whom I’m sure would not object to being described as definitely not part of the right wing), they have have around 100 members, from both the public and private sector. The members elect the Board.
I like their independence, in that the membership fee is relatively modest (for non individuals) at $1,700, and it means they are not beholden to any one large funder.
The AGM was a fairly brief affair, and was followed by the award to Brian Easton. The final paragraph says:
The “advancement of economics and its applications in New Zealand” requires decisions to be made, often in a political context. If politics is indeed the art of the possible, then the boundaries of what is politically possible, let alone desirable, will be widened if the interested and influential public has an adequate understanding of the reasons why certain actions might be considered by policymakers, and of what the consequences of those actions might be, or might be hoped to be. The Award’s recipient has been an outstanding economic journalist, and a participant in public economic debates, bringing unusually broad perspectives to issues of lasting importance, for over 30 years. The public of New Zealand has benefited greatly from his tireless work, and from the exceptional clarity of his writing. He has indeed “advanced the study and understanding of economic matters directly or indirectly affecting New Zealand”, as the Award seeks to recognise and promote.
I disagree with many of Brian Easton’s views, but have always enjoyed the clarity of his writings, and wealth of research. I also appreciated his willingness to debate issues – at one of my first Young Nationals conferences we had Brian and Roger Kerr debate economic policy, and it was a fairly lively debate!
After the presentation, we had an address from Dr Steven Dunaway. I twiittered a few extracts from his address, which got a bit of interested Q&A on Twitter.
Dr Dunaway is an Adjunct Senior Fellow for International Economics at the (US) Council for Foreign Relations. He is a former deputy director of the International Monetary Fund’s Asia Pacific department.
Dunaway talked about global imbalances and the prospects for the world economy (and New Zealand). It was pretty sobering stuff as the point was made economic growth in many countries post-crisis will not be anywhere near as strong as it was pre-crisis. He says
At this juncture, the situation overall is not encouraging. While some policies being pursued will facilitate the adjustment of global imbalances, actions in many countries appear likely to add to imbalances over time, and the lack of needed policy actions—especially structural reforms—in other countries will delay adjustment as well. Consequently, the outlook for recovery and growth in the world economy does not look good. With adjustment in imbalances occurring in the United States that will result in significantly slower growth in demand, the key challenge for the world economy will be to find other sources of demand to take the place of the U.S.
In other words, don’t expect the US to lead the world out of recession into growth. No surprise as their unemployment figures hit almost 10% this week. Guess the fiscal stimulus didn’t work that well!
However, this appears likely to be a daunting task. None of the
other major economies appear inclined to make the necessary changes in policies to deal with their imbalances and raise their demand. In these circumstances, the world is likely to face a prolonged period of slower growth and greater instability than it has known for several decades.
For a small, open economy like New Zealand, this situation will pose a very inhospitable environment. While there is little that New Zealand can do to change things, the key to making the best of a bad situation will be to retain the economy’s flexibility and adaptability.
So if we want unemployment to stop growing, and start shrinking, we need to flexible and adaptable. And it means we don’t have so much the luxury to say “Let’s just ignore all those minerals in the ground”.
He then looks at the US:
There are reasons to believe that the U.S. household savings rate will rise significantly above its current level. Households have experienced a substantial decline in financial wealth, as well as a sharp fall in the value of housing. Savings will have to rise as individuals seek to rebuild their wealth. …
The U.S. government will also have to increase its savings to deal with the massive fiscal deficit that has opened up, …
The conclusion is:
Therefore, it can be expected that national savings in the United States will rise substantially in the period ahead. Thus, adjustment in the U.S. savings and investment imbalance will take place and the current account deficit will narrow. Consequently, demand in the United States over the next decade or so will grow substantially slower than it has in the preceding three decades.
So how about Europe:
Europe is an unlikely candidate to pick up the slack in world demand resulting from slower U.S. growth. Major European countries—particularly Germany—look likely to remain heavily dependent on exports to drive their economies. This situation reflects in part a sense of complacency among the Europeans and a lack of political will, especially in current circumstances, to make some difficult policy choices.
A good start would be their agricultural protectionism and subsidies.
No serious consideration is being given to diversifying their economies by removing barriers that constrain Europe’s growth. There is no appetite for dealing with the significant rigidities that exist in labor and product markets. Instead, the Europeans are content to wait for world growth to resume.
But the biggest problem is the Euro:
But the biggest problem for Europe is within the euro area. The area’s southern countries (Portugal, Italy, Greece, and Spain) have become noncompetitive both within the euro area and externally. Since they are now members of the euro, they cannot rely—as they have in the past—on changes in their nominal exchange rates to produce a real depreciation in order to restore their competitiveness. They have only two choices. They can raise competitiveness by improving the efficiency of their economies through structural reforms. Or slow economic growth in these countries to allow an improvement in competitiveness through lower inflation than in the rest of the euro area. The latter is the likely way that competitiveness will be improved because of a lack of political will to implement needed reforms in these countries’ product and labor markets. As a result, the countries of Southern Europe are in for a long and economically painful adjustment. This adjustment is likely to severely test the future of monetary union and the euro.
Dunaway actually went on to say he thought some of those countries might even fall out of the Euro.
So we look at Japan:
Japan is expected to do little to pick up the slack in world demand. The country appears to be on the verge of slipping into its second major deflation in the last two decades.
And can they improve:
The only hope for lifting Japan’s potential growth rate and domestic demand over the medium term lies in implementing badly needed structural reforms—especially increasing the flexibility of product markets and improving access to the labor market. Enacting such measures would entail taking on entrenched vested interests and changing cultural norms.
The short version of this, was Japan needs to get way more women into the workforce.
And then China:
The low cost of capital coupled with the poor intermediation of savings by the major state-owned commercial banks has resulted in substantial resources being directed toward the large state-owned enterprises, which tend to be in capital-intensive industries. As a result, production in China has become very capital intensive, creating the rather ironic situation that output growth does not generate much employment growth in a country that has such a large pool of underemployed workers. The official targetfor growth is set at 8 percent because that level of growth is viewed as being required to produce the 1-2 percent of employment growth needed per year to absorb new entrants to the work force and reduce somewhat the substantial underemployment of labor in the rural areas.
So even China is no silver bullet. But some advice for them:
Financial market reform is also needed to improve the intermediation of savings in China. Lifting the cap on deposit rates would not only help push up the cost of capital, it would also increase competition in the banking sector and provide incentives for banks to expand credit to new customers. Bond and equity markets need to be more fully developed to provide alternative sources of financing for firms and a much broader
array of assets for households to invest in. Small- and medium-sized firms have had to rely largely on retained earnings or the assets of their owners to finance investment. Consumers also have had limited access to credit. Better credit access and higher yielding assets to invest in would reduce household saving and raise household incomes over time, boosting consumption.
And finally we have New Zealand:
The key to assessing implications of the current account deficit for New Zealand’s future is to understand the sources of the deficit and how it is being financed. New Zealand’s current account deficit does not really look to be part of the problem of global as defined in this paper. Structural problems in New Zealand’s economy do not appear to be a factor contributing to the deficit. Looking at macroeconomic level data, the deficit also does not appear to arise from a basic imbalance between savings and investment.
So far so good.
Some indirect evidence as to whether a serious imbalance existed between savings and investment can be inferred from the behavior of New Zealand’s exchange rate. If domestic demand in New Zealand (particularly driven by low savings) had been a major factor behind the rise in the current account deficit, then it would have been expected that the exchange rate would depreciate. Instead, the exchange rate appreciated strongly over the period after 2006 when the current account deficit was rising sharply. This currency appreciation suggests that it was capital flowing into New Zealand that in effect pushed the current account into a larger deficit.
A useful context for the debate over our current account deficit.
In the end, it is obvious that there is little that New Zealand can do to escape the effects of the slow recovery in the world economy that is in prospect. It can also do little to change this outcome. With a slow world economic recovery, commodity prices can be expected to be relatively stagnant for some time, especially prices for the type of “soft” commodities that New Zealand produces.
To survive and prosper the best it can in such a hostile environment, New Zealand’s economy will have to retain its considerable flexibility and adaptability. This is the only way a small, open economy will be able to cope with the stiff challenges that it is likely to face.
And this is why it is important we have flexibility in not just capital markets, but also labour markets. I’m not an advocate for no minimum wage, but consider as youth unemployment soars, how many more young people may have kept their jobs if youth rates had not been abolished.
After the speech we had dinner at Icon Restaurant. Around 50 – 60 people all up. As I blogged in another post my table discussed the pros and cons of intensity based carbon credit allocations in trade exposed industries, and it amused me that it was probably the only time one could ever have such a discussion over dinner, with everyone participating!
So all in all, was an interesting night.Tags: Brian Easton, NZIER, Steven Dunaway