New policy: take your money and give it to exporters

03/02/2012 § 6 Comments

Here we go again. The NZD/USD exchange rate is up over 0.83. The exporters are complaining and rightly so, because their business is now harder. MED is complaining on their behalf, which is a bit less ‘rightly so’.

When we first moved to New Zealand, the NZD/USD exchange rate was about 0.42. Great for exporters! Sell milk powder in US dollars, and then exchange them two-for-one for the home currency. Sweet.

But…the university library had to stop buying journals and books because they were too expensive. Several years later, they were still trying to repair the damage to the collection. And what was true for knowledge resources must have been true for physical ones. Companies must have been making do with old equipment rather than buying new overseas technology.

Now the situation is reversed. The high exchange rate makes it harder to export successfully. On the other hand, petrol is cheaper, computers are cheaper, overseas holidays are cheaper, etc., etc. Whether to use the high exchange rate to buy capital goods or consumer goods is a decision being made in millions of households and businesses. But, the favourable rate is good for lots of us in lots of ways.

When the NZ dollar went up, you as consumer got a raise.

So, has MED in its Briefing to the Incoming Minister pointed out that the high exchange rate means we are all a little bit richer? Don’t be silly. ‘Cause, see, it’s all about the exports. The opening sentence:

The Government’s aim of building a stronger economy will require a substantial increase in the share of exports in the economy.

The analysis, though, is incoherent. Try this passage:

Although the boom in commodity prices has protected commodity producers, it has also supported the exchange rate, resulting in continuing pressure on non-commodity exporters.

Let’s try that again. There has been a boom in commodity prices. As a result, there is strong demand for NZ exports. As a direct result of strong demand for NZ exports, we have a higher exchange rate. That’s what MED is saying. People want our stuff and they are willing to pay for it. Thus, the currency is strong. Thus, and they don’t say this, all those imported goodies are cheaper. Yay!

So what’s the problem? MED continues:

These [non-commodity] exporters cite the persistently high exchange rate as the most significant obstacle to their growth (excluding food and beverage exporters).

Translation: we have successful businesses in some sectors of the economy. They face good market conditions with high demand. They have also figured out their production processes and are profitable. They are making money. Other sectors aren’t doing so well. For whatever reason, they aren’t making money. They haven’t figured out the market, they have made production efficient enough, whatever.

What is MED’s plan? To make you poorer. To take away your raise. To make petrol and TVs and computers and travel more expensive for everyone in New Zealand, to benefit a few:

Measures which help to increase household savings and reduce public and household debt – among others – will help rebalance the economy and reduce exchange rate pressures. This will therefore continue to be a government priority.

At least we’ve been warned.

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§ 6 Responses to New policy: take your money and give it to exporters

  • Great post.

    I’m sure I remember Canadian work a decade ago showing that manufacturing exporters could be net better off with higher exchange rates given their reliance on imported intermediate machine goods and deterioration of capital stock over a period of weak exchange rates.

  • Hi

    If that was all there was to the reasoning behind MED’s policy advice, I’d have to agree with you.

    However, I would like to think our reasoning was a bit more subtle and empirically based than that. Some of it is contained in the Occasional Papers that we publish on our website.

    Of course, I don’t claim that our advice is 100% right – only that it is the best judgement that we can make based on the evidence that we have.

    If you disagree with our thinking and would like to engage in a more substantive discussion on it, I would welcome that – as indeed I already have with some of your colleagues. A contest of ideas can only help advance all our thinking.

    Regards

    Roger Procter (Chief Economist, MED).

    • Bill says:

      Hi Roger –
      Actually, I expect that the internal discussions at MED were subtle and informed. The BIM, though, has some problems. The main problem is no attention to opportunity cost. Sure, yes, we can put money into industrial policy or try to affect the exchange rate, but these actions have important indirect costs. My preference is to foreground those costs.
      Also, the language needed unpacking or translating. The meaning of the words was hidden. We can argue about the accuracy of my translation, but don’t think it was too far off.
      I expect that MED has in mind some sort of Dutch disease or path dependency model, arguing that a temporary boom in dairy is damaging attempts to build a sustainable, broad-based economy. The step between that and rent-seeking is small. MED should probably be clear about the difficulties.
      Thanks for the offer to talk about it more — I might take you up on that.

  • I agree there are costs of doing things, including particularly the risks of rent seeking and simply doing the wrong thing. On the other hand, doing nothing will give us what we are currently getting – which is a slow slide down in GDP per capita relative to the OECD mean. Which of course is not the same thing as saying that any action is better than no action.

    My own expectation is that the boom in dairying is likely to be more structural than temporary, which we should welcome (and be wary of – remmber wool). So the question then -which we have to form a view on – is what if anything should we be doing given that circumstance.

  • […] for folk economists the burden of proof falls on us .  Also Groping to Bethleham discusses this here and […]

  • […] reaction, well, there were two. First, let me send you to an earlier post about giving money to exporters. I do understand that a high exchange rate hurts exporters — ce sont mes oignons. The point […]

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