Comments

David Thompson Posted:
So very, very true. It beggars belief that we consider ourselves to be a developed nation when so much of our economy is based on selling milk powder or logs. BTW, I own a Plinius amplifier (my second) that drives a set of Theophany speakers.
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David Thompson Posted:
A robust but sobering report. It concerns me that confidence is rising, yet sales and exports are down and "manufacturers and exporters are still lagging behind other sectors". Surely we should wait until we're earning more money before we start spending more?
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siemens Posted:
Yes true! The only thing that will never die in this world is the nature and its science behind it. Great post.
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Kieran Ormandy Posted:
Thanks for the question Steven, Germany has seen increases in manufacturing employment since 2009, and Switzerland has had stable manufacturing employment between 2006 – 2011, even in the face of ongoing Euro-zone issues. Korea has seen increases in manufacturing employment since 2008 and Israel experienced large increases since 1998, while being stable over the last 4 years. Singapore has had increases in manufacturing employment over the last two years. These countries all value their manufacturing sectors and work to protect them, this is reflected in the above numbers and their performance through the GFC. Note data around the above examples was sourced from OECD labour market stats.
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John Walley Posted:
Point one: you should have no doubt what our Association says publically represent the views of our members. Point two: we don’t knee jerk responses, if you trace back our comments around NZPower you will see them link all the way back to our research in 2004 and 2005. All that material is fully linked from our comments above. Point three: you will note our comments on major users, sadly the same advantage does not accrue to smaller industrial users. The perverse incentives of the LRMC approach in all this are well known. Point four: the NZMEA is not like any other Association in New Zealand we admit only manufacturers and exporters into membership, and our public expressions are the views of that restricted membership.
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26/4/10

MEA Backs More Regulation


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This article published in The Press on March 20 presents the Manufacturers and Exporters views on how the economy is going, what changes need to be made and what obstacles are preventing such changes.

MEA Backs More Regulation


As the dust settles on the global economic crisis and New Zealand starts its recovery, the fundamental levers behind our economy are coming under increasing scrutiny and, by some, found wanting. BEN HEATHER reports.

Recently the Tax Working Group said our tax system was broken and the Don Brash-led Taskforce 2025 report recommended sweeping, if predictable changes, including flatter tax, more privatisation and less regulation.

This approach appears to have the backing of big business and to some extent, despite a lukewarm public response, the Government.

However, another very different approach to reconfigure our economy also appears to be gaining traction, advocating more regulatory tools for the Reserve Bank and changes to the tax regime, designed to suck money out of "tax havens" - read property - and into productive businesses.

Unsurprisingly, one of the biggest advocates of this position in New Zealand is the Manufacturers and Exporters Association.

Founded in 2007 through the merging of the Canterbury Manufacturers Association and the New Zealand Engineers Federation, the MEA has been a strong critic of New Zealand's fiscal and monetary policy.

MEA chief executive John Walley claims the Reserve Bank's focus on the Official Cash Rate as the only tool in the regulatory box has left exporters battered by a volatile and overvalued exchange rate at the mercy of speculators.

Compounding this, our tax regime favours a property investment merry-go-round at the expense of an economy based on value-added growth. The OCR also appears to have been ignored by banks, which Walley says lent recklessly in the good times and tightened the purse strings in the bad times, usually to the detriment of already credit-starved businesses.

Walley says while recession has brought official interest rates down to 2.5 per cent, New Zealand still has one of the highest rates in the developed world and an overvalued dollar continues to wreak havoc with exporters.

"When there's been inflationary pressure in the economy we have arranged matters so all that pressure rests on the tradeable sector and the tradeable sector buckles under the weight, " he said. "When we die, everybody dies."

Exports represented about a third of New Zealand's gross domestic product, about $40 billion in the year to March 2009. But export growth has been increasingly lagging behind the OECD average since the 1970s.

This trend is mirrored in the sluggish growth of GDP per capita compared with Australia, a fact much bemoaned in reference to almost any economic problem in New Zealand.

The solution, at least according to Walley, is tightening controls on the volume of money, printing money to control the exchange rate, introducing a capital gains tax, and giving tax breaks for research and development.

Variable ratios on how much money banks are required to hold in reserve relative to lending should also be introduced, he says. These could be raised to discourage reckless lending in the good times and lowered to prevent tightfistedness in the bad times.

Kiwibank should also be used more aggressively as a foil against anti-competitive behaviour among the bigger banks.

Other options could include an excise tax on an essential commodity, such as fuel, which could be adjusted to pump more or less money into the economy.

"We need ways to control the volume (of money) not just the price."

Much of this runs against the long-established wisdom in New Zealand, enshrined in the 1989 Reserve Bank Act, that a light hand on the economy is best and controlling inflation is where it ends.

Qualitative easing, another word for printing more money to bring the dollar down, gets no airing in Government circles despite being used recently by central banks in both Britain and the United States.

But the financial crisis has prompted a lot of soul searching by the world's financial institutions and governments and some of the MEA's views have been echoed elsewhere.

The International Monetary Fund, the supposed bastion of free trade and globalisation, released two reports last month cautiously supporting capital controls to protect countries from the vagaries of an exchange rate controlled by speculators.

In the reports, the IMF says while most countries welcome foreign investment, sudden surges could pump up exchange rates, undermine exporters and lead to asset bubbles, such as an unsustainable property boom.

It also says central bank's single-minded focus on controlling inflation through interest rates was no longer enough and they should look at broadening their monetary tools, including forcing banks to hold bigger capital reserves.

Walley likens the reports to the Vatican coming out in support of condoms and says it undermines the prevailing wisdom in New Zealand that our status quo is "best practice".

"This government, and previous governments, don't want to scare the horses."

But Deputy Prime Minister Bill English said while he was "reasonably open-minded" about some of MEA's ideas, intervention in the exchange rate, either by the Government or the Reserve Bank, was not on the table.

English says while the Government has stopped short of a capital gains tax, planned changes in the tax system were aimed at avoiding the previous boom cycle of New Zealanders incurring heavy debt by buying houses off one another.

"We are looking at increasing the taxation on property."

The Government was aware exporters had had a rough ride for the past five years but action is being taken, he says, pointing to the Reserve Bank introducing minimum long-term funding reserves for all banks.

These reserves, to be introduced at 65 per cent next month, are intended to stop banks leaning on short-term foreign debt when the economy picks up.

"We want to avoid the excesses of the past cycle that put manufacturers in a really difficult position. The Reserve Bank has started making changes that might help avoid an anti-manufacturing cycle."

Walley says the new requirements on long-term funding reserves was a step in the right direction but would be bypassed by banks without wider reform.

Many of the MEA's ideas are supported by BERL's chief economist Dr Ganesh Nana, who agrees reliance on the OCR has been bad for New Zealand and harmed one of our biggest tickets to prosperity: exporting.

"The New Zealand export sector is what pays our way," he says. "We're not going to get rich by selling houses to one another."

Nana says there is much frustration among exporters who are slowly being ground down by policies tipped against them.

"I think we've imbedded in this country the process and policies that create a low wage economy. We've taken up this wonderful policy that we thought was so great but it hasn't worked."

Nana and the MEA perspective seems to get little airing in wider public debate perhaps because of the complexity and breadth of change suggested.

The MEA is also, like any lobby group, self-interested, as manufacturers and exporters would benefit first if these reforms were implemented.

Unsurprisingly, the reforms were quickly rubbished by the New Zealand Business Roundtable executive director Roger Kerr, who described MEA's ideas as "maverick" and without the support of "serious economists".

"I think its founded on broken economics," he said.

Reliance on the OCR was "totally conventional" and in line with best practice overseas, he says.

The volatility of the kiwi, cited as so destructive by the MEA, was not out of line with other currencies, he says.

"Exporters have learned to manage that through hedging."

Kerr points to stable inflation as evidence the status quo in New Zealnd is right and says the debate has been raging for more than 20 years.

But while the argument is the same, the global financial crisis might have shifted the goalposts.

An IMF report Rethinking Macroeconomic Policy, says small countries that abandoned controlling inflation as their one guiding light and fiddled with their exchange rate during the economic crisis acted sensibly.

"Central banks in small open economies should openly recognise that exchange rate stability is part of their objective function," the report said.

This runs contrary to a whole generation of economic wisdom in New Zealand, championed by Roger Douglas and Ruth Richardson and never seriously questioned by any government since.

The MEA would say it is time for another look.
 



tags: monetary policy, fiscal policy, ocr, capital gains tax

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