The Real Economy
The ‘Real Economy’ is made up of the farmers, manufacturers, tourist operators and
service providers that sell to the world and generate New Zealand’s external income.
As Angus Tait once said, “There are three ways to generate wealth; you farm things,
you make things or you dig things up.” That is the essence of the real economy.
In the tradeable economy, firms compete with others anywhere in the world in any
market to sell their goods and services. The domestic market in New Zealand, for
most goods and services, is small. Firms here must compete locally and in export
markets to have an expectation of earning sufficient returns on their often sizeable
investments to make those investments worthwhile. Without sustained investment in
innovation, research, product and process development, and more generally productivity
improvements competitive advantage will lost as others improve what they offer to
their customer.
This competition on a global scale brings many additional dimensions to the competitive
framework. When a local firm competes with another local firm monetary and fiscal
policy settings, regulatory requirements, finance costs, health and safety, compliance
costs or even carbon costs are not competitive dimensions, they are the same for
all competitors. Once competing in New Zealand against imports, or in offshore markets,
these matters become a critical competitive concern.
These additional concerns show themselves as competitive disadvantage in terms of
cost generating lower returns on the effort expended. In this way Government policy
choices have a significant bearing on firms’ success.
So the non-traded economy might just shrug and say fine we only compete with locals
so we don’t care what the policy framework might be as it is the same for everyone.
That is correct to a point, but policies that hold up interest rates in the name
of pressing back against inflation overvalue the exchange rate make imports and
foreign holidays cheaper in the short term, but damage the ability of exporters
to earn a living. That, ultimately, threatens the sustainability of the economy
as a whole.
Unfortunately, in the short term the objectives of the tradeable and domestic economies
are in conflict (high exchange rate and low cost imports vs low exchange rate and
better returns from exporting), but in the medium and long term, the domestic economy
can only be successful if the tradeable economy can function effectively. To compete
globally good returns from exports are necessary to fund the product and process
development necessary to remain competitive. Large investments in intellectual property
and new machinery need higher returns to fund them.
Without investment and development the tradeable sector falters, jobs are lost or
never come into being and demand in the domestic sector falls. Think of the whole
economy as a table, the four legs represent the export sector (primary, processed
primary, manufacturing and services) the domestic or non-traded (the tabletop) economy
is supported by the export sector (legs). The domestic economy can only grow sustainably
if the legs can provide adequate support.
Wealth transfers to the top of the table (domestic economy) from the legs (our exporters)
via an overvalued exchange rate are a problem that threatens the economy as a whole.
Our choice of policy settings for the past 20 years or so has consistently overvalued
our currency; change is needed to rebalance our policy settings and arrest the decline
of our export sector and more broadly, over time, the decline of our whole economy.
