How the left eschewed logic to criticise transtasman currency

Friday 18th January 2002

BLAMING THE IMF: Jane Kelsey

The launch of the euro as the single currency of most European Union member countries has renewed discussion on whether Australia and New Zealand should do the same.

The government floated the idea fairly early on in its term, only to be knocked back by the Australians, who sniffed we could adopt their roo but a new common currency was not on the cards.

There is some merit in a single currency for transtasman investment purposes. Investors in bonds, shares and managed funds across the ditch carry exchange rate risk that can make a hash of paper returns. That happened to managed funds a while back, for example, when the kiwi escalated against the roo.

In Australian dollar terms, investors here were making a profit but on conversion into New Zealand dollars they were breakeven. Australasian investment flows could be enhanced considerably to mutual benefit if exchange rate risk were eliminated.

One bizarre critique of transtasman currency union was proffered by left-wing Auckland law professor Jane Kelsey in the New Zealand Herald (Jan 4). She warned New Zealand could end up like debt-defaulting Argentina if this course was taken. She had apparently become an expert on the Argentine economy due to visiting the country as the guest of the University of Buenos Aires in August 2001.

Her argument against a common Australasian dollar turned on identification of the proposal as a case akin to the former fixed 1:1 convertibility rate of the Argentine peso to the to the greenback. Never mind that if there is a common currency convertibility does not apply because convertibility requires not just one but at least two currencies. Ms Kelsey was not about to let logic get in her way. Nor facts, as it emerged.

The villain of the piece for Argentina, Ms Kelsey intoned, was convertibility of the peso to the greenback. She claimed Argentina's woes in its alleged loss of export competitiveness were due to the fixed peso exchange rate.

Extraordinarily, she wrote, "Convertibility prevented the Argentine government from funding its budget by expanding the money supply or devaluing to provide relief to exporters."

Whoa! Stop right there. Convertibility has no influence on money supply in itself. Ms Kelsey left out a critical piece of information she must have known. Since 1991, Argentina had operated a currency board. A currency board requires the country not to print money outside of a specified ratio to its existing foreign currency reserves. Convertibility then comes into play because the country will declare the rate at which its own money translates into the reserve foreign currency.

In Argentina's case, its currency board was by law not permitted to issue pesos for a ratio less than 66.6% backing of US dollar reserves, although in practice the board stayed at 90% or more. It was currency board rules, not convertibility, that was the critical limit on money supply. Because of the currency board restriction imposed on money supply, the Argentine government instead had to raise taxes and increase foreign borrowings - imprudently as it turned out.

No one has suggested a transtasman dollar would be based on a currency board. The euro is not based on a currency board either. Incidentally, Hong Kong operates a currency board but its successful example is less useful to Ms Kelsey's political purposes.

And were Argentina's exports really that badly affected by exchange rates? Kurt Schuler in his article "Setting the record straight about Argentina" <http://users.erols.com/kurrency/argrec.htm> does not think so.

He writes: "Exports in the first eight months of 2001 were 3.7% higher than in the same period in 2000 while imports were 9.5% lower. If the rest of the economy had been growing as fast as exports over the last few years, Argentina would not be in a recession." So much for Ms Kelsey's comments about convertibility and exporting.

Ms Kelsey castigates the wicked IMF for lending Argentina emergency funds in return for austerity measures that cut government, and particularly welfare, spending and praises Brazil for its supposedly wise and benign abandonment of convertibility in the aftermath of the Asian crisis.

Brazil's economy collapsed as a result and was restored by - surprise, surprise - emergency IMF loans and a quid pro quo austerity package. But Ms Kelsey conveniently suppresses this evidence of contradiction in cheering Brazil and booing Argentina. Argentina's problems stem not from convertibility but failure to undertake "neo-liberal" reforms so hated by Ms Kelsey. Its economy is still too reliant on primary production (shades of New Zealand) and outdated manufacturing.

Its welfare and federal political systems are too costly and its militant trade unions too powerful. All this is the post-World War II legacy of the Francoist Juan Peron and his Labor Party and it is the same Peronists who now claim they will rescue Argentina by ending the market economy.

None of Ms Kelsey's economic arguments about Argentina stands up on critical matters of fact and logic, nor are we left any wiser as to why New Zealand should not have a common currency with Australia.

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