Annus horribilis

Monday 18th December 2000

In one year we've become 24% poorer, watched some of our best brains leave, and lost confidence in our businesses, government and ourselves. It can only get better, argues Rod Oram

Only a year ago we had the world by the tail. Business confidence was near an all-time high, the economy was hot and we were raring to defend the America's Cup. Some said we were great.

Today, confidence is shot, growth is lousy, and the cream of Team New Zealand has fled the country in the company of thousands of our "best and brightest". Business and government are behaving like characters in Shortland Street, our dollar is dubbed the "South Pacific peso", inflation knocks on the door like the Grim Reaper and the Reserve Bank governor talks of "stagflation" while ownership and management of our biggest corporates head offshore. Many say we're abysmal.

Why we lurched from euphoria to funk is easy to spot: just look at the timeline. It starts with Don Brash raising cash rates and voters picking a centre-left government. It ends with Jim Anderton close to spending $80 million on a People's Bank.

But these are simply the trouble spots and trigger points. Much harder to see are the more significant long-term trends that brought us to this sorry state. Put simply, years of political and economic excess have finally caught up with New Zealand. This year we began to work them out of our system in the most profound economic and political shift in a decade.

Trouble spots

What started all this gloom was not, as many business leaders would argue, the election of the Labour-Alliance government. It began the week before, when the Reserve Bank tightened monetary policy for the first time in three-and-a-half years.

From mid-1999, economic activity had taken off with a hiss and a roar, driven by the upturn in commodities and abetted by one-offs such as Y2K spending and the America's Cup.

Within months, a shortage of manufacturing capacity and skilled people was forcing prices upwards. An economy-cooling rise in interest rates was essential; the official cash rate rose half a percentage point to 5%, triggering disquiet from business that reached a crescendo of outrage in early 2000. Even dryish business leaders openly criticised the Reserve Bank's management, saying that the bank was killing the recovery. In reality the Reserve Bank was, and still is, fighting deep-seated problems in our economy - an economy that's volatile, slave to the commodity cycle and seriously under-invested in people, manufacturing capacity and high-value goods.

The electorate made its own judgment on the state of the nation, voting in the first centre-left government in a quarter century. The platform was clear: fiscal prudence, coupled with a small redress of power and benefits for the "have-lesses", and a more hands-on role in economic development. For starters, renationalise ACC, bring in the Employment Relations Act, lift the top personal tax rate to 39%, freeze tariff cuts, fix superannuation and end West Coast logging. "They're communists!" protested a prominent Auckland property developer.

The government delivered on its election promises, sending the business community into a blind fury. Some complaints were justified, such as nasty fishhooks in the early ACC and ERA legislation, but resistance to change got the better of good judgment. The Insurance Council, for example, used dodgy data to make its case against ACC. Business ranted, without listening to what the electorate and the government were saying about economic inadequacies.

Politicians were no better. Prime Minister Clark, Deputy PM Anderton and Finance Minister Cullen listened without understanding, responded grudgingly, and quickly earned a reputation for being "business unfriendly" and "arrogant" (see "Roger, over and out" on page 50 for more on the fallout).

The slagging and sulking would have been laughable if they were not so damaging. They seriously impaired the debate and triggered a nosedive in business confidence at home and in New Zealand's reputation abroad. Together, they cost economic growth. Only once the two sides had exhausted themselves, did common sense and common ground about economic development begin to emerge, helped by October's Business Forum.

Meanwhile, the New Zealand dollar glided as gracefully as a brick. Over the past year it has lost 24% of its value against the US dollar, only bottoming out in early November. Only a handful of currencies, such as the Zimbabwean dollar, performed worse. "I've never been so ashamed to be a New Zealander," a senior business leader wailed on his return home from a foreign trip.

Blaming the government was good sport, but wide off the mark. In 1996 the dollar spiked at over 70 cents to the US dollar for three reasons: it was an alternative to the then out-of-favour US dollar; a flood of immigrants bought Kiwi dollars to import capital; and the Reserve Bank pushed up interest rates to dampen excessive domestic demand and inflation. But the high interest rates only made our financial assets even more attractive to foreigners, adding further upward pressure on the dollar. The deadly double of high interest rates and high currency killed the rural sector, while expensive exports and a flood of cheap imports devastated manufacturers. Hello, current account deficit.

The deeper story

Something had to give. Inevitably, it was the New Zealand dollar. Yes, the US dollar was rising so all other currencies fell. But ours plunged because foreign investors lost their confidence in our ability to address the economy's deep-seated structural problems.

The root problem is political excess, exemplified by blind faith in unfettered markets. Yes, such faith drove reforms essential for this country's survival. But the zealous commitment to pure markets has had five debilitating effects:

We consume rather than save or produce.
Foreigners buy our existing assets rather than invest in new ventures.
We fail to focus resources on what New Zealand does best.
We prevent government from playing a legitimate, constructive role in leadership and economic development.
Vulnerable segments of society have benefited.

Economic excesses flowing from those policy failures are painfully clear. We're living far beyond our means - witness the yawning current account deficit. We import goods and capital to support our first world lifestyle, but can only part-pay for them with exports still dominated by second world commodities. To finance the deficit we sell assets abroad and take on more foreign debt.

Thankfully, the low dollar is now wreaking a profound economic change, doing for us what we were incapable of doing under our own free will. It is discouraging us from debt-driven consumption and encouraging us to produce. Our trade performance is improving. Within a couple of years our current account deficit could be down to around 3.5% of GDP, from a peak of 8.5% earlier this year.

It's nice that the weak dollar is driving exports. But low costs and low exchange rates usually condemn countries to producing low-value goods and services, with a resulting low standard of living - Malaysia makes Protons; Germany makes Mercedes-Benz.

Worse to get better

The supreme challenge to corporate New Zealand is three-fold: to become more sophisticated over the next two decades, so we can earn a good living from high-value products and services; to prove that it's possible for New Zealand to have a world-class home-based and -controlled large company; and to develop myriad small businesses in the same high-value, knowledge-intensive mould.

This year, though, corporate New Zealand failed its mission. Lion Nathan and Brierley Investments packed up and left, while Carter Holt Harvey is exporting its senior management in small teams to avoid detection. Telecom and Air New Zealand pulled off important strategic deals abroad to help secure their futures, but leave the nagging suspicion that if they can they will emigrate too.

Yet from the traumas of this year have emerged the two most vital things of all: new leadership in government and business; and competition of ideas after 15 years of the pure market's intellectual mono-poly.

Pure markets exist only in the heads of economists. Perhaps now we'll get real and be practical, like the rest of the world.

Whether this government can follow through remains to be seen. Many members of the coalition are sceptical, if not outright hostile to the role of business and markets, and even wealth creation. Can business work with such a government? Who knows?

The real danger is a new complacency, a determined "feel good" optimism in spite of the facts. "Hey, this isn't such a bad little country after all," say people guilty about slagging off the place earlier in the year.

"New Zealand is still a good place to do business," allowed a senior member of the Business Roundtable, turning on the charm after October's Business Forum. It might have been the nicest thing a Business Roundtable leader had ever said about New Zealand. But it's wrong. New Zealand's 50-year slide into second world status continues unchecked.

Boosterism is an essential, but cheap prerequisite for the turnaround. It is absolutely no substitute for calm heads capable of rigorous investigation, thought, debate and action - all highly prized qualities, yet again in short supply this panicky past year. If this is going to be our only annus horribilis then New Zealand needs to set an aggressive new course into the knowledge economy.

Rod Oram is an Auckland business writer and frequent contributor to Unlimited. oram@clear.net.nz

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