Bryan Gould: Key's legacy leaves us with grim future

John Key believes he is creating a stronger economy. Photo / Greg Bowker

Any advantage we have as a primary producer will be lost when we are at the mercy of foreign owners

As he finds himself sailing into increasingly choppy waters, it is perhaps not surprising that the Prime Minister's thoughts might turn to the judgment that history might make of his term in office.

There have been several occasions recently when John Key has speculated on that matter and, among other predictions, he has confidently forecast that he will be remembered as having left the economy in a stronger condition than when he took over.

It is hard to conjure up much by way of statistical evidence to support that assertion. Indeed, the contrary seems more likely - that history will regard the Key Government as having been responsible for a further and possibly decisive relapse in a long-term comparative economic decline that might even threaten New Zealand's viability as an independent, self-governing state.

Could such pessimism be justified? Surely, it may be argued, in a world that is likely to provide an ever-expanding market for premium food and other primary products, New Zealand's expertise in this area will guarantee a rosy future?

That should certainly be the case; our advantages as a primary producer, coupled with our political stability, our freedom from corruption and our access to expanding markets should mean increasing prosperity.

But optimism on this account has to be tempered by our Government's insistence on pursuing policies that we know from hard experience will hold us back rather than take us forward. Despite the advantage of conditions, like a stable banking sector and buoyant export markets, that are more favourable than most other countries have enjoyed, we have spent the last four years or more bumping along the bottom of recession.

Even more worryingly, as a recovery of sorts gets under way, it is driven by factors that make it inevitable that we will compound the very problems that have dogged us for decades.

Far from resolving our economic problems, we are about to intensify them. The long-awaited "recovery" is a function of increased domestic consumption and a building asset inflation. We are heading straight back into the same old familiar vicious circle, and each time we do a circuit, more escape routes are closed off.

The Auckland housing bubble and the consequent diversion of savings and bank-created credit into property rather than the productive sector means that our manufacturing and other productive industries are denied the investment they need to compete in international markets.

The inflationary stimulus produced by rising Auckland house prices will mean higher interest rates - rates that are already offering a premium to "hot money" speculators - and that in turn will mean that the dollar remains overvalued.

High interest rates and an overvalued dollar will further handicap our manufacturers and exporters and will knock the top off the returns we are able to make even on the products we can still sell overseas - ask the dairy farmers.

The overvalued dollar will also trigger an orgy of imported consumer goods, worsening our balance of trade, necessitating more borrowing and therefore a higher premium to overseas lenders to induce them to lend to us, and the constant temptation (to which the current Government willingly succumbs) to sell off more of our dwindling assets into foreign ownership so that we can balance the books.

The costs of increased borrowing and repatriated profits made by foreign-owned businesses have to be paid across the foreign exchanges, thereby worsening our indebtedness as a country and weakening our ability to control our own destiny.

The damage to our productive sector means that, far from developing new products, our productive base has become dangerously narrow - and as the assets of, and income streams from, even that narrow base pass into foreign hands, we will look in vain for the national wealth to reinvest in our future.

Indeed, John Key sees overseas ownership as not just a painful necessity but as the most promising path to future prosperity.

The short time horizon of a foreign exchange dealer does not apparently equip him to ask what will happen when the profits and assets of our shrinking productive base are in foreign hands, and foreign owners (think Rio Tinto) have extracted what profits they can from our mineral resources.

To paint this picture is not to speculate in pessimism; it is merely an extrapolation of trends that are already long-established. Those who resist such a scenario should ask themselves which part of it is not already familiar. If these trends are allowed to continue for much longer, our national future is grim. We would have lost any possibility of deciding our own future. The only question worth debating then would be whether we become an economic satellite or colony of China directly or whether we are first absorbed into a greater Australia on the way.

But none of this - either the inheritance left us by our forefathers or the mortgaging of our future - seems to matter to New Zealanders today.

History's verdict on today's economic policy is likely to be harsh. But that will not be our concern; history, after all, is written by winners.

Bryan Gould is a former UK Labour MP and former vice-chancellor of Waikato University.

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