Berl economist laments export failings

Dr Don Brash's report on catching up with Australia has sparked a new round of debate about monetary policy, with critics saying policy should be refocused on fostering exports.

Berl chief economist Dr Ganesh Nana said the nub of New Zealand's economic problem was its failure to create an export-oriented economy.

Auckland University's Professor Tim Hazledine said New Zealand's focus on low inflation was "extreme in the world". He suggested we should adopt a currency union with Australia and concentrate on being "clean, green and expensive".

But Dr Brash's 2025 Taskforce, which released its first report on Monday, ruled out any change to monetary policy and was lukewarm about currency union.

Taskforce member David Caygill was the Finance Minister who passed the current Reserve Bank Act in 1989, stipulating that "the primary function of the bank is to formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices".

Dr Brash administered the act as Reserve Bank Governor from 1988 to 2002.

Their report argued for catching up with Australian living standards by cutting state spending and taxes, selling state enterprises and relaxing restrictions such as minimum wages.

Dr Nana said New Zealand had failed to develop an export-oriented economy because businesses were scared off by a volatile and overvalued exchange rate.

"The alternative is a monetary policy focused on a stable exchange rate that does not appreciate too much, and that means that we control inflation through the supply of credit - that tilts the balance of credit supply towards business investment as opposed to property investment," he said.

The Brash report examines Singapore's policy of keeping its exchange rate within a target band, spending up to US$26 billion ($36 billion) a year to buy up foreign currencies to keep its own currency down in some years. It says the costs and inflationary risk make this "not a viable option for New Zealand".

But Dr Nana said it would be cheaper to follow the US lead and print more New Zealand dollars.

"We'd go out into the foreign exchange markets and exchange NZ dollars for foreigners' dollars and there is no limit to what we can do," he said.

Although this would push up import prices and fuel the local money supply, he said the resulting inflation should be contained by regulating the amounts the banks could lend.

"You say you can't lend beyond, to take a figure, 70 per cent of the value of a house, or whatever," he said.

Professor Hazledine said the New Zealand dollar was the world's 11th most traded currency in the short-term money markets, accounting for nearly 2 per cent of all currency trades in 2007.

"Do we really want to be in play in this particular game?" he asked.

He said an "Anzac dollar" would make it easier to export to Australia: "Are any of the states in Australia trying to get their own currency? No.

"Are any of the states in the US trying to get their own currency? No."

The Brash report also suggests that currency union with Australia could help New Zealand to catch up economically "if adopted as one part of an overall far-reaching reform agenda".

But it notes that the 53 per cent trading range in New Zealand's effective exchange rate between 1992 and 2009 was similar to the currency volatility of much larger economies such as the US (52 per cent).

Australia's effective exchange rate fluctuated over a 41 per cent range.

"Changing the currency regime is not a substitute for serious and sustained microeconomic policy reform," the report said.