Peter Lyons: Global economics for petrolheads

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Teaching economics to adolescent boys often requires the use of bad analogies to reduce their natural inclination towards sleep.

I am blessed with a monotone that invites slumber.

New Zealand has a two cylinder economy. China has a V6 whereas the United States has a V8. But the United States has had engine trouble in recent years. Prior to the global financial crisis they were using unhealthy levels of bad credit to lubricate their economic engine. This almost caused their engine to seize up in 2007/8.

The engine is now showing signs of regaining its speed and handling ability on the road to recovery. It is an engine largely built around enterprise and innovation but it has been affected in the past by bad fuel additives. It has been the envy of other economic vehicles for almost a century because of its high performance. This is despite occasional breakdowns and repairs.

But the V6 Chinese economy has been the standout performer in the past few decades. There has been much talk amongst race commentators that it would overtake the American V8. It was certainly outpacing the United States over the past decade. But despite its higher speed in recent years it still trails the US by a very large margin. It is also carrying far more passengers for its engine size.

But recently the V6 Chinese economy has developed a serious case of speed wobbles. The Chinese government has an unfortunate tendency to grip the steering wheel tightly at such times. It is terrified of a bad crash. This could cause the passengers to question its driving skills. It could lead to calls for a new driving team.

But the Chinese government gripping the steering wheel too tightly has caused the vehicle to veer all over the road. This has been very unnerving for the other economic vehicles on the road. Many have been forced to take evasive action to avoid a crash.

The V6 Chinese economy has been fuelled by cheap resources particularly low wage labour over the past few decades. But a real high performance V8 economic engine requires a key fuel additive called "efficiency". This additive is sometimes labelled "higher productivity." An economic engine can reach very high speeds using cheap labour as fuel.

But it eventually hits a performance limit as supplies of this cheap fuel run out. At this stage, its speed can slow dramatically. It can overheat. The Chinese economy seems to have reached this stage. This could create some carnage on the road to prosperity.

High performance V8 economies usually cruise along at slower speeds because they have already exhausted their cheap fuel supplies. Their performance is largely dictated by the magic fuel additives of "productivity" and "innovation."

In the 1950s the Soviet Union appeared to have developed a new model of economic engine that seemed to offer far better performance than the Engine used by the United States. It later became apparent that this Soviet economic model was flawed and subject to major engine failure. Its speed and performance and handling had been vastly exaggerated to make the engine seem better than what it really was. China's V6 may suffer from a similar problem.

Meanwhile New Zealand's V2 engine is still chugging along but it is spluttering a bit. It also continues to emit some unpleasant exhaust emissions which it is reluctant to address.

New Zealand has sought to build a bigger, more powerful economic engine over the past thirty years. It has used a blueprint called the "free market" model. Yet somehow it is still stuck with a V2 engine despite significant and costly modifications. Some commentators suggest there may be some design flaws in the blueprint. Other countries such as the United States have apparently used this blue print to achieve high performance in the past. But they have generally tailored it to suit their own unique circumstances.

New Zealand's economic speed and performance has benefited from the slip stream of the Chinese v6 economy in recent years. As the Chinese economic engine slows this has impacted on New Zealand's economic performance.

The Chinese slowdown is also having an adverse effect on the Australian V4 economy. This further affects the performance of New Zealand. Australia has often provided a handy tow for New Zealand in the past when things got tough.

The slowdown in Australia's speed and performance has resulted in frequent changes in their driving team in the past few years. Their passengers are renown for their unruliness. They often fail to appreciate they are a few cylinders short of a V8.

Peter Lyons teaches Economics at Saint Peters College in Epsom. He has written several economics texts.