Dialogue: Our dollar could be costing us plenty

The first in a series of three articles, prepared for Business New Zealand, asks why this country isn't richer and what is holding us back.

It's an issue that many New Zealanders don't want to acknowledge - our waning prosperity.

ARTHUR GRIMES, director of New Zealand thinktank the Institute of Policy Studies, looks at the economic realities confronting New Zealanders and suggests one avenue for improvement.

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It may seem strange to suggest that the New Zealand dollar is holding us back. But it is vitally connected with our success in exporting.

As a nation, we don't export enough. Fewer than 4 per cent of New Zealand companies are exporters and this percentage has been falling.

International evidence shows there is an association between high income and high levels of export activity, regardless of country size, location or type of products.

For a country like New Zealand with a tiny domestic market, the ability to export is critical; it's the only way we can grow.

We have a particularly difficult barrier to overcome - distance.

Exporting from a country as remote as New Zealand involves large costs relative to the existing small domestic sales of many firms. Faced with these costs and with the risk that an incorrect calculation to expand into exporting could place the entire firm in jeopardy, many firms (96 per cent in New Zealand's case) choose not to expand and instead service solely the small domestic market.

The fixed costs of exporting are discouraging. Some are inevitable (the price of a flight to Australia or the US) but some can be reduced through policy harmonisation between New Zealand and one or more other countries.

If firms could have the same institutions and policies in their prospective export destination as they do at home, the costs and risks of exporting would be reduced.

One example is New Zealand's choice to retain its own currency.

An Institute of Policy Studies survey of 400 New Zealand firms showed a majority favour switching to a joint currency with Australia. Support was widespread among small and large firms, exporters and importers, and firms in the manufacturing, agriculture and services sectors.

Overall, 58 per cent of firms were positive towards currency union; 28 per cent were neutral and 14 per cent were negative.

Strongest support came from firms with 11 to 20 employees.

The survey indicated that these firms are threshold companies, which tend to be poised to increase their export activity, with a substantial increase in exporting activity once they reach a company size of about 20 employees.

This is consistent with another finding of the survey: firms with fewer than 25 employees find it more expensive to hedge their foreign exchange exposure risk than larger firms. So they hedge less, and that places them at risk.

Smaller firms without foreign exchange expertise find foreign exchange risks and costs a major barrier to export.

Multiple currencies hold back trade. It is a lesson that is staring us in the face as we observe a major new combined currency, the euro, enter the world stage.

So perhaps the kiwi is holding us back.

The cost of retaining an independent currency may be one factor in explaining our relatively poor growth rate. For New Zealand companies, the NZ dollar may amount to a self-imposed non-tariff barrier to trade.

The currency issue is one of several policy areas that could be harmonised with another country to reduce the costs of exporting. Evidence suggests that once firms start exporting they do not have the same problem in growing.

The key, therefore, is to adopt policies which remove barriers to export.

The simplest way may be adopt Australian policies and institutions in areas except where our own are demonstrably superior.

Another approach may be to consider adopting US policies, including the US dollar, on the same basis.

The idea stirs controversy over national sovereignty, of course.

However, the decision to adopt another country's policies or currency are our own decision to make (and potentially to revoke if circumstances were to change), so there is no question of ceding sovereignty.

Instead, it is a question of New Zealand policymakers adopting policies which are most likely to result in the expansion of New Zealand business activity, and hence living standards in New Zealand.

Aligning our key policies in a strategic way could boost our growth and stop us getting poorer on the world stage.

New Zealanders know our health system has to ration healthcare, that our education system is under-funded relative to top-quality systems elsewhere and that we cannot afford to play our full part in world security because we are relatively poor.

If we want our Government to deliver sustainable improvements in these and other services, we should seriously consider creating a policy environment that helps that happen.

* Tomorrow: Glenn Withers, Australian Government adviser and Australian National University head of public policy, sees similarities in the economic issues confronting Australia and New Zealand, and suggests a possible approach.