KEY POINTS:
Cabinet ministers reacted like headless chooks to news that major NZ exporters are upping sticks to Asia.
Instead of lashing out at political opponents ("Just take a cold shower please, Trevor Mallard"), they would have been better off calling a summit to find a common accord on how to avert a looming exchange-rate crisis.
There's no need to subject National to another round of wedge politicking, as Mallard is obviously attempting by focusing on his opponents instead of a rather serious problem. Ministers and their National counterparts tried to do just that at a secret meeting with the heads of the Reserve Bank and Treasury last year.
They got together to study a range of supplementary stabilisation instruments devised by Reserve Bank and Treasury officials. The secrecy was blown in February after some politicking from both sides.
On the agenda this time should be an investigation into non-politically correct options: These could include currency controls under study in much of Asia; Reserve Bank intervention in the dollar; pegging the NZ dollar to its Australian counterpart, and dropping interest rates to spark an outflow of hot money.
None of these are particularly palatable. They could all fail - and might attract another judgment from Bollard that they simply won't work.
What should go onto the agenda are the elements over which the politicians do have control. Primarily lavish government spending levels, which are increasing the pressure on monetary policy, as Bollard notes.
We are all paying for the 2005 electoral auction. Labour offered interest-free student loans and expanded its Working for Families tax credits. National countered with wide-ranging tax cuts.
Irrespective of the ideological differences between the respective policy stances, the impact is obvious.
The OECD suggests that, while supplementary stablisation instruments should be pursued, adjustments to fiscal settings provide an obvious alternative. It noted that the Treasury forecasts a significant fiscal impulse in the current and next two fiscal years, which is helping to underpin domestic demand. If the stance was neutral, the burden on monetary policy would be easier and interest rates could be lower.
It suggested there is limited ability to scale back spending plans. But there should be greater flexibility around 2008-09, which happens to be smack in the middle of the 2008 election bidding cycle.
The OECD doesn't say so outright, but if Labour and National could reach an accommodation for 2008-09 - or, better still, allow Labour to reduce committed spend in 2007-08 in return for a National ceasefire on opportunistic political attacks - much economic heartache may be avoided.
The outlook for exporters is not great. If the NZ dollar remains high, squeezed profits in the tradeables sector will spread via slower wage growth, job losses and postponed or forgone business investment.
The OECD notes three potential possibilities over where the burden of adjustment might fall:
* On exporters and import-competing producers;
* Through households deciding to cut back their consumption in response to the impact of higher interest rates; and
* The risk of a less benign scenario triggered by a sharp shift in foreign investor sentiment.
If investors decided to pull out of NZ dollar denominated assets, this could lead to a large, potentially disorderly fall in the exchange rate, which would restore the external balance and boost exporters' competitiveness.
This, in turn, would place households under renewed stress as the Reserve Bank would have to increase the interest rate premium to attract investors back into the currency.
Given the potential variables, we should not be surprised at the decisions by some of our leading exporters to shift production offshore.
Fisher & Paykel's plant move to Thailand had been widely telegraphed among the Auckland business community. But the forthcoming departure of this iconic company has touched many New Zealanders, as F&P had defied the odds by keeping its Auckland plant going for so long.
The decision to move closer to markets is a rational one. The alternative is to stay at home, be punished by crippling exchange and interest rates - and still be left without sufficient critical mass to achieve the economies of scale to stay competitive.
Other competitive pressures will emerge as we slip further behind Australia. The New Zealand Institute's number-crunchers released a graphic report at last week's Australia New Zealand Leadership Forum in Sydney.
Australia's GDP per capita (A$47,181) is about 30 per cent higher than New Zealand's (A$33,682), with NZ well below the OECD average. NZ's figure is now lower than all Australian states, including Tasmania.
Top performers are resource-rich Northern Territory (A$59,649) and Western Australia (A$58,688). The lowest is Tasmania at A$35,253 - but even that state heads off New Zealand on A$33,682.
Those low incomes are driven off the low wages are paid here, which have acted as an incentive to keep manufacturing exporters here.
But there's problems ahead. Each week, about 700 Kiwis join the exodus to Australia.
If companies want to stay here and develop high-growth technologically advanced industries to replace the departing manufacturing base, they will be hard-pressed to compete for highly-skilled labour.
Other figures presented to the forum suggest that a million New Zealanders now live offshore - roughly 20 per cent of our population.
Australia, with a population of 20 million, has just 800,000 offshore.
While Australia turns to our highly-skilled people to fill gaps, New Zealand's ethnic mix is changing as we turn to the rest of the world to cover shortages. The business implications from this are profound.
