Editorial: Good news and bad in high dollar

The New Zealand dollar has this week risen higher than it has been since it was floated 20 years ago. While this is good news for importers, for those travelling or investing abroad and for all who want the best the world can offer, it lowers the income of exporters when they come to convert their foreign earnings into local currency. Speaking to the Auckland Chamber of Commerce this week, Finance Minister Michael Cullen described the exchange rate as a major concern, noting that it was driven mainly by the weakness in the United States economy.

Thankfully, he said nothing more than that - nothing to suggest that the Government is contemplating steps to weaken the currency, not even to hint that the Reserve Bank might use its newly acquired trading powers in a probably fruitless attempt to stem the dollar's rise. He was much more concerned about the economy's capacity to continue its growth rate of recent years and to maintain high employment. If demand outruns the economy's productive capacity it will produce inflation, which kills investment and jobs.

When the economy is nearing its capacity, as labour shortages suggest, a high exchange rate can help to contain inflation by lowering the price of imports. Were it not for the appreciation of the dollar, the Reserve Bank would be obliged to raise interest rates soon to keep inflation within its range of tolerance. But the exchange rate offers only temporary and unreliable relief, particularly if it owes more to weaknesses in the American economy than the strength in our own.

The greenback's decline is the conventional explanation for our dollar's rise but, oddly, the economic weaknesses that explain the fall in the American dollar are also found here. Both countries are overspending, undersaving and running high deficits in external trade and payments. The main difference is that the US Government has been also running a high internal deficit and ours is in the black. Could that make all the difference to the currencies? It is possible. Foreign exchange markets seem highly attuned to states' financial performance.

Ultimately, a strong currency is supposed to be incompatible with a high current account deficit and an economy that depends on commodity trade. But world prices for our farm commodities have been relatively good for most of the past five years and domestic activity has been strong enough to carry us through a mild trough. It is the momentum of domestic activity that Dr Cullen is keen to sustain by expanding the economy's capacity.

The key, he told the Auckland chamber, was to improve labour productivity. That meant getting better value from tertiary education and workforce training, better immigration policies and practices and reducing the barriers faced by those with young children who want to return to paid work and careers. He adds for good measure high capital investment from domestic savings which he intends to encourage in this year's Budget.

Institutional solutions such as tertiary education seem particularly congenial to the Government. Dr Cullen has lately declared a belief that even industrial innovation is something that does not spring from a can-do culture but is learned from a suitable course of study. Likewise, Labour instinctively favours more selective immigration and the encouragement of institutional childcare. But productivity may be better enhanced by steps the Government would find less congenial, such as making it easier for employers to hire, fire and organise staff more flexibly, encouraging training on the job and binding staff to stay long enough to provide a fair return on the investment in them.

The last time the dollar was nearly as high as it is now, in 1996, the strength of the economy proved transient. This time it looks more solid. But nobody can take it for granted.