Dialogue: Forget the doom and get ready for a boom

Contrary to predictions of national poverty, KEITH RANKIN* says history suggests that the depreciation of the New Zealand dollar will usher in an era of economic prosperity.

The depreciation of the New Zealand dollar is good news. It is setting us up for a decade of high economic growth and reduced dependence on foreign credit. So why all the doom and gloom?

On August 12, the Herald reported National's finance spokesman, Bill English, as saying: "The weak dollar is making the country poorer. When the exchange rate drops as significantly as ours has, someone ends up poorer. Even exporters know you can't get rich on a weak currency."

The problem is that a beating-down of our currency feels much like an All Black defeat. Indeed, now that both seem to be becoming a habit, it is easy to feel that our nation is stuck in a rut.

It is not. We don't have to believe Mr English. We should turn to our history books instead, and see just what does happen when countries like ours face a "currency crisis."

The Depression of the 1930s is a good place to start. Following the election of a Labour Government in 1929, Britain faced a crisis that led to the collapse of the gold standard. By 1931, the pound sterling had been overvalued for five years. Then, with Britain unable to meet its liabilities, sterling floated free. It lost 40 per cent of its value against the United States dollar and the Western European currencies.

The result was, for Britain, a period of sustained expansion. Although triggered by the "collapse" of the pound, the British recovery also depended on a low interest-rate policy, an end to free trade (which reigned from 1846 to 1931), and a liberal unemployment benefit.

The British recovery was an extraordinarily significant event because it led the world out of the worst economic crisis of the century. In contrast, the American and French economies remained grounded through the 1930s.

It was the British economic recovery that preempted a lurch towards totalitarian solutions. (Unfortunately, the British recovery came too late to prevent Hitler's rise to power in Germany.)

In the years after 1926, New Zealand's pound, which was tied to that of Britain, was overvalued to the detriment of our farmers. The Minister of Finance for most of that time, William Downie Stewart, was a staunch supporter of the strong pound. Despite widespread advice from independent economists that the pound should be devalued, Stewart held out and the depression deepened.

Early in 1933, Stewart resigned rather than sanction a devaluation. The New Zealand pound was duly devalued by 25 per cent. In the 10 years after the devaluation, the national economy grew at an average rate of 7 per cent a year, its fastest-ever growth spurt.

Fast forwarding to the 1960s, devaluations in Britain and New Zealand in 1967 were critical to the resolution of both countries' crises. Once again there was far too much unnecessary angst surrounding these devaluations. Commonsense decisions had been opposed out of a sense of misguided patriotism.

In the 1975-86 period, it was Australia's turn to get stuck in the economic blues. Unemployment was higher in Fraser's Australia than in Muldoon's New Zealand. Then, in 1986, Treasurer Paul Keating, with a well-timed masterstroke, called Australia a "banana republic." The Australian dollar plunged and the Australian economy took off on a growth spurt that never really came to an end.

The huge unexplained differences in the economic fortunes of Australia and New Zealand during the 1997-98 Asian crisis date back to the momentum of Australia's post- banana republic economy. Contrast the inertia of our economy since 1987.

In 1992, the British pound took a hiding reminiscent of 1931. The grossly overvalued pound floated free from the European Monetary System. As in 1931, Britain moved quickly into a sustained growth spurt. If George Soros had not taken on the Bank of England and won, Britain would have got stuck into the kind of dependency trap that we were stuck in through the 1990s.

In 1997, the currencies of Malaysia, Thailand and South Korea were depreciated in what came to be known as the Asian crisis. Those countries are in full recovery mode now. In each case, the crisis has turned out to be a blessing.

This year, it's our turn. This is the second wave in a currency correction that began in May.

From the financial reforms of early 1985 to Don Brash's failed attempt in May to push up the value of our dollar, New Zealand has been living a credit-card economy rather than trying to earn a living.

The way out is through an exchange rate that enables us to service our external debt from foreign exchange earnings, while replacing imports with the products of our own labour.

There is no shortage of knowledge workers and other useful people who would like to live and work in New Zealand, even at markedly lower levels of remuneration than in the countries we compare ourselves to. All we need to do is employ them with decent working conditions and salaries high enough to enable them to raise families while paying a mortgage.

The year 2000 is the beginning of a new era. The nightmare of 1984 is over.

* Keith Rankin teaches economics at Unitec.