Notion of an Anzac dollar gaining currency

Is there strength in currency unity or are we better off floating alone? SIMON COLLINS and MATHEW DEARNALEY look at the arguments for and against a merged currency.

A year ago, the 62 workers at Premier Plastics were down to a four-day week. The Sandringham business was in dire straits.

Managing director Morris Watson had a yelling session with his bank, who wanted him to lay people off.

He insisted on keeping his staff, who had worked at the company for an average of nine years - some up to 20 years.

Now they are reaping extraordinary rewards. Thanks to the low kiwi dollar, Premier's output has jumped 30 per cent and most of the staff are now working six days a week. Many are earning up to $200 a week more than a year ago.

The boom in demand for plastic bottles indicates surprisingly strong growth by the company's customers, who fill its bottles with aromatherapy lotions, medicines, pills, shampoo, powder and cleaning fluids.

More than half the bottles are exported - with local products inside them. The low dollar has made those products much more competitive.

Most of the other half of Premier's bottles are filled with local products that compete against imports, mainly from Australia. And the low kiwi is pushing up import prices to the point where local consumers are switching to New Zealand-made alternatives.

"There is a resurgence in import substitution," Mr Watson says. "We are going flat out. We just can't do enough."

Premier Plastics is a dramatic illustration of our independent exchange rate working the way it is supposed to. We have been spending $7.5 billion a year more than we have been earning.

With the dollar down to US39c and 75c Australian, we'll earn more and spend less.

In fact, our high exchange rate over most of the past 15 years - averaging US60c and A85c - has been a big cause not only of our persistent overspending, but also of our high unemployment and poor economic performance.

By pricing NZ-made products too high, we lost both local and overseas consumers. Less production meant less employment, and slipping living standards.

That's why the Coalition Government has told Reserve Bank Governor Don Brash to "avoid unnecessary instability in output, interest rates and the exchange rate."

But the growing integration of world markets is raising doubts about whether it is either possible or desirable for small countries such as New Zealand to try to smooth their economic cycles with floating exchange rates.

Kerry Harding, of Designer Textiles in Otara, believes it is time to join the Australian dollar.

His company employs 230 people in Auckland and 100 in Brisbane. Of its New Zealand production, 65 per cent is sold here, 20 per cent in Australia and 15 per cent elsewhere.

The company exports $3 million worth of New Zealand merino fabric for active underwear and women's evening wear, mainly to Europe and North America.

Mr Harding says New Zealanders should see Australia as part of our "home market." But the separate currencies put New Zealand businesses at a disadvantage.

"For us, to eliminate the exchange risk would be a major. We would just be another supplier - appearing to be just like an Australian business."

A survey of 409 New Zealand businesses by the Institute of Policy Studies last November found that 58 per cent were positive towards merging the Australian and New Zealand dollars. Only 14 per cent were negative, with 28 per cent neutral.

An institute report by economists Dr Arthur Grimes and Sir Frank Holmes asked: "Should New Zealand remain the smallest industrialised country to run an independent monetary policy?"

They found a prima facie case for adopting a joint "Anzac dollar."

Between the floating of the kiwi in March 1985 and late last year, they found that its value was completely unrelated to New Zealand's trading record.

While the ratio of export to import prices was virtually steady throughout the 1990s, the kiwi dropped from US64c in 1991 to 50c in 1993, rose to 72c in 1996, and has now plunged to 39c.

Dr Grimes and Sir Frank found that a main driving force behind these fluctuations was local house prices.

When Auckland house prices surged 85 per cent between 1992 and 1997, fuelled by immigration, Dr Brash took fright. He pushed 90-day interest rates up from under 5 per cent in 1994 to 10 per cent by 1996, eventually pricking the house price bubble.

Foreign money flooded in to take advantage of the high interest rates, and pushed the exchange rate up 44 per cent.

As a result, exports stopped growing, imports rose and our national overspending ballooned. Having an independent exchange rate clearly only made things worse, so long as it was managed primarily to restrain domestic inflation.

In contrast, there would be real benefits in adopting the Australian currency.

First, as Mr Harding says, our trade with Australia would increase because New Zealand businesses would no longer be seen as "foreign." More trade would make both countries better off, because each country's industries could cut costs by supplying a larger market.

Second, trading with Australia might give New Zealand businesses the confidence to export further afield.

The bigger the "home" market, the lower the costs per unit and the bigger the profits to fund ventures into other countries.

Third, a merged currency would make investors in each country more willing to invest in the other, by eliminating exchange rate risk.

This was a huge benefit for Ireland when it joined the euro zone in the 1990s. American companies serving the whole European market could now take advantage of lower wages in Ireland, confident that they could export to the bigger countries with no currency risk.

Fourth, and perhaps most important, are the "dynamic" benefits of a merged currency. It would force us to respond faster to market changes.

Having our own currency allows us to share the costs of change.

For example, if the price of butter drops because consumers become more worried about cholesterol, the kiwi dollar is likely to drop as well.

The lower kiwi partly compensates dairy farmers for the lower butter prices. And all New Zealanders pay higher import prices, effectively shouldering some of the costs of butter's decline.

Arguably, this process is at the root of our decline. We have allowed the exchange rate to soften the market signals that should have shifted more resources out of butter years ago.

Yet there are two strong reasons not to abandon our own currency.

First, we would have to buy into another currency whose fluctuations may have perverse effects on us.

Whereas the European Community buys 68 per cent of Ireland's exports, Australia buys only 21 per cent of ours. Dr Grimes and Sir Frank found that over the period 1986-99 the Australian dollar was just as volatile as the kiwi.

Linking even to our close friends the Aussies may harm us if their currency goes up or down in response to, say, the price of gold or Sydney real estate.

Second, even if all other countries in the world had the same currency, it would still make sense to have a separate NZ dollar as a vital tool to generate local jobs and development.

With no capital controls, banks and other investors put money wherever they can get the highest returns. This year they have been pulling money out of New Zealand and investing in places such as Silicon Valley and China.

Within a country, people can respond to shifts like this by moving to where money is being invested - for example, from Northland to Auckland.

But most New Zealanders cannot migrate to Silicon Valley or China. So a shift of investment to those places is liable to leave people unemployed here.

With our own currency, we can do something about it. As investors pulled out this year, they had to sell kiwi dollars and buy other currencies. The value of the kiwi dropped.

That has made businesses such as Premier Plastics more profitable - and made it worthwhile for Mr Watson to expand this month into a building across the road.

It would also be possible to generate local jobs without a separate currency. Somehow, we would have to increase our productivity or lower our costs until it became as profitable to invest here as in Silicon Valley or China - say by cutting real wages or slashing company taxes.

But this would be hard going because it would require cutting a whole range of prices and wages. A separate currency allows us to much more efficiently adjust just one price - the exchange rate.

There are, therefore, strong arguments both for and against abandoning the kiwi. Is there any way to get the best of both worlds?

Possibly. An Irish Green economist, Richard Douthwaite, advocates local currencies circulating alongside national and international ones.

Local councils would issue their own currency, use it to pay staff and contractors, and require it to be used to pay rates.

But people would be free to convert their local units into wider currencies such as the kiwi, which would operate as legal tender.

Mr Douthwaite would like to see kiwi dollars being spent into circulation by the state, rather than lent into use by banks. He also advocates issuing a new currency just for people's savings.

"You would buy this money with your kiwi dollars if you wanted to buy shares, or a house, or pay [superannuation] contributions or lodge money in a savings account, or invest abroad. This currency would be kept scarce so that it retained its value."

Foreigners buying local assets would have to buy the savings currency, so capital inflows would not affect the exchange rate for kiwi dollars used by farmers and other exporters.

If we cannot stomach such a radical change, then Mr Douthwaite believes we should keep our own currency - and that European countries will soon regret abandoning theirs.

"In fact, I would say that the break with [British] sterling laid the foundations for the boom in Ireland," he says. "Certainly Ireland would be experiencing severe competitiveness problems now if it was still linked to sterling."

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