Bollard “calls for exchange rate stability”
“New Zealand has had a recession, and the pick-up is slower and more vulnerable – a difference financial markets do not appear to appreciate.
“This is particularly evident in the relatively stable cross-rate on foreign exchange markets. If financial markets can’t see the differences, they will eventually lose money, and it will hurt the New Zealand economy.”
So says Alan Bollard today. So it’s official. The only thing Reserve Bank Governor Alan Bollard can do to stabilise the exchange rate is to plead with Forex dealers, asking them essentially to leave us alone.
So that’s our monetary policy in a nutshell: we beg people not to mess up our economy.
Dear Selwyn.
Can you please explain, in 1984 what exactly was the rationale for opening our currency like a hookers panties?
I understand that we had a command economy gone mad under Muldoon, but in ’84 we were still fundamentally an exporting country. Was it ideology that opened us up fully to ‘market forces’ rather than simply devaluing the dollar, or pegging it to another currency; and, why has it not been re-visited as a policy? Who does benefit financially the most from it?
Thank you, keep up the good work.
T
Tadhg: Like many things in the past I guess you had to live through them to really understand the decisions that were made and why.
My personal opinion is it was an overreaction to Muldoon and an act of faith on behalf of the neo-liberal economist advising the Labour government. At that time a lot of the negatives that have since transpired around the world might not have been as apparent as they are today.
What I do know is some of the economists that advised the government back then advised them that exactly what has happened would happen so those that didn’t swallow the neo-liberal economic religion could see what the future held from the policies being implemented.
I will get a few others who have done more research in this area to post a comment or two to see if there is more clarity around the why as I am interested to know more as well. Selwyn
Some quick responses back from those who where there.
• don’t forget that we did devalue in 1984 – by 25% (immediately after July 14 election).
• the float occurred in March 1985, some nine months later – (my memory was that it was concurrent with Lange being in Oxford for that great anti-nuke debate).
• Why we did is a mystery, but it was well after the ‘84 Budget (and the Treasury Briefing (Economic Management) that espoused the virtues of the free market mechanism.
• After 9 months of such an environment, it (free floating) would have seemed to be a relatively logical course of action.
I can shed a bit of light here Sel:
In 1984 media speculation followed a leak that an incoming Labour government would be likely to significantly devalue the dollar upon election. The Reserve Bank advised the then Prime Minister, Sir Robert Muldoon, that the dollar should be devalued. Muldoon ignored the advice, owing to his misheld belief that it would hurt poorer New Zealanders in the medium term. In June 1984 Muldoon announced a snap election to be held in July. This caused an immediate run on the dollar, as currency speculators believed a Labour win would mean devaluation. Despite a deepening foreign exchange crisis, Muldoon continued to refuse to devalue, forcing the Reserve Bank to take some extraordinary steps, such as the temporary closing the forex markets for a short period of time to slow down devaluation.
Leading up to 1984 the NZ Treasury, which had been unsuccessful in the battle against Muldoon’s disastrous ‘Think Big’ government investment projects and the two-year wage and price freeze, had clear views on what needed to be done. They were pulled together in the few weeks following the announcement of the snap election in mid-June 1984, as a post-election briefing for the incoming government.
The day after winning the general election in 1984, the Labour government was informed that it faced a foreign exchange crisis. Within days the situation had escalated into a constitutional crisis. Decisive corrective action was required, and was boldly taken. The currency was devalued and interest rate controls were removed in order to allow monetary policy to defend the new exchange rate. Price controls were quickly removed.
Two enormous tasks followed. The spiral of fiscal deficits, public debt and credit downgrades had to be reversed, and markets had to be freed up to allow the private sector to generate sustainable economic growth. These twin tasks of stabilisation and liberalisation took most of the next decade. The programme constitutes what a former OECD senior official, David Henderson, has called “one of the most notable episodes of liberalisation that history has to offer”.
It is fair to say that the course of action Lange and the new Labour government took was the only “prudent” one to take at the time. If NZ wanted to avoid a complete and utter collapse of its currency and economy there were really no alternatives.
More detailed info and be found here: http://en.wikipedia.org/wiki/1984_New_Zealand_constitutional_crisis
A slightly counter view Israel……
There were, of course, plenty of alternatives. Just not ones that the received wisdom at the time agreed with.
Yes, the devaluation in ‘84 was inevitable and unavoidable. We didn’t have reserves left to defend the currency with. But the subsequent floating of the exch rate and related policies were by choice.
The freeing up restrictions/controls on the goods (production) markets carried some sanity. But, the sequence of freeing up markets is important.
The freeing up of financial flows was undertaken earlier than the freeing up of goods markets, and this at the time caused a shift in resources away from production towards financial speculation. Sound familiar?
This earlier freeing up of financial versus goods markets only accentuated our fundamental external current account imbalance which continues to today.
The above comments where not mine i just posted them from a contributor. These are mine….
Yes there are always choices beyond those considered as wise or prudent to those making the decision.
We are all victims of both our formal and informal education and that drives us to make calls that to others seem illogical or at least ill considered. I see this both in peoples personal and business lives all the time where they say “but there were no other options” and I can see three or four but they couldn’t as the emotional pain of making them was just too high.
The over reaction to the command economy of Muldoon is still part of our decision making in New Zealand as is the swing to arguably the most open economy in the world with the government that followed.
The “fear” of being perceived as part of either camp is still making many politicians impotent today. The market doesn’t decide, people do. If we leave our future entirely to the market forces this country is doomed to maintain its long downward spiral (IMHO).
Those economies that advocate Neo Liberal policies seem to be ones that benefit from its adoption elsewhere and typically started from a position of significant strength. Our journey of faith and it’s lack of success was in hindsight totally predictable.
tadhg – good questions, the most important one being, “why has it not been re-visited as a policy?” I believe you will get some answers to that question from two books that I have completed reviews for that can be downloaded from the top area of this page on the NZMEA website:
http://www.mea.org.nz/events.aspx
The books are,
1) Culture and Prosperity: the truth about markets – why some nations are rich but most remain poor. John Kay, 2003, Harper Business. He cites and analyses Argentina and New Zealand(!) as examples of countries that were onces rich but are now in the “intermediate-rich list” – not far off being considered poor.
2) The Origin of Wealth – Evolution, Complexity, and the Radical Remaking of Economics. Eric D. Beinhocker, 2006, Harvard Business School Press. This might be a useful chapter for you, ‘Politics and Policy – The End of Left versus Right’ that includes a very interesting section entitled ‘Left-wing Utopias and Free Market Fantasies’.
You might also want to have a read through an article/thread by Selwyn on Interest.co.nz:
http://www.interest.co.nz/ratesblog/index.php/2009/11/06/opinion-how-neoliberalism-has-failed-new-zealand/
And these by John Walley:
http://www.interest.co.nz/ratesblog/index.php/2009/11/04/opinion-rbnz-needs-effective-tools-to-control-non-tradeable-inflation-and-volume-of-credit/
http://www.interest.co.nz/ratesblog/index.php/2009/10/23/opinion-why-new-zealand-needs-to-follow-singapores-example/
It is not as though we are lacking options. What we do lack is LEADERSHIP and the WILL to change, and both have been lacking for a considerable time, which is undeniable.
Les Rudd
Invited Member
NZMEA
Thing is it is the global elite that wins with the neocon agenda, individual countries do to some extent but the large private transnational interests really hover up all the gain. And the people at the very bottom get well and truly reamed.
Grumpy Old Man – it’s why I’ve never seen the NZ Labour Party as the party of the ‘common man/woman’ – given they slavishly followed the neo.con religion as slavishly as those at the other political pole. No surprise I guess when you look at the NZ political geneology involved. Anyway given the completion of this recent parliamentary banking inquiry that David Cunliffe has led, maybe they can generate a new mandate for change will lead to ‘The End of Left versus Right’ in terms of rebuilding the NZ economy and also abandon the dogma associated with both ‘Left-wing Utopias and Free Market Fantasies’. Here’s hoping. I wonder if they got the wotsits for it?
Don’t hold back Les, say what you really mean. I agree by the way….Left and Right is dead and we need to get on with making decissions that make sense for 95% of New Zealanders instead of 5%.
Selwyn – I see little hope of Nats gov. responding positively to Lab’s banking inquiry. Given theere are well research options to fix most of the problems indentified in that work, that implies a time limit on Labour responding positively to create a proposed mandate for change – no matter how much they fear ‘political risk’. They either show LEADERSHIP, or they don’t. Writing a report is one thing, but writing history is another – and from what I saw of them over the last ten years, they don’t look that so qualified for that kind of challenge. I’d like to be proved wrong.
Time will tell Les. They are seriously looking at all the issues and lots of data gathering at the moment. Frankly they have the horsepower to come up with some great solutions if as you say they have the political will to do so.
The debate over asset sales needs to start now as it might as well be broadcast on TV 1 News that National is lining up the asset sales. The treasury report is an early announcement and part justification. “Live within your means” New Zealand but in the mean time we will clock up some debt and then say 2 years from now that you have spent too much and it’s time to sell of the silverware again. Sel
The ideas described here might help:
http://www.interest.co.nz/ratesblog/index.php/2009/11/16/top-10-at-10-south-canterbury-losses-china-bubble-to-pop-mad-butcher-vs-chrisco-dilberts/comment-page-1/#comment-47427