In a recent select committee meeting, Bill English made this comment when discussing calls from manufacturers and exporters to bring down the exchange rate;
"What they’re telling you is they want to cut the real wages of their workers, because that is the other side of the equation."
This comment ignores many of the highly negative effects that the currently high exchange rate is having right now on jobs in the manufacturing and export sector and what this does to future investment, employment and wages.
As it reads, Bill English implies that if we choose to lower the dollar to benefit exporters, there will be an equivalent individual impact through higher import costs.
This is not the case, exchange rate impacts are focused on relatively few exporters and higher import prices are diffused across all consumers.
It is a matter of survival of export jobs against almost imperceptible cost increases for everyone.
In the long run, wages reflect the level of labour productivity, which is the level of output each worker provides. As labour productivity is improved, wages can also rise.
Productivity is a function of investment which is increasingly absent as the overvalued currency ruins margins on export efforts.
How can labour productivity be improved?
In the manufacturing sector, historically this has been achieved by moving away from basic unskilled, labour intensive production, to more automated machine and robotic processes, which require high levels of investment.
As a result labour demand in the sector has changed significantly over time.
Manufacturing needs a much higher skilled and educated workforce, to correctly run the new production processes, design cutting edge products and systems, manage export markets and supply chains as well as provide the innovation to stay competitive.
This suggests labour productivity in manufacturing is now relatively high compared with other sectors, as demonstrated by higher median and average wages in manufacturing when compared to that paid by our total economy.
What is the real effect of the exchange rate on our consumer prices?
A recent Reserve Bank of Australia (RBA) report entitled “The exchange rate and consumer prices” explores the level of pass-through the exchange rate has on import prices, manufactured good prices and consumer prices. This found that a 10 per cent appreciation of the Australian dollar reduced overall consumer prices by around 1 per cent; an effect which was spread out over around three years. It is reasonable to expect New Zealand would show similar results.
If the exchange rate was to fall, and take the pressure off our exporters, the relative effect of this on consumer prices would be small.
This means the real wages, which are measured on how much you can actually buy with the wages you receive, would only see small possibly imperceptible decreases.
These three graphs come from the RBA report. The top graph shows how the exchange rate has, as would be expected, had a direct and immediate effect on import prices; a 10 per cent appreciation lowers import prices by around 8 per cent.
The second graph shows the same effect on manufacturer goods, where a 10 per cent appreciation tends to lower prices of manufactured goods by around 2-3 per cent.
Finally overall consumer prices show little impact from the 10% exchange rate appreciation; this would be expected as overall national consumption is many times the level of imports.
To repeat, the impact of an elevated exchange rate is focused on very few firms and the benefit and penalty is diffused across many consumers.
In New Zealand only 1,000 firms export more than $2 million.
The appreciating dollar directly affects the margins of the businesses selling into other countries. Government and the Reserve Bank have shown no intent to address the issue, and while they acknowledge the challenges for exporters they have no policy response.
This creates an environment of uncertainty, so exporters are unwilling to reinvest, as trends indicate returns will continue to be squeezed.
Investment drives research and development, design, machine tools, systems and innovation along the supply chain and allows us to stay up with the global competition.
As this dries up our future competitiveness withers and we will see more exporters close down or pack up to move offshore.
This means more jobs will be lost in the sector, many of which are highly skilled, high paying jobs, dragging down average earnings in New Zealand.
Bill English’s comment is entirely political, setting one group against another.
We need to see politicians do better than this, and get into policy for the long haul.
A lower dollar would allow New Zealand to develop a more robust, diverse and thriving export sector.
This would create many well paid jobs, and provide innovative jobs sufficient to prevent innovative and skilled individuals from leaving.
We cannot expect our labour productivity and wages to improve in the long term if the current settings starve margins and investment; slowing innovation and the skill accumulation of our workforce.
Without investment, which fuels innovation and research and development, labour productivity will not improve.
Absent of any real structural improvements, any momentarily enhanced purchasing power is a delusion.
Manufacturers do not want to see the real wages fall; we want to see purchasing power placed on a sustainable basis and then improved.
A realistically valued currency is what it is but it puts the economy on a sustainable path, rather than driven by the illusion of wealth through cheaper TVs and foreign holidays.
A lower dollar will make imports more expensive, but in the long term, a thriving manufacturing and export sector is what will provide higher employment while raising wages and living standards for all New Zealanders.
The RBA report is clear that the exchange rate has a relatively small effect on overall consumer prices. This means a fall in the exchange rate would vastly help exporters and have a comparatively small effect on purchasing power.
We cannot rely on debt and cheap imports to survive; we need to support our export sector so we can pay our way in the world.
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John Walley is the chief executive of the NZMEA. You can contact him here »
27 Comments
Mr Walley's logic seems sound. The path of least resistance seems to be to at least not let the currency go up further; (although a say 10% devaluation would likely kick start activity even more). Once the NZD reaches any new high level, some people seem to feel entitled to the spend on foreign goods that that new level allows; and see any drop as a negative or bad news. If the currency hasn't gone up in the first place, then there is far less sense of entitlement.
So from where we are now, some people would see a drop to 75c against either the Aussie or USD as a negative; just as if we get to over 90c against either (as current graph trends suggest, without intervention), a drop then even back to where we are now seems to upset people. Best not to get up there in the first place.
You really see the effect of the value of a Kiwi dollar when you pay for a meal, hotel or taxi in Euros. It is a fact that devaluing your currency reduces the wealth of the currency holders. You would not let a bureacrat water down your gold bar with copper? Or would you?
You missed the point mist, devaluing the currency cristalises when you exchange it for another currency, deprecation is real. If the benefits of improved buying power don't materialised is has to be for another reason, maybe a lack of competition, or collusion. You wouldn't let the reserve bank water down your gold so why your currency?
Mr Walley can you please explain how every country is to simultaneously devalue their currency whilst boosting exports?
It seems you are aware of mathematics the rest of us are ignorant of ...
Also can we see a straight graph of exporter profitability v exchange rate.
Robby217 - you have made some very good points in your posts here I am glad you asked for a graph on exporter profitability v exchange rate to be put up as this information is seriously lacking in the current debate.
I have not been able to find appropriate graphs on the devaluation of the NZD in the 1980's that can be overlaid with employment/unemployment that occured after the devaluation.
The information would also need to be overlaid with immigration/migration figures.
Mr Walley can you please explain how every country is to simultaneously devalue their currency whilst boosting exports?
Unfortunately a typical response each time this debate comes up...so, do you think we should put it in the too hard basket, just bend over and accept what is coming?
Maybe we should all apply this logic - 'sorry not coming to work today, the traffic is just too much for me'.
If we do nothing at all, it gets a lot worse. NZ needs to decide if we want exports or not and then act accordingly. At least firms like mine will know where we stand and a decision on what we do next becomes easier.
My mathematics are generally the same as others and I have a long history in engineering and the stuff build on my sums is still standing and working.
The issue is one of policy contrast, and focus. The benefits of the high currency are diffused across the whole economy and the pain is focused on a few exporters threatening the already problematic balance of payments and jobs in New Zealand. If others take action and we dont our probllems are amplified.
On the numbers for exporters it is hard to speak for them in general, however an exporter selling into Australia or New Zealand consumption, buying bits in US$ might be happy right now. But those selling 90% plus in USD or Euro irrespective of their supply weighting in either currency are suffering.
One example a large employer, 300+ people, well hedged is currently booking in the mid 70s that is driving a 9% return if the same calculation was made at mid 80s the return falls to 2% - all things considered would you invest in such a prospect?
What happens to the jobs, the 3 jobs per person dependent on those jobs – see my blog for more.
Bill english is a politician, what more a politician who do not want or know how to solve the economic problems facing New Zealand.
To excuse himself of all responsibility for economic performance he prefers to do nothing.
That way he cannot be blamed. Furthermore to blame our economic underperformance on circumstances beyond his control is the best as then he cannot be seen to be partial to any sector of the economy. And to further to show his impartiality, he then says "if we do this for them, somebody else will be hurt" type of statement.
English has no idea what must be done, or worse still he does know but choose not to for political gain. ?
New Zealand is the victim of currency wars raging throughout the developed world. Our currency is high right now not because of our productivity nor strong economic performance, but only and purely the result of the "carry premium" for currencies.
Imagine bankers and investors (hedge funds more likely) borrowing at 1% and lending it ot New zealand Banks at 3 0r 4%....this is money for nothing....(chicks for free ?)
Our goverment and Central Banks happily allow this to happen infact our PM actually encourage this saying "it makes NZ wealthier".
Meanwhile the distorted currency is slowly but surely killing off our industry little by little..until we only have our agricultural exports left and even that will be castrated by a high exchange rate..
This will continue until the tide turns the other way when hot money flows out either in the next crisis, or when ( unlikely) the world's economy improves and interest rates rises worldwide. Then we find that our debt repayment becomes impossible and finally NZ default and becomes the Greece of the south.
This is not an impossible scenario, any rational thinking economist can foretell what the situation can become if we do not take proactive action..
Mist - I agree with what you are saying however NZ has to address the real issues of Governent spending, taxation, legislation and the entitlement mentality that causes distortions within the market.
Devaluing the dollar is putting a band-aid over the problems and will create further problems.
I hope everyone including Mr Walley has read the RBGs speech yesterday posted on this site which agreed the currency is overvalued and then canvassed a series of unpalatable and risky methods of controlling it.
We cant just devalue. Even if we went to fixed exchange rates ( which is what the Swiss have done against the Euro ) we would then have to be prepared to defend the peg. Given the enormous amount of Kiwi traded compared with our GDP that would be a tricky business and we would need to get the OCR down to zero. The resultant inflation would quickly destroy any benefits to exporters.
Just exactly what does Mr Walley propose we do?
Better to do nothing and hope than do something and hope without understanding what is likely to happen, especially if it involves punting billions of tax payer dollars.
I dont think people in positions of responsibility should advocate for a lower currency without explaining how exactly how they would achieve it.
Bill English is a flat earth monterist -farm raised and treasury trained.
Bill's only concern is that farm input costs be as low as possible. He doesn't care what happens to the rest of the economy. It's a simple as that.
However while arguments against a high dollar are valid I'd be hugely fearful of letting the Treasury or the RBNZ loose in the money markets with the tax payer dollar.
We do need a much more subtle approach but I've yet to see one advocated.
The daily humbug..."This is not the case, exchange rate impacts are focused on relatively few exporters and higher import prices are diffused across all consumers"
So there you have it...don't worry if the cost of living blows sky high with fuel leading the charge because it'll be 'diffused across all consumers'.......doh
Wolly,
Let's consider the maths of your point. Suppose the exchange rate was to devalue by say 5%; and suppose an exporter's net margin was 5%, then allowing for some increase in his imported input costs, his new margin would be say 9.5%- or nearly double. So it's fairly obvious how important it would be to him.
The effect on fuel costs should be 5% on the imported element of fuel- say 50% might be imported and the rest value added here, or tax. So 5% times 50% comes to 2.5%. (that's assuming of course the oil companies have kindly passed on all the price reductions as the currency has gone up)
A link here:
http://www.stats.govt.nz/searchresults.aspx?q=household%20expenditure
shows average weekly household income on petrol at $41 in 2010. Times 2.5%, comes to $1 a week per household on average.
Of course other things would be affected as well. So it could easily work out to $10 a week to the average household, and to some, that may not be trivial.
But it's not all that much either. And apart from fuel, much of it is discretionary.
Oh right..so your math gives it the big tick..Mine on the other hand does not!
Exporters that depend on currency gains to make fat their bottom line, have failed IMO
I think you need to do a bit more study into what you refer to as 'discretionary'...and it would pay to remember the lower cost of living leads to greater saving potential...and that can lead to increased investment in private business leading to job creation and export gains.
Having a higher valued currency is a positive thing.
Wolly,
Exporters are fighting against an ever appreciating currency. Most would have been perfectly happy with the currency where it was a year ago; two years ago. They are not looking for the currency to devalue from a long established position. So to represent them as failing is a bit tough.
The current account deficit shows the currency gains are in fact flying straight out the national window, off overseas, at $10 billion per annum. So no, net national saving is not increasing. (For other reasons, households may be at least breaking even, but the government is more then blowing the difference with its deficit.)
And the extra saving and therefore investment you hope for, most certainly won't be by exporters or import substituters, if they see the currency perpetually increasing, cheered on by the Prime Minister. They have no money to save or invest.
Maybe we should look back and reflect on our ...so called...free trade agreements.
In particular the one with China and the looming one with USA.
It has been common knowledge that China has had a policy of export driven growth... and part of that has been a fixed echange rate regime that supports the export driven economy. ( ie very undervalued exchange rate)
Who negotiated the free trade agreement with China..???
Now we have USA... and an almost done free trade agreement..
What in this agreement might protect us from USA monetary policy..???
My guess is nothing...........
The term "free trade agreement"... is a terrible misuse of the english language.
It is not just exporters who are a dying species...it is also local manufacturers..
The only sector that is immune from "free trade agreements" , and low wage, developing economies... is the Non- tradable sector.
Where was John Walley when these trade agreements were being done.... My guess is that he was all for them...and was lobbying hard .
does anyone really think that trade with china is fair and equitable.... that there is any kind of level playing field..???
The hypocrisy is that all the rules and regulations that our "leaders" impose on our manufacturing were totally pushed aside when agreeing to free trade with China.
Our leaders don't care if the real costs of products produced in China ( eg. environment, health , safety..etc..etc..) are not reflected in the price of Chinese goods.
yet... they are very serious about making our manufacturers comply with more and more things.. that end up costing ..more and more..... and don't blink an eyelid if our manufacturers plead hardship.
the problems ...and answers..run a lot deeper than just our overvalued exchange rate... in my view....
Some wise and experiened leadership that understood first principles.... would be a good start.
On trade agreements I was doing my level best to try and ensure that the playing field was as level as possible. In the manufacturing sector that is to ensure the technical barriers to trade are not insurmountable. I failed in that effort and have been working since to rectify the problems generated by a flawed negotiation and agreement.
It is possible to point to the absence of fair trade but when faced with the inevitability of an agreement the choice is limited and all that is left is to try and make it work.
The downside of currency devalution is to the good peole, the people who saved their money and invested. Policy should be toward allowing savers their due in increased interet rates and a high dollar. Why worry about people who are not wise with their money? spenders. It is just further moral hazard.
Of course there are many other reasons for the continuing decline of the NZ manufacturing sector other than the high dollar. These have been canvassed endlessly. What hasn't are sustainable and practical solutions to the continuing decline of NZ manufacturing.
For instance a reduction of tax on all income/profits from manufacturerd exports from NZ- owned firms (milk powder is not manufacturing). More emphasis on training a highly skilled workforce. Encouraging young people into manufacturing and exporting, developing a long term strategy based on successful models overseas etc etc.
Fundamentally those countries which have successful manufacturing export sectors have usually built these up over decades through such things as intelligent policy, training and rewarding people in this sector with high social status, and other forms of direct and indirect support. We seem to think we can do otherwise.
The other issue of course is that the culture of countries like Germany value science, alongside practical but highly trained engineers and technicians, and above all realise the importance of intelligent and innovative DESIGN in the development of manufactured products. Excellent, dynamic and innovative design is half the battle. And I don't mean people who like playing around with graphics on a computer.
Talk about NZ's number 8 wire ingenuity is just an anachronistic and naive myth in this environment.
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