Editorial: No future in a weak currency

Opinion

As the stubbornly buoyant New Zealand dollar finally begins to ease, the Economic Development Minister has delivered a timely message. New Zealanders, says Trevor Mallard, will never enjoy the higher standard of living to which they aspire off the back of a low dollar. It is a worthwhile point to make to those who see some sort of economic salvation in a low-dollar economy, or those who, in the minister's words, may be thinking of building their business planning around an exchange rate of 50-odd cents against the United States dollar.

Mr Mallard said he hoped, and expected, that in the medium to long term the currency would be higher than it is now. For that to happen, however, the economy will have to undergo a significant transformation and strengthening. New Zealand must become much more efficient at using labour and capital, and become less a commodities producer than an exporter of high-value products.

A floating exchange rate and a reliance on commodities will always be a recipe for big cyclical swings, and periods of inconvenience for exporters. When the dollar is strong, they receive less when they convert their foreign earnings into the local currency. A strong kiwi should be incompatible with a high current account deficit and an economy dependent on commodities trading. But, as evidenced by the interest of foreign investors despite the present serious deficit, the exchange rate has lost much of its link to economic performance.

Economic transformation has, of course, been much discussed, but proved elusive. As much can be taken from the dollar's average value of about 57USc in most of the 20 years since it was floated. It signifies that this country has been far less smart than the US, and even the likes of Australia and Ireland, in fostering productivity growth.

Improving that level of growth has been touted as the centre-piece of the Government's third term. But its canvas is, thus far, short on detail. The key to that growth, and hence higher wage growth, lies, however, in a mixture of innovation, especially in the likes of IT and communications, a skilled labour force, improved infrastructure, significant investment and astute decision-making.

Some of that, such as labour upskilling and infrastructure development, lies with the Government, and it can enhance its role substantially by ringing changes to science and research spending in this year's Budget. And by offering every encouragement to the private sector to invest strongly. Impediments, when identified, should be swept aside.

If the Government's ambition comes to nought, Mr Mallard's hopes will also be dashed. In that case, it would be reasonable to assume that, for the foreseeable future, the dollar would sit around the 58USc to 60USc level, only a slight improvement on the historical average. It is worth noting the downside of this for importers, or for those who wish to travel or invest overseas.

Mr Mallard's statement was a reminder to such people of the benefits that accrued before the oil crisis of the 1970s when the exchange rate was around US$1.50. New Zealand's failure to quickly grab hold of inflation in the 1980s put paid to that, as, subsequently, has the higher productivity growth rate of the US.

There is no quick way to ensure some of that ground is permanently retrieved. In the first instance, words need to be replaced by action. But Mr Mallard is right to at least point out where long-term prosperity lies.