Dialogue: Getting poorer so we can get richer

By COLIN JAMES

A marvellous thing happened on our way into the 21st century. Our economic prospects started to feel better - but that is partly because we got poorer.

Provided no international economic calamity takes us all down, this decade is shaping up not too badly.

Exports have gone well these past couple of years and the proceeds have been flowing into the cities. Migration has turned from an outflow to an inflow. The stockmarket, while hardly rocketing into the ether, did well above the world average last year.

A good part of the reason exports have done well is down to dairying and, to a lesser extent, meat: two good growing seasons swelled output and prices were high for a variety of reasons, including some one-offs.

So the traditional export industries carried the economy through the early part of the world downturn and deposited money in consumers' pockets to carry us through the next bit.

We are doing relatively better than many rich countries and a lot better than many east Asian tigers. Singapore, dependent on the stalled American IT industry, dropped 7 per cent last year.

Commodity exports have also carried Australia. This has temporarily turned on its head 40 years of wisdom that we two countries needed to do more sophisticated things.

We also came through the 1997-98 Asian crisis with stronger growth than the average of rich countries. Overall, contrary to folklore, the 1990s decade was better economically than several before it - growth a person doubled - though that was off a low base and was boosted by rich Asian migrants in the mid-1990s.

Why? Rogernomics, much maligned and socially damaging, generated a more flexible economy.

No longer do governments try to defy world forces, as when the terms of trade - our national earning power in the world - dropped more than a third from the mid-1960s to the mid-1970s.

Finance Minister Michael Cullen says he won't boost spending through this world downturn. Instead, he is relying on the "automatic stabilisers" in the fiscal system until the world economy picks up.

Both Government and private analysts see a strong next year after a not-too-bad this year. Most also think we should do okay through the decade even though good growing seasons don't happen every year and world commodity prices fluctuate.

Cullen could hardly have a more soothing report card to take to voters later this year. Unless, of course, you look across the Tasman where folks are visibly richer. Which makes an important point.

Arthur Grimes, a fine economist and director of Victoria University's Institute of Policy Studies, has found that our commodities had better world prices in the 1990s than Australia's but Australia had higher economic growth. Australia's exchange rate was better aligned to its economic fundamentals than ours. So it got more of the benefit of the high prices than we did.

Put another way, we were pretending to be richer than we were.

Over the past five years and particularly over the past two we have been coming back to earth. Between the end of 1997 and the end of last year our dollar dropped about 20 per cent against the rest of the world.

The dollar's average level over the past two years has been about 15 per cent below the average in the 1990s decade. We can now buy that much less of other countries' goods and tourism than we could in the 1990s. In short, we are poorer.

This is no short-term phenomenon. Since the late 1970s the dollar's value in the outside world has halved.

Of course, that is not the only indicator of our economic well-being. The cost of living doesn't rise by as much as the dollar falls and wages have gone on rising faster than prices. So in everyday life, as distinct from tripping round the globe, the slide has been buffered.

But it does seep through in many ways into our way of life. We can't afford the health workers and academics we need. We are priced out of our best land by foreigners. To get top executives to make our economy go better we have to pay salaries that seem outrageous to toiling battlers.

The dollar's fall has helped make us feel better for a bit - and it has given us a chance to rev the economic engine. But we are poorer for it. Fixing that is the real agenda for this year's election.

* ColinJames@synapsis.co.nz