Illustration by Tim Denee – www.timdenee.com
You’d think, given the near bankrupt state of the state of California, that a guy who has served on Arnold Schwarzenegger’s Council of Economic Advisers would be wanting to keep a very low profile these days. But not Professor Sebastian Edwards. No, instead, Edwards has come to New Zealand on one of those conference junkets organised by the Treasury, the Reserve Bank and Victoria University and told us we have a “Woody Allen” style approach to our economy.
Meaning: we Kiwis are all “a bit depressed and neurotic” – when really, everything’s apparently pretty fantastic down here. Get this:
As Woody, many New Zealanders worry a lot,” he told the two day seminar….. “They worry about the economy and about the country’s position in the world. “They are convinced things are going downhill, and believe that the future looks rather bleak.”
Where Woody Allen has a beautiful girlfriend, interesting friends, a nice apartment and a well-paid job, New Zealand is “at the very top” of the World Bank’s rankings for “doing business”, has one of the strongest educational systems in the world, and is one of the least corrupt countries.
Of course, a few of us peasants who don’t know how lucky we are do tend to regard those World Bank rankings of best places for ‘doing business’ as being a problem, not a compliment. We also tend to regard Third World rates of rheumatic fever among New Zealand children, vastly increased gaps in income inequality, a regime of unaffordable tax cuts for the rich, a blind focus on the deficit as being our No 1 problem ( rather than say, unemployment) and so on, and so on, as being signs of trouble.
We don’t regard them as being the equivalent of having a beautiful girlfriend, interesting friends, a nice apartment and a well paid job. To the point where we find it infuriating that some chirpily moronic American should be down here at our expense and feels free to tell us: “Don’t worry, be happy.”
But wait a cotton pickin’ minute, though. Hasn’t Professor Sebastian Edwards himself been known to have a few Woody Allen misgivings of his own about the New Zealand economy ? Why yes, he certainly has – if Edwards was the author of this October 2006 paper on New Zealand’s current account deficit. In which paper, Edwards made these somewhat alarming observations :
* As may be seen, at almost 9% of GDP New Zealand’s deficit is very large from a historical and comparative perspective. It is in the top decile of deficits distribution for all advanced countries in the first thirty years of floating. As the data in Table 4 suggest, at this point New Zealand’s current account balance looks more like a Latin American or Asian country, than like an advanced nation. ( p.13)
* What is interesting, however, is that very few advanced countries have had current account deficits in excess of 9%… What sets New Zealand truly apart is the historical persistence of its large current account deficits. ( p 14)
* The picture that emerges from this Table confirms that New Zealand represents a unique case in terms of its external position; together with Iceland, it currently has the largest negative NIIP (Net International Investment Position] among advanced countries. Moreover, New Zealand’s NIIP is significantly higher than that of other advanced nations.
All of this negative commentary by Edwards is mere prelude to a summary that posits New Zealand’s large current account deficit as not being due primarily to say, a poor trade performance on our part – unlike the US problems with its deficits – but is caused by the net investment income [ie repatriated profits from foreign investment] flowing out of the country. [Which is a good example of how being cited by the World Bank as one of those swell places for foreigners to ‘do business’ (and buy up our assets) has actually been a stone cold liability for ordinary New Zealanders.]
Somewhat bizarrely, Edwards treats our dependency on Australia – and its ownership of our banking sector – as one of the few things standing between New Zealand and a crash landing. [Edwards writes: “On the other hand, given the importance of the “contagion” variable in this analysis, if Australia herself is subject to a “sudden stop”, New Zealand is highly likely to go through a hard landing and an abrupt reversal. Assessing the likelihood that Australia will experience a sudden stop is beyond the scope of this paper.”]
Here’s the summary table from Edwards’ paper :
* During the last thirty five years New Zealand has been one of the few countries with persistently high current account deficits.
• During this period [New Zealand] has also been subject to a number of adjustments, including some characterized by large and rapid current account reversals (1975, 1976, 1983, and 1988).
*The recent ….. levels of the current account deficit are very large, both from a historical and comparative perspective. Indeed, at 9% of GDP, they are larger than most estimates of the “sustainable” current
• New Zealand’s large negative Net International Investment Position (NIIP) is currently 90% of GDP. This is a very large figure, both from a comparative perspective, as well as when compared with the evolution of the NIIP for New Zealand.
*In contrast with the U.S. the main source of New Zealand’s current account deficit is not the trade deficit. Indeed, until recently the trade balance was in surplus. The main source of New Zealand’s current account deficit is the investment incomes account.
• Having said this, in recent years the trade balance has turned into deficit, contributing to the large overall current account imbalance.
• To an important extent the (very) negative NIIP and (very) large current account deficit may be explained by New Zealand’s very close economic relationship with Australia. In particular, the significant presence of Australian FDI in a number of sectors – including the banking sector – explains the large negative investment incomes account….
And so on. Yep, that certainly sounds like an economy in the pink of condition. Only the global financial meltdown has subsequently helped reduce New Zealand’s current account deficit, as our depressed economy has simply not been racking up the investment income outflows of yore. No significant structural change has occurred to prevent that current account deficit from blowing out again – to well beyond the 5% level that Edwards regards as marking the boundary line of sustainability.
Perhaps instead of using his freebie down here to chide us about our Woody Allen sensibilities, Edwards could – for a start – revisit his own past concerns about New Zealand’s economic settings. Because the structures that are generating our chronic current account deficit levels are unsustainable, and are producing social outcomes that benefit the few, while intolerable for many. Maybe Edwards might care to front up in person, and tell those families whose kids have rheumatic fever just how lucky they are.