New Zealand as it is, warts n'all
This is the last article that you will read for a while espousing doom, doom, doom. It is time to start floating ideas for debate on how we get out of the mess.
My last blog but one, on the possible issues relating to currency pegging, I circulated widely to a number of business leaders. It engendered a lively online debate. In the words of Roderick Deane, I was on a different economic planet to him and I was nuts. Floating the dollar is the only way to survive in the real world. In short he is acquiescing to the world as it is, and cannot grasp, yet, that things can change by unilateral action. This said reality check one for NZ:
We are small, irrelevant and along way from everyone. No one cares what we do or don't do.
The far away bit means we are more vulnerable to energy shocks than just about any other country on the planet as our goods, big bulky stuff, commodities, have to be shipped across the planet to buyers. Now get real guys. Milk powder is a global commodity and it has a price. We have to pay the price of getting our milk powder to the customer, thus delivered to a customer we will get the lowest net price on just about every commodity in the world that we make.
It will get worse over time as transport and logistics are going to become real expensive. A business trend over the last 5 years, and it will continue, is to shorten the supply chain. I.e. have production closer to consumption. Guess what this means globally? NZ is toast if it keeps exporting base level commodities because no one will want them or if they do we will get nothing for them.
Now in terms of where we are at economically as they say a picture says more than a thousand words. As you also know I hate doing base level research, simply because our reality is so self evidently obvious that I don't think I or any of us need to do such research.
One of the exchanges with Roderick Deane resulted in him giving to me the attachment to this blog - click here to read it. He has put into statistics all that I have been alerting you to for the last 5 years.
I have his permission to share this with you. It is a presentation he made on 2 September to the NZ Retailers Association. Certainly the slides and statistics were complied by ANZ and Business Roundtable economists. Now before you jump up and down and say "bah humbug those self interested idiots", I say to you don't shoot the messenger. Much of what the Business Roundtable says is sensible stuff, albeit presented from a perspective that usually results in the message being lost on the populace.
There are 84 slides in this presentation, you will be able to spot the self promotion and the business agenda but I will just highlight some of the slides in this presentation that you should look at and then swallow hard.
We are POOR.
Slide two, our GDP in 1996 dollars is $30k. It was $5k in 1866. In real terms that is a very low growth rate, and relative to the world it is worse again.
We all know that NZ is a commodity exporter, 100 years ago it was meat and timber, now it is timber meat and milk. We have not developed our economic capacity one iota in 100 years. Slide 10 is, however, relevant and is good news if it is sustainable, our terms of trade have improved since 2000 breaking a long run losing streak.
Don't get too excited as terms of trade is imports and exports in a hotchpotch matrix. The last 9 years have seen the emergence of China as a cheap junk exporter. This won't continue forever. So the terms of trade improvement is nothing to do with us and everything to do with China. This is the Asian gift.
Slide two is frightening, for 100 years commodity prices have been trending downwards. In part this is due to increases in global production, South American meat, Russian timber and in part it is energy costs as mentioned above.
If we do not develop our value added exports within 20 years we will be a subsistence farming economy and those not farming will be subsistence stall owners, pitching to the passing trade. And fuel costs will mean there won't be much of that. Have a look at slide 55 as well, commodity prices are correcting from unusual highs. So dairying shouldn't get too excited about the short term blips upwards. The trend is downwards and has been for 100 years.
Slide three, read this and weep. Relative to the rest of the world we are as poor as we were in 1820. Then the Maori had a pretty good life as did the whalers relative to the rest of the world. America was still finding its feet, and the west was still very wild. Europe was just recovering from the Napoleonic wars so statistics while interesting can be a bit inflammatory. We had 80 years at the top of the world in terms of income. 1870, we stole Maori land and cut down trees. Can't do that again that free lunch to prosperity is gone.
1913 to 1950 we had meat and wool and two global conflicts. In 1973 we took a hit. Britain joined the EEC and the first major energy shock hit. And by 1973 universal welfare as an entitlement was firmly embedded and we had become a nation of hand out bludgers. The next three bars show exactly where it got us. As poor as we were in 1820!
We have the global religion of consumerism and we live beyond our means. Slide five. We have had three years of trade surplus since 1955, and not had one single trade surplus since 1967. As always NZ is an early adopter.
Productivity. Have a look at slide 11. Mostly it is to do with capital efficiency since 2001. Our housing bubble has deprived business of capital. The lack of reinvestment in business has resulted in capital's productivity declining sharply from 2002 with labour doing likewise. Subsequent slides explain why we can't attract business capital either. If we want to close the gap with Australia by 2025, fat chance, productivity has to be redressed. Slide 17 and Slide 18 is all Don Brash and yet another taskforce.
God, we are good at talking and doing nothing. To catch Australia we need a growth rate of 4% pa for the next 15 years. You have got to be kidding. Give up now. Set a more realistic goal. Slide 19 shows the growth in our and the Australian economy. Australian is export led. Ours sine 2000 has been consumption and housing led. I.e. we have attempted to spend our way to riches.
Slide 21 is real interesting on the productivity front. It plots GDP to hours worked, it shows that NZ works more hours than most and earns the least amount of GDP for those hours. When you consider how many don't work it tells you a lot about the working week of those who do work. Luxemburg works as hard as us but earns three times as much. Have a look at slide 36 as well. Those who are working are working less hours, it has got to get worse not better. More for less is not a starter.
Slide 12 is highly political. But on growth, if that is important, Michael Cullen and Helen Clark performed as well as Rob Muldoon. Muldoon is a blight on our history and so is Clark.
Slide 24 should be music to John Minto's ears. The workers share of GDP is increasing, yet productivity is decreasing. Have I missed something? See slide 25. Slide 27 sums it up in terms of attracting capital to NZ. Our productivity relative to our cost of labour is sliding.
And we have created an elephant in the public sector. Sure it is better than 1989, but the trend is up, and worse we are paying those in the public sector who arguably produce nothing, more than those who work in the private sector. Slide 30.
Slide 37, shows the quantum leap to poverty that John Key and Bill English are taking us on, to keep a fools paradise running.
And the double deficit that will kill our economy. Look at slide 33. Result government debt now rising strongly, slide 34.
Now if you ever wanted a slide that shows you how statistics can lie, unemployment ones that is, slide 38 is it. Invalids and sickness beneficiaries number nearly 3 times those on an unemployment benefit. I thought modern science and medicine made us healthier. Surely this can't be right? Well it is, we are sicker than we have ever been. I am telling you.... we are sick in our heads.
We really do think nanny state will feed us, clothe us and house us. Wake up it can't do this much longer so the 140,000 sickness beneficiaries had better decide it is time to get better. Have you ever noticed that the bosses are rarely sick? That self employed are rarely sick? Are they more healthy than the rest of us? No, they just think differently.
And are we in debt? You bet we are. Slide 40. What fuelled, it housing, slide 41, slide 50, slide 51 and 52. Consumer debt is mushrooming, look at slide 61. Sure you can do a lot with the scale on a graph.
As an investment destination we are now globally uncompetitive. The NZ protection racket we call government wants to much so business goes elsewhere. Slide 65, 66 and 67.
So guys we are poor, lazy, sick dependants who are hopelessly in debt and bludging off the farmers, with a heavy burden of interference and regulation, and a track record of trampling property rights.
Now of course not all of us are poor, lazy and sick. But sadly too many of our people want more than they can afford, don't want to work and expect others to pay for them. It has to change or eventually it will change. Our new Chinese masters will sort us out, and it won't be nice.
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There is no problem being a commodity based economy so long as you recognise that you must produce more to compensate the decline in prices of said products and the rise in expectation of the people in the land. This is a discussion about economic focus and productivity we are not in the game as yet, I agree with all you say, however there are more solutions than problems on a positive note.
Good article Bruce. I agree NZ faces some serious challenges and we need to get serious about working together to sort them out. What is positive is that recent commentary by Treasury, the likes of Bernard Hickey and yourself are bringing the issues to the public. My concern is that the Government is not being up-front with the public on the dire situation we are in. Under a popularity based political system, where the bulk of the NZ population are either employeed by the Government or on benefits and where the productive sector is a minority, will not vote internally for the reforms required. The productive sector will simply vote with their feet and move to Australia, along with their tax base. The Government needs to he honest and tell NZ that the current path is unsustainable. We have 4 options: a. Status quo. The Govt needs to be clear that under this scenario NZ will no longer be able to afford any welfare system, education or health within the next 10-15 years (as noted in the Treasury report). b. Undertake the necessary economic, tax and welfare reforms. This will be painful in he short term. c. Ask Australia to take us under their umbrella and becoame a state of Australia. Australia will impose strict conditions on this, such as abolishing our government and Treaty of Waitangi in favour of the Australian government. They will also force the above economic reforms on us. d. Finance our deficits by borrowing from foreigners, adding to our already massive froeign debt. Under this scenario, or lenders (most likely the Chinese) will soon take control of our assets, fiscal and monetary policy (and consequently the social policy) as settlement of the debt. I don't think NZ'ers really understand what this will mean in terms of their lifestyles. The biggest losers will be those who are unskilled and have been reliant on welfare. They need to look at the unskilled in China to see their future.
I hope you never get to write the Good News Bible. However everything you have posted here (and in prior blogs), is true and has been evident for many years. Whether a nation or an individual, borrowing more is not a way out of debt. As you and several posters have been saying for three years or more - we are a basket case. The sooner we do something about it the sooner we are out of trouble.
This article should be front-page in every Fairfax paper, and they should buy the front page of the Herald and the ODT and print it there as well.
Kevin (#1) - the reason is ... politicians do not think New Zealanders have the courage to face life as it is. Instinctively they also know that the angst will be sheeted home to them and they see this as unfair (to them).
Bill (#2), I would appreciate you expanding on your contention that producing more is an answer. Producing more of something into a market that doesn't want it is surely a recipe for disaster? Or, if it wants it, cannot pay a reasonable price for it.
Farming income has been steady in decline since 1905 (with blips for wars), with steadily increasing costs eroding that lowering income. Currently farming is a "lifestyle" choice for most engaged in it. I live/work in this sector.
1. In simple terms no rational city businessman would invest with an average return on capital of less than 2%, a figure often on the generous side for our pastoral farmers. 2. Until the recent price-rise for Fonterra products, perhaps as many as 25% of dairying operations were on the brink of bankruptcy. These businesses - and the banks that allowed them to gear to unsustainable levels - have a small breathing space.
So I'd really like to know where you see we can at once, maintain this high level of debt, and increase the return on capital while accepting ever lower prices while at the same time producing more of something no one wants to pay for.
Perhaps we simply have to rejig our concept of return on investment? Accepting that a "living" is adequate recompense and that the funds employed are written off at the moment of purchase. Don't tell the banks about that idea though.
A very good series of article Bruce. We seem to have a philosphy in the world at the moment that the only way to put out a petrol fire is to pour more petrol on it. I cannot fathom the logic behind spending more (on absolute junk) to get out of debt, especially when it requires us to get into more debt to do so.
Unfortunately Campbell is right. 30 - 40% of the population will vote for Labour, and hence vote for increased social spending, with no concern where this money comes from. 25 - 35% will vote National for much the same reason except with a more rural / business outlook. Whether it is for the "country" or themselves is a moot point. The other 20 - 30% will abstain, wont understand how to mark a voting paper correctly, or vote with any conscience whatsoever.
And so with that as the major determinant behind who runs the country, no government can install any true remedies to the economy, as that will guarantee them being voted out the next election.
What we probably need is a benevolent dictator. Someone who doesn't want the job, but will do it because it is needed. No Mugabe's, Pol Pot's or Politicians need apply.
Bruce - I have downloaded the RDeane file but cannot open it. What program do I need to use to open this file?
Mining,solves the immediate problems but as you say Bruce, structurly NZ is stuffed. 1# ---Gov't NEED to say NO at times to UN demands. 2#Government departments and servants,COPY to many "low standard international programmes. 3#Government are not there to provide services,and especially ,when the so called "customer" is blatently WRONG ie.unemployed and single parents. 4#Family welfare "top ups" for the low wage earner has to stop.-US and AUS studies indicate ,employers do not increase wages because the govt will.---Also two points should be noted a,if employers cannot pay resonable wages -they shouldn't be in business. b, didn,t we precisly stop this practice of "subsidising" businesses-namely,---FARMERS-- way way back in the early 80,s.
5# Government should back exporters-ONLY -not domestic business.-Imagine if the public service gave all their fantastic skills to exporters,-- Key should just refocus public serv-ants/unions, to exports -no layoffs -and the votes will follow. 6#Domestic business should be made to take a back seat-if they are any good -they too will export. 7#Exporters should supply 'lamb' to top end restaurants-worldwide-not by products to low profit markets.Milk products are the same.ANY products are the same. 8#Tourism-backpackers consume noodles and drugs-we do not need this market.Get ones with lots of money. 9#In general -set high standards internationally, raise gst and abolish income tax for first $100,000. 10#-abolish secoundry education in favour of uni/poly/industry learning ,in any direction a student/employee wants. 11#- give tax benefits only to those that work -for super/dentist/doctor/education-budgeting,commerce ect. 12# Create an enviroment where WORK is the most BENEFICIAL aspiration.
Andy #6 - Powerpoint
I find the slides showing per capita GDP by country interesting. They clearly show that wealth creation is not about ideology, the wealthiest countries range from social democracies with large government sectors to market based economies with small government sectors. The same countries have appeared at the top of the list for many years, despite changes in governments.
This leads me to conclude that when it comes to wealth creation ideology (excluding extremes) is largely irrelevant. My assumption is that wealth creation comes from long term quality leadership and management.
Another point - I'm not sure that being a commodity producer is necessarily a bad thing. Most commodities are supply limited in the long term whilst demand is steadily growing. There is limited scope to increase the world's arable land, therefore future growth in food production must largely come from productivity growth which is unlikely to keep up with demand growth. Having said that, I am not advocating sitting back and waiting for commodity prices to increase. We need to focus on the things we can control so that we are well placed to take advantage of any commodity price increases if/when they occur.
It is written in Micro soft power point, should open, and you are asking a ludite.
The link to the Powerpoint document should be working now.
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Bruce, great article.
We are playing with ourselves if we think higher taxes, no asset sales, no cuts in government spending and no competition in the public sector is going to deliver a growth rate to match Australia. we will have no-one here to deliver even 1% soon.
Tragically Mr Key has promised his flock no economic reforms until after 2011 because that is his serious business year, not sure why 2009 cant be serious too but votes are more important than lifting our standard of living apparently.
The Australian Next 50 Years of Prosperity goal will have the ockers chasing a 4-5% growth target when our economy after the Sir Roger Douglas reforms only got 3%.
The ockers will dredge our productive skill base leaving us with fewer and fewer to pay the ballooning cost of social welfare.
What on earth is John Key and Bill English playing at doing nothing?