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Interesting article in interest.co.nz:-
Dutch Disease
New Zealand's debt binge parallels oil-fuelled booms
Could New Zealand have Dutch Disease (DD)?
At first sight the idea seems preposterous.
The term arose originally when Holland enjoyed a bonanza from North Sea gas. The result was a huge inflow of cash which led to many distortions, mostly arising from an over-valued currency and a plunge of exports.
New Zealand has displayed these symptoms for some time but there have been few analyses of the pathology of a combination of high currency values and (usually) high interest rates when measured against OECD peers.
DD can arise from other causes that a natural resources bonanza. Holland got money from selling gas; New Zealand has got it from selling the family silver.
It would be tedious to enumerate yet again our levels of debt. Suffice it to say that the trading banks have increased their holdings of personal housing debt from $99 billion in February 2005 to $114b in February 2006. That is growth of more than 15% in one year, a year when many predicted a housing slow-down.
Corporate overseas debt data lags, but the latest figures show that debt rose from $125b in March 2003 to $149b in March 2005. Meanwhile, credit card billings increase by about 10% a year, and balances outstanding have increased from $3.8 billion in February 2004 to $4.5 in February 2006 (an 8% annual increase).
Income rises have not kept pace with this dedicated shopping.
New Zealand has joined that rather select club of countries which have negative savings. There are some disputes among economists about our saving rate, but the evidence seems to indicate that spending is higher that income. A useful indicator is our current account which is in massive, even record deficit, of around 9% of GDP. We import much more that we export. We also export dividends/earnings on foreign-owned enterprises in New Zealand.
DD arises from a huge increase in foreign currency earnings. While it could arise from a revaluation of commodity exports, such as NZ enjoyed in the Korean War Boom, it has occurred in recent years from a massive increase in debt.
There is now considerable academic literature on the topic because several countries such as Norway and Russia have enjoyed oil-led booms. Several rather poor countries have enjoyed short-lived booms arising from surges in commodity prices. If there is validity to the hypothesis that DD can arises from debt, it will be confirmed by a degree of correlation with at least five factors::
An over-valued currency: This discourages exports and encourages imports, especially of price-sensitive manufactured exports.
Rent seeking behaviour: The argument is simple: why invest in a shoe (or shirt) factory when housing offers better returns? The problem is that a rising housing market gives the appearance of growth. That is an illusion: it is a series of transfers that increases debt. It does nothing to increase production. Rent seeking behaviour diverts resources from useful areas of production to consumption items such as housing. It involves a mis-allocation of resources which lowers growth.
Reduced incentives to the accumulation of human capital: In booms, governments become very generous in their employment and welfare policies. Holland, for example, had warehouses of art painted by state-supported artists. This generosity stimulates non-wage income, and there is good evidence that when there is lots of easy money, many people feel less need to enrol for education and training. Education enrolments become inversely proportionate to an abundance of external income flows. New Zealand’s university enrolments are falling despite a demographic increase in the 18-year old age group, and interest free student debt.
Less incentive to save and invest: This is quite complicated but a simple example may be useful. Take imports: items become very cheap, so consumers grasp them as soon as possible, even by credit payments. Why save when you can buy a new bed interest free? It would be irrational to postpone acquisition when the item is interest-free and sourced overseas from an area of appreciating currency. It also destroys demand for many New Zealand-made products, which are unable to be price competitive when the currency is artificially high. The high currency displaces domestic manufactures.
Over-confidence: A flood of external easy money causes over-confidence. It blunts a necessary concern with formulating good economic policy or reforming institutions. When a society is awash with cash, it is complacent about good education, good investments, or a proper level of welfare. Norway is the usual whipping boy in these arguments. It is accused of postponing unpopular by necessary reforms. Public expenditure is massive but increasingly unproductive. Research and development is almost non-existent. The proportion of exports to GDP has been stagnant for years.
New Zealand is not unlike Norway. It is quite effervescent. The carry trade has brought a record high to the stock market and a housing bubble. Although exports and tourism are floundering, the public are enjoying a terrific shopping spree. Wages are rising.
It is not the time to talk to friends and neighbours about capital investment, research and development or productivity. Their obsessions are the housing market, holidays and fun. As a nation we have turned our houses into ATM machines, always drawing down more cash based on home-equity loans or reverse mortgages.
We have Dutch Disease.
Dutch Disease
New Zealand's debt binge parallels oil-fuelled booms
Could New Zealand have Dutch Disease (DD)?
At first sight the idea seems preposterous.
The term arose originally when Holland enjoyed a bonanza from North Sea gas. The result was a huge inflow of cash which led to many distortions, mostly arising from an over-valued currency and a plunge of exports.
New Zealand has displayed these symptoms for some time but there have been few analyses of the pathology of a combination of high currency values and (usually) high interest rates when measured against OECD peers.
DD can arise from other causes that a natural resources bonanza. Holland got money from selling gas; New Zealand has got it from selling the family silver.
It would be tedious to enumerate yet again our levels of debt. Suffice it to say that the trading banks have increased their holdings of personal housing debt from $99 billion in February 2005 to $114b in February 2006. That is growth of more than 15% in one year, a year when many predicted a housing slow-down.
Corporate overseas debt data lags, but the latest figures show that debt rose from $125b in March 2003 to $149b in March 2005. Meanwhile, credit card billings increase by about 10% a year, and balances outstanding have increased from $3.8 billion in February 2004 to $4.5 in February 2006 (an 8% annual increase).
Income rises have not kept pace with this dedicated shopping.
New Zealand has joined that rather select club of countries which have negative savings. There are some disputes among economists about our saving rate, but the evidence seems to indicate that spending is higher that income. A useful indicator is our current account which is in massive, even record deficit, of around 9% of GDP. We import much more that we export. We also export dividends/earnings on foreign-owned enterprises in New Zealand.
DD arises from a huge increase in foreign currency earnings. While it could arise from a revaluation of commodity exports, such as NZ enjoyed in the Korean War Boom, it has occurred in recent years from a massive increase in debt.
There is now considerable academic literature on the topic because several countries such as Norway and Russia have enjoyed oil-led booms. Several rather poor countries have enjoyed short-lived booms arising from surges in commodity prices. If there is validity to the hypothesis that DD can arises from debt, it will be confirmed by a degree of correlation with at least five factors::
An over-valued currency: This discourages exports and encourages imports, especially of price-sensitive manufactured exports.
Rent seeking behaviour: The argument is simple: why invest in a shoe (or shirt) factory when housing offers better returns? The problem is that a rising housing market gives the appearance of growth. That is an illusion: it is a series of transfers that increases debt. It does nothing to increase production. Rent seeking behaviour diverts resources from useful areas of production to consumption items such as housing. It involves a mis-allocation of resources which lowers growth.
Reduced incentives to the accumulation of human capital: In booms, governments become very generous in their employment and welfare policies. Holland, for example, had warehouses of art painted by state-supported artists. This generosity stimulates non-wage income, and there is good evidence that when there is lots of easy money, many people feel less need to enrol for education and training. Education enrolments become inversely proportionate to an abundance of external income flows. New Zealand’s university enrolments are falling despite a demographic increase in the 18-year old age group, and interest free student debt.
Less incentive to save and invest: This is quite complicated but a simple example may be useful. Take imports: items become very cheap, so consumers grasp them as soon as possible, even by credit payments. Why save when you can buy a new bed interest free? It would be irrational to postpone acquisition when the item is interest-free and sourced overseas from an area of appreciating currency. It also destroys demand for many New Zealand-made products, which are unable to be price competitive when the currency is artificially high. The high currency displaces domestic manufactures.
Over-confidence: A flood of external easy money causes over-confidence. It blunts a necessary concern with formulating good economic policy or reforming institutions. When a society is awash with cash, it is complacent about good education, good investments, or a proper level of welfare. Norway is the usual whipping boy in these arguments. It is accused of postponing unpopular by necessary reforms. Public expenditure is massive but increasingly unproductive. Research and development is almost non-existent. The proportion of exports to GDP has been stagnant for years.
New Zealand is not unlike Norway. It is quite effervescent. The carry trade has brought a record high to the stock market and a housing bubble. Although exports and tourism are floundering, the public are enjoying a terrific shopping spree. Wages are rising.
It is not the time to talk to friends and neighbours about capital investment, research and development or productivity. Their obsessions are the housing market, holidays and fun. As a nation we have turned our houses into ATM machines, always drawing down more cash based on home-equity loans or reverse mortgages.
We have Dutch Disease.
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