Dear John,
As you form your new government, there will be many
who, for the sake of the country, will wish you well and who will hope that you have the wit and will to overcome the economic
crisis that now afflicts us. This may be the moment to put to one side your experience as a merchant banker and
to concentrate instead on the needs of the real economy in which most people live and work.
Your challenge is in fact twofold. You will
first have to confront, with other world leaders, the global crisis that now threatens us, but at the same time
you will have to look forward to the steps that will be needed if we are to improve our own endemically disappointing economic
performance. The world's big economies have been, after all, like great ocean liners which have done very well while sailing
the global ocean, until they suddenly sprang a leak and started to sink. We, on the other hand, from the moment we launched
our own tiny and vulnerable craft on global waters in 1984, have been waterlogged for 25 years.
The decisions you will have to take in response to
the global crisis are, in a curious sense, relatively straightforward. There is a wide-ranging consensus as to what
needs to be done, embracing right (George Bush) and left (Gordon Brown and Kevin Rudd), which you should have no difficulty
in joining.
The steps taken so far in New Zealand are in line
with that consensus. The cut in the OCR, the Bank Deposit Guarantee Scheme, the measures to improve bank liquidity,
will all help to avert disaster. Even so, it is almost certainly the case that we have not yet seen the full dimensions
of the crisis. As our export markets close down and our tourist numbers decline, we will feel – in addition to
our own home-grown recession - the full brunt of the international recession. And, while our banks look reasonably well
placed for the time being, the higher cost and greater difficulty of borrowing overseas will have their impact sooner or later.
The difficult issues, however, will arise in tackling
our own deep-seated and endemic national problems. It is here that your real test will come. If your government is to slow down, or even stop or reverse, the migration across the Tasman (which has
attracted so much attention from politicians over recent years), it will have to deal with the fact that if we had matched
the Australian performance over the past 25 years, every New Zealand family would be $80,000 per year better off. It
beggars belief that this disparity is unrelated to the policy prescriptions we have chosen to put in place over that time.
Just as the global crisis has compelled a freeing
up of the debate about international economic and financial arrangements, so it should be seen as an equally strong reason
for undertaking a re-appraisal of our own national policy stance. Both the global crisis and our own shortfall in economic
performance, after all, have a common origin - the belief that there is no alternative to the current orthodoxy of unregulated
markets and of economic decisions being the preserve of bankers rather than elected governments.
It is that simple-minded belief that must now be
subjected to review. Your actions and statements so far suggest that you understand this (though you may have your work
cut out to persuade your deputy and Minister of Finance that it is not "too hard" to make a change).
In case you need to buttress your resolve in this
respect, you should take courage from the increasing chorus of influential voices - from Joseph Stiglitz at the United Nations,
to Robert Skidelsky and Vijay Joshi in the pages of The Guardian - who are now calling for new thinking and new measures.
Nor is there any shortage of reputable New Zealand
economists – Brian Easton, Ganesh Nana, Kel Sanderson, Anthony Byett - who believe that the time is long overdue for
reconsidering the wisdom of relying on a single policy instrument - interest rates - to control inflation. There are
many others who will concede in private that new thinking is needed. Even your
predecessor as National Party leader, Don Brash, has recognised the need for additional instruments in his advocacy of a variable
rate of excise duty on petrol. And the new Labour finance spokesperson, David
Cunliffe, seems ready to break the shackles of current orthodoxy.
The country will hope that you might go further,
and put your weight behind the growing international demand for a “new Bretton Woods”, which would put a new international
framework in place – as Henry Paulson puts it – to redress imbalances and restrain excessive capital movements. No country has more to gain than we have from such a development. If we are to improve our economic performance, both at home and internationally, we must be ready to apply
the lessons that both our own and the global experience should teach us.
Bryan Gould
13 November 2008
