When three guys got together in November 1957 to prepare the prototype edition of BERL Forecasts, I can only imagine the issues they faced in launching a new business. And I would also imagine that the New Zealand economy they were assessing then must have been so different from the economy of the present day. I say “imagine”, because I wasn’t around then.

The key mechanism in 1957 to control the economic situation was import controls. For New Zealand operated under the shadow of a critical foreign exchange shortage. Consequently, the foreign exchange that was available was strictly rationed through the control of imports and the regulation of other foreign exchange requirements (e.g. for travel purposes). When this mechanism was unsuccessful, as was the case in 1957, wider all-encompassing demand control measures were applied in order to further reduce the populace’s demands for foreign exchange. For example, Arnold Nordmeyer’s infamous 1958 Black Budget, which included dramatic increases in tax on beer and cigarettes. In other words, the demands of the nation’s consumers were sacrificed in order to safeguard the nation’s foreign exchange reserves.

Such a mechanism was necessary due to the fixed exchange rate system then operating across the globe – well, the parts of the globe we were trading with back then (i.e. the UK).

Fast forward about fifty years and, now, of course, the availability of foreign exchange is allocated through the standard economist’s instrument of rationing – i.e. price. The floating exchange rate means that we no longer have to worry about foreign exchange shortages or concern ourselves with safeguarding foreign exchange reserves. For the price of foreign exchange (i.e. the NZ$ exchange rate) now adjusts almost instantaneously to ration foreign exchange to those willing to tender the price currently being commanded. Thus, in a nutshell, New Zealand has moved away from a foreign-exchange-constrained economy.

But now we have the latest Monetary Policy Statement saying, in a nutshell, that the New Zealand economy is growing too fast, unemployment is too low and the housing market is not helping. And so we are going to ‘buy’ low inflation by placing New Zealand in a growth strait-jacket.

And so the battle against inflation is being won (or ‘bought’) through having some of the highest interest rates in the OECD. Yes, the current battle is being won, but the war continues to haunt us. Indeed, accepting such high interest rates as necessary in the battle against inflation puts us perilously close to admitting defeat in the war against inflation.

Because, to me, it suggests we’ve given up on New Zealand businesses, enterprises and workers delivering the investment and productivity improvements needed to fight inflation. Rather, the price of fighting inflation will continue to be paid by businesses, enterprises and workers in the export sector as their competitiveness erodes away in the face of an export-unfriendly exchange rate.

So, I ask, is the inflation-constrained economy much different to the foreign-exchange-constrained economy? On the one hand, we have a situation where the needs of a nation’s export sector are sacrificed in order to meet a pre-specified inflation target. On the other hand, we had an economy where the needs of consumers were sacrificed to safeguard a nation’s foreign exchange reserves. Or, is the economy we are now assessing that much different to the New Zealand economy faced by those three forecasters some 50 years ago? I ask because it appears to me that the suppression of demand continues to be the paramount goal of economic management.

But the primary instrument in the war against inflation (and, indeed, in the accumulation of wealth and well-being) remains the generation and maintenance of competitiveness and productivity gains. These gains are concomitant with profitability, wage and employment gains. And these gains will only accrue if the nation devotes, and invests, significant resources to building and maintaining the social, physical, human and intellectual infrastructure required for a first-world economy. I suggest this requires leadership, not economic management.

The prospect of such investment occurring in the face of interest rates amongst the highest in the OECD is not bright. And the prospect of the required leadership is similarly not bright, if the best we can come up with is to label 2007 as Export Year.

I just hope my frustration and sadness is misplaced. Otherwise, in the words of Elton John, it will indeed be a sad, sad situation. And, the story of a small trading nation struggling to pay its way in the global economy won’t really have changed that much from that of fifty years ago. And so I also hope the next 50 volumes of BERL Forecasts somehow has the opportunity to tell a different story.