Annual Conference NZ Agricultural Economics Society

About the time I was considering standing for parliament for the first time, in January 1983, Metro magazine published a feature called "The Best of Auckland". Readers had been asked to write in giving their views on the best that our biggest city had to offer. I can tell you, it's interesting reading.

According to readers of Metro in 1983, the third best place in New Zealand's biggest city to buy a coffee was McDonald's. Phillip Sherry was thought to be the best newsreader. Country Calender was the best TV programme. The best shopping mall was a place called Queen's Arcade. Collards was the best wine, and admittedly it's still one of the best. But Sir Robert Muldoon was judged to be a sex symbol.

In 1983, Metro was a very bourgeois magazine, read by the sophisticates of cosmopolitan Auckland. And if they wanted a coffee, after watching their favourite programme, that symbol of urbanity Country Calender, they rated McDonald's to be the third best place to go. New Zealand sure has changed in the last 12 years. It's changed for the better.

It's a much more interesting place to live. The range of goods and services available today make a mockery of what was available when that Metro magazine was published back in 1983. And that's what an open, free-market economic framework is all about. It's a way of people organising themselves to produce the goods and services that others value most highly.

Economic growth is not a number. It represents that more goods and services that people value are being produced and sold. Employment growth is far from being just a number. It reflects the fact that over 200,000 more New Zealanders are now involved in meeting the needs and desires of others, and being paid for it. Price signals in a free market are the most advanced and liberating way of organising social cooperation ever known. You see the benefits throughout New Zealand.

I do want to speak briefly about the economy and its prospects as we move towards our first MMP election. The election is a conflict between those of us who believe that, in general, individuals are best able to decide how to organise themselves to improve the quality of life, and those who believe they know better. One thing for sure is that the rural vote will be critical, in what will be a very close election.

Farmers, as a general rule, have been among the chief advocates of the changes of the last 12 years. The irony is that many of them - particularly sheep and cattle farmers - feel that they are not benefiting from the changes. The chief concern is the value of the New Zealand dollar.

It's argued that the Government's "obsession" with keeping inflation low is driving up interest rates, and the dollar, and undermining the exporting sector. Those afflicted with serious cases of paranoia blame Asians for driving up Auckland property prices, fuelling inflation - ignoring that Auckland is not the only property market, and neither is housing at large the only one, to have experienced increased prices. I do not believe bitter arguments about the value of the dollar to be of much value.

Throughout the 1980s, and through to 1992, our dollar declined dramatically. Throughout that time, some exporters did well and some did badly. Since 1992, the dollar has increased somewhat, and, again, some exporters have done well - like the dairy and deer industries - and some have done badly. And, in fact, in historic terms, it is wrong to say that New Zealand has a high-value dollar. Nevertheless, the second most popular political party in New Zealand says it would force the dollar down, by abandoning the Government's "obsession" with low inflation. I guess it's probably more fun to be obsessed with Sir Michael Fay's baby-sitter.

Winston Peters says he would get rid of the 0-2% inflation target and instead replace it with a policy of keeping inflation below the level of our trading partners. For most people, this would be a difficult policy to implement, because you never know in advance what the inflation rates of your trading partners are going to be. But, according to his supporters, "our Winnie" is omniscient, so that would present no problem to him whatsoever.

His real problem would be that the latest information I have shows that Japan had an inflation rate of -0.5%. And if you trade-weight the inflation rates of our trading partners, they have about the same inflation as we do right now. So while, on one hand, "our Winnie" reckons the 0-2% target is "obsessional", on the other, "our Winnie" is promising to keep inflation at about the same rate, or lower. Clearly, if he means what he says, he wouldn't be able to relax monetary policy and force the dollar down.

The same is true with Labour. It says it would keep inflation between -1 and 3%. I don't see that it would have much scope to relax monetary policy either.

What's frightening for farmers about these parties is that, while they promise to keep inflation at around its current rate, they also promise to spend up large on whatever the Wellington lobby groups tell them to. Farmers know what happens when a party promises to keep inflation low while engaging in a big spend-up. We pay higher interest rates.

In the 1980s, that's exactly what happened. Labour's sensible wing had a policy of keeping inflation low, while the Helen Clark wing spent whatever they thought it would take to stay in power. Overnight interest rates went above 100%. 90-Day Bank Bills went over 25%. Now, interest rates remain relatively low

despite the current political uncertainty. We've balanced monetary policy with fiscal policy.

This week, we had a timely reminder of the risks of getting fiscal policy out of sync with monetary policy. The National Bank said that, in its view, increases in social spending were beginning to be in conflict with the low inflation target, and that that, along with political uncertainty, was causing interest rates to rise. A few saw that as criticism of the Government but comments by the Chief Economist of the National Bank suggest otherwise.

Nevertheless, it was a timely reminder to both the Government and, in particular, to parties of the left, about the interest rate perils of fiscal policy acting in opposition to monetary policy. I hope they might heed that warning, but I wouldn't count on it. Sensible fiscal policy isn't popular, so it has no place in any New Zealand First manifesto.

I believe the scenario for the farming sector over the next three months will include rising interest rates, as the political premium increases. The scenario after the election will depend on the result.

Despite what they say to some audiences, none of the three political parties with support of over 10% are promoting policies which would, in practice, cause the dollar to fall. That's not a credible policy position for parties which say they would keep inflation below that of the our trading partners.

But two of those three parties, are promoting fiscal policies at odds with their low inflation policies. While they wouldn't say it to any audience, they are promising higher interest rates for farmers. The huge irony, particularly in "our Winnie's" case, is that that could mean the dollar would move ahead faster than otherwise.

If you are trying to forecast ahead, you need to assess the likelihood of this happening. I'm not game to predict the exact shape of the next Government. With MMP, voters, for the first time, have the power to elect a parliament which collectively reflects their views. But, also for the first time, voters will not directly determine the Government. The Government will be determined by the politicians who are elected.

What I believe is that there will be sufficient MPs in parliament who will have the common sense to maintain the gains of the last 12 years. There will certainly be enough to maintain policies of low inflation. I'm confident there will be enough to maintain responsible fiscal policy. I'm confident they won't want to bring unions back to the centre-stage of policy making. I can't see a consensus emerging that parliament should take more of people's money and spend it on the pet-projects of Wellington lobby-groups. And most MPs, I believe, won't want to undermine trade access and jobs by closing off our economy to the world.

I believe a National-led Government will emerge from the no doubt confusing situation we may find ourselves in on the night of 12 October. That means we can expect the current economic framework to remain in place.

These are my thoughts as we move towards the election. Thank you for your invitation. I look forward to engaging in a more informal discussion on agriculture.