Parity parties

The Prime Minister is reported as reckoning we should celebrate parity with the Australian dollar.  It hasn’t happened quite yet, there has been a bit of a pullback today, and market positioning means there are probably still a few obstacles to getting there.  But at current exchange rates one would be brave to bet much against parity happening sometime soon.

But is it something to celebrate?  I don’t think so.  A high (real) exchange rate lowers the relative price of consumption.  And since consumption is often thought of as the point of economic life, the cheaper consumption is, the more of it we can have.  But, over time, one can consume only from what one earns, and – all else equal – an exchange rate that skews things towards consumption tends to reduce the ability of firms and individuals to earn more in future.  That issue doesn’t arise if the exchange rate rises because (and to the extent that) the terms of trade rise, or because New Zealand firms have found new or better products, or smarter ways of organising themselves.  As Krugman put, it in the longer-term if productivity isn’t everything, it is almost everything.

So let’s stand back and consider near-parity against the AUD.   Our terms of trade have been falling more slowly than Australia’s, so relatively speaking that is a positive for us.  But this morning’s papers contain reports of record grain gluts.  The combination of very weak oil prices, abundant grain stocks, and falling grain prices doesn’t bode well for dairy prices (nor does China’s drive for self-sufficiency, or the removal of European quotas).  Exports are a larger share of the New Zealand economy than they are of the Australian economy.  And whereas the New Zealand export sector is largely locally owned, so that all the income losses are borne by New Zealanders, much of Australia’s export sector is foreign-owned, so funds managers around the world will be sharing the pain as iron ore prices keep falling.  I’ve shown before that there has been no sign in recent years that productivity growth in New Zealand is improving relative to that in Australia.

The exchange rate is not strong just against the Australian dollar.  At around 79 on the TWI  – an index that probably puts too much weight on the Australian dollar –  the exchange rate is less than 5 per cent below its post-float peak.

So what does support the NZD, against the AUD and more generally.   Over the last year, the Reserve Bank of New Zealand raised its policy interest rate by 100 basis points, while Australia (and most other advanced country central banks) were cutting policy rates and easing monetary policy.  (I’m deliberately posting this before 4:30: whether, as everyone assumes, the RBA cuts again today or leaves it another month or so isn’t really the point here.)

OCR increases would have made sense if inflation was picking up, but it has stayed low (headline has collapsed, but core measures have remained persistently weak despite the allegedly robust recovery).  The Reserve Bank Governor, who talked confidently a year ago about 200 basis points of OCR increases, has slowly had to walk back his rhetoric and then his actions, but we are still left with a policy rate quite out of line with those elsewhere in the advanced world, when core inflation is consistently below the target midpoint, wage inflation is weak, inflation expectations  are falling, credit growth is quiescent, and the unemployment rate  –  real people, losing real skills –  remains uncomfortably high.

If it comes, parity is nothing to celebrate – any more than the previous peaks were things to celebrate.  Rather, taking together all the information, those peaks have typically been markers of some unsustainable imbalances building up.  This time, that looks like the gap between our OCR and policy interest rates abroad.  And probably a misplaced confidence (in official circles and among private commentators) in the ability of the New Zealand economy to remain relatively resilient as the commodity slump goes on, the economies of our two largest trading partners weaken, and as Christchurch no longer represents much, if any, of a source of new growth in demand.

Is the IMF becoming obsolete?

Timothy Taylor has an interesting post Is the World Bank Becoming Obsolete?   My most telling memory of the World Bank is the year it, and its legion of visiting experts, won the prize for the biggest single customer of the Lusaka Hotel Intercontinental.

But the same question should be asked about the International Monetary Fund (IMF).  I’ve had a lot to do with the Fund, here and overseas, including two years as Alternate Executive Director on the Board of the Fund.  Indeed, participating in an IMF technical assistance and training mission to China paid for our honeymoon.

The IMF was founded in the wake of World War Two, to preside over the new global system of fixed exchange rates, and provide short-term credit to members with temporary balance of payments difficulties.  For various reasons, New Zealand was late to join the Fund – not until 1961.   By the time the membership became near-global (in the 1990s), the original mission was no more.

It is a curious institution.  The structure looks highly technocratic (and the organisation has many highly capable people), but in fact it is highly political.  That isn’t intended as criticism – relations between sovereign states are as political a matter as any, and decisions to commit large amounts of money to other countries quite probably should be as well.  Indeed, before the IMF existed, short-term loans were made to countries in need bilaterally, based on the potential lenders’ assessments of their own interests, the importance of relationships etc etc.   The recently approved loan to Ukraine might have looked much more defensible as a loan from major Western powers based on their own national interest considerations than it does as an allegedly technocratic assessment of Ukraine’s economic prospects and of the Fund Board’s own Exceptional Access Criteria (all occurring with a Russian Executive Director at the Board table).

The IMF now has a number of roles:

  • Article IV surveillance discussions and reports on each country’s macro-economy and financial system.  The most recent New Zealand Article IV report is here.
  • Research and statistics
  • Technical assistance
  • Lending

Statistics are good and useful.  Someone probably needs to collate and disseminate them internationally, and provide a central point for guidance on international standards of comparability.

But it is by no means obvious what other useful or important roles the IMF is now fulfilling.

The Fund provides technical assistance to many countries on technical aspects of monetary and fiscal policy, financial system infrastructure etc, mostly in the less developed parts of the world.  Much of it is worthy stuff.  But why do we need a multilateral government agency to do it?  There is a myriad of consulting companies, large and small, around the world, often staffed with former officials.  And if it is argued that poor countries often can’t afford such advice, there are at least two points in response.  The first is to note the tendency of international agencies to want to install gold-plated systems that go well beyond the actual needs of many of these countries.  Having to write the cheque oneself, should induce a more hard-headed assessment of what is really needed –  and can be maintained – when weighed against other domestic spending priorities. Second, if advanced countries do want to provide aid to help an emerging country acquire outside technical assistance there is nothing to stop them doing so.

Article IV surveillance reports used to be confidential to the member country and to the IMF Board.  These days, inevitably and perhaps appropriately, almost all Article IV reports are published, and are written with publication in mind.  Publication doesn’t mean that no confidential discussions occur between visiting Fund missions and senior officials and Ministers.  But the focus is on what goes to the Board, and then goes public – and often on the wording of the published concluding statement and press conference at the end of the mission.  Simple messages dominate, and important intractable issues get too little focus.

But is there a gap in the market for the reports of organisations like the IMF?  In 1945, with tight controls on private capital flows, perhaps there were big gaps.  But these days, local and international banks churn out frequent reports on a wide range of countries, and entities such as the Economist Intelligence Unit cover many more on a lower frequency basis.  Macroeconomic analysis on Kiribati is certainly limited, but so (apparently) is demand for such analysis.

Perhaps IMF reports are more incisive or enlightening than the other reports?  Unfortunately there is no evidence of that.  The IMF probably typically has more resources at its command, but they are not that well used –   I have repeatedly lamented to IMF staff how relatively poor the institution is at marshalling cross-country perspectives and experience to shed light on New Zealand’s challenges and issues.  And if the IMF has more resources, the incentives it faces often encourage blandness and inoffensiveness, and rehearsing an optimistic conventional wisdom.  Check out Fund advice in the early 2000s for many European countries, and the euro area as a whole.   Or think of the incentives on staff and management to pull their punches when writing about the Article IV report on a country whose finance minister is chair of the ministerial oversight committee, the IMFC (Gordon Brown comes to mind)

And what of lending?  The Fund has a mix of concessional and (allegedly) non-concessional lending facilities.  The concessional facilities are really just foreign aid, and are not my focus here, except to note that they are far from the Fund’s original mandate.  The idea of the non-concessional lending looks good in principle, but is too-often bad in practice.  For a country with a large (private) external debt, and the possibility of sudden stops, the option of being able to secure short-term credit as a backstop has some value.  In earlier decades – notably in the late 1960s – New Zealand borrowed from the Fund to ease adjustment to a nasty terms of trade shock.

But in more recent decades  Fund lending too often quickly looks a lot like “extend and pretend”,  with an emphasis on the “pretend”.  Fund lending to Argentina enabled the authorities to defer, and defer, and defer an inevitable adjustment.  Fund lending to Greece in 2010 was not remotely defensible in terms of the Fund’s own policies on large loans (although it served the short-term interests of many of the major Board members, and the then Managing Director).  And the recent loan to Ukraine looks harder to defend, from the start, on technocratic grounds then even loans to Greece and Argentina.  If the Fund didn’t exist, lending to troubled countries would still occur, but since the loans would be made directly by national authorities in lending countries, perhaps requiring direct votes in national Parliaments, the prospects for democratic scrutiny would be greater.  And the absence of the so-called “preferred creditor status”, which has mostly protected the Fund from financial loss, might mean more searching scrutiny upfront about the sustainability of a borrowing country’s debt.   There is a role for lenders of last resort, but to be valuable they need to know when to say “no”, and the IMF isn’t set up to do that job well.

International agencies don’t go away easily.  The Bretton Woods agreement, for example, provided for the dissolution of the BIS and yet the BIS is still with us.  I expect the IMF will reach its century –  perhaps by then, as per the Articles, headquartered in Beijing.