Towards a new Reserve Bank Governor

The Prime Minister confirmed the other day that this year’s General Election will be held on 23 September.  The Governor of the Reserve Bank’s five year term expires on 25 September, the Monday after the election.  That is a far from ideal situation.

Graeme Wheeler is widely expected to confirm in the next few days (what he already apparently told some staff last year) that he won’t be seeking a second term.  Comments from the Minister of Finance the other day more or less confirmed it –  if he was going to have a second term there would typically be an announcement of the reappointment by the Minister himself, not a statement from the Governor.

But although the Governor’s likely departure adds a bit more colour, the issue I want to focus on here would be relevant whether or not the Governor was seeking reappointment.

There is no provision in the Reserve Bank Act for an acting Governor, other than to (at most) complete the term of a Governor who leaves early (thus, Rod Carr was appointed acting Governor for a time in 2002 when Don Brash resigned with immediate effect to go into politics).   If a Governor is to be in place on 26 September, the appointment will have to have been made before the election.    There are various practical reasons for that, some obvious and some less so.  Anyone appointed from outside the Bank would have to give notice from a current position, and before anyone can be formally appointed that person has to agree a Policy Targets Agreement with the Minister of Finance.  That simply isn’t going to happen on the Monday morning after the election.

And so an appointment must be made by the Minister of Finance in the current government, to take up a position three days after an election in which there could be a change of government.  The office of Governor cannot be left vacant for a few weeks –  since all powers in the Bank (including crisis response powers) are vested in the Governor.    And the Governor, personally, is the single most powerful unelected person in New Zealand –  his/her choices materially influence the short-term performance of the economy (short-term here including horizons of several years), and how the financial system is regulated, which under some models directly impinges on firms’ and households’ access to credit.

None of this might matter if (a) there were a stellar candidate to become the Governor, whom everyone across the political spectrum was happy with, and (b) if the major political parties/groupings had a common approach to monetary policy and financial regulation.   That isn’t so now –  whereas, say, when Don Brash was being reappointed in 1993 and 1998 it was nearer to being true (certainly any differences on monetary policy between National and Labour were of second order importance).   Since the Act came into effect in 1990, twice before a Governor has been appointed in election year. In 1993, the Governor’s new term began several months before the likely election data, and in 2002 the appointment of Alan Bollard was not made until a couple of months after the election.  We haven’t faced this particular set of circumstances previously, and it to my mind the position highlights several deficiencies in the governance provisions of the Reserve Bank Act.

None of this might matter if the things we sought from a Governor could be written down so explicitly that there was little or no room for discretion.  A new government could, of course, insist on a new Policy Targets Agreement, and the new Governor would simply have to go along, no matter what his/her personal sympathies might be.   But as the last five years have illustrated again there is huge scope for discretion even within a typical PTA, and there is nothing akin to the PTA to govern the financial regulatory activities of the Bank.

The situation is rendered even more unsatisfactory by the dominant role of the Reserve Bank Board in the process of appointing the Governor.  If, as is the case in most countries, the Minister of Finance had the lead role in appointing the Governor, an appointment like this –  needing to be made before the election but to take office after the election –  migth appropriately be made in consultation with the Opposition.  It would be inappropriate to install someone quite controversial in an appointment made pre-election.  But under our Reserve Bank Act, the Minister of Finance can only appoint someone the Board has recommended.  The Minister can reject a nominee but can never impose his own.  Minister and Prime Ministers have been known to send messages as to the sort of people they might think appropriate, or even those they wouldn’t accept, but the prerogative to nominate rest with the Board members, who can at times have a rather high view of their role (as is legally appropriate, if perhaps not politically).

This time, there isn’t a serious alignment issue between the Board and the government –  all Board members have been appointed or reappointed by the current government.  But it is easy to imagine a slightly different timing: the Governor’s term expires four months after the election, there is a significant change of government, and the incoming Minister of Finance is left with no choice but to appoint a Governor nominated by a Board appointed entirely by his/her political appointments.   There is, quite simply, a serious democratic deficit.  It is quite extraordinary that the government cannot install as Governor –  the person who will have the biggest policy influence on short-term macro outcomes, with quite limited effective accountability, for the following five years –  someone they are comfortable with.

These problems arise for several reasons.  One is simply that whatever the length of the Governor’s term (unless it was as short as three years) every so often the appointment will be due in election year, and election dates shift around (unlike, say, the US system).  But the other reason this matters here more than most places, is that our system vests so much power –  all of it on monetary policy, and most of it on financial regulation –  in a single individual, the Governor personally.  Hardly any other country (none that I’m aware of –  given that the Bank of Canada doesn’t do financial regulation) does that.  With, say, a five person committee, with one member appointed every year, far less hangs of any single appointment (although the Governor will always remain particularly important).  And the other reason is the (again unusual) New Zealand practice of tying the PTA to the Governor’s appointment/reappointment –  by contrast, in the UK the Chancellor sets the inflation target in each year’s Budget, and in Canada, the PTA-equivalent isn’t renewed when the Governor is appointed, but in the middle of his/her term.

I’ve argued for a long time that all of these issues need to be addressed legislatively.  Doing so would bring the governance of our central bank more into line with (a) international practice, and (b) how we govern other public sector agencies in New Zealand. Sadly, that isn’t going to happen before 26 September –  the current government, at least in public, has been reluctant to admit that there is any room for improvement in the governance model.  And so we are left with the near-certainty of a new Governor being appointed before the election, with a PTA set before the election, and the possibility of material change of government.  It seems unlikely that a National-ACT government wouldd be looking for the same sort of policy or person as, say, a Labour/Greens/NZF government.

There are not any easy answers to this problem –  but a first step would be an open recognition of the issue from the relevant parties (Board, Minister, key Opposition parties).  I’ve argued previously that perhaps the least bad way forward now would be for Graeme Wheeler to accept a reappointment for one year (or even six months).  As regular readers know I’m not one of Graeme’s bigger fans, but it would seem a fairer and more acceptable approach, allowing the longer-term appointment to be made by the incoming government (of whichever stripe) rather than risk an appointment to take effect three days after the election that a new government could have real difficulties with. There don’t appear to be any statutory obstacles to such a solution: new Governors have to be appointed for a five year term, but reappointments can be for any (shorter) term.

It doesn’t seem likely that route will be chosen.  And perhaps the Board/Minister will end up appointing someone fairly acceptable to all parties, but laws exist for hard cases, and this is one of those areas where legislative change is now well overdue.

As for who might become Governor, and what I think the Board should be looking for, that can be covered in a later post.   And as some people have asked, next week –  when perhaps the hyperventilation around Trump will have died down somewhat – I will offer some posts on the New Zealand Initiative’s immigration report.

A dynamic and diversified export sector or “alternative facts”?

The Prime Minister went to Auckland yesterday, accompanied by his Deputy and his Minister of Finance, to deliver what is popularly billed as a “state of nation” address at the Auckland Rotary Club.   I’m staggered that the Prime Minister could give such an address in Auckland and not once mention that house price debacle that his government, and the previous Labour government, have presided over, and done little to address.

But the bit of the speech that caught my eye was this

I’m proud that on the other side of the globe from the European capitals I visited a few weeks ago, New Zealanders have built a cohesive and globally competitive country that can provide valuable lessons to the rest of the world.

In recent years, New Zealand has dealt with the biggest financial crisis since the Great Depression, we’ve dealt with devastating earthquakes and we’ve made significant progress on deep-seated social and Treaty issues.

We now have a dynamic and diversified export sector,

In particular the suggestion that we have “built a globally competitive country” and as a result we “now have a dynamic and diversified export sector”.  (I wasn’t too sure about the “valuable lessons” we can apparently offer to the rest of the world, but I’ll leave that aside for now.)

Statistics New Zealand typically advise that the best way to look at longer-term trends in components of the national accounts is to use ratios of the various nominal series.    Doing so avoids deflator problems, and also recognises that prices –  earned and paid –  matter.   Here is the chart showing exports –  and imports –  as a share of GDP.


Exports as a share of GDP are now below where they were when the Prime Minister was Minister of Finance/Treasurer in the last days of the Shipley government in the 1990s (and lower than at any time since then, under Labour or National governments).

In a thriving, globally competitive, economy one would more normally expect to see both exports and imports trending upwards as a share of GDP.  For small countries that is even more important than large countries.

Out of curiosity I did dig out the data on export and import volumes and how they’ve grown relative to GDP.  Here is the chart for the last decade.


Export volumes have certainly increased a little faster than real GDP has, and import volumes more so.  But if the value of what we sell to the world (and then buy from it) hasn’t increased as a share of GDP, it doesn’t look like a particularly impressive story.

And finally, here is the chart I run every so often, showing an estimate of GDP broken down between the tradables sector (primary plus manufacturing plus export of services) and the non-tradable sector (the rest).  And I’ve presented both series in real per capita terms.  It isn’t a perfect proxy by any means, but it tries to get at the idea that domestic production for domestic consumption –  especially in the manufacturing sector – is often exposed to global competition too.


In real per capita terms, this estimate of tradables sector GDP hasn’t grown in more than 15 years.  The current estimated level is lower than the average for the 2000 to 2007 pre-recession period.

The evidence for this economy being globally competitive is slim at best.  There are no doubt plenty of individual firms doing well, but it doesn’t add up to much, especially as the starting point –  the initial share of exports (or export value-added) in our economy –  was already so low for a country our size.

In part, firms seeking to export –  or produce locally in competition with imports –  have been battling uphill.  The TWI measure of the exchange rate is around 79 this morning –  on the Reserve Bank’s real exchange rate measure only around 5 per cent off the post-float peak.    High real exchange rates can be a welcome thing, when they result from rapid productivity growth and the growing success of New Zealand firms in international markets. The high exchange rate rate then helps share the gains around.  But that simply isn’t –  and hasn’t for a long time –  been the New Zealand story.

I’m not entirely sure why politicians come out and say this sort of stuff (“globally competitive”, “dynamic and diversified export sector”).  It is particularly sad coming from the Prime Minister, who in his early years as Minister of Finance used to make exactly the sorts of points I’ve made in this post in speeches up and down the country: he was particularly fond of a version of the tradables/non-tradables chart.  And the government has long had as one of its targets a material increase in the share of exports in GDP, suggesting that they knew there was something not quite right about New Zealand’s economic performance.

But now, almost nine years in, they seem reduced to simply making up lines like these, that perhaps might feel or sound good, so long as no one actually looks into them.  Doing so discredits the speaker, and perhaps as importantly it further cheapens and debases political dialogue and debate.  Bill English should be better than that.