Think Big and the balance of payments

When I was listening to Radio NZ on Sunday I heard some people discussing why they thought “Think Big” was a good idea.

Although I agree with some of the points they raised, if those points are actually true (namely that they felt, given forecasts at the time, these projects would have been viable – and that there were substantial barriers to private entry) I also disagreed with large amounts of it.

One of the main things I disagreed with was the call that increased “self-sufficiency” in terms of steel and fuel improved our “balance of payments”. Now this is a claim I’ve heard from a number of “Think Big” supporters – and as a result it is a claim I plan to discuss here.

The Balance of Payments?

Ok, I’m sick of people calling the current account deficit the balance of payments deficit – as fundamentally, this is what people are trying to say. The Balance of Payments is the current account balance + the capital accounts balance + the financial accounts balance + “technical adjustment” = 0. It is an identity that always equals zero – so lets stop misusing it for a bit.

So given this, we have people telling us that we have a lower current account deficit because we are “self-sufficient” – fundamentally, as we make it here instead of importing it. This is incredibly wrong-headed.

We have discussed this before (see claim one when we took up the frogs challenge). It is unclear whether forced “self-sufficiency” will improve or worsen our current account position.

Current account position

Now our current account balance is the balance of trade + balance on foreign factor income + net transfer income (thank you wikipedia). Putting transfers to the side this tells us that we can be pushed into a deficit if we import more than we export, or if we have a poor investment position with the rest of the world (which leads to dividend and interest rate payments overseas).

The thinking that our friends on Radio NZ had was that if you increase the domestic production of things we import, we don’t have to import it anymore and woohoo our trade balance improves – and so does our current account balance.

However, there are a couple of problems when looking at the argument this way:

  1. There is an opportunity cost from producing steel etc here. Those resources could be allocated to making other things. If the things that are prevented are exports then we may not get that improvement in the balance of trade.
  2. If we do not have a comparative advantage at making these imports, the price will be higher – which implies that people will substitute to other goods. We may import these other goods – leading to a smaller improvement in the trade deficit then we expected.
  3. There is a capital cost associated with setting up the industries. If we borrow this capital from overseas (as Muldoon did) then we keep have to make interest payments from this borrowing overseas. If the interest payment exceeds any improvement in the trade balance, then our current account deficit will be worse.

As a result, even if we do have the unusual policy goal of “improving the current account deficit” (something I have said appears to be a sort of silly goal), Think Big type projects in no way ensure that we will actually reach this goal!

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  • There’s also the fact as you allude to, that if we make more stuff, but the capital is owned overseas, we worsen the current account deficit.

    (scold me if I’m wrong, or using the wrong terms!)

  • I think you should defend to the death their right to march, and then go down and meet them with baseball bats.WoodyAllenWoody Allen, in regard to the KKK

  • So, in my partisan thinking, not only did the “Buy Kiwi Made” campaign cost the NZ taxpayer $6.3 million, if it was successful it may actually cost us a lot more ?

  • “(scold me if I’m wrong, or using the wrong terms!)”

    Your terms are fine – I was just being pedantic 😉

    “There’s also the fact as you allude to, that if we make more stuff, but the capital is owned overseas, we worsen the current account deficit”

    Sort of – if domestic firms increase their profitability but are part owned overseas it will worsen the current account deficit, even though domestic welfare is higher.

    With think big we were borrowing overseas to fund capital – this is actually equivalent to what you are saying here (except that more of the risk for the venture falls on us instead of the international community in this case).

  • “So, in my partisan thinking, not only did the “Buy Kiwi Made” campaign cost the NZ taxpayer $6.3 million, if it was successful it may actually cost us a lot more ?”

    Well this depends.

    Another way to think about the “Buy Kiwi Made” campaign is to think of it is advertising. If the campaign increased the value people received from buying NZ products then it could have been beneficial – if it increased the cost of not buying NZ made then it hurt social happiness.

    Sure the campaign was based on a false premise – but ultimately the important thing is whether telling people this game them $6.3m worth of value. I’m not sure that it did 🙂

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