Following economic geography arguments, how does this chart compare to one for the only economy anywhere near ours in both distance to major markets and internal size: Alaska? Arthur Grimes compares us to South Australia. How about that?

For the comparative advantage people, how do other economies concentrated in the same tradable industry groups compare? (Is it possible that the measured “terms of trade” are not the whole story?)

By itself, the chart tells us that something changed markedly in late ’03 or ’04. What?

Does the graph show an issue?

Well it does show something in that the tradeable part of the economy has been in recession for the best part of 8 years and shows no signs of improvement. So while the non-tradeable sector has carried on its merry way the tradeable sector has been in recession.

What is the issue?

The issue is manifest is a weak balance of payments situation. Rick Boven and the NZ Institute have pointed out that to catch Australia we need to be exporting a lot more value added goods, rathe than more bulk commodities (infant formula rather than bulk milk powder for example). Compared to the economy of 10 years ago the tradeable sector is not pulling its weight. So we aren’t earning the sorts of incomes we want because we ain’t got the cash coming in from exports.

As Roger Kerr notes the problem may be excessive Govt spending, which has driven up the real exchange rate and interest rates to boot, making exporting less profitable. I suspect the impact on the cost of capital is also important here rather than just the impact of a high real exchange rate. But then exchange rates are relative… if the US$ is weak then by definition NZ$ is ‘strong’ all other things being equal… So the policy implication may be that the cost of capital is too high because we are sucking in more foreign cash (interest rates go up) to sustain out domestic economy.

3. Changes that could improve matters?

Better directed investment and better understanding of savings – there have been numerous calls for the Govt to stop running big deficits… That helps, but getting cash into the right parts of the economy is also necessary. I think that Govt making better use of the capital markets (particularly equity) to fund itself is a good place to start to help lower the cost of capital.