Address Forum Futures Trust 3 October 2006
By Petrus Simons*

IS THE BALANCE OF PAYMENTS AND INTERNATIONAL DEBT A TICKING TIME-BOMB?

The balance of payments is indeed a ticking time-bomb. It is not the only one. Environmental problems are increasing in severity and, sooner or later, will impose the need for change. The Government should explain this clearly to the people of New Zealand and prepare a long-term plan that would step-by-step replace the current fossil-energy system to a totally solar-based system in the context of a revamped, much more solidarity-based tax/welfare system.

A. CURRENT SITUATION

If an economy is in equilibrium surpluses and deficits on the balance of payments will even out over the course of the business cycle. One may also have a situation of persistent small deficits if the economy is expanding by means of foreign investment. However, this should lead to either higher export returns or lower imports over a period of time. Countries in this situation often finance such an expansion by means of an undervalued rate of foreign exchange. When in March 1985 all foreign exchange regulations were scrapped and the NZ Dollar floated, this option ceased to be available.

Since that time policy-making has been severely restricted. We can either have an independent fiscal policy, i.e. fiscal deficits or an independent monetary policy, but not both. Hence, when the Government wants to expand the economy, the Reserve Bank will apply the brakes by pushing up interest rates.

New Zealand has had balance of payments deficits since 1973, meaning that private debts incurred to finance these deficits, especially since 1985, have been accumulating to $130 billion or 84% of GDP by June 2006. At the same time there has been a growing amount of foreign investment in New Zealand. Both financial debts and foreign investment lead to debits on the balance of payments in the form of interest, dividends and profits. In the year ended June 2006 investment income was -$11,902 million or -26.7% of exports. It compares with a deficit of $3,845 on the goods and services balances. The deficit on current account was $15,154 million or 9.7% of GDP and 34% of exports and 31.3% of imports. In order to reduce the current account deficit, the balance on goods and services should be increased very dramatically.

One can only conclude that the policy of relying on the private sector for making those investments that would propel the country’s production and export performance/import substitution to a much higher level has failed. The combination of high export prices and the fiscal stimulus administered by the Labour Government, with the Reserve Bank pushing up interest rates and thereby the NZ Dollar, has led to a massive inflow of overseas capital that has gone mostly into housing finance.

Another way of putting this is that the New Zealand Dollar is highly over-valued, meaning that our exports are far too expensive and our imports far too cheap. Again the NZ Government is not in a political position to redress this over-valuation. Eventually, it will be addressed by foreign capitalists. In that event, the burden of the adjustment will fall on the most vulnerable of our population, in part because our present tax system is regressive rather than progressive.

The imbalances in our economy are also indicated by an excess of real interest rates (called r) over the real rate of GDP growth (called g). During the years 2001-2004, however, this equation was in balance, so that unemployment fell to very low levels and households were able to borrow.  Such borrowing was financed from overseas capital. Real interest rates are high because we have to compete with overseas financial centres for the capital flows needed to finance our balance of payments deficits. However, they have the effect of slowing our production and exports, also because of the associated appreciation of the rate of foreign exchange. 

B. SOME IMPLICATIONS FOR THE FUTURE.

I take the view that the world has already reached ‘peak oil’ (on a production basis, as calculated by oil geologists) or is very close to it. The world is, therefore, heading for what an energy expert like Robert L Hirsch (USA, lead US fusion programme in 1970s, headed ARCO as well as think tank Rand and is now responsible for SAIC, a research establishment with 43,000 associates round the world) calls a mega-crisis. We need at least 20 years to prepare for it.   

I also believe that the world’s financial system is highly unbalanced and is at risk of crashing. The USA has become the world’s largest debtor, requiring about 70%-80% of the savings of the rest of the world. Within the USA, consumer debt has been soaring. Without such debt, the US economy would have been very sluggish. Should US consumers start saving, the whole world might get pneumonia.  Asian economies, especially China, would be in trouble. Our export prices would fall significantly.  Our exchange rate would depreciate rapidly, especially if investors wanted to invest in safe currencies. Our rate of inflation would rise. The Reserve Bank would increase interest rates. House prices would fall and many people with high debts would be in deep trouble.  Our whole policy framework might unravel, with major social consequences.

However, this is only a short-term problem.

The longer-term problem is much more challenging than that of a short-term financial collapse, unpleasant though that might be. 

Given its importance, I mention only agriculture.

New Zealand agriculture has been intensifying in recent years by a much greater usage of chemical nitrogen derived from natural gas.  Our clover-based pastures are under threat from the Varroa-mite and the clover-weevil. Dr Troy Baisden of Landcare Research has painted the consequences of this trend (Agbrief 2006/14 of 12-18 April 2006). Dairy farmers would have to import feed by 2011 and sheep and beef farmers by 2022. By 2050 3 billion bags of feed might have to be imported by which time we would be awash in reactive nitrogen. Clearly, Dr Baisden has not taken into account the problem of peak oil. If he is right we would have to face a major rise in our import bill.

Would our exports increase sufficiently in volume, quality and price to compensate? I doubt it very much.  Should WTO talks succeed, and all import barriers and export subsidies disappear over the next twenty years, then, world-wide production of food would increase very strongly, especially in Europe, Russia, Ukraine and Latin America.  Prices would be under constant downward pressure.

I can only conclude that the balance of payments combined with our high foreign debt is indeed a ticking time-bomb.

C. A Wider Perspective

A philosopher of technology by the name of Stork once put all inventions made by humankind on a clock. The Industrial Revolution then had to be put at one half minute before midnight. During the half minute to the present the world has been transformed enormously. We are now confronted with the consequences in terms of severe climate change, depletion and extreme wastage of precious resources such as oil, topsoil, soil structure, biodiversity, phosphate, fishing stocks, clean water, pleasant landscapes and tropical forests.

Essentially, we have two choices.

1. We carry on as we have since the time of the Renaissance. We continue to use scientific technology to solve all of our problems and we continue to do so under the guiding light of the market. This will mean that technocrats, business people, private equity funds, hedge funds and pension funds will be in charge. Whatever Maori and NZ farmers have discovered will be patented by these interests

Or:

2. We make a decisive break with a history of 500 years. I rate the probability of such a break as very low.

In terms of energy policy, I would like to suggest three choices:

a) We go for greater efficiency in the use of energy;
b) We aim for sufficiency;
c) We switch the whole economic/technical system to true sustainability on the basis of solar energy.

A few notes on each of these options:

Greater efficiency all round sounds attractive, but has the disadvantage of resulting in greater usage or lower prices with similar effect. We all know that modern cars are more efficient than cars produced during the 1950s or 1960s. Yet, greenhouse emissions from the current car park around the world are much higher because the fleet of cars has risen very significantly.

Perhaps, we do well to remember that the industrialisation process since the 18th century has been enabled to a large extent by fossil fuels. One can put coal and oil in ships, cars, factories and planes. Thus, one can achieve high speeds of production and distribution. The current globalization process relies on extensive and fast transport networks.

In general, greater efficiency in the use of fossil fuels is compatible with the capitalist system of accumulation and growth, regardless of natural limits. This is the key reason, why governments and business corporations will be very reluctant to halt the use of fossil fuels. They are prepared to defend and protect their sources of fossil fuels by military actions or by driving up the price beyond what their rivals can afford.

The option of achieving greater efficiency would fail to prevent the conflicts that will intensify and multiply around the use of fossil fuels.

So, what is the story about the sufficiency option?
The idea is that we limit production and consumption to what is sustainable given natural limits. This would require a major break with the current capitalist market-driven system that is ruled by corporate and financial powers. The latter want 20% return on capital invested. If you compound such rates of growth in profitability you will soon outstrip the capacity of the earth to provide the means for such growth.

Clearly, Governments would have to intervene heavily in the operation of the economic/technical system to prevent environmental problems. This is the rationale for resource management regulation. As we know producers generally tend to resent the time and costs of compliance. Since time is money, it is a cost they believe they cannot afford.

Such regulation in itself achieves very little, therefore. If successful, it inspires the invention of new technologies. The imperative that ‘what can be made should be made’ would not be put aside. 
 
This brings us to option 3: producing and consuming within ecological limits. How would this be achieved?

Conceptually, this is very simple. Stop using fossil fuels and switch to renewable forms of energy based on the flow of solar energy. In practice, this would involve major changes to patterns of both production and consumption.

Before considering this option in more detail, I would like to suggest that in all likelihood we will see a set of policy initiatives taken from each of these three options. There will be moves to improve energy efficiency, but not in a very radical way. Regulation will continue. It will be extended in some areas and pared back in others, depending on political pressures and there will be much talk about new paradigms of energy derived from renewable sources.

One can also see stronger dialectics between these options. Pollution will be combated by regulation, by market systems and subsidies provided for renewable energies. Movements such as the greens and those advocating biological farming will continue to fight Transnational Corporations (TNCs) and governments that appear to favour the paradigm that technical change and markets will solve all problems. Governments and TNCs will change their rhetoric and part of their practices, albeit after a piecemeal fashion.

D. Putting the Economy on a Solar-Basis

The third option, if pursued vigorously over the next twenty years and beyond, is the only chance we have of coping with the depletion of oil and natural gas as well as climate change. It is not an easy option. 
We may be able to substitute solar-based electric power for fossil-generated electric power, but it will be exceedingly difficult to substitute solar power for fossil power in transport systems. Consequently, production would tend to take place there where there are sources of energy available. The current extensive and intensive transport networks around the world would be severely curtailed. Sailing ships might have a comeback. Electric trains would be more economical than electric lorries or electric cars. I doubt whether planes could fly on the basis of solar energy.

Of course, solar energy includes biomass. Energy from biomass, ethanol, for example, would be the ideal fuel for transport systems. However, the biomass concerned would have to be grown organically, since, under this option chemical nitrogen derived from natural gas would not be available anymore. A complete substitution of bio-transport fuels for fossil fuels would require a very large area of land. This would run counter to the need to grow more food and to grow it without chemical fertilisers and sprays (derived from oil and gas).

In general, agriculture would have to be put on a genuine biological basis and would have to feed a world population which is expected to grow from 6 billion to 9 billion as well as to produce energy for transport purposes. This is an extremely tall order, especially in the light of the current degradation of land in many places and the need to set up biological systems to deal with natural predators. One would expect that luxury goods such as chocolate and coffee would rise in price or disappear altogether. 

Obviously, many social problems would arise during the transition to solar energy. This requires an advanced social welfare system. Most of us would have to live like pensioners today. It might be healthier for many of us. The tax system should be made much more progressive. Personally, I would favour both a more equitable distribution of wealth and a more equitable distribution of income. This should provide the solidarity that would be needed during a transition to an economy based on solar energy.

The transition would also be facilitated by the introduction of a new commons. I am thinking particularly of vesting the ownership of all land in a common fund, so that whoever wants to use land would have to lease it from the fund on the basis of strict requirements as to sustainable usage within a solar-energy based economy.

A policy change such as I am advocating should be promoted on an international basis, although the chances of this succeeding are very slim, unless major catastrophes would make the change imperative.

In the mean time, we should not be idle, but, whilst aware of a variety of time-bombs ticking away prepare a step-by-step change-over to a solar-based energy system. This should harness the capabilities of our research institutions. It should also harness the innovative capacities of New Zealanders across the board. To unlock this innovative capacity, the Government should take a lead and point the way ahead. 

CONCLUSION

The balance of payments is indeed a ticking time-bomb. It is not the only one. Environmental problems are increasing in severity and, sooner or later, will impose the need for change. The Government should explain this clearly to the people of New Zealand and prepare a long-term plan that would step-by-step replace the current fossil-energy system to a totally solar-based system in the context of a revamped, much more solidarity-based tax/welfare system.

*Petrus Simons

Petrus Simons was born in the Netherlands, where he worked for 11 years in a shipping, trading and industrial business specialized in building materials. He migrated to New Zealand in 1967 where he studied economics and worked as an economist for the New Zealand Employers Federation (1972-1978), the Bank of New Zealand (1980-1988) and as a partner in consulting firm Integrated Economic Services (1988-2003).