The MT Diary

Testing NZ's economic cistern; Australia the Lucky Country again; rockier than Gordon

by Howard Davies, the director of the London School of Economics
Last Updated: 31 Aug 2010

Counter-cyclical investors have done well in the past three years, so I thought a counter-cyclical holiday might be in order - to Australia and New Zealand in their mid-winter.

The idea came from the Reserve Bank of New Zealand in Wellington, which invited me to help celebrate its 75th birthday. The bank was born out of a rib of the Bank of England, and also has a curious link with the LSE, through the economist Bill Phillips - he of the curve - who was a Kiwi engineer by origin. He invented a hydraulic computer that shows, for example, how a rise in inflation affects unemployment, and vice-versa. Water flows in and out of little tanks marked 'current account', or what-have-you.

New Zealanders have a magnificent working model in their Reserve Bank museum. I asked it how a public-sector deficit of 15% and a negative growth rate of 6% of GDP would affect unemployment and the popularity of the government in power. Pumps pumped and tanks filled and emptied at a great rate. The system just couldn't take the strain. They are still mopping up the mess - as the Conservatives will find themselves doing, from next May onwards.

New Zealand is not doing at all badly - except at rugby, which causes its citizens great pain. They may be the only nation that would rather have a recession than lose to the Springboks. In fact, they've had a mild downturn, which began early but has now blown itself out.

On the other side of the Tasman Sea, Australia has done even better, perhaps the only developed economy to avoid recession altogether. As inhabitants of the Lucky Country, they take it for granted that swine flu and credit crises will pass them by. But to outsiders, it is intriguing.

Part of the reason is that their banks are still standing, and profitable. Why? Former Reserve Bank Governor Ian MacFarlane has annoyed them by arguing that the main reason was that they were protected from competition by the government's policy of not allowing takeovers or mergers among the 'four pillars' - the domestic banks that dominate the market. So they were not tempted to reach for yield in exotic markets that they didn't understand. The bankers themselves prefer to think that they were smart enough to dodge the sub-prime bullet.

Another factor may well have been the regulatory environment. Australia moved the banking supervisors out of the central bank a year or two before we did. It has worked very well. And the other OECD country whose banks are conspicuously healthy is Canada, where there has always been a supervisor outside the central bank, and therefore a tripartite arrangement on UK lines. All of which may suggest that the solution to our problem may well not be a structural change.

Of course, it helps these days to be quite close to China, and the Aussies are benefiting from the huge fiscal stimulus there, which is sucking in iron ore, coal and other commodities. That has pushed up the Aussie dollar. So Sydney is no longer a bargain-basement destination. You have to think twice before ordering that second bottle of Chateau Wagga Wagga. But with unleaded at 65p a litre, you can still afford a heavy carbon footprint, so we drove from Sydney to Melbourne.

The roads are nearly empty, yet driving is a stressful experience. Speed limits vary from 40 to 100 kph, through all points in between, with no rhyme or reason. And every few hundred yards you're told off for committing a thought crime. Signs tell you that you will pay $243 and earn three 'demerit points' for not buckling your seatbelt, and that you must stop every two hours to 'Revive and Survive'. You must constantly 'reduce your speed', no matter how fast you're going, and even 'drive quietly' - an injunction policed by 'noise cameras'. If you go too fast, you may wind up on an 'arrester bed', which Max Mosley might enjoy, but it sounds threatening.

Australia is now the nanny state par excellence - as they wouldn't say. On the beach at Manly, near a little outcrop of smooth rocks and pools, a toddlers' paradise, a sign says 'Danger - Exposed Rocks'. When our politicians rant about European directives on health and safety, we might perhaps recall that by comparison with life Down Under, we live a life of libertarian licence.

If there is a politician with a less secure hold on his job than Gordon Brown, it is Malcolm Turnbull, leader of the Liberal opposition in Canberra. Mature readers may recall that he was the thrusting young Aussie lawyer who embarrassed Robert Armstrong, then the Cabinet secretary, in the Spycatcher affair, by inducing him to admit that he'd been 'economical with the truth'. So he has earned a footnote, or at least a toenote, in British political history.

Unfortunately for him, he put his footnote right in it recently when he accused the PM of corruption, based on what turned out to be a fabricated e-mail, leaked to him by a Treasury official who has since had a nervous breakdown.

So why is he still in office, if not in power? It's our old friend Tina - There Is No Alternative. He has managed to neutralise all plausible challengers. Sounds familiar? You can go 12,000 miles and find yourself looking in the mirror.

But in the winter sunshine, with that second bottle well under way and no recession in sight, somehow it all looks better. Can that flight home be put back?

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