Saturday, April 13, 2024

Tracking NZ’s position on this stormy sea

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Global food security concerns could play to the country’s strengths – if managed right, says Cameron Bagrie.
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For anyone engaged in exporting, the Ministry of Foreign Affairs’ 2023 Strategic Foreign Policy Assessment – Navigating a Shifting World – should be compulsory reading. 

The connotations and implications apply to all, however, and the themes are being expressed locally.

For MFAT to note that while opportunities may open up, “in the near term the future looks grim” is telling. That is not usual language for any government organisation to use but gives a clear steer on where we could be headed. 

One common aspect is risk – a lot more of it.

For a generation or more, MFAT notes, “we have enjoyed a comparatively stable and secure strategic environment that has been favourable to New Zealand’s interests and values”.

We have relied on trade liberalisation and international co-operation, which have been foundations of “foreign, trade and economic policies for decades”. We have been protected from global threats by geography and a peaceful Pacific region. “Economic growth models of the past 40 years have been based on concepts of efficiency and free market competition with minimal state intervention.”

The world has not suddenly changed overnight. MFAT’s 2018/19 Annual Report noted that “New Zealand’s wider Asia-Pacific region is a centre of geostrategic competition and home to a number of flashpoints”.

NZ is still managing to make progress in key areas, including trade; witness the recent trade agreement with Europe, though the dividend that will be delivered is a long way down the track.

However, the tide has turned. Global trade peaked as a share of gross domestic product around the global financial crisis. Tensions between China and the United States have been brewing over a long period, in part because the US has been the hegemonic power since World War II and does not want to give up that position. 

Technology is the new battleground, but those microchips also need minerals. As the world becomes more and more connected and interdependent, differences are accentuated, providing challenges to achieving unity.

Populism, self-interest and protectionism are on the rise, along with distrust of institutions. Liberal democracy is being challenged. Covid-19 was notable for a lack of global leadership early on, along with a lack of leadership on action to limit warming to 1.5degC. Self-interest is usurping group interest. Covid, inflation and transitioning to climate resilient economies are challenges not only to growth, but to the equality and equity of growth.

MFAT identifies three major shifts:

• From being directed by rules to influenced by power. Power brings the ability to challenge the status quo and rules. Witness Russia and the Ukraine, and China’s greater assertiveness.

• From economics to security. The economic imperative is being usurped by the geopolitical imperative. Security is being prioritised in food, energy and technology, with the latter critical for economic advancement. The geostrategic contest for the Indo-Pacific region is intensifying with China growing more assertive. 

• From efficiency to resilience. “Just in time” is morphing into “just in case”, with risk-management-style discussions around management and board tables more prevalent. Supply chain effectiveness can no longer be taken for granted. The new buzzwords are decoupling, de-risking, near-shoring, re-shoring, on-shoring, friend-shoring. Shoring up resilience including access to resources, markets and supply chains comes at an economic cost as it represents a move away from relying on competitive advantage.

These shifts are local too. Politicians such as the former minister of transport not playing by the rules, or even reading the rules. Other cabinet ministers the same. The audacity of ram raids. Funerals now disrupting everyday activities. NZ is seeing subsets of Rules versus Power.

Boardroom discussions now talk more about risk as just-in-case sinks in. The politicians do not appear to appreciate the risk associated with our energy dependence and reliance on global supply chains. 

MFAT’s report is light on where to, in part because the uncertainty is huge.

The themes identified will challenge the low-inflation orthodoxy we have been used to. We could be entering a series of rolling supply shocks. Russian President Vladimir Putin’s recent strong-arm movement, which has seen wheat prices bounce, is an example. Two percent inflation on average looks an aspirational target as opposed to a realistic one.

Navigating inflation means higher interest rates; lacking a central bank backstop – which inflation has removed – we are now taking real risk to make real money. Higher average inflation also means the same for interest rates.

Dependence versus diversification needs to be debated. We have too many eggs in that China export basket.

Managing or mitigating risks does not come for free but neither can it be ignored, and I would not describe NZ as being a strong manager of risk. Energy has been a debacle. What will be the shape of defence spending going forward? A lot more I suspect. Another spending pressure that works against tax relief.

Division will drive more use of power and less obeying of rules locally. We have growing division. Who is the leader or what is the policy platform that can unite the majority?

NZ is somewhat fortunate in that food production is our strength, and security in it is now a global priority. That provides opportunities if executed well.

Managing risk is not about putting naysayers in charge. It is about balance, the use of data to validate the risk-return trade-offs, and executing. The shifting landscape just means lifting our game and modifying for a few different rules.

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