6. Conclusion and a look forward

The Global Financial Crisis had a very important lesson for all countries that were affected by it. It is noticeable, that countries, which went into financial crisis with high levels of Government debt, did worse than those where Government debt was lower. Countries such as Greece, Ireland, Spain, and Cyprus – the all had to receive emergency help from either the European Union, or the International Monetary Fund. Otherwise they would not be able to pay their obligations on time and would be in default.

New Zealand was a special case. The country’s government debt was relatively low (and is relatively low today, perhaps half of Europe’s levels of debt as a percentage of GDP). In addition, the country’s banks did not engage in potentially very profitable but also incredibly complex financial instruments in the way that the American or European banks did. In other words, the simplicity of the New Zealand banking system was a factor of good influence. Its banks were also healthier than in most of the world’s financial centres. New Zealand trades in commodities, and commodity prices were also favourable over the course of the Financial Crisis, but this was due to market fluctuations, and not due to a deliberate policy.

However, despite the fact that in a way New Zealand benefited from relatively calm conditions compared to others, there were also lessons to learn for the country, its Government and the Reserve Bank as well. The Reserve Bank had to use extreme measure to prevent the economy going into severe recession. Here again, I’d like to compare the worst of the crisis in New Zealand and in the Russian Federation. The bottom (or the trough) of the cycle meant minus 2.2 per cent of GDP contraction (see Graph No 2), but the bottom for the Russian Federation was much deeper – at close to 8 per cent. The Reserve Bank of New Zealand was quick to move in difficult times, and cut the Official Cash Rate by a total of 5.75 per cent. The Central Bank of Russia had the Refinancing Rate at 11 per cent from July 2008, and then raised (!) the rate twice, each time by 1 per cent, to 13 per cent. So the business environment in Russia had the highest rate since late 2005, throughout the worst time in the economic cycle. The rate of 13 per cent was in force until late April 2009⁵⁴. And one cannot say that the Russian Central Bank was particularly successful in fighting inflation either. So the Reserve Bank of New Zealand must have been doing something right. As for the Russian Central Bank, there are clearly conclusions to be made, and it is encouraging that action in inflation targeting by the Russian Central Bank is being taken now.

In summary, it is my opinion that the Reserve Bank of New Zealand has been overall very successful in pursuing its main policy goal which is general price stability. Some factors of such a success must be named:

• Macroeconomic stability. This in turn is based upon low levels of government intervention and a predictable legal environment for the economy to operate;

• A well-developed financial system. Russia is catching up fast in this respect with the developed nations, although the institutions are still not so well developed;

• Independence of the central bank in using the policy instruments and its authority in ensuring the price stability;

• A tried and tested mechanism of monetary policy instruments to influence the price levels

• Clear methodology of inflation forecasting

• Openness and transparency of the monetary policy.

The Economist Intelligence Unit estimates that New Zealand will display good growth rates in the years up to 2030. The political environment is stable, and major changes in political direction are not expected any time soon. The Government and the Central Bank are quite decisive in their actions. The budget may return to surplus in the fiscal year from July 2014 to June 2015. The next five years may see growth rates of around 3 per cent per year, and the inflation – stable at around 2 per cent per year. The fact that New Zealand relies on agricultural exports makes it vulnerable to fluctuations in prices of commodities and to unpredictable weather, but the islands of New Zealand are impossible to move, the Reserve Bank cannot manage the weather and the New Zealanders have been through these difficulties before. Even with all those risks taken into account, the Economist Intelligence Unit forecasts the average GDP growth of 3.3% per year until 2030, real GDP per head growing at 2.5%, and labour productivity growth of 2.6% per year in the same period⁵⁵.

The success of the policymakers in New Zealand is supported by the World Bank Doing Business rating. In summary terms, New Zealand is rated overall 3^rd out of the total 189 countries observed in the 2014 World Bank report. Plus the areas, where the country is ranked 1^st, 2^nd or 3^rd are one of the most important ones for the economy to have a lot of private initiative, and at the same time to be supported by sound Government policies. Extract from the World Bank Doing Business Report for 2014 demonstrates the status⁵⁶.

Indicator	2013	2014
Doing Business - Overall Ranking	3	3
Starting a Business	1	1
Protecting Investors	1	1
Registering Property	2	2
Getting Credit	3	3