I spent this weekend at the Labour Party conference in Auckland, and it was a heartening and energising experience. I had a real sense that the openness to new thinking that I predicted way back in my first Policy Progress post, and which I’ve recently been tracing in the UK Labour Party, was alive and well in New Zealand Labour, too.
I was particularly pleased about Annette King’s Agenda for Change for children, including legislated targets for the eradication of child poverty.
But, for the moment, I want to focus on Phil Goff’s announcement about restrictions of foreign purchase of farmland and strategic assets, and some of the broader issues around economic policy that I think it touches on.
Back in May, I identified that New Zealand’s gross national income (GNI) — what New Zealanders earn — as a proportion of gross domestic product (GDP) — has been declining slowly but steadily for at least the last 40 years.
Source: National Accounts of OECD Countries: Detailed Tables, Volume II, 1996-2007, 2009 Edition
(I also compared us with handful of other countries.)
A main driver of the gap, which had risen to 7.5% of GDP by 2007, is the amount we pay to foreign owners of New Zealand-based resources and productive capacity.
This phenomenon has also been acknowledged by Treasury in a 2009 report, though they are not concerned by it:
Greater foreign ownership increases the gap between GDP (economic activity that occurs in New Zealand) and GNI (income accrued to New Zealanders). However, the gap does not matter in itself; rather, the question is whether the gap results in lower long-term real incomes.
To the contrary, their report argues that “foreign investment brings a number of benefits that are much more likely to increase long-term real incomes.”
In a 2006 essay, David Skilling, who was then the director of the New Zealand Institute, took a much less benign view:
This consistent sale of debt and equity claims on the New Zealand economy to foreign investors translates into a high degree of foreign ownership of the productive New Zealand economy . . . A significant portion of New Zealand’s economic growth therefore benefits the foreign savers who have invested their capital in New Zealand. New Zealand is increasingly becoming a nation of employees rather than of owners.
One important function of capital inflows is not arguable, however: it’s an accounting identity, and thus true by definition. Pulling my old economics textbook by Joe Stiglitz off the shelf, I find the savings-investment identity written as:
private savings + government savings + capital flows from abroad = investment
Or, in other words, “to decrease capital flows, it is necessary either to reduce the budget deficit, to increase private savings, or to decrease investment”.
And here we come to the nub of the challenge of progressive economic policy in New Zealand. Whatever unease we might feel about foreign investment, we need it to achieve even the relatively modest levels of investment in our productive capacity that is currently occurring.
Because, as we hear time and time again, we in New Zealand are not saving enough to drive the investment we need. When I looked at the breakdown of Australian and New Zealand income per capita a few months ago, I found that Australians were collectively spending 66%, or nearly $6,000 a year per person, more on gross fixed capital formation than New Zealanders were. Of course, in part this reflects the fact that Australians are richer than we are, but the consequence is to reinforce that relative advantage.
So, unless and until we can improve our savings levels, we need to maintain current levels of capital inflow from abroad.
But we should be aware of the cumulative impact that this is having. And of just how much of an outlier New Zealand has become. Philip Lane from Trinity College Dublin and Gian Milesi-Ferretti from the IMF have done a lot of work estimating the net foreign asset position of a whole range of countries. This graph from a 2004 paper by them shows that, even for a relatively poor ‘industrial country’, New Zealand’s situation of having a net debt of nearly 100% of GDP is well outside the norm.
They also found that a negative net foreign asset position tends to drive up long-term real interest rates, which makes it more expensive for businesses to invest in productive capacity. A 2003 paper by Christopher Plantier for the Reserve Bank tends to confirm that for New Zealand.
What this all says to me is that we would want to be very confident that our foreign investment is indeed going into building new productive capacity.
If it is, then there is some evidence that there will be positive side-effects as well. Firm Foundations, a 2002 report from the Ministry of Economic Development found evidence that foreign owned firms outperformed domestic businesses and argued that “foreign ownership has provided resources and opportunities to generate substantial positive change to the practices and capabilities of New Zealand businesses”. There are also studies that suggest R&D spillovers.
But where capital inflows are simply coming in to transfer the ownership of an existing asset or resource, with no further development envisaged, then the argument is quite different. Particularly in the case of land, which is a finite resource (“Buy land; they ain’t making any more of it”, the US humourist Will Rogers used to say). The only ‘beneficial’ effect of foreign land purchase (without accompanying investment plans) is to potentially bid up the price, and that’s mainly of benefit only to the seller.
An economic argument against sale restrictions in this instance therefore tends to come down to a faith that whatever a willing buyer and a willing seller agree on is always the most efficient outcome. In other words, it relies on an unwavering faith in the market.
Beyond that (apart from strategic assets), we get into more challenging territory. It would seem the first thing that needs to be done is work to to boost household (and/or government) savings levels. If this can be done, then current levels of reliance on foreign capital inflows will (as per the accounting identity) decline of their own accord. Thus more general restrictions on foreign ownership may not be necessary or desirable.