Posts Tagged ‘foreign ownership’

Commentary round-up

Wednesday, October 27th, 2010

A regular feature spotlighting new writing (and audio) from top commentators Rod Oram, Colin James and Brian Easton.

In Labour fails to convince on economic policy (Star-Times), Rod Oram is rather harsher than his earlier Nine to Noon radio spot (covered last week). He is particularly critical of Labour’s new policy on foreign investment:

. . . if foreign investors help the New Zealand dairy industry shift to far more sophisticated, higher-value products, there is a good case for having them here. Labour says those are the land investors it will approve, while it bans the rest.

It will be very difficult, though, for the government to pick the right projects. Other countries such as Ireland have learnt how to make difficult decisions about which foreign investments to support. Labour must convince us it can learn and apply them. If it doesn’t, its agricultural land policy will be a big liability in the business community.

I find this a little ironic, in light of Oram’s own suggestions on foreign investment on Nine to Noon a few weeks ago, as covered in my round-up at the time:

It would be far more interesting if approval was contingent, for example, on a large-scale investment that would improve the industrial capability of New Zealand and increases exports beyond a business-as-usual case. Or there would be safeguards, so for example if a foreign investor bought a New Zealand company any money that that company had received in the way of government R & D grants over, say, the previous five years were refunded. You could be an awful lot more strategic about that — as other countries have been.

If anything, that sounds rather more difficult to operationalise than what Labour is proposing. Though perhaps he has backed away what may have just been an off-the-cuff musing at the time. In any case, he concludes:

“John Key has no game plan for our cities and our farms so that we can compete and win in the global economy,” Goff told the conference. “I do.”

No he doesn’t. But at least he and his Labour colleagues are working on it.

(Oram’s Nine to Noon spot didn’t appear this week, due to the short week.) (Thanks, Samuel Parnell!)

Colin James looks at the Maori Party in The foreshore party’s long growth into realist politics (Fairfax papers):

What does this say to the Maori party as it gathers on Saturday? That it has reached or is close to the limits of what it can extract from National. National will not agree to a “Treaty-based constitution”, except in the formal sense that the Treaty is the founding document legitimising the imposition of constitutional colonial government.

. . . So on Saturday there will be congratulations for the leadership on the totemic wins. But the farsighted will ask what can be extracted from National for a second term after next year’s election which has not already been dealt with or set in train.

And in Science, John Key and the Singapore syndrome (Otago Daily Times) he continues last week’s discussion on science policy:

So what’s stopping Key deciding to lift the game? He could, for example, add $200 million new spending each year for five years, which would get us to around 1 per cent of GDP.

. . . Of course, it also means either taking money off somewhere else or delaying a return to a budget surplus. And many RS&T ideas produce no return and those that do can take up to 10 years for a return, whereas hip operations, national superannuation at age 65 and the like are here-and-now politics.

Nothing new from Brian Easton this week.

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Foreign ownership — getting the balance right

Tuesday, October 19th, 2010


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.


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Further reading:


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Commentary round-up

Wednesday, September 29th, 2010

A regular feature spotlighting new writing (and audio) from top commentators Rod Oram, Colin James and Brian Easton.

In the Fairfax paper this week, Colin James asks, Will unequal tax cuts be good for the economy? After covering the usual contestation between government and opposition about who gains what from the October 1 changes, he concludes by saying:

Much has been made of the rise in income and wealth inequality since the 1980s in our sorts of “Anglo” economies.

That may be an element in recent political volatility and might partially explain conservative parties’ failure in Britain and Australia to win majorities in otherwise propitious circumstances: the 1950s-60s upward socioeconomic mobility stalled in the 1980s. In turn it may be a factor in faltering economic growth, now the house-bubble-borrow-and-spend taps have been turned off.

Intriguingly, the Economist magazine, not noted for soggy leftism, several times directly linked inequality to growth rates in a recent survey of Latin America: the more unequal a country, the slower its economic growth.

Of course, Latin America is different. Isn’t it?

Colin’s Otago Daily Times column is The long haul back out of the 2000s economic haze, another look at our economic situation and economic prospects:

New Zealanders were the most indebted in the developed world after now-bust Iceland. That debt was lent by foreigners: New Zealand’s country debt to the rest of the world, at 86 per cent of GDP, poses a risk that in another global shock credit lines might be pulled in.

But:

Despite our 2000s profligacy, we have a real possibility of a reasonable decade ahead. We may even, with luck, avoid a house price plunge: prices might just go sideways and let inflation engineer the fall of 30 per cent or so in real terms needed to align with fundamentals.

That however depends on exports to Australia and China, and they both have their own problems. Australia is heavily reliant on mining (as Rod Oram has noted previously) while  China needs to contend with “water; widening social and economic divisions; corruption”.

Rod Oram’s Star-Times column, Water forum offers sign of hope, covers the Land and water Forum, as Colin James did last week. Rod is a bit more cautious than Colin about whether Nick Smith has achieved a break-through in collaborative processes:

. . . it remains to be seen how far the government will buy into the forum’s recommendations. If it treats them as a framework for an enduring consensus on water, then it could run a robust, publicly supported national water strategy.

Then it, business, environmental and other lobby groups and the wider public would want to use the collaborative process to find common ground on other very difficult issues such as energy strategy, adaptation to climate change, urban land use and design, or even the likes of savings and superannuation.

But if the government treated the forum’s recommendations as a menu from which it selected politically acceptable items, or worse rejected others under pressure from lobby groups, it would make a mockery of the collaborative process. It would leave us mired in the same old adversarial politics.

Rod also talks to Nine to Noon about Transpower versus the business lobby and the government’s changes to the rules for foreign investment. He sets out some interesting ideas of his own for the latter:

Oram: It would be far more interesting if approval was contingent, for example, on a large-scale investment that would improve the industrial capability of New Zealand and increases exports beyond a business-as-usual case. Or there would be safeguards, so for example if a foreign investor bought a New Zealand company any money that that company had received in the way of government R & D grants over, say, the previous five years were refunded. You could be an awful lot more strategic about that — as other countries have been.

Ryan: Unless you lose your investment to other countries.

Oram: No but other countries are strategic. They know what they want, and they know what to ask for and expect from foreign investors. And we don’t.

Brian Easton publishes an index of his articles on gambling economics.

If you have thoughts about the issues raised by our commentators this week, or other interesting pieces of commentary you’d like to highlight, then leave a comment below!

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Domestic, but not national

Tuesday, May 18th, 2010

The comments for last week’s post on Krugman and commodities were, as always, thoughtful and interesting. Greg critiqued Krugman and queried the durability of profit motive; James Caygill highlighted trade-offs between commodities and environment; BigCake talked about the opportunity for non-commodity agricultural products. And David Craig sounded a note of caution:

The thing I wonder/ worry over more is the extent to which NZers themselves will be the ones prospering. The processed/ manufacturing food industry is already one in which rates of international/ foreign ownership are extraordinarily high. Basically Fonterra is an outlier here. I will trawl around at some point to find the graphs which shocked me on this point in 2007.

The other thing is that on a global scale the extent of our invaluable good soils/ productive crop and farmland areas are not large: go have a look at a map of the dairy industry, for example, and realise how fragile territorially we are there. By comparison, the budgets of those looking to corporatise primary aspects of production here — along with assets/ land — are enormous. I predict that within 15 years, short of protective action in this area, 40% of dairy and related land with be owned offshore, and selling commodities through corporate value chains which don’t send much at all back here.

The issue of foreign ownership is, I think, one we’ll have to talk about to some extent in the Progressive Path to Prosperity work topic.

I did some number-crunching recently, originally spurred by a comment-thread discussion involving Matt Nolan and Achela about terms of trade and the difference between national income and domestic product.

Take a look at this graph:

Source: National Accounts of OECD Countries: Detailed Tables, Volume II, 1996-2007, 2009 Edition

You can see, especially in the trend-line, that New Zealand’s Gross National Income has fallen pretty consistently as a proportion of Gross Domestic Product since 1970, from 98.8% to 92.5%.

To understand the significance of that, it’s necessary to explain the difference between GNI and GDP. For this, we can turn to the OECD’s Understanding National Accounts:

GDP measures the total production occurring within the territory, while GNI measures the total income (excluding capital gains and losses) of all economic agents residing within the territory (households, firms and government institutions).

To convert GDP into GNI, it is necessary to add the income received by resident units from abroad and deduct the income created by production in the country but transferred to units residing abroad.

The publication then gives some examples:

For large countries like Germany, the difference between GDP and GNI is small . . . But it is larger for a small country like Luxembourg, which pays out a substantial percentage of its GDP as workers’ earnings and other so-called “primary income” to the “rest of the world” . . . Primary income includes interest paid on money invested in Luxembourg . . . Ireland is in a comparable situation to Luxembourg, since it pays out substantial dividends to the parent companies of the American multinational firms that have set up there, partly, but not entirely, for tax reasons.

So what that means for New Zealand is that our net “primary incomes” payable to the rest of the world (such as interest and dividends) have increased from 1.2% of GDP from 7.5% of GDP.

How does that compare with other countries? I’ve selected a handful:

Source: National Accounts of OECD Countries: Detailed Tables, Volume II, 1996-2007, 2009 Edition

As might be expected based on the earlier OECD comments, Ireland’s decline in GNI/GDP has been sharper and steeper than New Zealand’s, and from a higher starting point. Australia’s trend parallels New Zealand but is more gentle. The United Kingdom’s ratio has risen above 100% in the last decade, for the first time since the early 1970’s. And, interestingly, the now-beleaguered Greece consistently had a ratio of over 100% until 2003.

Neither Greece nor Ireland’s current predicament would be an attractive fate for New Zealand. Can we see the fall in their GNI/GDP ratios as some sort of precursor to that? On the other hand, the similarity between New Zealand and Australia, who we don’t generally perceive as having a ‘foreign ownership problem’ is perhaps a bit of a surprise.

These figures and their implications are worth looking into further, I think.

To put my cards on the table regarding this topic, I’ve always tended to be something of a ‘free-trade progressive’. In this, I’ve been reassured by the example of Scandinavian social democracy which, even in the heyday of protectionism, combined a generous welfare state and a significant degree of industrial democracy with an expectation that their exporters should foot it on the international stage without tariffs or subsidies. And along with this, my tendency has also been to see foreign direct investment as something to be sought after (within reason) rather than something to be scared of.

Going into this Progressive Path to Prosperity topic, however, I want to have an open mind. And I do confess that the prospect of foreign investors having claims over an increasing amount of our productive capacity seems like something that, to say the least, is not sustainable indefinitely.

What’s your view? Are these steadily increasing “primary incomes” something we should be worried about? Is foreign ownership a threat to our economic sovereignty? Or do progressives need to get over their aversion to foreign investment and accept that foreign capitalists are no worse than domestic ones?

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