A few years ago, when I wrote my autobiography, I included a chapter called “The challenge of making economic policy in a democracy”. In that chapter, I tried to debunk a lot of commonly held myths about economic policy.
There are lots of them: • “Government should control what private landlords charge for rental accommodation to protect low income people”. • “Import controls and tariffs protect jobs and create employment”. • “The government has scrapped protection for New Zealand industry in the vain hope that our good example would be followed by other governments. It hasn’t been, and we’ve been suckers”. • “Central banks in the US, Japan, the United Kingdom and Europe print money, so we should too”. • “Rogernomics was an economic disaster for New Zealand”.
I know no economists who would subscribe to those views, but I suspect they are quite widely held by ordinary New Zealanders.
Another widely-held myth is that foreign investment in New Zealand is too often to our disadvantage.
New Zealand has been the recipient of investment from abroad from our earliest history, some of it in the form of foreign investment in New Zealand government bonds, some of it in the form of foreigners buying shares in New Zealand-controlled companies (often called “portfolio investment”) and some of it in the form of corporate investment, or “foreign direct investment”, where the foreign investor controls the company in which the investment is made. It’s this kind of foreign investment which engenders most hostility – a perception that “foreigners” are controlling us, probably making too much money at our expense, and sending all the profits overseas.
Historically, we had a welcoming attitude to foreign direct investment, but in recent years that has changed. In a survey undertaken by the OECD a few years ago, 55 countries were compared based on their policy towards such investment. That survey found that New Zealand was more restrictive than any other OECD country except Japan, and more restrictive than all the 55 countries surveyed with the exception of Japan, India, Indonesia, Saudi Arabia and China. In other words, 49 other countries were judged to have less restrictive policies towards foreign direct investment than New Zealand does.
I used to share this hostility to foreign direct investment. Indeed, the thesis I did for my Masters degree at Canterbury University warned against foreign investment in general and foreign direct investment in particular, influenced no doubt in part by my Economics lecturer Wolfgang Rosenberg, a delightful man but one who made no secret of his strongly left-of-centre political views.
When I went to Australia to do a doctoral degree, I spent three years studying American direct investment in Australia, intent on showing that an in-depth study of such investment would prove conclusively how much harm such investment had done to Australians. To my total surprise, I discovered I had not just been slightly incorrect in the conclusions in my Masters degree, I had been completely wrong: American corporate investment in Australia had been of immense value to Australia except where the American companies had been the beneficiaries of subsidies of one kind or another.
I have no doubt that the same is true in New Zealand. Foreign companies invest in New Zealand with the intention of making a profit. If they can do so (and not all do of course), the profits they earn are only a part of the value they add – that additional value may accrue to New Zealand workers, whose wages benefit from the additional demand to hire people, may accrue to the Inland Revenue Department, may accrue to New Zealand consumers in the form of better prices or better quality, or may accrue to property owners who see higher demand for their property.
One of the many reasons for New Zealand’s deplorably slow growth in income per person is the hostile attitude to foreign direct investment. Official policy assumes that the foreign investor has to prove that their investment will benefit the country, instead of starting from the presumption that such investment will almost by definition be beneficial.
few years back, I was the chairman of a small company called Oceania Dairy – a company which had gone through the laborious process of getting all the consents needed to set up a milk powder plant in South Canterbury. It was owned by dairy farmers in that part of the country, and the intention had been that they would put up the money to build the plant when all the consents had been obtained. Alas, after the consents were obtained, the farmers were less enthusiastic than expected about putting up the $80-100 million to build the plant. So the company went into hibernation until Chinese dairy giant, Yili, came along and saw the opportunity to get quickly into production by buying the company. That made sense for almost everybody – the dairy farmers who would have another processing company competing to handle their milk, the local authority which would gain another substantial ratepayer, the workers who would be employed in the plant, Inland Revenue which would see another source of tax income. But the investment needed the approval of the Overseas Investment Office – that took three months, whereas it should have taken three minutes – or not required official approval at all. (And of course, since that time Yili has gone to expand Oceania Dairy very substantially, and has recently bought Westland Dairy at a price which West Coast farmers could scarcely believe.)
At the present time, if a foreign investor wants to buy almost any New Zealand land they have to go through all kinds of hoops, and prove that the investment will benefit New Zealand. But if the New Zealand owner wants to sell a piece of land, one must assume that he has calculated that he can be better off by selling to that foreign buyer than by selling to any alternative buyer, and better off than holding onto the land himself. There should be no need for any official approval at all.
And yes, it’s fashionable to worry about foreigners buying up agricultural land to plant pine trees, but the problem there is not the nationality of the buyer but the fact that government policy has made it attractive to plant pine trees! Blame government policy, not the foreign investor: he is simply responding to the signals which government policy has created.
Similarly, foreigners have been largely banned from buying residential property because, it is argued, that buying has pushed up the price of houses to an unaffordable level. But foreigners haven’t pushed up the price of cars. Foreign demand for houses in Auckland has pushed up prices only because government policy (in this case local government policy) has restricted the supply of land on which housing can be built. Don’t blame foreigners for that: they are just responding rationally to the stupidity of local government planning rules, in exactly the same way that locals have been doing.
In almost all cases, foreign direct investment benefits New Zealand, and should be welcomed.
Footnote: Last month, I wrote about the extreme unaffordability of housing in our major cities, and in Auckland in particular. Since that time, Barfoot and Thompson, Auckland’s biggest real estate agency, has reported that the median house price in Auckland jumped by an astonishing $46,000 in just a month, with an increase of almost 6% in just three months. In another news item, it was reported that the median section price for a single-family home in the US in 2018 was just US$49,500, or some NZ$76,000.