CRISES FACILITATE MAJOR CHANGE
It is a peculiar aspect of humans that we usually need a crisis to make real change. We all know of personal examples. The guy who for years drank too much. Then he had a major car accident, and hasn’t drunk since.
Societies are unfortunately similar. When life within them is normal, people are in their comfort zones. Yes, we know our tax system needs restructuring; our health system is going to go broke in 20 years; our society has woefully inadequate savings: our economic behaviour is heavily skewed towards capital gains… But tackling those longer term, large issues, all seem like major challenges. Life is comfortable right now. Too many vested interests to challenge and upset. Let’s just drift on a bit longer.
The human mind is also very adept at shutting out unpleasant circumstances, and living as if they don’t exist. Not surprisingly societies are equally good at living with long term issues which seriously need fixing but which remain in the too hard basket.
During World War 2, Churchill formed a cabinet drawn from both sides of the political spectrum. As soon as Britain faced a national emergency, UK politicians stopped playing politics and started acting together in the best interests of the country. Did it ever occur to anyone, to ask: Why can’t they do that all the time?
If a meteor was hurtling towards a direct hit on the earth, national borders would become irrelevant. The world would suddenly begin co-operating together to try and minimise a major threat to mankind.
Rahm Emmanuel (former Chief of Staff of President Obama) summed it up:
‘You never want a serious crisis to go to waste. And what I mean by that is that its an opportunity to do things that you thought you could not do before’.
Milton Friedman, the famous economist, put it this way:
‘Only a crisis produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function; to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable’.
Society needs a major threat, to get people sufficiently worried that they are prepared to make change. There is probably even a relationship: the more severe the threat, and the more worried people become, the more extensive the change which becomes possible. To take an extreme example: if the lives of you and your children are threatened, you will genuinely consider pretty much anything, to retrieve the situation.
It is no coincidence that New Zealand faced a serious economic crisis in 1984, when the Lange-Douglas government assumed office. That government was the last government in New Zealand to drive major change (whether you agree with what they did, or not) – floating the dollar, establishing an independent central bank, removing subsidies and tariffs, broadening the tax base with GST, corporatizing the public service, selling off state assets and businesses, devolving decision making to schools… Our whole economic and political landscape was significantly rewritten at that time and has not seriously been changed since.
Will the economic consequences of Covid deliver us a similar opportunity for long term change? One views such a possibility with mixed emotions. On the one hand, the economy both in New Zealand and around the world, will need to get seriously stressed, and people seriously worried, before that opportunity has been created. So it is a circumstance which in many ways we fervently do not want to occur. But it is a circumstance which, if it does occur, will be a once-in-a-generation chance to transform New Zealand.
What we can say at this stage, is that a serious meltdown of the world economy over the next 3 years is quite possible. Worldwide debt levels were already very high (fortunately less so in New Zealand’s government finances), before Covid. They are going to be very much higher after Covid has medically receded. Many world economies were only being kept in positive territory prior to Covid, by extremely low interest rates, and very accommodative monetary policies. The Covid shock will add to their already weak state. New Zealand has two of its key export earners – tourism, and overseas student education – completely shut down, potentially for many months and possibly even for longer. Together, these earn around NZ$21.2 billion annually -more than a quarter of our total gross overseas earnings.
As they say: assume the best, and prepare for the worst. If a major economic slowdown does hit the world, New Zealand will not be excluded. That much we can be sure of. And if it does occur, and generates stresses on New Zealand society which create the circumstances for major change, then lets at least not waste the opportunity.
In this chapter, I consider some specific economic topics we might tackle. Later I address banking, housing, tax, and other economic topics which merit their own chapters.
LENGTHEN THE ECONOMIC HORIZON
Economics is a subject which has significantly been captured by mathematicians, who have built complex models which seek to project the future. What will the growth rate be? How much will GDP amount to next year? What will be the inflation rate?
Our financial commentary is preoccupied with these minutiae. The focus is forever short term. But when one goes behind the various figures which are so carefully analysed and so hotly debated, and looks at the statistical work which produces them, there is a significant amount of guess work involved. The margin of error is often considerable.
We waste too much attention and effort on short term economic statistics. The important issues in economics are the longer term issues, which are overly obscured by the plethora of short term data. We need to give those longer term issues far more attention than they presently receive.
KEY LONG TERM ISSUES FOR THE COUNTRY
What are the key long term issues NZ faces? Answer: first and foremost our economy has significantly underperformed over the last 70 years. Yes, we have done rather better in the last 10 years. But these recent lifts in our GDP have been largely thanks to tourism, high immigration, and to our trade relationship with China, rather than as a result of positive improvements to NZ’s fundamental economic settings. Despite this recent lift, overall our economic performance remains middling to disappointing; and fundamental imbalances in our economy continue.
These existing poor economic policy settings are attributable to a number of factors- some of which I address in this chapter, and the more significant of which merit their own later chapters. Economic variables are all interrelated and impact on each other. So it is difficult to write without some degree of overlap. But if I had to nominate the most damaging aspect of the NZ economy, I would say it is badly unbalanced. The country has far too much of its wealth invested in housing; and far too little invested in financial assets- especially shares and businesses.
A number of specific factors (lack of institutional savings; a belief every NZer should own their own home; a banking system which is skewed towards house lending; a limited supply of housing land; a tax system which favours capital gains) have helped get us to this unbalanced position. But the unbalanced position is deeper than specific factors. It is also part of the makeup of New Zealand society.
New Zealanders have an ingrained expectation that most of their wealth will be in their house. They do not expect to hold a significant part of their wealth in shares and businesses. Most NZers believe you get wealthy by buying houses, and benefiting from capital gain, rather than working hard in your job. So the real economy has a lesser focus in the minds of New Zealanders than is needed if enhanced economic progress is to be generated. That focus on capital gain not real commercial growth, significantly damages the economic progress of NZ.
We do not see that our economy is unbalanced in this way. The average New Zealander has never realised there are alternative possible ways for the economy to be structured. They never think they could change the mix of their investments to hold less in housing and more in commercial assets; nor that our emphasis on housing is damaging our future economic progress.
There are countries in the world (such as Switzerland) where people commonly rent their apartment for all their life, and hold all their wealth in the sharemarket. The exact converse of New Zealand. Switzerland is also a dramatically more successful economy than New Zealand
| Switzerland | New Zealand | |
| Share market value per head | $178,705 | $17,788 |
| GDP per head | $62,100 | $39,000 |
On average, Swiss have TEN TIMES as much invested in the share market as New Zealanders. Switzerland (which has a population of 8.5 million, compared to 5 million in New Zealand) is far more successful economically and is home to an amazing array of world leading multinational companies. New Zealand has no comparable companies.
Ultimately, for New Zealand to become a far more successful economy, we need to change a number of specific areas of the economy which help incentivise this imbedded bias in favour of houses and capital gain. Central among these, is to increase institutional saving through Kiwisaver. Our disappointingly low total of assets currently held in the NZ Super Fund and in Kiwisaver funds, is a major detriment for the country. Far too much of our funds are instead currently invested in housing. But we also need to change widely held and longstanding perceptions among New Zealanders. We need to wean New Zealanders off housing, to a view that people do best, and the country does best, if a majority of the wealth of the country is invested (through institutional savings funds) in business and in the sharemarket. We need to aim to make this country’s economy a Switzerland of the South Pacific.
A second major change needed if we are going to lift our performance as a country, is to revitalise our whole approach to social spending, which is costing too much, and providing an inadequate standard of services. A whole new mindset on social spending, in Health, Welfare and in Education is required. Social policy has to become a partnership, where people take some responsibility for their own welfare and progress in life, and work in conjunction with the government to improve social outcomes. The government needs to lift the efficiency of its services in these areas; but it cannot improve our very real social issues on its own, without beneficiary buy in and mutual effort- no matter how much money government throws at the problems.
Covid is surely a major crossroads. New Zealand can go on with substantially unchanged economic and social policies. While it would be overcritical to describe what we have now as ‘failed policies of the past’, and our recent performance has lifted somewhat in the last 6 years, I suggest our present policy settings are only going to deliver ‘more of the same’- disappointing under performance. We can continue to leave our wealth predominantly in housing- and wonder why the Kiwi economy refuses to fly. We can continue to pour money into Welfare- and remain surprised that the number of homeless increase. We can continue to pour money into our health system- and remain surprised at how long it still takes to get treatment and how inefficient our hospitals remain. We can leave our economic and social policy settings unchanged, and act as if none of these issues exist. Or we can embark on major policy changes, in an attempt to address these issues and lift our performance as a country.
As I set out in chapters following, I see mounting debt, a mediocre economy, a malfunctioning social and political system, and a legacy of disappointing issues we will leave behind for our children and our grandchildren, if we let slip a major opportunity which may develop after Covid, to drive major meaningful change in this country. Yes we have a country with many natural advantages. Now it is time for us to step up, with some excellent policies, to make it a truly great country.
Read on, if you are interested to consider something more positive, something coherent and (hopefully) thought through; something more challenging and adventurous for the future of this country. As a baby boomer coming towards the end of my life, I feel very disappointed so far, with my generation’s legacy which we potentially will leave this country. Late that it is for my generation, I hope it is not too late to embark on some bold new directions, which could begin to set this country on a much more positive trajectory for the benefit of our children and grandchildren. There is no time to lose!
WHAT WILL ACCELLERATE NZ’S ECONOMIC GROWTH?
A number of key topics to encourage NZ’s economic performance, merit their own chapters, and these follow. There are also some specific changes to the economy which I address in the rest of this chapter, namely:
- NZ does not save enough
- Our society is moving towards unfortunate disparity of wealth.
- We are significantly a low wage country, with poor productivity
- We lack adequate price competition
- NZ is still primarily an exporter of commodities
NZ LACKS ADEQUATE SAVINGS
In 1972-1975, funded superannuation was set up. In 1975 the Muldoon government dismantled that funded superannuation , and replaced it with pay-as-you-go superannuation. (By ‘pay-as-you -go’ is meant current taxpayers through their taxes, fund the superannuation of current retirees; then when those current taxpayers retire, their superannuation is in turn paid from the taxes of the next succeeding generation of taxpayers). The country (especially the Baby Boomer generation) has never saved since 1975 for retirement, until Kiwisaver was introduced very recently. New Zealand has never had a significant pool of institutional savings, principally because we have not had funded superannuation (I discuss superannuation in detail in Chapter 10 below- but it is a topic closely related to Savings).
The NZ Super Fund and Kiwisaver, are both relatively recent changes, whereby the country has belatedly begun to save towards the costs of future retirees.
What have NZers done, if they have not saved as a society? Answer: they have bought a house when they marry, and paid it off over their working lifetime. Then they sell the house when they retire; downsize to a retirement home or similar; and use what is left over from their house sale, as their retirement nest egg. Home ownership has been ‘the ‘investment’ for many NZers, by which they provide for their old age.
What happens when a country has large pools of savings? Answer: funds managers invest those savings in the share and bond markets. The funds saved locally, are recycled, to local business. But New Zealand has never had a large pool of domestic savings. So when local businesses have needed capital, all too frequently that capital has been provided from offshore. When a NZer establishes a successful startup, too often it has been sold offshore, rather than floated on the NZ share market.
A good percentage of the NZ share market is owned from offshore. In addition to overseas shareholders owning many NZ listed shares, our companies are in the process of migrating out of New Zealand. In 2014, there were 17 NZ companies listed on the Australian Stock Exchange. At latest count, there are now 56 NZ companies listed in Australia. Companies migrate to where the deepest pools of capital are.
Then there is direct overseas ownership of businesses operating in New Zealand. All four of our major banks; one of our two supermarket chains; our media; our two breweries; much of our food processing sector; our insurance sector, to name but a few, are owned offshore. The list goes on and on. And much of this overseas ownership has developed in the last 50 years. Our media used to be owned by local companies; Wilson & Horton, and so on. Our breweries used to be DB and Lion- both owned locally. Our insurance used to be owned by NZI, South British and AMI. We used to own BNZ and ASB and provincial trust banks here.
New Zealand has in truth, sold the family silver over the last 50 years, as it has lacked a pool of savings in the country, to fund and retain ownership of our commercial sector. Even NZ Government Bonds are predominantly held offshore. According to Treasury as at 30 November 2019, 52.8% of all NZ government bonds on issue were held offshore- and over the last 15 years, the percentage has gone as high as 80%. The decision to abolish funded superannuation in 1975, has left NZ short of investment capital ever since, and has surely cost the country dearly.
How to reverse this? Primarily, build up a pool of local savings as soon as possible. The NZ Super Fund is now again being funded by the Government (after government contributions ceased from around 2008, until 2018). It currently totals around $43 billion. Kiwisaver funds now total around $60 billion. Unfortunately the NZ Government allows no tax deductions for funds paid into Kiwisaver. This means approximately 20%-25% less goes into funds for investment, than if the contributions were made pre-tax. Then NZ short-sightedly taxes the earnings of both NZ Super Fund and of the individual Kiwisaver funds. This NZ tax treatment differs from most overseas countries, which usually allow contributions to funds to be made pre-tax, and then for fund earnings to be tax free or to enjoy tax concessions until money is withdrawn from the fund. Because NZ gives no tax concessions either on contributions or on fund earnings, the funds grow slower, and the pool of capital the country needs to build up, is correspondingly deferred. NZ was not only exceedingly late in getting started with institutional savings- we then have unusual tax policies which slow the growth of the very limited saving which is now occurring here.
The National Party has announced as part of its election policies for the 2020 election, that if elected, it will again suspend contributions to the NZ Super Fund- so under a National Government that fund will only grow by the extent of its tax paid earnings and investment gains. Another potential future limitation on building up NZ’s pool of savings.
Compare our 5million population and $100b savings pool, with Norway (population 5.4m) NZ$1,976b in savings; Hong Kong (7.4m people) NZ$760b savings; Singapore (5.8m people) NZ$625b savings, and it is obvious we are still in our saving infancy. Australia (25.5 million people) has around NZ$170billion in its Sovereign Wealth Fund, and around NZ $3000 billion in private superannuation funds. The employer rate of compulsory contributions in Australia is currently 9%, rising to 12% by 2025 (with tax incentivised employee savings on top or that). In NZ, the employer contribution is 3%, with tax then taken from that. We are a thousand miles behind all these countries including Australia with our superannuation savings, and falling behind further every day.. These major savings discrepancies cost us significantly as a country; imperil the standard of living and well being of future retirees; and risk more NZ businesses falling into overseas ownership.
I should add a few more comments following on from our lack of domestic savings. First, when I say I prefer to own rather than to rent a house, that is not to say anything against landlords. It is rather to say that I prefer living in my own home. I do not oppose overseas ownership of NZ business, because of any opposition to overseas corporates as such. It is just better for New Zealand, that we own and retain the profits from as much of our commercial sector as we can. It is surely a less favourable outcome, for overseas corporates to pay themselves large dividends out of NZ each year, than if we owned those businesses ourselves, and retained that income in the country. Our balance of payments is significantly in deficit every year (NZ paid approximately $8.5billion more to offshore interests, than we received in external income in 2017), in part because of the amount of profits being remitted out of the country by overseas owned local businesses. The country is surely worse off as a result.
Further, overseas ownership can see decisions to close local businesses made on the other side of the world. Cadbury’s factory in Dunedin; Aulsebrooks and Bycrofts biscuits closed here, and now made in Australia. Glaxo’s drug factory in Palmerston North shut down. Even short of wholesale closure, local businesses can be hollowed out by an overseas owner, with severe impact on local employment and communities. Outcomes such as these would be less likely with the business in local ownership..
Then NZ’s Overseas Investment regime is in my view overly welcoming of overseas investment. But it has had to be up until now, because there has been a dearth of local domestic capital. Overseas money has been the only major source of capital in town, which has been available for NZ business to tap into. If we increase institutional saving, so there is much more domestic capital available, then the Overseas Investment criteria should be progressively tightened.
Why not require the vendor of a business or other NZ asset, to prove to the Overseas Investment Commission that they have first offered the asset for sale in NZ, and been unable to find a suitable domestic purchaser, before they qualify to offer the asset for sale to an overseas purchaser? Why not put a stamp duty on any NZ assets sold under an OIC approval, to make it more expensive for an overseas investor to buy a NZ asset, than for a domestic investor to buy that same asset? These are just two preliminary suggestions, as to how NZ could move to tighten the OIA criteria.
An overseas entity establishing a new business here, is less unfortunate than an overseas entity purchasing an existing NZ business. Overseas entities may have technology, which we do not have in NZ, and which we would benefit from. We benefit if they bring that technology to NZ, and set up business here. But we should minimise the sale of existing NZ businesses to overseas interests. Increasing our institutional savings , and thereby the pool of local NZ capital, is the major way to minimise loss of further NZ businesses to overseas ownership. As more domestic capital is generated by increased institutional saving, OIC rules should simultaneously be tightened to slow further overseas acquisition of our commercial sector; and even hopefully to begin to return some of that commercial sector to NZ ownership.
The suggestion pushed by parts of the commercial community, that NZ benefits from an open door for overseas capital, is not one I agree with – provided we generate our own source of domestic capital for the future.
WEALTH DISPARITY IN NZ SOCIETY
Historically New Zealand was a very egalitarian society. Our settlers left Europe to escape the straight jacket of Europe’s hierarchical societies. Wealth, privilege, and an entrenched class system all kept the European inequalities in place.
Our forebears came to New Zealand, determined to break that mould. They largely did so, for the first 150 years of this country’s existence. But it does appear our egalitarian society is changing much more into haves and have-nots. Even as one of the ‘haves’, it is a progression which concerns me.
The increases in disparity are not confined to NZ. They are occurring in many first world countries. They are helping drive revolts against conventional politics- Trump in US; the UK leaving the EU; Macron and the yellow vests in France; the rise of anti- immigration parties elsewhere. Increasingly large sections of society in the West feel left behind, by their economies, and are lashing out: at this stage mainly through the ballot box; but also in street protests (Chile, France, etc).
New Zealand is not so far down the wealth disparity path as many nations; but it is definitely appearing here. We have a low wage economy, and high house, farm, and other asset prices. The percentage of NZers owning their own homes is dropping noticeably. It is probably the most obvious measure that wealth disparity is on the increase.
What is causing this increasing wealth disparity? First, NZ’s productivity is low (see next section of this chapter). Although our workers probably work as hard as anywhere, for a variety of reasons they are not sufficiently productive: which means we can’t afford to pay them well. NZ is a low skills, low wage economy. Not surprisingly, this leads to a section of our society struggling financially.
Technology continuously improves in its ability to replace unskilled jobs. Go to an airport, and check-in staff have been replaced by self-check-in machines. Drive into a carpark, and a parking machine has replaced the ticket man. Supermarkets are replacing checkout operators with self-check-out machines. Banks have largely replaced tellers with cash machines and on-line banking. Call a firm these days, and you will likely reach an automated switchboard (or where a human answers, they may be in Philippines, or a cheap labour country).
If you are a semi-skilled worker, you are lucky these days to still have a job. Your ability to negotiate wage increases in this environment, is extremely limited. The economic impact of Covid will likely put firms under financial pressure, and make this position worse. Unskilled and semi-skilled workers have been standing still financially or even going backwards for the last 20 years. Only a strong NZ tourism sector (which generates many unskilled jobs) has masked the plight of the unskilled in this country- and that tourism sector is now under threat.
Another factor contributing to Wealth Disparity has been a change in business behaviour; especially in the West. Business horizons have become a lot shorter. Management and Boards are now focussed on extracting maximum profit from their businesses, as quickly as possible. How to do that? Highly incentivise your top management. Maximise the gains and drive the share price over the next 3 years. Borrow more, and pump your share price further with share buybacks. Cut as much cost as possible out of the business; service the customers with computers rather than people, and keep the business prices as high as possible. Management , shareholders and boards achieve gains. Customers (often the struggling members of society) end up with reducing products or services at higher cost. If you have tried in the last 10 years, to ring your bank, utility provider, etc on an 0800 number which is provided to service general customers, you will know what I mean by this major decline in service for all but important customers.
Then there remain questions how the NZ education system still manages to turn out so many disappointingly qualified dropouts. How can it be compulsory for children to attend school from 5-15 years, and yet some children exiting the school system cannot even read? If NZ is not educating children to the best of their potential, we are setting them up for second class citizenship (or worse) in life.
Finally, NZ Government policy is hurting the less well off. The major culprit is the Reserve Bank. Its low interest rates since 2008 have pushed both farm and house prices up. Worried by these increases, the bank then imposed Loan-to-Value restrictions. Only customers with a 20% deposit, should normally be given a bank mortgage. How can a young couple who are renting, save up $100,000 in the provinces, or closer to $200,000 in Auckland, to buy a house? Answer: they can’t. Either they are fortunate and get parental support: or they remain renting. The Reserve Bank has contributed significantly to wealth disparity in NZ society, through its monetary policies.
Then there is Central Government. In combination, petrol and electricity prices are major burdens for lower income people. Petrol has a high Government tax component: around $2 billion per annum. Electricity , following the electricity reforms and partial privatisation, has increased significantly in price. In March 2020, I saw Meridian spilling water down dams on the Waitaki River. A business with a 52% Government shareholder, wasting water- presumably to keep the cost of power high. The Government extracts major dividends and tax from the Electricity sector- from Transpower ($165m plus $100m tax) and from the Gentrailers a total in 2019 of tax and dividends of around $725million. In total almost $1billion per annum which the Government receives from the energy sector annually, which has to be paid for through a higher price of power. The high cost of power; along with high petrol prices, hits lower income sectors of society hardest.
And none of this takes into account the massive $2billion per annum tax on cigarettes (36% of Maori and Pacific Islanders remain smokers- more than double the proportion of smokers across the entire population); large taxes of around $1.1billion per year on alcohol (the less well off are often also good drinkers); and taxes of around $300m per year on gambling (if you are broke, you are more likely to gamble). Lower paid people have their direct taxes deducted at source, with no opportunity for tax shelters. Low income people spend a higher proportion of their income than high income earners- meaning that relative to income, GST imposes a higher burden on them in indirect tax. Central bank and NZ government policies really hit hard-very hard- the less well off sections of NZ society.
Finally there are capital gains in asset prices. If farmers have a better season the price of farms go up. NZers seem unable to keep the prices of their assets steady, and recognise that returns from them fluctuate. We ultimately reflect economic gains in the capital prices of farms, commercial buildings, and rental houses. The absence of a capital gains tax must exacerbate this process. How can a young farmer accumulate sufficient deposit to buy a farm for $5million? Answer: with rare exceptions, they can’t. So the next generation of farmers is being locked out of farm ownership as well. Those young NZ sharemilkers who 50 years ago worked like crazy to buy farms, have now become lifelong farm managers. High asset prices in NZ contribute significantly to wealth disparity.
How to lessen economic disparity in NZ? No easy answers, especially in the area where technology is eating into unskilled jobs. Increasing productivity in NZ is absolutely key to helping the less well off (see section below). The next most obvious areas for improvement- alter Reserve Bank and government policies, and try to drive down house, farm and asset prices. If there is a silver lining which comes out of the Covid lockdown, the economic downturn which may follow is likely to result in reduced prices of capital assets, which would be good for the country (if not good for the owners of such assets); and otherwise hard to achieve politically. Tough economic conditions after Covid, would facilitate a more conservative outlook around Board tables, and constrain corporate salaries and bonus schemes. High salaries for the top echelon of people in the public sector should be cut as well. If the public service is genuinely motivated by the well being of the country (see next section on Productivity) then there is no need to pay them high incomes which compete with top commercial managers. Increasing price competition in the NZ economy would also help (see below). And long term, a rebalancing of the tax system, to reduce income tax and replace the revenue lost with a capital gains/wealth tax, would also assist.
Yes I have always voted on the Right of the spectrum; and yes, what I have written in this section may sound socialist. But I actually worry that disparity within NZ society, could do us much harm. We don’t want to bequeath our grandchildren a stratified European type society of haves and have-nots. That would be contrary to the first 150 years of NZ’s existence. In my assessment, the problem of increasing wealth inequality in NZ society is certainly more important than climate change. A pity it does not receive the same amount of attention.
DISAPPOINTING NZ PRODUCTIVITY
Productivity is about ‘working smarter’ rather than working harder. It’s a measure of how much is produced from each hour worked in an economy. An economy which has many workers working long hours to produce a given output, has low productivity. An economy which has fewer workers working less hours to produce that same total output, has higher productivity. An economy where the workers have low productivity, cannot afford to pay its workers well. An economy with high productivity workers, can afford to pay its workers higher wages. Increasing labour productivity is an important component of higher per capita incomes and, in turn, higher living standards, and less wealth disparity.
Productivity growth is mainly seen when a given firm or industry has rising output, and a declining workforce. Using large numbers of low skilled labour to pick an agricultural crop, is part of low productivity. Investing in crop picking machines, and picking the same crop with few higher skilled picking machine operators, is associated with higher productivity.
The Productivity Commission summarises the disappointing productivity position in New Zealand:
‘Workers in NZ work longer hours and for less reward than workers in most other OECD countries. We are one of a small number of OECD countries with both a low level of labour productivity and low productivity growth. Countries with productivity records similar to NZ are Mexico, Greece, Portugal, Israel, and Japan.
NZ’s labour productivity or output per hour worked, is around 40% below the average OECD benchmark. Since 1996 there has been no sign of this catching up to the top half of the OECD. Instead the gap has increased.
So why is NZ’s productivity performance so low….Very few NZ businesses operate at the global technological frontier in their industry. We have lots of very small low-tech businesses surviving in a small, insulated domestic market with weak competition..That isn’t a recipe for productivity growth.”
A good broad brush measure of productivity, is GDP per head of population. Obviously the higher this is, the more productive the country. In 1950, NZ GDP per head was 97% of US GDP per head. In 2018, the figure had dropped to 65%. The bulk of that percentage fall took place before 1990.
In an excellent article in January 2020, Michael Reddell compares wage rates and the growth of the NZ economy. He finds NZs productivity growth has been poor for a long time, and actually slowed over the last decade.
Mr Reddell says :New Zealand in the last 10 years has had
‘…very rapid policy-driven population growth into an economy with few things going right for it. That has had the effect of skewing the economy inwards. It boosts the demand for labour, and so workers have done ok given the mediocre overall performance of the economy. But that should be no consolation for anyone given that, overall, we kept drifting further behind the leading group of advanced economies and are increasingly being overtaken by former Communist, formerly fairly poor, eastern and central European countries’.
What has been causing NZ’s disappointing productivity growth? There are no simple answers. First, Productivity has actually been negative (ie declining) in the State sector (especially in health and education) for the last 25 years. This has lowered our overall productivity figures as a country. The whole Public sector (including local bodies) has to be made more productive. Much more productive.
New legislation is just being finalised and drawn up, for the NZ State Services Commission (the body which acts as overseer of the NZ Public Service). Although the previous empowering Act was silent on the topics, it has been decided to set out in the new Act, ‘the Principles’, and ‘the Values’ of the NZ Public Service. Drafts on these two core values of the Public Service, made NO MENTION of the need to lift productivity in the state sector. Improving economic performance in the sector, is not something state servants consider important. A major change in corporate culture is needed among our public servants, if we are seriously to tackle productivity under-performance in their sector, and in NZ.
The Lockdown provided some unfortunate but timely examples of poor public service decision making. Waitakere Hospital handled Covid cases poorly. There were poor decisions on compassionate quarantine exemptions. A report on PPE gear was scathing about shortages and the inept handling of supply by Health officials. People in quarantine were not tested adequately. The Defence Force was brought in to shore up border protection.
Sidelined Health bureaucrats are the same people who supervise our inefficient hospitals. Covid related deficiencies telegraphed a timely message that if we are serious about lifting Productivity in this country, this has to include a lifting of performance across the whole of the state sector. Successive governments have found it easier to leave an underperforming state sector, than to ruffle the feathers of the state sector unions. These deficiencies can no longer be left in the Too Hard basket.
Then NZ does not invest enough in new technology and new machinery. Our shortfall is really significant. Capital per hour worked in certain measured sectors in 2009, was 40% below Australia. This lack of investment accounted for over a third of the Trans Tasman productivity gap. Capital equipment is generally more expensive in NZ. Our real interest rates prior to 2008 were higher in NZ- helping deter investment. Our tax treatment of depreciation and research and development, was insufficiently encouraging.
NZ has had high population growth in the last 6-7 years thanks particularly to high net immigration. Cut availability of lowly paid immigrant temporary workers, and firms may be forced to become more innovative; to invest more and to produce the same, with fewer workers- ie become more productive. Despite regular suggestions from the corporate sector, saying we need more immigrants to keep the economy growing, the converse is very probably the case- we need fewer immigrants with higher skill levels, to increase productivity growth.
By far the majority of NZ’s businesses are SME’s- small and medium enterprises. They lack economies of scale. They are less likely to innovate and invest heavily, compared to multinationals. Banks need to be far more willing to lend to commerce and to the productive sector, including small business. We need our business organisations to collaborate, and to work with universities, institute of directors, and other sources of skill, to mentor small firms to progress.
Arguments occur whether raising the Minimum Wage, pushes the low skilled out of work. Asia has tended to raise it, force its businesses to invest more, produce more with fewer workers, and move to higher value products and outputs. The lower the NZ minimum wage, the easier it is for firms to keep on employing large numbers of lowly paid workers, and avoid either investing or innovating.
Change the mindset of New Zealanders- away from housing as their main form of investment, into financial saving and investing into shares and commerce. Increase institutional saving significantly. Hopefully changing the tax system, to lower direct Income Tax, and bringing in a Capital Gains Tax (see Chapter on Tax) would also help this move to more productive investment.
Increase competitive pressures in the economy (see next section). Higher levels of competition forces firms to innovate more.
Every politician (from all sides of the spectrum) promises to cut red tape- and does the opposite. Government regulation has relentlessly imposed costs and burdens on business and on agriculture over the years- and continues steadily to add to that burden. Would it be possible to hope that a real crisis may cause politicians to start asking ‘How can we limit the drag which government regulation puts on business, and agriculture?’ The perceived benefit which some new rule may generate, has to be balanced against the costs and job losses it will indirectly impose. Without a sufficient focus on progressing our economy, that analysis has not been adequately undertaken in the past.
Finally, try and make the Productivity Commission more central in NZ commerce and in formulating NZ economic policy. The Commission publishes a lot of learned and very good papers. But is it sufficiently involved formulating policy and driving change? Overlooking altogether the need to improve productivity, while reformulating the NZ public service, suggests productivity has to become much more front of mind in the NZ economic consciousness.
Overall, productivity growth surely reflects how NZ has viewed its economy. When times are okay, we leave well alone. We drift, and spend on short term popular political objectives. If, as seems likely, we face some tough economic times post Covid, hopefully we will be more inclined to drive some of the changes needed to lift our productivity performance. They are absolutely vital for the future of our country, and for the sake of our grandchildren. We have barely scratched the surface of the changes needed. We are yet even to get the issue seriously into the consciousness of many key people in NZ society. Could a real crisis put it there?
INADEQUATE PRICE COMPETITION IN NZ.
Ask tourists (before Covid!) who used to come here. Ask Kiwis returning to NZ after living overseas. Ask housewives buying in NZ supermarkets. They will all tell you: New Zealand is a high cost country. Our substantially overseas- owned commercial sector, is doing very well at our expense.
Why is this? First, New Zealand is a small isolated economy. By its very nature, it has limited competition, compared to a large economy. We had a son living in USA for a number of years, and we spent time there. Houses were much cheaper (at least in Michigan). Food was cheaper. Clothing much cheaper. Restaurants were much cheaper. (To be fair, medical and legal costs were the opposite- much higher). The large US economy generated much more competition in most sectors; and this was definitely reflected in keener prices.
Compare this to New Zealand, with two supermarket chains; two breweries; two media companies; two TV companies; one major building products company (which sells very highly priced building products) ; two airlines…… Our small market and the limited competition in so many sectors of the NZ economy, means competitive pressures are less here. So domestic prices tend to be higher.
But even where there are more competitors (4 major banks; 3 major petrol retailers) margins in those sectors still appear generous, and prices are not low. It is surely the case that our consumer watchdog, the Commerce Commission, is ineffective. Whether that is because the Commission is not set up properly, with adequate powers in its legislation; or whether the personnel running the Commission are not doing a good enough job, I do not know. But the investment the country makes in the Commission, is currently producing inadequate dividends for consumers.
Freeing up importing (including legalising parallel importing), and lowering tariffs, was supposed to bring in imported competition, which would be difficult otherwise to replicate in our small economy. This has been effective in some sectors (for example clothing and furniture), where former local firms have gone out of business, in the face of cheaper imported competitive products. But many sectors (especially the services sectors) are not directly affected by imported competition.
From 2008, NZ saw accommodative economic conditions. They surely made firms more complacent. Margins were extended, and cost increases passed on. It is likely any Covid induced downturn will tighten competitive pressures.
What to do to enhance competition? There is only one thing which is obvious: beef up the Commerce Commission. Stronger legislation. More staff. Better staff. Require the Commission to investigate competitive pressures and margins in various sectors on a regular basis, and publish the results.
If the Commission found inadequate competitive pressures in say the grocery sector, the Government could offer financial incentives for new entrants into that field. Say it offered new entrants (including potential domestic new entrants, and also the two German chains Lidl and Aldi) tax breaks or financial incentives to set up new supermarkets within say 3 years of the Commission’s report. We subsidised Warner Bothers to make films in NZ (and greatly benefited the NZ Tourism sector as a result). If the revamped Commerce Commission found inadequate competition in a sector of the NZ economy, then why not have the Government get actively involved, to try and rectify that position? Subsidies in an economy are generally to be avoided. But if they can be used to increase competition, the payback to consumers may well be many times the direct cost of the subsidy. My suggestion: the NZ Government consider taking a more activist role in driving competition in our economy. Just the suggestion the Government might encourage new entrants into sectors found to be uncompetitive by the Commerce Commission, would hopefully spur existing firms to compete more.
ADD VALUE, MINIMISE THE EXPORT OF BULK COMMODITIES
I remember vividly an example from economics at University. A grower of cocoa beans (probably in a poor African country), sells them for 1 cent. A processor turns them into cocoa powder, and sells that for 5cents. A confectioner (probably in a wealthy first world country) turns the cocoa powder into chocolate, and sells the chocolate bar at wholesale for 50c. The consumer buys the bar at retail for $1.00.
The key ingredient in that chocolate bar is cocoa beans. And yet the grower of those beans receives 1% of the value of the finished product.
But it is even worse for the grower. Cocoa beans are a commodity. Whether it is oil; metals; or agricultural products, the prices of commodities are set on world markets, and inevitably fluctuate. The grower of the cocoa beans will get higher prices for his production one year, and lower prices next year. He is a price taker.
But the manufacturer and the retailer of the chocolate bar set their own prices. If the price of cocoa powder goes up, they will put the price of the chocolate bar up. If the price of cocoa powder goes down, they will likely improve their profit margin. They have power to control their own economic destiny. The grower of a world commodity product does not- he just takes what the world price gives him each year.
Sound familiar to the roller coaster ride New Zealand farmers experience in their incomes each year, as the prices of our agricultural exports fluctuate on world markets?
New Zealand is still primarily a producer of agricultural commodities. We are price takers for much of our output. We are basically a low wage country, with far too many low level unskilled jobs.. Much of our dairy production is sold as milk powder. 50%+ of our timber production is exported as unsawn logs. Our fruit, vegetables, fish, , etc: too much of this production is still sold on a commodity basis. Wine (of necessity) is an agricultural output which is exported as a consumer product, rather than as an agricultural commodity.
Just imagine how much value would be added to the country’s exports, if more of our timber was exported as Lockwood kitsets; as laminated beams for use in construction; as kitset furniture; as paper.
Just imagine how much value would be added to our exports, if more of our milk powder was processed into ice cream, yoghurt, fancy cheese. When Tip Top was recently sold by Fonterra, it was reported that the percentage of the ice cream Tip Top makes, which is exported, had been relatively constant throughout the time Fonterra had owned the business- around 10% of Tip Top’s production. Our ice cream is better than most in the world- but we sell insufficient overseas.
Reflect for a moment: how do we produce the base commodities we principally export? Forestry gangs cut trees. Temporary immigrant workers harvest our horticultural crops. Lower level farm workers milk many of our cows. If we only export base commodities, we tend to produce them via low wage and low value jobs.
Grower Foods in Hawkes Bay, was a producer of frozen and tinned fruit and vegetables. It was bought by Canadian multinational, McCain. McCain now produce pizzas, dinners, and other consumer products. In the South Island, McCains have a large potato factory. It processes locally grown potatoes, and sells them as fries inter alia to McDonalds overseas. Instead of selling sacks of potatoes, McCains process them and export them as fries. How much value is added to our potato exports through that further processing? Why does a Canadian company succeed in adding value, while we in New Zealand struggle to do so?
Yes, with vacuum sealing, we are exporting more chilled meat, rather than frozen. The meat industry has progressed well, in producing consumer ready cuts to go straight into overseas supermarkets. Yes, there are major subsidies, tariffs, quotas, and impediments in most of our overseas markets, to free trade in food and in agricultural commodities. Yes, there are major food processing companies in the world, which will always prove doughty competitors.. But as a country we have to continue our efforts to process as far as we can, our top quality agricultural products, despite the difficulties.
We should have the very top academic and commercial brains in the country (and perhaps with a few top brains added from overseas), working full time to add value to all our exports. We should be putting plenty of government money into such work.
Then government policy settings need looking at. I used to drink Australian produced Crown lager. It was competitively priced with NZ brewed beers, and I liked the fact that it was cheaper in NZ than in Australia. Then perhaps you have noticed how a lot of the beef sold in NZ is from Australia. Why should it be economic to bring Australian beer and beef to NZ and sell them here, and undercut local NZ production? Answer: while I have never investigated, I would have little doubt the Australians are subsidising their exports in subtle ways: and that is why those products are cheaper here than they are in Australia; and why it is worthwhile for retailers to bring them to NZ and sell them in competition with NZ produced products.
Recently NZ timber mills have been closing, complaining they cannot buy sufficient logs because subsidised Chinese companies have been paying high prices to foresters here. Is the addition of value in the timber industry being impeded by unfair competition?
In an ideal world there should be no subsidies and no tariffs. But we will never have an ideal world. If NZ is to succeed with viable local industry, and with export of added value products, we have to support our exporters, and our local industry, at least to the same extent other countries back their commercial sectors. We need a few ‘quasi subsidies’ from Government, to offset overseas trade restrictions in our export markets. The rest of the world does not operate under pure trade policies- we need to adopt their approach more.
I should add that what I am advocating are policies which assist all exporters, and impose uniform tariffs or costs for importers. What we should NEVER have, is politicians offering assistance to the smelter, steelworks, refinery, bungee or other specific employer. Companies are adept at announcing a possible closure, knowing they are situated in a key electorate, and an election is coming up. Politicians getting involved in a case by case level of assistance is very unfortunate and should not be allowed to happen. The level of assistance should be modest and universal. If businesses cannot export with that level of assistance, or exist behind that level of assistance, then they should fail, without governments having any role in trying to keep them afloat.
Add value add should be a constant primary objective for the country to strive towards, which is emphasised continuously by the Government. Policy settings need to support that objective in all reasonable ways.
SUMMARY
Take the opportunities Covid may provide, to break out of current policy settings. Focus on the long term changes which will improve the NZ economy. Significantly increase our institutional savings as a nation. Try and minimise asset prices, including house and farm prices, and thereby limit financial disparity in our country. Adjust government policies to reduce the financial disparity they cause. Put productivity gains to the forefront of all economic policy initiatives. Drive competition in the NZ economy. Drive value- add in our exports.
There is so much positive economic change we need to drive. And I haven’t even yet started discussing the major topics for change, which merit their own chapters.
Covid – Catalyst for Change 