Eating the Seed Corn

Many people are concerned when they see New Zealand assets – land or infrastructure or businesses – sold into foreign ownership. But, we are constantly assured, that instinctive reaction is at best misplaced and at worst an expression of xenophobia. There is, we are told, no cause for concern; indeed, the reverse is true. The willingness of foreigners to pay good money for our assets should be seen as an expression of confidence in our economy and a welcome increase in the spending power available to New Zealanders.

Yet those concerns, those instincts, have considerable substance. Kiwis are naturally concerned when they see a large proportion of our national economy and productive capacity passing into foreign hands – a larger proportion, as it happens, than for almost any other developed country. They don’t need degrees in economics to understand that if the ownership of income-bearing assets changes, so too does the right to the income. Assets that used to benefit New Zealand owners now produce income for foreign owners – and the repatriation of that income overseas imposes a further burden on our already overstretched balance of payments.

The old analogy of selling off the family silver and then living off the proceeds is not easily dismissed. And it is not only the income stream that we lose; we also give up the rights of ownership and control over more and more of our economy, so that decisions of great importance to us are made in foreign boardrooms far away by people who know little and care less about our interests.

The issue is, in other words, not as straightforward as it is said to be. The first step towards a clearer understanding is to differentiate between two different types of inward foreign investment. An investment from overseas in a new factory would at least provide some new employment and tax revenue, even if the profits were sent back to the foreign owners. But where the foreign investment is to purchase existing assets, it has little to commend it, except to the vendors (who might receive a higher price than they would otherwise have done).

There may of course be cases where foreign ownership is a price we have to pay to keep an enterprise going; but even then, foreign ownership, especially where the buyers are overseas (and often Australian) private equity partnerships, is often just a stepping stone to asset-stripping, followed by a quick departure with the loot.

The reality, which is hardly ever spelt out, is that selling off our assets is a sign of weakness and not strength. We do it because we need to; the proceeds are needed to pay for the imports which we otherwise could not afford. It is hard to imagine a more classic definition of a rake’s progress.

Many people will intuitively understand that selling our assets is minus and not a plus, but there is a further downside that may escape the attention of even the well-informed.

The sale of our assets to foreign owners inevitably brings an increased inward flow of foreign capital – but without a corresponding increase in the volume of domestic production, so that the inward flow could be expected to have some (usually adverse) impact on issues like the inflation rate (though this is hardly an issue at present).

But the inflow of foreign capital will also mean an increased demand for New Zealand dollars so that the purchase price for our assets can be paid to the New Zealand vendors. That increased demand will in turn mean, as is true of any commodity for which there is an increased demand, a rise in the value of the New Zealand dollar.

Is this a bad thing? Ask New Zealand manufacturers and exporters. Ask the Reserve Bank. The answer is that a higher dollar hands a price advantage to foreign manufacturers and importers, reduces market share for New Zealand industry both at home and overseas, and – as our dairy farmers will testify – makes exporting more difficult and less profitable. And the net result is a worsening balance of trade.

That is why the recent fall in the New Zealand dollar has been welcomed as helping New Zealand exporters and manufacturers, and also why the Reserve Bank, which might normally want to raise interest rates in order to cool the housing market, has refrained from doing so – for fear that higher interest rates would push the New Zealand dollar higher and choke off the slight recovery in our productive sector.

It is the role of our high interest rates in pushing up the exchange rate and handicapping our producers that usually attracts all the attention. But it is less well understood that there is a further culprit – the inflow of foreign capital as we sell off more and more of our assets.

We have created for ourselves, in other words, a vicious circle. We sell assets because the high dollar means that we have a perennial trade gap and we need to bridge that gap; but selling assets helps to drive the dollar still higher, the trade gap widens further as a result, so we have to sell yet more assets. We are paying the price for failing to face our real problems.

Bryan Gould

24 January 2016