Are We Willing to Pay any Price?
No one doubts the benefits of extending our trade opportunities – but many are alarmed at a dangerous naivety in what passes for our trade policy. That policy reflects our unfortunate dependence on a single commodity; our anxiety to maximise our one trading advantage by currying favour with powerful trading partners has led us into some treacherous waters.
We have, for example, rapidly built up a Chinese market for our dairy produce with the result that – without any assurance that that market will remain open to us – we are now virtually economic prisoners, forced to meet almost any Chinese demand in order to retain a market that has become our life blood.
We have chosen, for example, to avert our gaze from the obvious effects of Chinese intervention in the Auckland property market for fear of offending Chinese opinion. More importantly, we have apparently not recognised that the Chinese interest goes beyond merely buying our products in a normal trading relationship, but extends to obtaining control of the productive capacity itself.
Dairy farms themselves, processing plants, manufacturing capacity, expertise of various sorts are now owned by Chinese operators; their production increasingly by-passes New Zealand economic entities and suppliers and is marketed by Chinese companies directly to the Chinese consumer.
There are of course many instances of Chinese capital being deployed across the globe in pursuit of assets and capacity. This is not a cause for criticism – the Chinese are entitled like anyone else to pursue their own interests. It is simply a statement of fact.
We, however, seem unaware of what is happening. It is no accident that this direct supply to the Chinese market has accompanied a fall in the proportion of New Zealand dairy production handled by Fonterra. While the proportion of our dairy production under Chinese control is still quite small, there can be little doubt that it will grow. Low dairy prices will force the sale of a number of farms to foreign owners. As the Chinese increasingly control their own sources of supply, their reduced requirements for dairy produce on international markets will inevitably mean downward pressure on prices.
Nor is it just the ownership of the physical product that has passed into foreign and often Chinese hands. The decision to allow non-farmer ownership of “units” (or, in other words, shares) in Fonterra has meant that we must now face the prospect of a significant part of the income stream from our most important industry to pass into private and often foreign hands.
Our anxiety to improve the markets for our dairy produce has led us into another potentially dangerous relationship. Free access for those products into the US market has long been touted as the “holy grail” of trade policy. So keen are we to achieve this that we are apparently ready – in a so-called free trade agreement – to give up significant benefits, such as Pharmac’s role in achieving the relatively low prices we pay for pharmaceuticals, and to accept severe limitations on other aspects of our ability to organise the way our markets operate.
Even more importantly, we will concede a large part of our powers of self-government by allowing foreign corporations to sue our government in specially constituted tribunals, and to force that government to change its policies and legislation – a power not, of course, enjoyed by domestic companies.
The irony is that these sacrifices are most unlikely to achieve much of what we want. The US (and, more generally, the North American) dairy industry is too powerful and too protectionist to throw open its market to competition from efficient producers overseas; and they have yet to reveal their hand and to bring their political influence to bear on the negotiations we are still pursuing. We have, it seems, spent months making concessions in the hope that the US will at some point deign to offer a deal on dairy produce, with little evidence that such an outcome is at all likely.
In instances like these, we over-estimate our ability to hold our own against the interests of much more powerful economies and over-state the degree of trust we can repose in them as economic partners. The Greeks have shown the price that can be paid for getting into bed with more powerful (and often more ruthless) economies.
Perhaps the most recent instance of what we are prepared to give up for the sake of a free trade deal is the $11 million paid to a Saudi businessman in the hope that he would use his influence to swing such a deal for us with the Gulf States. There can have been no other reason for such a payment. John Key duly turned up, ready to sign the deal, but departed empty-handed. We appear to have traded away our corruption-free record and reputation for the sake of a payback that didn’t materialise. “Naivety” doesn’t really cover it, does it.
Bryan Gould
11 June 2015
Who Are the Ideologues Now?
It is a truism of today’s political analysis that, over the three or four decades since the onset of the so-called “free-market” revolution that swept across the western world, the centre of political gravity has moved substantially rightwards. Most of those of middle age or younger will have grown up, after all, in a world where it has been widely accepted that markets are more or less infallible, that government spending is inevitably wasteful and a drag on economic development, that running a country is just like running a business, that we all benefit if the rich get richer, and that private profit justifiably and inevitably overrides all other considerations.
So insidious and comprehensive has been the advance of this orthodoxy that even those who choose to question or oppose it are hard put to understand how complete and extensive has been its victory. Political leaders who seek to offer alternatives are disarmed and enfeebled, without realising it, by their experience of growing up within its confines. They are, in any case, urged – on electoral grounds and even by their friends – to understand and accept the new reality; and that reality, of course, keeps on moving rightwards.
One of the most significant consequences of this re-definition of the political landscape has been the acceptance that what would once have been regarded as at the extreme outer edge of what is politically possible is now the new centre ground. Any divergence from this central position is, by definition therefore, literally eccentric; and any move away from “free-market” orthodoxy is condemned as either a return to the past or an irrational lurch leftwards.
These definitions of centrality and divergence have had the further advantage, for their proponents, of confirming a long-held public perception. In the days when the political left was prepared to challenge existing power structures, they were undoubtedly helped by their development of, and adherence, to an ideology of sorts that allowed them to ground their objections to orthodox policies in some loosely defined analytical framework.
It was perfectly understandable that, as a consequence, the left in politics was seen as the doctrinaire element in the political spectrum, whereas the right was identified as pragmatic and concerned with what would work. Indeed, it is the fear of being characterised as ideologically driven that inhibits today’s leaders of the left from straying too far from current orthodoxy.
Parties of the right have found it advantageous, on the other hand, to clothe their lurches rightwards in the language of experiment and exploration of what is possible, rather than of ideology. They have also proceeded stealthily, one small step at a time, with the intention of concealing from the public that each new step is in reality a further development of a highly ideological agenda.
That may, however, be about to change. As the tide of ‘free-market” orthodoxy has reached its high-water mark and appears to be receding (at least in most parts of the western world other than the euro zone), it is more and more likely to leave exposed to public view those new policy initiatives that seem to have little to do with common sense and practicality and to reflect much more clearly what are doctrinaire preoccupations.
Consider the following recent instances. The government’s ideological preference for private over public provision has led them to engage Serco – an international firm already notorious for its failures in a range of countries – to run some of our prisons. The outcome? The shambles – and the unacceptable and damaging shambles at that – now revealed at Mt Eden prison.
Charter schools? An idea that has already been shown in its country of origin, Sweden, to produce disastrous results in terms of educational standards, and is now in the process of proving that point all over again in New Zealand, at the expense of some of our most needy and disadvantaged children.
And what about the wacky idea of financing the delivery of social services to some of our most vulnerable citizens, including the mentally ill, by selling bonds to private investors who will then expect to make a profit from their “investment”?
What links all of these and other similar ideas is that they have little to do with what will work and best serve the interests of society and its citizens. They are instead all statements of ideologically driven preference – in each case, a preference for private provision, not because it works better, but because it is a faithful rendition of “free-market” theory.
It seems, in other words, that the usual view of the left as doctrinaire and the right as pragmatic is in course of changing. It is now the right that espouses the ideological approach and that will go on doing so for as long as it is not held to account and its bluff is not called. It is the left (when it can make up its mind and, like the lion in the Wizard of Oz, reclaim its courage) that has the opportunity to offer new alternatives to free-market orthodoxy that are not the product of doctrine, but are simply sensible and will produce better outcomes.
Bryan Gould
26 July 2015
Chinese Buyers? No, Australian Banks
The outrage, justified or otherwise, at Labour’s disclosures about Chinese buyers in the Auckland property market have distracted the critics from the main point being made. In any market, whether for property or anything else, the introduction of a major new element of demand will have an immediate impact and will drive prices upwards. And that is true, whether the new entrants are from New Zealand, outer space or elsewhere. It is not the provenance of the new buyers that matters but the fact of the increased demand.
No one disputes that overseas buyers, many from China, are now actively involved in buying Auckland property. In the case of these buyers, their impact is increased by the fact that they are not only a new element but in many cases have greater purchasing power than local buyers, and can therefore outbid them. And because their purchases will often be made for speculative purposes, they will be more concerned with the prospective return on their investment rather than with its immediate resale value or the property’s suitability as accommodation for themselves. These factors, taken together, have pushed up prices and help to explain why Auckland’s housing crisis is one of affordability as well as of an imbalance between supply and demand
There is, however, a further issue that is almost completely overlooked. It is not just overseas buyers, Chinese or otherwise, whose purchasing power is helping to drive prices up. That factor is significant for local buyers as well. In both cases, the fact that purchasers are willing and able to enter the market and to pay the inflated prices for Auckland property is a major factor in determining the price structure in that market.
In the case of local buyers, their willingness and ability to pay the ever-increasing prices is a reflection of several factors. If they are already home-owners in Auckland, they will be able to use the inflated sale price of their existing property to finance – at least in part – the purchase of a new one. They will also have the assurance, for the time being at least, that the rise and rise in Auckland house prices and the consequently increased equity they enjoy will relieve them of any concern about the size of the debt they have to take on.
Most importantly, their purchasing power reflects their ability to access relatively cheap mortgage finance from banks that are always keen to lend. They are therefore able to go into the market armed with a purchasing power that is hugely greater than they can command for any other purpose. There is no other market where it is not only possible but commonplace to draw on a purchasing power of up to three times one’s annual income, to pay a low interest rate on such borrowing, and to enjoy what seems to be a cast-iron guarantee that the asset purchased will provide not only huge utility (in the form of accommodation) but a substantial capital gain as well.
None of this would be possible if it were not for the continued willingness of the banks to lend for house purchase. For the banks it is a no-brainer. As the Bank of England has now confirmed, banks create the money they lend out of nothing and can charge interest on the new money for as long as it exists in the form of a debt owed to them. That is where their record and increasing profits come from. It requires little effort to attract mortgage business (since there is never a shortage of potential borrowers) and it is a more low-cost, secure and relatively risk-free business than any other form of lending.
There is virtually no constraint on the volumes of new money that the banks are able to create and lend in this way. The only limitation is the availability of new borrowers with enough security and ability to service the loan – and even those constraints are eased by the asset inflation that ever-increasing lending brings about. The banks are able in other words to go on lending ever-increasing amounts into an inflating market which they themselves create.
Much of this is unfamiliar to the banks’ customers who continue to believe that the banks lend only money that is actually deposited with them by savers. But the truth of the situation – that what the banks lend has virtually nothing to do with the much smaller volume of deposits they receive – is beginning to dawn on the authorities and, in particular, on the Reserve Bank, which is why there is increasing interest in so-called macro-prudential measures designed to restrain bank lending on mortgage.
That is also why, as Professor Laurence Murphy of Auckland University points out, freeing up more land for development will do little to help. It will simply provide yet more opportunities for banks to lend larger and larger sums of newly created money and for developers to seek larger and larger profits. The affordability crisis will go on getting worse. In other words, and at the risk of accusations of xenophobia, it is not so much Chinese buyers, as Australian-owned banks, that are responsible for our housing crisis.
Bryan Gould
16 July 2015
Chickens Coming Home to Roost
“Rock-star economy” is a catch-phrase that has served very well to persuade us that we are doing well in economic terms. But “chickens coming home to roost” and “living in a fool’s paradise” may be nearer the truth about our economic performance.
First, those chickens. The warnings that some of us have voiced for some time about our dangerous dependence on a single commodity are, sadly, proving all too accurate. The slump in world dairy prices has exposed the unwelcome truth that our apparent good fortune depends substantially on just one price for just one product – and we now know that the milk powder price will not remain consistently at its recent high levels.
The charge that must be laid at the door of successive governments is that we have wasted the chance, during the good times, to prepare for the day when they came to an end. Instead of broadening our economic base by developing significant new industries and products, our economy is more dependent than ever on just one industry that, despite its great success and strength historically, cannot be expected to carry the rest of us forever.
This failure to diversify is not just an error of omission. Ministers may have failed to do much about the problem, other than make the occasional speech, but their real failure is one of commission. Our reliance on dairy products is the inevitable result of the macro-economic policies that governments have consciously pursued over decades.
Over a very long period, they have quite knowingly engineered an over-valued exchange rate as the consequence of the high interest rate policy they have used as a counter-inflationary tool. They have equally knowingly turned a blind eye to the inevitable consequences of thereby making our goods more expensive than they should be in international markets, including our own.
Those consequences include a perennial trade deficit that can only be financed by borrowing and by selling assets to overseas interests. And that trade deficit arises because new producers find it difficult to sell over-priced goods into export markets, however good they may be, with the result that our potential growth points cannot get a secure foothold that will allow them to grow and prosper.
The over-valued dollar has, in other words, killed off or otherwise stifled many of the new industries and products that are needed if we are to diversify. In the end, if we charge too much, it is only our very best and long-established performers that can survive – and even they will do less well in terms of the margins they earn and will struggle if markets turn down.
None of this is surprising. The economic consequences of the current policy settings are, or should be, well understood. But our leaders either deliberately or ignorantly choose to ignore the damaging consequences of their policies – and then wonder why we have failed to develop a broader base for our dangerously narrow economy.
And what about that fool’s paradise? It is not just the fall in world dairy prices that has revealed it for what it is. The dairy industry on which we have relied for so long is now vulnerable to a number of threats that we have scarcely begun to recognise.
As the dairy price has fallen, Fonterra’s travails have shown up in greater relief. They are, of course, partly of its own making, but they are also the consequence of a gung-ho approach to the Chinese market for our products.
No one doubts that we are now very vulnerable to any diminution in Chinese demand for our products, but what may not be so clear – yet – is that the great benefits we have enjoyed for so long from the success of dairying are in the course of passing into foreign hands.
The availability to investors – many of them foreign – of Units in the Fonterra Shareholders Fund means that much of the income stream from our dairy industry is now on its way out of the country. Even more importantly, an increasing proportion of the industry itself is being acquired by foreign interests. The proportion of milk production now being handled by Fonterra is falling steadily as foreign – and largely Chinese – owners of New Zealand dairy farms choose to bypass Fonterra and market their product directly into the Chinese market.
This development, too, should come as no surprise, but it has clearly never occurred to our naïve government. Yet, it is clear that – as we see from Chinese acquisitions around the globe in industries of much greater importance than dairying – the Chinese aim across the board is not merely to buy the products they need but to acquire and control the productive capacity itself.
To make this point is not to criticise. The Chinese are perfectly entitled to pursue their own interests. But we should surely be equally ready to recognise what is happening and to take appropriate action. The dairy production which has sustained us for so long may soon not be ours to rely on. Sadly, fools do not enjoy paradise for long.
Bryan Gould
12 June 2015.
How Did We Come to This?
How did we come to this? When did New Zealanders become convinced that the care of the most vulnerable in our society, and particularly of those suffering mental illness and disability, should be treated as an opportunity to make a profit rather than as a community responsibility?
Nothing more clearly demonstrates the mindset of the government we re-elected just a few months ago than this stark assertion that it is the quest for money that alone motivates us. We now know beyond doubt that our government is convinced that the only way to persuade people to care for others is to encourage them to make money from other people’s desperation.
There will, of course, be those who will respond immediately with the argument that – distasteful though it may be – it is simply a recognition of what really drives people, and that we should welcome anything that produce better outcomes, however they are motivated.
Those of us who still retain a belief in the inherent attachment of New Zealanders to this country’s traditional values will reject that argument. But even if we were to overlook the moral bankruptcy of such a contention, we would still be entitled to show that the basic premise that we will thereby get better provision has no foundation.
We are by now familiar with the consequences, in many areas of our public life, of entrusting important interests to the tender mercies of those whose sole interest is the search for profit. Is Sky City concerned about the damage to problem gamblers from more pokies and gaming tables? Is Petrobras worried about the impact on our marine environment of deep-sea drilling off our coast? Was Pike River alert to the need to look after the safety of their miners?
We know from experience that the first concerns to fly out the window when the profit motive is at stake are the well-being of others, service to the community, and the conservation of scarce resources.
That lack of interest, let alone concern, for wider community values becomes more marked, the further removed the profit-seekers are from the impact on the ground of their actions for other people. If the extent of the investor’s involvement is that he or she puts in some money and then waits for the regular and promised payments, but never has the need or even opportunity to see what activity in practice actually generates those payments, it is simply unrealistic to believe that there will be much interest in whether or not a particular service is properly delivered.
The only concern will be as to whether the conditions that are specified in order for the payment to be made have been met. And it is here that the government’s experimental model really breaks down.
The government’s case for taking this action, after all, depends on their claim that the current models, involving either their own staff in the Ministries of Social Development and Health or the purchase of services from approved voluntary bodies, does not adequately guarantee that the required services are fully delivered.
That is presumably because the government has trouble in accessing sufficiently reliable information as to the level at which those services are provided. They have presumably discovered that a comforting report that certain goals have been achieved does not always accord with the facts.
Yet, if that is the case, it is hard to see how removing the government even further from the action, and interposing a range of private investors with literally no interest other than their regular payments in the quality of those services, can be expected to improve matters.
If the public servants and voluntary bodies that are directly involved cannot be trusted to provide reliable information about the services that are provided, what makes ministers think that a certificate provided to authorise payment of interest on a bond to a virtually anonymous investor will be any more reliable?
If the government is so suspicious of the reports it receives about the quality of services being delivered, it is hard to see that changing the method of funding those services can address the problem. Indeed, it is likely to become worse, since the pressure will be on from investors to ensure that, whatever the level of service actually provided, the reports will show that the required outcomes have been met.
And if there is a real issue here, and there are proper safeguards to ensure that stipulated outcomes are in fact achieved, so that the regular payments are not always guaranteed, what makes the government think that investors would tolerate that uncertainty and would buy the bonds anyway?
The case for this experiment in other words has nothing to do with better services or even just better value for money. It has the great advantage that it gets another tranche of public spending off the government’s books and helps to reduce the deficit. And it rests on a visceral conviction – or, if you prefer, a gut feeling – that making a profit, whatever the context and the wider outcome, should always be supported and is always worthwhile. It has, the government seems to be saying, an intrinsic value all of its own, and trumps all other considerations.
Bryan Gould
2 June 2015.