Kiwis' insular world view needs to change

Globalisation will work better for NZ with policy changes and a shift in attitude says the Treasury.

A tough talking Treasury working paper is calling for further changes to immigration policies and investment rules so New Zealand can gain more benefits from its open economy.

It seeks to reduce barriers to foreign investment, and also questions whether agriculture will continue to be the backbone of the economy.

A wide range of domestic policies need to be changed to give more weight to improving New Zealand's international connections, including making direct foreign investment easier (see the IKEA story below).

The Treasury paper also slates New Zealanders' views on international connections as possibly preventing the policy changes that would improve economic performance.

It cites strongly held views about foreign investment in 'sensitive' assets, like land and airports, and points to concerns about high migration flows from Asia, and to the transfer of manufacturing operations offshore.

It calls for a shift in the New Zealand psyche "that sees international connections as more of an opportunity than a threat", and for support of "a culture that sees international integration as a success."

In the case of foreign ownership of land the paper suggests that if the real issue is access to the land for recreation, domestic policies should regulate that rather than prohibit foreign ownership altogether.

A World Bank study of fast growth economies quoted in the paper said their most important shared characteristic was making the most of the world economy. "To put it very simply, they imported what the rest of the world knew, and exported what it wanted."

New Zealand struggles to do that partly because of its distance from international markets but also because of problems in accessing and applying knowledge.

This can be partly overcome by more foreign investment as foreign owned firms tend to be more productive than domestic firms. They have better management practices and they also open up international distribution networks.

On agriculture where New Zealand has led the way on R&D in some areas, the authors say their paper is deliberately provocative.

"Industry structures potentially lean against dynamism and international expansion, notably capital and ownership structures and some competition settings. The farm-gate and short term focused production model tends to limit longer term market signals from consumers through to producers."

International connections have been previously identified as part of all the five factors that Treasury considers drive productivity: innovation, enterprise, investment, skills and natural resources.

Policy changes are proposed in three areas:

  • International factors should be given greater weight in setting domestic policies
  • Knowledge transfer can be improved particularly from the movement of highly skilled people
  • Policies should take into account global trends in labour mobility, the rise of the service sector and the growing importance of Asia.

While the New Zealand economy is relatively open it is "only moderately well connected with the world economy, and being open is "necessary, but not sufficient".

The paper notes that high immigration can reduce social cohesion and place downward pressure on wages. Developing policies that speed up the integration of migrants into the economy would help. Temporary migration for study or work is also a useful way of encouraging permanent settlement.

In the trade area, although about 95% of imported goods are tariff free, "New Zealand does not compare well on total trade barriers."

According the World Bank data, "New Zealand is only 43rd of 125 countries of inbound average applied tariffs."

Total exports as a percentage of GDP are also lower than in other small advanced economies, and contrary to the belief that firms "learn by exporting" the paper says that firms that are already the most productive go into exports and only the best of these engage in direct investment offshore.

The paper makes a number of suggestions about improving the ability of firms to operate internationally including reducing fluctuations in the exchange rate, lowering information costs for firms, and adopting policies for cross border harmonisation and international standards.

The paper suggests a range of unilateral and multilateral moves to liberalise capital flows, including less emphasis on screening out non New Zealand citizens. New Zealand's rate of direct investment overseas is about half the OECD average and over half of it goes to Australia.

The paper recommends that policies to boost foreign direct investment should be considered, although it notes that providing financial incentives to attract investment may not lead to an overall economic benefit.

New Zealand would benefit from a better functioning innovation system, the paper says and it recommends more R&D, some public funding to help transfer international knowledge, and more assistance and incentives for the holders of intellectual property.

The IKEA Case

One example of where domestic policy factors worked against international connections is the IKEA case, which is cited in the Treasury paper.

"In recent years, the international furniture chain IKEA has been considering entering the New Zealand market. A new shopping centre was proposed in Auckland, in which IKEA would be a tenant.

The Auckland City Council turned the proposal down, based largely on traffic concerns. The Environment Court overturned that decision, but put strict rules around it,

explicitly excluding IKEA.

From an international connections perspective, IKEA would be likely to bring a number of (mainly longer term) benefits to New Zealand, such as quality products for consumers, competition, pressure on vertical supply chain linkages, management expertise, and international experience.

Other international firms may have noticed IKEA's negative experience.

The point here is that whether IKEA entered New Zealand did not depend on foreign investment screening or international transport costs, but rather on a string of domestic policy settings, including roading infrastructure, the Environment Court process, and the Council's approach to retail centres."

International Connections and Productivity:

Making Globalisation work for New Zealand Treasury Paper April 2009

Published in the National Business Review of 24 April 2009