Capital Markets: New Zealand’s road to recovery

Dr Oliver Hartwich
NZ Herald
25 May, 2023

“There is a lot of ruin in a nation.” It is one of those sayings that is easy to misinterpret.

Taking Adam Smith’s famous quote literally, there are so many ways for a country to go wrong. But it can also be read as saying that there are many ways countries can come back from their difficulties.

Either way, Adam Smith’s 18th century dictum applies to New Zealand today.

Yes, there is a lot of ruin in New Zealand. Much more than would allow one to sleep comfortably. But maybe there is hope.

Before we can get to the hopeful part, we must acknowledge where New Zealand is facing ruin.

New Zealand finds itself in a vulnerable position. Though considered a developed economy, it is performing poorly on many indicators.

Regarding GDP per capita, New Zealand now sits below countries like Italy, Belgium and Iceland.

Our annual labour productivity growth has hovered around a meagre 1 percent for the past three decades.

The OECD ranks us as the most restrictive economy for foreign direct investment (FDI) among its membership. No wonder that as a percentage of GDP, our FDI stock is now lower than it was 25 years ago.

Meanwhile, the International Monetary Fund (IMF) predicts we will have the worst current account deficit in the developed world this year. One in eleven dollars of our GDP is effectively funded from overseas.

And that is before we even get to how New Zealand’s state services are underperforming. New Zealand’s government sector does not provide a decent education. It does not run a world-class healthcare system. Its infrastructure delivery leaves a lot to be desired.

Though it would be an exaggeration to say that New Zealand lies in ruins, something is obviously not right. Far from being “God’s own”, we have become distinctly average, if not mediocre.

Unpleasant as it is, it must be spelled out directly.

New Zealanders prefer to think everything is fine. Number 8 wire and all that. She’ll be right.

We are not so good at admitting when things go wrong.

But an honest analysis of our sad state of affairs is vital to overcome it.

Here is a starter for ten.

New Zealanders believe that we are a country open to the world. That we are almost the ones who invented free trade.

Well, not quite. Though New Zealand got rid of most tariffs, signed bilateral trade agreements and facilitated the Comprehensive and Progressive Trans-Pacific Partnership, we never took full advantage of the globalised economy of the early 21st century.

New Zealand understands globalisation mainly as a byword for selling our raw products on international markets. And yes, we are good at that.

But globalisation is more than that. It should mean linking our business networks deeply into the world economy. That might have happened had we seen more FDI come here. And then we would have witnessed growth in the international connectedness of our economy, too.

Alas, this never happened. We did not make it easier for international companies to invest here, nor did we make migration procedures any easier.

Some of this is due to Covid. During those Covid years, our border was almost impenetrable to foreigners (and to many Kiwis, too).

But New Zealand’s hostility to FDI precedes Covid by decades. Our country has never been easy to navigate for international investors.

In justifying these restrictions, we keep telling ourselves we are protecting our vital interests by vetting anyone who might come here. But in truth, we are paying a heavy price for this supposed vigilance.

Who knows how many furniture stores have never made it to New Zealand because of these restrictions? Or supermarkets? Or pharmacy chains?

How many multinational factories never got built in New Zealand because of our regulatory barriers to entry? How many research facilities? How many data centres?

And who knows how much New Zealand consumers would have been better off given these additional choices?

New Zealand needs another liberalising wave to unlock the opportunities of globalisation (or whatever is left of it).

But just opening up more to the world is not enough. If we want to be an attractive destination for international capital, we also need to become a more attractive place for international talent.

And that means more than making visa processes faster and easier. It is also about getting our schools up to developed-world standards. Likewise our healthcare system. And solving the housing affordability crisis, for that matter.

For global talent to settle in New Zealand, this country needs to offer a better all-around package. We should not expect highfliers from advanced countries to consider living here if we can only offer nice scenery.

Incidentally, if we managed to improve the basics such as health, education and infrastructure, we would also be more likely to retain our own talented people ... before they consider leaving for Australia.

There is a lot of ruin in a nation, to be sure. But New Zealanders have it in their hands to turn our country around.

Yes, New Zealand is going through a rough patch right now. But with the right leadership, we can get out of our current malaise and become world-class again.

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