Ladies and gentlemen,

Thank you very much for the invitation to speak to you today. It’s a great pleasure to be here and present you with “A Global View of New Zealand’s Economy”. At least that was the title for my speech that I was given.

In my first five months in your lovely country I had quite a few speaking engagements and media interviews. What surprised me was how often people commented afterwards how refreshing and unusual is was to hear someone speak his mind – as if that never happened in New Zealand.

It was probably a criticism wrapped in a compliment, and what they really meant was something like: “You better watch out; in New Zealand we are not as brash as the Australians.”

But as a literal-minded German, I never got that message.

And so at the risk of making myself unpopular once again I would like to give you my unfiltered views on where New Zealand stands in the global economy.

To begin with the most undiplomatic statement of all, to the world economy New Zealand certainly does not matter. New Zealand’s share in the global economy is 0.2 percent; its share in the global population at 0.06 percent is even smaller.

To put this into perspective, last year the Chinese economy expanded by US$ 693bn – or roughly five times the total size of the Kiwi economy. Every two and a half months, China adds economic power equivalent to the total annual production of all of New Zealand.

In a way, these absolute figures do not matter. You can have a large economy but be poor on a per capita basis. And you can be a small economy but be rich per capita.

However, another thing is also clear: The state of the world economy matters more to New Zealand than the state of the Kiwi economy matters to the world.

That is, of course, a truism. But it does not hurt reminding ourselves of this fact. Because we are living in a small and remote country, we have to compete even more vigorously with other countries for the best ideas, talents and capital. These economic factors are not somehow magically drawn to us. We have to attract them to these shores.

Other countries may get away with bad policy settings for longer because of the size and depth of their capital markets, because their currencies enjoy reserve status, or because they are usefully geographically positioned.

New Zealand has no such luxuries. We are small and flexible enough to make our own decisions about the direction of our economy. But we have no safety net to fall into if things go wrong.

So we should also be free of any illusions about the way in which we might matter to the world as a trend-setter or a good example. Whether we are particularly good or bad at anything is highly unlikely to change the behaviour of our trading partners.

Whether New Zealand declares itself nuclear free, introduces an Emissions Trading Scheme or does anything else, it won’t make a difference to global policy-making.

It is fair to say that the world simply does not pay much attention to what we do here. If we are lucky, they know the name of our capital although even in Australia they might struggle to remember Wellington.

On the other hand, Canberra probably shares the same fate on the international stage – and who could blame anyone for forgetting Canberra?

It is quite telling what happens when you start typing in “New Zealand” into the German version of Google. Google then tries to predict what you will look for next, and in the German case the most common search terms following “New Zealand” are ‘travel’, ‘weather’, ‘time zone’, ‘climate’ and ‘campervan’.

Now I don’t want to make this sound negative at all. All I am saying is that we ought to be realistic in our self-assessment about New Zealand’s place in the world economy.

We have to be aware of the fact that we are easily classified, or should I say: dismissed?, as just an attractive and exotic holiday destination – not a place that you would think of doing business with.

From the perspective of international investors or potential trade partners, there is no absolute need, no imperative to do business in New Zealand. For our global partners, having a relationship with New Zealand is, to use Bill English’s parlance, a ‘nice to have’, not a ‘must have’.

Realism is important. We may love this country. We may be convinced that it’s one of the best addresses in the world – and it probably is. But to the world we are less important than we might think and certainly than we would hope to be.

What does this mean for New Zealand’s economy? I would argue that this implies two things: First, instead of waiting for the world to discover New Zealand, we have to embrace the world. Second, in order to make the world interested in New Zealand we have to be better than other countries. We have to be exceptionally good in what we do in order to arouse the interest of international investors and trading partners.

So the questions are: Are we in fact embracing the world? Are we inviting the world to engage with us? And are we exceptionally good in what we offer to potential international partners?

As it stands, question marks are appropriate on all of these questions.

New Zealand’s openness to the world seems to be a bit one-sided. It is New Zealanders themselves that are open to exploring the world. The better skilled they are, the more likely they are to leave the country … and the less likely to return.

A few years ago, the OECD estimated that 16 percent of all New Zealanders are living abroad – the second highest percentage after Ireland. More worryingly, 24 percent of all tertiary educated New Zealanders do not live in New Zealand – the highest percentage in the whole developed world.

Even countries like Mexico, Poland, Portugal or the Czech Republic are more attractive to their own educated population than New Zealand. New Zealanders, on the other hand, are apparently unhappy with the opportunities their country offers them and leave in droves.

When expat organisation Kea surveyed New Zealanders living abroad, it was clear why they had left. Half the respondents said that they were living abroad because of better general economic prospects, a better job for themselves or one of their family members.

Those Kiwis that have left New Zealand for a better life abroad were successful in their quest. The Kea survey revealed that they are more than ten times more likely to earn over NZ$100,000 per year (46% versus 4%).

It is also interesting to note that three quarters of those expats surveyed had received their highest education in New Zealand, not abroad.

So this means that New Zealand spends an enormous amount of money educating and training its youth only to see a large proportion of them disappear and do well abroad.

No wonder, then, that New Zealanders enjoy a global reputation as hard-working, intelligent and educated people. It is precisely those New Zealanders that you will meet in Sydney, London or Singapore.

New Zealanders are without question open to world … as migrants. Who said that Kiwis don’t fly? They do – in every direction.

Unfortunately, when it comes to openness to the world in the other direction, it does not look so good for New Zealand. Sure, New Zealand receives migrants from other countries. But the total migration intake does not compensate for the population loss resulting from outward migration.

Over the year ending in June 2012, New Zealand lost a net 3,200 people to migration. And while we are running small individual net migration surpluses with many countries, we have a massive migration deficit with Australia, to which we lost almost 40,000 people last year.

All in all, this has led to a growing skills shortages list, as published by the government on an annual basis. The main occupational groups affected by this skills shortage are engineering, construction, agriculture and forestry, health services, ICT and electronics, and transport.

It almost sounds like the whole of the labour market except culture and media studies graduates is affected.

Why is it so difficult to plug the gaps in our labour market with qualified migrants at a time when in many developed economies, particularly in Europe, a whole generation of young people are experiencing unemployment?

It is well known that in countries such as Italy, Spain and Greece youth unemployment rates are as high as 50 percent. And these Italians, Spaniards and Greeks are by no means poorly educated. They are young, skilled, and motivated. And they are hungry for a better life. What is stopping us from offering them a better future here in New Zealand?

Incidentally, Australia is a little better aware of this opportunity. For example, last year the Australians hosted a skills fair in Athens to identify young Greeks who might add value to the Australian economy. But even the Australians were overwhelmed by the interest in migration. There were only 500 tickets for the event – but 12,000 young Greeks wanted to sign up.

New Zealand should follow this Australian example and directly target high potential migration markets overseas.

Attracting new migrants to New Zealand is important to make up for the net migration loss to Australia. It is necessary to plug the skills gaps in the labour market. It is also desirable to mitigate at least some of New Zealand’s ageing problems. It also helps add to the social dynamism of nation.

Like all other developed countries, New Zealand is undergoing a demographic transition. The population ages as we all live longer. At least, in New Zealand’s case fertility rates are close to the so-called reproduction level. This is unlike many other developed countries such as Italy or Germany, in which every new generation is about a third smaller than the one before.

For New Zealand it means that the demographic transition to an older society will happen more slowly than in many other countries. But it will happen.

Even with a much healthier fertility rate in New Zealand, population ageing is well underway. Over the past decade, the median age has increased from 34 to 37 years, meaning that half the population is now above that age. Statistics New Zealand forecasts that this trend will continue for decades.

By the late 2020s, 1 in 5 New Zealanders will be aged 65 or older. By then, the number of people over the age of 65 will exceed the number of children under the age of 15 years. Currently, the number of children is 50 percent higher than the number of people over 65.

Migration cannot stop this ageing process simply because – believe it or not – migrants get older too. But with a good migration policy, New Zealand could at least try to compensate for the migration loss of young New Zealanders. And we could use migration to compensate for the loss of skills that happens when a quarter of New Zealand’s best and brightest prefers to apply their talents and knowledge abroad.

The alternative is, of course, to halt the brain drain of Kiwis.

But whether it is stopping the Kiwi brain drain or attracting skilled migrants to this country, in both cases New Zealand needs to be a country that people want to stay in or migrate to. It needs to make them a good offer.
N
ew Zealand needs to be attractive in a double sense: Attractive as in ‘attracting people’. And attractive as in ‘an attractive place to live and work’.

It is our challenge to make New Zealand such a place.

Of course some of you will object that New Zealand already is an attractive country. But then you would need to explain how it can be that such an attractive place does not, in fact, attract people but lose them.

Although I said at the beginning that I don’t mind being controversial, I do not wish to sound too pessimistic and grumpy either. There are of course lots of things that are great about New Zealand. But we all know that there is room for improvement on a number of fronts.

For a start, New Zealand’s productivity is lagging behind many other developed economies. In 2010, we were marginally ahead of Greece, not exactly a global economic powerhouse, and slightly behind the economic giant of Slovenia for real GDP per hour worked. And while our labour productivity was low, it was also not increasing by the same amount as labour productivity in other countries such as Australia or the US. In other words, we were falling further behind.

With this poor productivity record, it is unsurprising that our GDP per capita figures are also behind the average of the industrialised world. We are now 22nd out of 34 OECD countries. Unfortunately, this is a long-term trend. Where four decades ago, New Zealand was above the OECD average and close to Australia’s GDP per capita, we are now well below the OECD average and the gap with Australia has widened to about a third.

One of the reasons for New Zealand’s disappointing productivity performance is that it no longer applies best practice to product market regulation. A recently published OECD working paper came to this unflattering conclusion.

Behind some of this record is down to the fact that while the rest of the world has used the past two decades to privatise state owned assets, New Zealand has gone in the opposite direction.

The government now owns around 45 different companies and commercial entities – including 17 state-owned enterprises (SOEs) – that collectively employ around 26,600 people. Among the notable acquisitions of the past decade was buying an 80% stake in Air New Zealand, establishing Kiwibank, and buying back KiwiRail. Electricity generation and transmission is dominated by SOEs, but the government also plays a role as the owner of New Zealand’s largest farming business and coal mining operator, to just name a few.

What I as a recently arrived foreigner find rather bizarre about New Zealand is the public hostility to the partial privatisation of some of these companies. The financial performance of New Zealand’s SOE sector is mediocre, with SOEs underperforming the national average. Why anyone would insist that government should have the sole privilege of owning these companies is beyond me.

Apart from that, I cannot understand why anyone would object to subjecting SOEs to the disciplines of stock market public listing requirements.

Floating these companies on the stock market would also give them better access to capital. And it would deepen New Zealand’s capital markets, increasing the savings and investment options available to New Zealanders.

It seems to me that when it comes to market regulation, New Zealand is not nearly as good as it thinks. The same could be said about New Zealand’s openness to Foreign Direct Investment.

The government promotes New Zealand to the world as “a great place to live, invest and do business”. Sounds good but if you dig a little deeper you find out that it’s not quite true.

The OECD has just done that and demonstrated that New Zealand has one of least welcoming foreign direct investment regimes. 49 countries out of the 55 assessed by the OECD’s experts have less restrictive FDI regimes than New Zealand.

In fact, The New Zealand Initiative just released a Research Note that examined the competitiveness of New Zealand’s FDI regime.

Although our research note is of course an excellent read, it does not make for good reading. New Zealand has the most restrictive regime for foreign direct investment in our manufacturing sector. It’s the third most restrictive for investment in hotels and restaurants, and the second most restrictive in oil refinery.

Since 1997, New Zealand has become less capital competitive. Despite the myth that New Zealand is ‘open for business’, on a comparative basis we certainly are not.

As a result of this, we have seen foreign direct investment trending down for two decades. And of course reductions in investment inflow will increase cost of capital to firms and cost of mortgage borrowers over time. And this is even without mentioning the ‘sensitive land’ category in the Overseas Investment Act.

New Zealand is now more restrictive than all the ex-Soviet Union states, Latin American, and Middle-East countries, bar Saudi Arabia. China, Indonesia, India and Japan complete the list of five countries that are more restrictive than New Zealand.

These results are worrying. Countries that are more restrictive on the OECD’s measure tend to be, unsurprisingly, less successful in attracting foreign investment. Not only that: More FDI usually lifts productivity and income growth – and conversely, less FDI depresses both productivity and income levels.

The pattern with openness to FDI is the same as with New Zealand’s attitude to privatisation. The world has gone one way, we have gone the other. In 1997, 10 countries were more restrictive than New Zealand. Since then, Turkey, Mexico, Canada, Korea and Australia have all surpassed us.

With this development, it cannot surprise us that FDI inflows into New Zealand have trended down as a percentage of GDP. Between 1993 and 2012, the average rate of decline was 0.2% of GDP annually. To say it in non-technical terms: As a destination for foreign investment we have become less popular.

New Zealand’s economic performance needs to improve substantially to make it the attractive country it needs to be to retain its best and brightest and attract foreign talent and investment. But to do so we need to rethink the way we regulate our markets and present ourselves to the world as a trustworthy partner for international capital flows.

On a more positive note, the opportunities that are open to New Zealand are enormous. Over the past three decades the centre of the global economic activity has gradually shifted from the Old West towards Asia. This process is likely to continue throughout the 21st century. What it means is that New Zealand, which for a long time had to deal with the tyranny of distance, will be able to enjoy the blessings of proximity.

While the centres of the Old West, North America and Europe, are in a deep crisis, the growth of the world economy is happening in Asia and in Latin America. And New Zealand is positioned right in the middle.

The way I see it, there are two basic options New Zealand could choose in this scenario.

The first one I would call ‘splendid isolation’. Afraid of the dangerous world out there, New Zealanders would resort to their insular instincts and try to limit their engagement with other countries. We would view Foreign Direct Investment with suspicion, particularly if it originates from countries like China, and especially when it has to do anything with agriculture.

We would be uninterested in emerging markets and instead focus on the more comfortable relations with our traditional trading partners. We would not accept any other country as a benchmark – with the possible exception of Australia. But we would always make sure to find good excuses to miss even the Australians’ mediocre economic and productivity performance – after all they have resources. Okay, we have resources too but we are too pure and too green to dig them out of the ground.

That ‘splendid isolation’ option is, of course, a bit of a caricature but at the same time it is not too far off from what many people in this country feel. But it is precisely the path that New Zealand must not follow. By withdrawing from the world and being inward focused we would be missing out on the great opportunities that are available to us. We would in fact choose to be a European-style, ageing democracy. Look at Europe, look at Italy, Spain, Portugal and Greece, and ask yourselves whether that is what you would want New Zealand to be.

Fortunately there is a second, much better option for New Zealand. Let’s call this the ‘Pacific Growth Club’ option. In this scenario, New Zealand would open its doors wide to foreign skilled migrants and foreign capital. It would reduce all barriers to trade and investment, particularly non-tariff barriers to trade because it is these non-tariff barriers that are making trade across borders, particularly in services, difficult.

New Zealand would reach out to its wider neighbourhood. We would engage with Latin America and Asia. We would see their growth rates and take them as our benchmark. We would be spurred to lift our game in terms of productivity, research and development, the quality of our education, the reliability of our infrastructure. We would just try to be better because we know that in an interconnected, globalised world a country as small and remote as New Zealand really only stands a chance to succeed if it is better than the rest.

So to come to a conclusion, let me summarise how I see New Zealand’s role in the global economy. As a small, remote economy, we do not matter to the world but the world matters to us. But as a small economy, we are the masters of our own economic fate and we are flexible enough to reform.

However, we have to lift our game substantially in order to stop or at least slow the brain drain that is badly affecting the economy and the supply side of our labour market. The best chance we have to achieve this is to make sure we catch up with best practice on economic regulation, liberalise our FDI regime and get serious about privatisation once again.

We should be more open to foreign capital and labour and we should not be afraid of economic and population growth. We have to make both happen because otherwise New Zealand is at risk of bleeding out to Australia and losing its best and brightest to the world. We want these people to stay here and build a New Zealand that is a member of the Pacific Growth Club.

To me, it just appears to be common sense to strive for excellence and not to settle for second-best solutions. If these views are controversial, then so be it. And if I have just made myself too unpopular, then I apologise for any inconvenience caused.

In any case, I look forward to a good discussion. Thank you very much for your attention.