Is New Zealand a Leaky Economy?

Is value that originated in this country now flowing to other countries at our expense, asks Dr Alan Bollard, Professor of Practice—Chair for Pacific Region Business at Wellington School of Business and Government.

Dr Alan Bollard

When Donald Trump calls attention to the US trade deficit with China, he is selectively focusing on only one thing – the bilateral difference in merchandise trade with one trading partner. He ignores all the other US trade relationships, forgets the US services trade surplus, omits the returns on US investment abroad, and also the many other advantages that the US holds in its international economic relationships.

Yet maybe he does us a service by drawing attention to the fact that globalisation has changed, and this is causing countries to think differently about cross-border economic flows. When it comes to New Zealand, this raises an interesting question: are we becoming a leaky economy? Is value that originated in this country now flowing to other countries at our expense?

Our globalised world works through markets and international rules. The US played a key leadership role in promoting these rules: the Bretton Woods agreements and exchange rate convertibility, the GATT now the WTO, the post-war European alliance now the OECD, the Bank of International Settlements now the Basel banking supervisory system, and the rest of it, which we loosely called the Washington Consensus.

Since the 1980s New Zealand has adapted to those rules, liberalising unilaterally, in order to open up its trade flows, reduce border barriers, and carry out domestic economic reform, all in the context of growing globalisation. Overall, these policies have benefited Kiwi consumers and pushed local producers to be more efficient.

But globalisation has itself been changing. The so-called “Globalisation 4.0” has seen increased mobility of almost all factors of production across borders. This means production, jobs, competitiveness, and people are moving between countries faster than ever before. The implication is that we may need to rethink whether some of our established international economic policies are still fit for purpose.

This has become more complex, because the US has itself responded in a nationalistic way: now much of the rules of the game, the Washington Consensus, are at risk at the hands of the US Administration, with their WTO disruption, withdrawal from the TPP, unilateral trade negotiations, and growing trade – tech – financial war with China.

With some well-known exceptions, New Zealand exports are still based on low value commodities. Asia-Pacific trade flows have changed: more sophisticated supply chains, more embedded services, increased use of electronic commerce, and a relentless movement up the value chain towards the customer. Some exporters (manuka honey, green-lipped mussels, merino garments) are taking advantage of this. But the big commodity exporters still seem comfortable to get by with minimal domestic processing and export in bulk. But this is leaving sophisticated process transformation to customer in the hands of overseas business, with value being left on the table.

An example is the export of New Zealand milk powder to Singapore; most of it is transformed by multinationals using sophisticated R&D, marketing techniques, branding, packaging, and market arrangements, converting it into high-value consumer product for the middle class East Asian markets. Analysis appears to show that Singapore could be getting higher returns from New Zealand milk powder then does New Zealand! The export of New Zealand raw logs to China represents an even sadder similar story. New Zealand company balance sheets are heavy with land and machinery, in contrast to their downstream East Asian counterparts who have invested in intangible assets such as intellectual property and market assets.

International capital has always been mobile. But new investment instruments, fintech, crypto-currencies, cross-border international transfers, et cetera, are making it much easier for New Zealanders to invest abroad, reduce domestic tax exposure, et cetera et cetera. New Zealand has proved a very fertile seedbed for new business start-ups, both resource-based and high-tech small companies. However, the limitations of our small market size and relative isolation mean many companies must look offshore very early in their life. This may involve offshoring of finance, markets employees, location, design, or migration of the complete company. As firms grow this may ultimately be inevitable, but if it happens early it means a loss of domestic growth, domestic taxes, domestic ideas and business ingenuity.

And what about our people? New Zealanders have long been big international travellers. But now they are becoming big migrants as well. The traditional O.E. pattern—overseas experience followed by young Kiwis returning home to start a family—is changing. Now there is an expectation of moving overseas to a professional job to pay off student debt, joining the growing international expatriate diaspora communities, a professional workforce educated at New Zealand expense but working for foreigners. This is migration rather than travel. Such mobility may bring private benefits but social costs, as we publicly educate young Kiwis then lose them It is now estimated by the OECD that one quarter of our professional workforce is working overseas.

We need to consider whether our economic policies are fit for purpose in this new world. This raises another interesting question for such a globalised small economy – should our government be working in the interest of New Zealand or New Zealanders? Are we working for the populations who were born here, or citizens, residents, taxpayers, voters, or those with other interests or rights in the country.

Some policies already promote “stickiness”. For example, our requirements that students repay loans faster if they leave the country, the discussion on taxing cross-border revenues, and some aspects of housing policy. Our competitor countries have been (sometimes overly) creative with policies designed to keep value within their countries. We need to learn from the better examples.

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