How to overcome being small in a big world

Who owns New Zealand and does it matter? Purists say it doesn’t matter. But it seems enough people think it does matter to stop Arabs buying Auckland airport. Who’s right?

For nearly half a century from the late 1930s governments responded to our distance from markets and vulnerability to international economic shocks by trying to ringfence the economy.

Imports and foreign exchange transactions were strictly controlled. The annual allocation of import licences was an economic policy event almost on a par with the Budget.

This both conserved foreign funds and promoted local industry, which was given blanket protection from foreign competition if it made or assembled goods to substitute for imports.

But protected businesses don’t try as hard as those under competition. Their prices were far higher than imports. They were timidly local, not international. Productivity growth was dismal. We slid down the rich-country wealth ladder. Labour’s Norman Kirk made that slide a campaigning issue as long ago as 1969.

When the economy stalled in the mid-1980s policymakers tore down the protections.

Now primary produce and tourism, essentially price-taking industries, dominate the economy. Productivity growth has been better than in Kirk’s day (and spectacularly good in dairying) but is still too low to get us back up the wealth ladder. We have been stuck around No 20 for a decade. And Asian countries, with whose leaders Helen Clark will hobnob in Sydney this week, are coming up fast.

John Key and Bill English will say a lot about that in the runup to next year’s election — though they confuse productivity growth and plain productivity, which gives no comfort that they are ready to run economic policy.

Moreover, our open, cheap-goods economy is seriously unbalanced: a frighteningly large deficit in transactions with the world and high private debt to foreigners. Foreigners own far more of our economy that we do of theirs.

Purists say that is unimportant. Private players in private markets will sort it out in due course (though the sorting out might be rough).

The government, purists say, should stick to removing obstacles to higher productivity growth by, for example, loosening regulation and cutting taxes, to leave private players freer to invest in new technology and other forms of innovation, which is how in the long run a country gets a higher standard of living.

But will they? The record in the less regulated, lower-taxed 1990s was not stellar. Even Key and English are not proposing a return to the 1990s policies.

Foreign multinationals, which own a large proportion of our business, don’t invest here if they get better returns in other countries. Small, distant New Zealand has limited appeal at head office. Tax and regulation are only part of that story.

New home-grown high-technology firms, which New Zealanders seem good at creating, innovate by definition. But foreigners buy most of them and usually transfer their operations eventually to some other country.

So is there a role for the government?

Labour, which thinks governments should do things, says yes: get medium-sized New Zealand-owned companies to expand production offshore. Tax rules were changed in the Budget to make that more profitable.

It sounds counterintuitive — the export of jobs. But some firms which have set up in other countries have also created jobs back home as a result. Operating on the ground in another market, as distinct from just exporting to it, both gives a firm critical mass and brings New Zealand owners closer to the action there.

And in markets like the United States, where some New Zealand manufacturers have set up production plants or bought producers, the “action” includes innovation. Tap into that and the whole firm can lift its game, including the home base.

Moreover, Economic Development Minister Trevor Mallard argues, if New Zealand firms own more of others’ economies that will reduce the huge deficit between profits foreign companies make here and profits New Zealand companies make overseas, which is a large part of the total deficit in transactions with the rest of the world.

So New Zealand Trade and Enterprise is “informing” and “facilitating” firms to take the next step offshore.

Tim Groser, National’s trade spokesman, calls that a “messy Mallard brainstorm”. Purists will remind us that government interventions can do as much harm as good and the money would better go on business tax cuts.

Moreover, if companies can make money by setting up offshore, surely all those who can are already doing it.

Not necessarily. A parallel is that, although there is money to be made through energy efficiency, much of it with simple changes, firms here have been slow on the uptake. The same apparently goes for offshore investment.

And if New Zealand firms own more of other countries’ businesses, there is likely to be less bother about foreigners owning ours. That’s globalisation. The real point is real incomes.