Red tape weakens investors’ ‘animal spirits’

Dr Bryce Wilkinson
The National Business Review
13 September, 2019

In 1936, the father of Keynesian economics, John Maynard Keynes, used the term ‘animal spirits’ to refer to the fluctuating human emotions that can drive economic decisions in stressful times.

Today the term is most often found in the context of investors’ decisions. Reduced confidence in the future lowers animal spirits and consumer and investor spending.

The Reserve Bank governor is concerned that lack of spending, including investment, could induce economic recession. Adrian Orr wants to see more borrowing and more private and public investment. Doubtless, the government wants robust economic activity during next year’s general election.

Infrastructure New Zealand is also concerned about inadequate investment in infrastructure but from a structural longer-term perspective. Under-investment in house building is a serious and not entirely unrelated concern. Road congestion is impairing wellbeing.

Orr has a case, sort of. Business confidence in economic activity in June has been the lowest since March 2009, according to the NZ Institute of Economic Research’s quarterly surveys.

Low investment from low business confidence is likely to reduce future prosperity. In that sense all New Zealanders are affected.

Everybody who wants the government to spend more on education, health, welfare, crime, regional development, workplace safety, transport and much else should care about this reticence to invest. Successful investment makes the things people want more affordable in future. Governments can spend more without having to raise tax rates when national income is higher.

Wage earners also have narrow and broad interests in greater investment. When firms give more capital funds to workers, it increases labour productivity – the only sustainable route to higher real wage rates.

There are grounds for serious concern here too. Government statisticians publish estimates of employed capital per worker. These estimates are for industries where this is most easily measured. New Zealand did almost as well as Australia overall on this measure between 1978 and 2009. Since 2009, there has been a major divergence. In Australia, the capital to labour ratio was 29% higher in 2018 than in 2009. In New Zealand the corresponding rise was only 9%.

New Zealand workers cannot hope to catch up with Australian wage rates when our growth in capital per worker is so much slower.

Risk perception

Yet low or reduced animal spirits must be caused by something. Most plausibly it is a sequence of events that make investments look riskier. A government’s signals of its attitudes to investors through tax and regulatory policies are one factor, adverse overseas events are another.

A report published this week from top business leaders in our capital markets points in part to red tape as a factor. (It also calls for greater inducements for New Zealanders to channel their savings through KiwiSaver, in part through the tax system. Some such aspects look self-serving, and the hope that KiwiSaver could raise national savings looks like wishful thinking.)

The report’s case for less red tape is compelling. It finds New Zealand’s regulatory regime extraordinarily restrictive and inhibiting foreign direct investment. On the Organisation for Economic Co-operation and Development (OECD) measures, our regime is by far the most restrictive among the 36 member countries. Mexico is the distant second-most restrictive member country.

The comparison with non-member countries is also galling. The OECD published estimates for 33 non-member countries of the OECD. Seven of these, including Saudi Arabia, the Philippines, Indonesia, Russia and China, are more restrictive than New Zealand. But we are well behind the other 26, including India, Laos and Tunisia. Countries such as the Mynamar Republic, Mongolia, Albania and Argentina are far less restrictive than New Zealand.

Long-standing New Zealand companies can now be deemed foreign investors if 25% of their shares are foreign-owned. Onerous red tape provisions apply to ‘foreigners’ buying sensitive land. The definition of sensitive land is absurdly broad.

The current government’s policies have made New Zealand’s regime marginally more restrictive. New Zealand’s restrictiveness score rose between 2017 and 2018. This was the first rise in estimates going back to 2003. Forestry and real estate were the adversely affected sectors.

OECD research finds that the more restrictive a country’s regime, the less inward investment it tends to attract. On UNCTAD statistics, in 2018, Australia’s stock of inward investment per capita was $US12,000 (75%) greater than New Zealand’s.

Current legislation has made it easy to stop a Canadian pension fund from buying shares in Auckland Airport but what harm could that purchase possibly cause New Zealanders? And what signal did stopping it send the investment world?

A Treasury consultation document reviewing the Overseas Investment Act 2015 was released in April. It identified many of these issues, yet it looks as though the government is only considering tinkering with the scheme.

Foreign buyers unwelcome

The consultation document made it clear the government is sticking to its view that it is a privilege for foreigners to be able to invest in New Zealand. That is the same as saying it is a government privilege for New Zealanders to be able to sell an asset to a foreigner.

Research reports published by The New Zealand Initiative have pointed out that the net benefit test that the Overseas Investment Office must use to evaluate applications is farcical. It explicitly stops the office from taking into account the benefit to the seller from selling to the highest bidder.

What is the case for treating foreign buyers of New Zealand assets differently from any other purchaser, anyway? The Treasury’s consultation document offers a few reasons. Several, including being a bad neighbour or violating cultural norms, are also true for New Zealand investors. A couple are spurious.

In contrast, issues of national security or risks to public order from buyers with non-commercial drivers are clear grounds for concern. Yet the current legislation has, in the Treasury’s words, “limited capacity” to reject investment applications on these grounds.

In short, the current act’s priorities are so misplaced as to warrant a fresh start. The act lends itself to populist, anti-foreigner actions that evade accountability for the cost to New Zealanders’ wellbeing while failing to guard against national security and public order risks.

This government is not going to do that but the Treasury’s consultation document gives some hope that it will consider tweaking the act to make it marginally less confidence-reducing for investors.

Dr Wilkinson is a senior fellow at The New Zealand Initiative.

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