Switzerland of the South Pacific: cargo cult thinking?

One of the odder articles to appear in the local media over the holiday weekend was Fran O’Sullivan’s piece in Saturday’s Herald, headed “Key’s vision: Switzerland south”.  I’ve been critical of the Prime Minister in a few posts recently, but when I first saw the O’Sullivan piece I wondered if she was really reporting the Prime Minister or building up a creation of her own.  But after several re-readings, I think she must really be reporting the views of our Prime Minister.

Of course, we have been this way before.  In the midst of the 1980s reforms, before the commercial property and equity bubble burst leaving us with a serious financial crisis, people like Michael Fay and David Richwhite used to give speeches talking of building a Switzerland of the South Pacific here in New Zealand.  Implausible as it may have been, my memory was of a positive vision – a liberalized economy would stimulate investment and entrepreneurship (and probably a large financial sector led by Fay, Richwhite?), enabling us to generate once again per capita incomes more akin to those in Switzerland(we’d matched or exceeded them as late as the 1920s).  In the climate of the times, in the early post-ANZUS days, Switzerland’s armed neutrality probably added to the appealing imagery.  Of course, it all came to pretty much nothing.  Switzerland remains one of the most prosperous advanced economies, while we languish as the slightly embarrassing poor relation.  Fay and Richwhite, as it happens, ended up relocating to Switzerland.

But John Key’s image is a much less positive one – New Zealand as a “beautiful and wealthy bolthole for high net-worthers seeking to escape from an unstable world”.

We are told that

Key believes that free-flowing terrorism is here to stay. To the Prime Minister, this simply makes New Zealand more attractive and will result in more high net-worth consumers wanting to come here

and

But Key contends it is the fear of terror – which has been happening over a long time – which is the driver for Europeans to up sticks and leave.

complete with talk of

If Donald Trump is elected President (assuming he first gets the Republican nomination) there may be a new outflow if his political bombast becomes reality.

Haven’t we heard all this before?  People allegedly about to flee the US if, say, George W Bush was re-elected.  Or people fleeing to New Zealand in the 1980s to escape the nuclear peril of the late Cold War tensions.  And where are we today?    Our per capita incomes and productivity relative to the rest of the world just keep on drifting slowly further behind.

And what about terrorism?  Tyler Cowen included a link the other day to this chart of annual terrorism-related deaths in Western Europe since 1970

chartoftheday_4093_people_killed_by_terrorist_attacks_in_western_europe_since_1970_n

Hardly a pattern suggesting that the rich and powerful  –  with much better protections than the masses – should flee to little old New Zealand.  If New Zealand didn’t prosper through a century in which Europe went through two savage wars and a prolonged Cold War, an exodus of the elites seems unlikely to be our path to renewed prosperity now.

The great age of European emigration was in the 60 or 70 years prior to World War One, not now.

Ah, but O’Sullivan points out, then there are the Chinese

New Zealand has also become an attractive destination for Asian high net-worthers who have invested in property here – particularly Auckland. Chinese investors are relatively open that they are seeking to de-risk their own exposure to the China market, get capital out and buy residential property in a pollution free environment.

Auckland, and Sydney, and Vancouver, and London and Houston and…..anywhere more or less safe without heavy tax and regulatory restrictions.  The Chinese capital outflow story is a real one, and a historically anomalous one –  about fear, corruption, and lack of secure property rights in China.  But there is little no basis for thinking that it will a basis for transforming New Zealand’s specific economic prospects.  We don’t have difficulty attracting foreign capital, but we haven’t (it appears) created a climate in which business investment here is sufficiently attractive to begin to lift our relative productivity and income performance.  And as China’s own GDP per capita is about a third of ours, it isn’t obvious that one would look to mainland Chinese as a source of sustained domestic prosperity. (Taiwan or Singapore might be different, but then those countries have rather more respect for domestic property rights and, not unrelatedly, more success in generating  domestic prosperity).

And if foreigners really were wanting to build a top-notch global business (as distinct –  and it is an important distinction – from protecting what one already had), you almost certainly wouldn’t start from here if you had any other choice.  No serious observer ever pretends that New Zealand is better than fifth choice even among the Anglo countries: try the US, the UK, Canada, or Australia, and if you can’t get in there, then there is always New Zealand.  For a similar population, higher incomes, and rather better location I’m never quite sure why Ireland doesn’t appear in those lists.

O’Sullivan also tells us tax plays a part.  We don’t, she tells, us compete with Switzerland’s (now somewhat attenuated) banking secrecy laws

But it is notable that one of the reasons why New Zealand has yet to follow Australia and bring in rigorous laws to clamp down on multinationals which are not paying significant tax here is because this country is competing for investment.

Perhaps, but this is the same Prime Minister who, interviewed by TV3 a week earlier, reckoned that the tax paid by multinationals in New Zealand was “not fair”, and whose government is part of the OECD-facilitated BEPS process.

If we were really serious about promoting business investment in New Zealand, and in turning lifting our incomes and productivity performance, one of the best things we could do is to remove taxes on capital incomes altogether.  Taxes on business incomes are, largely, taxes on wages, precisely because they discourage the business investment that, for example, New Zealand has been so short of.  This isn’t a popular line to run in New Zealand, or perhaps anywhere, but a government that was serious about creating the conditions under which its own people could prosper, and in which foreign investment would assist us in that process, would not still be presiding over a company tax rate of 28 per cent and talking of finding ways to raise more money from foreign companies operating here.

[This is not the post for a lengthy treatment of tax issues, but a standard response is that much lower company tax rates would be a windfall gain to existing foreign investors, with no benefit to New Zealand.  That might be so if most foreign investment here were in tradables sectors (since selling prices of tradables are largely determined in international markets), but in fact the largest components of foreign investment here are in the non-tradables sectors, where lower company taxes would be expected to result in lower domestic selling prices (eg for banking or telecoms services), benefiting New Zealand consumers and businesses.  I outlined some thoughts on tax a few years ago here.)

As the O’Sullivan moves towards her conclusion she notes

If the Key Government keeps its nerve, the wealth transition will continue. For instance, New Zealand is becoming a magnet for high net-worth Chinese tourists and for students from Saudi Arabia – markets which are growing rapidly. That interest will bring with it investment in hotels, airports, and housing.

Both –  Chinese tourists and Saudi Arabian students –  are surely welcome, but is there any reason to think they are a probable basis for a reversal of our decades of income decline?  Our universities aren’t exactly Harvard or Oxford –  or even on a path to getting there –  and although I’m loathe to criticize tourism (we want holidays, so do foreigners), there is no advanced country of any size that has managed to support or sustain top-tier incomes based on tourism.  France is perhaps the most-visited country in the world, but it isn’t tourism that keeps it rich.

Finally

Annual net migration reached an all-time high of 68,840 people. And net migration from Australia was positive for the 11th consecutive month. These positives underline that John Key’s vision of New Zealand as a Switzerland of the Asia-Pacific has indeed the potential to become reality.

Key won’t be doing anything to destroy that wealth effect.

It gets boring to keep pointing it out, but over the last year around a net 4000 New Zealanders left New Zealand.  If we can’t even persuade the New Zealanders to stay, let alone create conditions that make the huge diaspora population want to come back,  it is a pretty unpromising foundation for the creation of a Switzerland of the South Pacific.

As for that “wealth effect”, O’Sullivan repeats the claim that the Credit Suisse Global Wealth Report demonstrates that New Zealand households are the second wealthiest (behind only Switzerland).  If she got this from Key (with all his advisers) it is inexcusable: the claim was widely reported at the time, but Credit Suisse themselves acknowledged that they had made a mistake, using the wrong exchange rate to convert New Zealand data in to US dollars.  I suspect someone else has pointed this out, as the detailed reference in the hard copy edition of the Herald has disappeared from the online version of the article.

It was, in any case, an odd statistic to trumpet.  Even on the corrected basis, New Zealand household wealth looks quite high.  But it does so because (a) our exchange rate is very high (they use market exchange rates, not PPP ones) and (b) because house prices, especially in the third of the country that is Auckland, are ridiculously high.   The average middle-aged homeowner in major cities such as Houston or Atlanta probably has a better house than the average middle-aged Aucklander, but it does not have a $1m price tag attached to it.

Which brings me to my final comment on the article itself.  The Prime Minister is reported as

He is frankly unapologetic about the massive increase in Auckland residential property values, which has resulted in many established Aucklanders becoming relatively rich, but younger people being locked out of the market. It is a trend which is not going to stop anytime soon, given the immigration figures.

They aren’t presented as direct quotes but if these lines are representative (and they are consistent with what he said in his TV3 last week) it is surely a disgraceful indictment of a failed government.  The sheer indifference to the plight of ordinary New Zealanders is breathtaking.    While his government continues to preside over land-use restrictions that limit the ability of Auckland’s physical footprint to grow, then continued high immigration would continue to hold up Auckland house and land prices.  But those land-use restrictions could be changed, and should be, especially if we are going to continue with anything like recent population growth rates.

The breathtaking indifference might be slightly less inexcusable if there were any sign that the Prime Minister’s Switzerland “strategy” (or just “this week’s talking point”?) was working.  If, for example, incomes were growing rapidly and steadily closing the gap on the rest of the advanced world.  But they aren’t.  New Zealand continues to do badly, and recent data suggest that over the last 15 years Auckland has done worse than the country as a whole (per capita incomes growing less rapidly).

The Prime Minister is surely mostly right when he says

“They look at us and think it is a highly developed first world economy, unbroken democracy, stable government, independent judiciary

But in Switzerland they get all that, and more.  Beauty and stability, rule of law and wealth, and all that in the heart of one of the largest and most populous regions of  prosperity and innovation anywhere on earth.    Boltholes tend to be places of comfort and luxury but not of great economic dynamism and entrepreneurship.  And I’m pretty skeptical that it is “bolthole” tendencies that have enabled Switzerland to get, and stay, rich –  that is more down to the innovative products and services of its firms and peoples – but there seems no more basis for thinking that New Zealand is on any sort of path towards being a Switzerland of the South Pacific than there was when Fay and Richwhite were championing the idea 30 years ago.

Countries get and stay rich mostly on the skills and talents and energies of their own people.  Natural resources can help.  Really remote countries, even with able people and natural resources, face considerable challenges.   But to keep on looking for our salvation to come from abroad –  as the Prime Minister seems to in this article –  seems no more promising than the Melanesian cargo cults.

 

19 thoughts on “Switzerland of the South Pacific: cargo cult thinking?

  1. Great piece.

    The “Switzerland of the South” tag is also close to other’s like the “Celtic Tiger”. If this is the new post-flag legacy from Key then I really worry for Kiwis’ future. I think the better comparison to make is John Key as the “Bertie Ahern of the South” a reference to the Irish PM in tiger times. Johnn Key also has presided willingly over a property bubble and happily poured fuel on the fire much like the Irish PM did with great hubris.

    I enjoyed reading Bertie’s WIkipedia entry – try swapping for Key:

    “There’ll be broad consensus around what Bertie did in Northern Ireland, the social partnership and the unity he brought to his own party. Also, he made Fianna Fáil the permanent party of government. They used to have all of the power most of the time, but now they have most of the power all of the time. All of that takes skill. But I wonder will people talk about ‘Ahernism’? Is there any such thing? What does he actually stand for? In some ways Bertie’s lack of vision was a positive, it made him flexible and willing to compromise, and he was certainly outstanding in that regard. But I dissent from the universal plaudits going around at the moment. He had no social or economic vision for the state he led. There was no fire in his belly. He didn’t really want to change society for the better. He was the ward boss writ large. But at the moment it seems it’s unfashionable to say anything adverse about Bertie.”

    How things can change quickly.

    “Colm Keena in a biography of Ahern described how his desire for power and an almost complete absence of political conviction, left him open to the influence of those with strong opinions, whose interests precipitated his mismanagement of the Irish economy”.

    Switzerland of the South? He’s just another Bertie.

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      • No, you are right. No one has questioned it and from the outside it appears to just be about power for Key, rather than financial gain whereas Ahern was taking cash in his early career (as were many others). But I think they do share a desire to be in the spotlight, to be seen at the centre of power and yet a man of the people at the same time. It is a weakness, you can see the way Key delights in any contact with celebrity and world leaders especially the US administration (tweeting a pic of him petting Obama’s dog today – closest access on this trip).

        Back to my point, if the Herald article is true then it reinforces the similarity in my view. Two leaders driven by a desire to be surrounded by the wealthy and powerful, with no moral compass to separate the crooks from the good guys. A plan for the economy built on speculation, wealth management, low tax for global rich rather than a plan that generates increased earnings, IP, skills, innovation etc.

        It’s the easy way out really. It relies on increasing debt and a steady supply of low-quality wealth tourists.

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    • John Key is a self appointed Tourism Minister. He has done his job and that is to bring in record numbers of tourists and increased GDP spending by 31% in a 11 billion dollar industry. We worry about the NZ economy being wholly reliant on Dairy and the National government under John Key has clearly diversified the NZ economy from a 60% decline in Dairy prices. He has done an excellent job.

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      • How did John Key manage to bring in those record numbers? I think any benefits of the last few years are external factors, not internal. Increased Chinese tourism is a global trend. NZ tourism has always been important to the economy. If anything the push into dairy with the increased pollutants has damaged the 100% Pure brand. Even one of his minister’s agreed it is more like 90% pure. For a country with such an amazing brand, I think kiwi’s are underestimating the damage of coverage in foreign newspapers.

        I think you are over-estimating Key’s powers or willingness to do anything other than surf on global trends. The problems start when the trends move against him and the legacy is bare. He is the do nothing PM and I do think the laissez faire attitude will come back to bite him in tougher times.

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      • John Key is subtle. He is not known as the “smiling assassin” for sitting back and doing nothing. He is a doer and things happen under his watch. Problems get fixed, the economy gets diversified, GDP continues to grow and NZ makes money.

        eg, the $500 million convention gets built. Multimillion dollar hotels are getting built, Apartment building are starting to pop up everywhere. The building industry is booming for a change. You may think it is mere coincidence and luck, but successful people create opportunity and that is exactly what John Key is doing and that is creating opportunity. Now it is up to the rest of us ordinary people to make hay whilst the sun shines. Bicycle lanes get built, Tourism and International students hit record numbers.

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  2. quote:- The sheer indifference (of the govt) to the plight of ordinary New Zealanders is breathtaking

    as compared to

    Government of the people, by the people, for the people

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  3. Certainly interesting to debate the merits of an open capital account if the inflows are being driven by ‘store of value’ considerations rather than driven by expectation of productivity driven returns: should government take more of an active role re the quality of capital inflows? I guess there is some debate on this internationally via the ‘monetary spillover’ topic which rekindles the Bretton Woods logic of guarding against the ‘predatory nature of international finance’. But, Mr Key is in the business of winning votes and few governments look past who the majority of the voting population are and what they want. In the case of NZ, I would think not many voters want house prices to reverse and while there may be some sympathy for future house hunters, such sympathy probably stops when foregin capital offers that wee bit more on the day of the auction….

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  4. Not many voters want to be in a negative equity position, but then flat nominal house prices for the next 15 years would markedly improve affordability and leave no one in negative equity.

    But in a sense, house prices are secondary to the real issue: the failure to achieve any convergence between NZ incomes and those abroad. We could free up land use restrictions tomorrow and altho house prices would fall it would, in itself, do little or nothing to improve the longer-term productivity/income performance of the economy.

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  5. Very interesting article, and cannot disagree with your conclusions. It troubles me that under our current policies my own children have put aside any expectation of affording their own property.

    The Herald article brought to mind a recent article (linked below) on the use of “secret” NZ Foreign Trusts, and wondered whether this is all part of the whole “Switzerland of the South” brand. It appears a bit unseemly to me.

    http://www.nakedcapitalism.com/2016/03/new-zealand-foreign-trusts-chickens-coming-home-to-roost.html

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  6. Great article – thank you.

    I’m quite curious as to the machinations behind the scenes that lead to an article like Fran’s being published – I”m not sure if it is written as her or her editor’s prerogative or if there is indeed some network of shady advisers with PR puff pieces at the ready that hand them out ready to go.

    The standard of reporting in New Zealand as a result is abysmal – there is little debate on real issues and concrete measures to improve them and instead people such as Key are allowed to get away with running an absolute dog and pony show.

    If only the opposition was more effective then perhaps there would be better results but in the meantime the more you can influence, inform or lead the discourse the better for us all Michael!

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    • I’m sure it was her own doing – and if Key is really running this line around the country then she does us a service in reporting it. I think O’Sullivan is often an interesting columnist, but does seem to be somewhat in the thrall of the access to the PM she obviously has, and prone to use her column to report and perhaps cheer lead, rather than to analyse and/or critique.

      It is little surprising that Labour made nothing of this Switzerland fantasy, altho I suppose (a) Key is out of the country, and (b) the Easter Weekend was a bit of a news dead zone

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  7. Hi Michael, thanks for the interest.

    Key has indeed been “running this line” and you are correct this column did include reportage. I often find myself interested in themes where there has been little or under reportage of what is actually happening. Do I write a news story and then comment on it, or, simply incorporate the news within a column? Something I wrestle with on a frequent basis.

    I chose not to write this particular Key thesis (NZ a high-networther haven in world afflicted by terror) as a news story or kick it into-clickbait territory by over-emphasising his hypothesis re Angela Merkel, but, instead give some insight into where the PM is positioning NZ.

    You may not be aware, but I am well-connected in the Auckland business community and it would thus hardly be surprising I have a reasonable handle on what is said by Key outside the Wellington bubble of the parliamentary press gallery or the “Lambton Quay policy complex”.

    So, it may come as a surprise to Wellington-based media -and the “Lambton Quay policy complex” that they don’t always have the full story.

    Case in point when RNZ/ MediaWatch which went on a fact-checking exercise to find out if the PM did indeed have the view that NZ was a haven for high networthers etc … to be obviously disappointed when there was no frank disavowal from the PM’s office but instead a careful affirmation of his basic position. As a digression, if I had of boosted the Angela Merkel hypothesis into a breathless news story, I would probably have had my ass roundly kicked by MediaWatch for taking an obvious hypothesis and turning it into international click bait.

    Another case in point, the gallery’s apologist comments on Key’s stance on the flag (post the referendum loss). Blatantly obvious to anyone (like me) who had suffered through at least five of Key’s flag campaign pitches at various business awards and charity fund-raising dinners that the PM was actively promoting change. He was also active in business, which I asked a Herald Business journalist to report on. (Note, I was not at the particular flag campaign fund-raiser in Parnell where signed bottles of whiskey were auctioned off but I knew about it from business contacts and it was reported on in the Business Herald). Again, I could have used this as grist in my own column.

    The point I am making is that much of what interests me is either not reported, or, is under-reported. Because I am time poor, I will continue to weave new material into my business columns rather than write a news story first. But also I do (in my NZME Business role) provide a considerable number of leads to journalists for the stories they do and provide direction around that.

    Re access to Key: Michael that is a seriously mis-informed conjecture on your part. I do not work within the press gallery. But I do attend Key’s major Auckland business events as he tends to extemporise and give more telling insights than I find through sifting the Wellington produced journalism and commentary. In that respect he is similar to Bill English whose prime Auckland business events I also make a practice of attending.

    Fran

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    • Thanks for the comments Fran. Little or nothing of what you say surprises me, and I find your columns very interesting and useful. I wasn’t meaning to be critical of you – I posed the rhetorical question around whether these were really Key’s views, partly to keep some distance from Key Derangement Syndrome, but quickly concluded that you were reporting his views, and doing a valuable service in doing so. Whether it might be useful for a senior columnist to provide some critical framing/analysis for some of those ideas is another question.

      My main criticism is of Key and his government, following in the footsteps of the previous government, is that have had no coherent or credible set of policies that offer any serious prospect of reversing the decades of decline. (Of course, neither does the “Lambton Quay policy complex”, notably Treasury and MBIE or the Productivity Commission.)

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  8. Michael, thanks. I try and steer clear of the usual press gallery semaphore ie “it is thought” etc – (read fed directly from the top) that journalists use.
    I agree about providing critical framing/analysis – which you have done yourself.
    I’ll have another think about how to better bring the lot together … Fran

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