Whenever I hear the term “nationbuilding”, and particularly when calls come for this or that programme in the name of “nationbuilding” I shudder somewhat. I spent some time working in southern Africa in the 1990s, and after-effects of the disastrous “nationbuilding” programmes of people like Kenneth Kaunda and Julius Nyerere were already apparent. Since then, the sheer awfulness of Hastings Banda and Robert Mugabe have also become increasingly obvious. “Nationbuilding” has a ring of something post-colonial, whether in Africa or Latin America, and (to me) a ring of persistent failure.
New Zealand has had its share (perhaps more than its share) of “nationbuilders”, people who seek to use the power of the state and its (our) resources to pursue one or another vision of what the country could become. There was Julius Vogel with the massive debt-fuelled expansion. And Sutch/Savage/Nash, financially fairly austere perhaps, but with a vision of an insulated New Zealand with a large manufacturing sector (those 22 TV factories). We’ve had NZ Steel and Tasman Pulp and Paper – and the Raspberry Marketing Council. We’ve had those who actively encouraged (and even subsidized) large-scale immigration. We’ve had the Think Big strategy of Muldoon and Birch. And latterly another wave (of decades-length) of large scale (supposedly) skills-based immigration, supposedly as a “critical economic enabler” – as if somehow the people we have aren’t really “good enough” for those holding the levers of power. And there are all sorts of other programmes that fly a bit further under the radar – film subsidies for example, or grants to those who capture the imagination of bureaucrats – or which simply never managed to command enough public support in time (the slightly younger Roger Douglas’s call for sixteen state-funded carpet factories). Each of these programmes that has been implemented made a difference, but how many of them were for the good is, at very least, an open question (my provisional answer is none of them). And if they weren’t good, there was almost no effective accountability for any of the designers.
I pulled off my bookshelf this morning Brian Easton’s 2001 book The Nationbuilders, 15 profiles of people Easton saw as having “shaped the New Zealand nation in the middle years of the twentieth century”. They are mostly political and bureaucratic figures, or people whose contribution was around politics and policy. None was particularly market-oriented (Coates and Muldoon appear, both from the activist ends of their respective centre-right parties). One major business figure was profiled – James Fletcher – but even his success was in no small measure down to the huge government construction projects. Oh, and there was Dennis Glover, who founded Caxton Press.
Which is a somewhat longwinded introduction to an article in the Dominion-Post a few days ago in which Shamubeel Eaqub called for this week’s Budget to be a nation-building one. It wasn’t simply a line in passing – the phrase appears three times in a not-overly-long column. In this case, “more public debt” is the call – in this case to build houses (30s revisited), public transport, and “rail in critical infrastructure corridors” (1870s revisited).
The reality is that the current expenses or lost revenue could be easily redirected into debt repayment to fund some serious amounts of new investment.
If we raised a 100 year bond, as Ireland has done recently, we could probably borrow about $30b for every $1b in debt repayment. Incidentally we spend about $1b a year on accommodation assistance. Redirected to borrowings, we could perhaps build about 82,000 houses on existing Housing New Zealand land in Auckland.
Set aside for the moment the long track record of poor quality government capital investment – not just here but abroad – and then consider a key difference between Ireland (and Belgium which also recently issued a 100 year government bond) and New Zealand.
First, both have very high levels of government debt (general government gross debt in excess of 100 per cent of GDP) and so the idea of locking in some of that debt for a very long time must seem quite attractive to the respective debt managers. Neither country seems to be launching an expansionary fiscal policy with the proceeds.
And second, there is quite a difference between the price of Irish or Belgian debt, and that issued by the New Zealand government. Belgium issued its 100 year bond at a nominal yield of 2.3 per cent. Ireland issued its at 2.35 per cent. The ECB has an inflation target of just under 2 per cent, and inflation in last 25 years has averaged 2.2 per cent in Ireland and 2.0 per cent in Belgium. At most, a reasonable estimate of the expected real interest rate over 100 years is perhaps 0.5 per cent. That should represent quite cheap borrowing (although whether it is really cheaper than a succession of 10 year bonds only time will tell).
What of New Zealand? We don’t have a 100 year bond. But the New Zealand government does issue quite long-term inflation indexed bonds. A bond with 14 years to maturity has a yield of around 1.82 per cent, and one with 19 years to maturity yields around 1.93 per cent. The implied 5 year rate in 14 years time (ie the last 5 years of the 19 year bond) is around 2.2 per cent. Who knows at what yield the New Zealand government could issue 100 year bonds (having taken all the inflation risk back on itself) but it seems unlikely that it would be less than 2.5 per cent. That is a huge difference in likely real borrowing costs from those European sovereign issuers. And yet Eaqub proposes we borrow to spend (“invest”) at those high yields, even though the real productivity performance of the New Zealand economy over decades has been far inferior to that of either Belgium or Ireland. In our case, a 2.5 per cent real interest rate not only materially exceeds past and likely future productivity growth rates, it may even exceed the likely future rate of real GDP growth.
For the government to borrowing at 2.5 per cent real might look reasonably attractive if the benchmark is New Zealand interest rates over, say, the last 25 years. But being in debt at all, as a government, should have been extremely unattractive during that period given how high New Zealand’s interest rates have been (and, laudably, successive governments markedly lowered our public indebtedness). Perhaps a long-term real borrowing rate of around 2.5 per cent real might be borderline attractive if we could count on excellent governance and disciplines and an assurance that projects would be subject to rigorous cost-benefit analyses. The track record on that score isn’t promising.
On a perhaps-related issue, Treasury last week released a series of blog posts on the financial return to the Crown from its investment in Air New Zealand, from the time of the Crown bailout in 2001. As a purchaser of last resort (in late 2001, post 9/11, no one was keen on airline shares), the Crown should have got quite good entry levels. And Air New Zealand remained listed on the stock exchange, with minority private interests throughout the subsequent 15 years, ensuring some level of ownership-based market discipline. Air New Zealand is widely regarded as a very well-managed successful airline, and for now is riding the back of relatively low oil prices and an upsurge in inbound tourism.
Over the period since 2001, the nominal 10 year government bond rate has averaged 5.3 per cent. And yet the internal rate of return the Treasury analyst calculated on the Crown’s investment has been 8.4 per cent per annum – and much of that is unrealized, and dependent on the current, still relatively high, Air New Zealand share price. Buy the entire equity index and I suspect few investors would regard a 3 percentage point equity risk premium as reasonable (from memory, historic market estimates are typically in a 4- 7 percentage point range). But Air New Zealand is not as risky as the index as a whole – it is far far more risky. Government debt financed that Air New Zealand investment, and taxpayers don’t seem to have gotten a remotely adequate compensation for the risk they assumed, even in an industry with lots of competition and market disciplines. It isn’t clear why advocates of large scale borrowing now – in a country with still quite high real long-term interest rates – think they would do better in generating economic returns.
So-called “nationbuilding” projects have usually been a way of wasting (with a fairly high degree of confidence) the nation’s resources in pursuit of some politician’s or economist’s pet vision. Government don’t – or perhaps rather shouldn’t – make nations, and in particular they certainly don’t make the wealth of nations. That is down to individuals, firms, and the networks of society. There is an important role for government – and whatever government does needs to be done as well (or least badly) as possible – but “nationbuilding” as a call seems no more likely today to result in a good, high-yielding, projects, than it did in 1870 or 1980 or 1935 or……