I’m generally a fan of Gareth Morgan, but boy his facts are wrong in yesterday’s Herald column, and those false premises lead him to really bad conclusions. Basically, Morgan is trying to argue that we have to let foreigners buy our assets because if we don’t then they won’t buy our currency and lend us the money to buy more in imports than we make from exports. Morgan doesn’t explain why it’s a bad thing to not be able to fund overspending:
“Foreigners who sell us the imports we covet don’t really want to be paid in our quaint currency. So a pass-the- parcel process occurs until some foreigner is found who will either extend us credit (by holding our Reserve Bank’s IOUs) or buys one of our assets, thus giving us the foreign currency to buy those imports we crave…
… The only way this reality might come to an end is for the NZ dollar to fall so far that the price of imports we hanker for becomes sufficiently expensive that we pull our heads in and live within our (income) means.
That prospect is so surreal it’s not worth wasting time contemplating it.”
Well, let’s clear up one thing: New Zealand does not import more than it exports. Since the global economic crisis began, we have exported more than we imported nearly every quarter – exports have exceeded imports by $6 billion in the past 18 months.
True, in recent times we have tended to import more than we export but trade deficits only became the norm in New Zealand after 1995 (see Stats Infoshare). The cause? Neoliberalism, which hollowed out our domestic manufacturing so everything remotely high tech needs to be imported and brought in inflation-targeting which has resulted in New Zealand having a relatively high interest rate, creating the carry trade, which has kept our exchange rate up making imports cheap compared to domestic products.
Morgan seems to think there’s some inherent cultural stupidity about Kiwis that made us import more than we export in the years from 1995 to 2009. In fact, we were just responding to the market signals created by neoliberalism.
“If a foreign investor thinks the price of the asset reflects an attractive entry to the prospective profits that could flow, they will want to buy it – just like anyone else. The land’s not going anywhere, of course, it remains located right where it’s always been and over time its ownership will change – sometimes foreign, sometimes not. No big deal”
Um. It is a big deal because the reason we have a current account deficit is foreign owners of New Zealand assets (like farms) exporting the profits they make, and our banking system, now 90% owned by Australia, exporting its profits. In the past year, we sent $9 billion of profits overseas while exporting $3 billion more than we imported. To make up the difference, we had to sell assets and take on more debt. Insufficient exports and too many imports isn’t nearly as much of a problem as the huge flow of profits to foreign owners of New Zealand assets, including our debt.
The truth of the matter is that we’re selling off our assets to finance the outflow of profits from the other assets we’ve already sold off.
(btw, who else is pissed off with the vacuous ‘they can’t take the land away’ line? The productive capacity of the land is what is valuable, and that’s what we lose)
Morgan then goes on about a dairy farm he owns in Brazil:
“If instead I’d invested in dairying in New Zealand I would simply have pushed land prices up and, I’m reasonably sure, have made less money. So it’s being argued by the xenophobes that a win-win for New Zealand and Brazil is worse than if I’d spent my money developing a farm up the slopes of the Southern Alps.Get real. Foreign investment is how countries develop.”
No. Foreign investment is how developing countries like Brazil develop. A country with a relatively poor domestic economy can’t generate internally the capital it needs to grow. But it only works while a country is in the development phase with high growth rates to finance the foreign investment and increase domestic incomes. New Zealand is not a developing country – it has the growth profile and, potentially, capital depth of a developed economy.
Let’s follow though Morgan’s horror scenario. He goes part of the way, then stops:
“Ban foreigners from buying our assets, though, and there certainly will be a sharp shock to the system.
If foreigners can’t use New Zealand dollars to buy New Zealand assets why would they be willing to hold New Zealand dollars?”
So what happens next? Foreigners are prevented from buying Kiwi farmland and strategic assets. Foreigners become less willing to hold Kiwi dollars, so the currency falls. That pushes up price of imports and make exports more competitive, so the current account balance improves. With less money flowing out as imports and more coming in from exports, New Zealand has more money domestically. That money can be used to fund capital development in place of foreign capital – New Zealand’s indebtedness to the rest of the world falls. Meanwhile, asset prices fall because a group of buyers has been excluded from the market, making it more affordable for Kiwis to buy them, leading to lower mortgages to the Aussie banks, and freeing up capital that was used to buy land for investment elsewhere.
We end up less indebted, with a deeper pool of domestic capital, with more competitive exports, with domestic manufacturing not being undercut buy cheaper imports, and we own our own assets. In return, you might have to buy a small LCD TV than you otherwise would have, or car rather than an SUV.
Yeah, that’s a real horror scenario, Gareth.