Submission to Parliamentary Inquiry
- Bill Rosenberg
The Foreign Affairs, Defence and Trade Select Committee is holding an Inquiry into New Zealands economic and trade relationship with Australia. The terms of reference are somewhat one sided: they appear to assume only good can have happened. However the Inquiry covers issues important to New Zealand and CAFCA such as investment, the proposals for abandoning our currency in favour of one with Australia, and trade. Bill Rosenberg wrote the following submission on CAFCAs behalf. The section dealing with the case against any proposed "Anzac Dollar" was published in Watchdog 94, August 2000.
While the Committees Inquiry covers a number of policy areas, this submission focuses on two: investment, and a single trans-Tasman currency (see Watchdog 94.Ed.).
This is not intended to minimise the importance of other areas. We focus on investment and related areas because they are our area of specialist concern and expertise. We share concerns with others, for example over the continued trade deficit with Australia; that New Zealand content in broadcasting has been opened to Australian productions under Closer Economic Relations (CER); and that there is effective Australian control of our food standards through its overwhelming majority on the Australia New Zealand Food Authority. There has been insufficient debate over the effects of CER.Investment
Income on foreign investment whether borrowing, portfolio, or direct investment is the principal (though not only) reason for New Zealands current account deficit remaining at excessive levels. Since mid 1996 it has been almost constantly over 6%, and up to 8% of Gross Domestic Product - GDP ($8.2 billion) . That feeds the enormous foreign debt at over $100 billion, compared to $16 billion in 1984, now over 100% of GDP. Paying interest on the debt and dividends to overseas companies is now taking almost a quarter of our export earnings and generally more than accounts for our current account deficit. On those measures we are in a worse situation than a number of the East Asian nations that crashed in 1997.
It is therefore of considerable interest whether our relationship to Australia improves or worsens that position. The available statistics are tabulated in the Appendix.
Not just in passing, we note the paucity of statistics available for the analysis of the Australia/New Zealand (or any other New Zealand bilateral) relationship. It is not possible for example to construct a full balance of payments between the two countries. There is an acute lack of data on which to judge the success or otherwise of CER and other aspects of our relationship with Australia. It seems irresponsible to make major decisions in such a factual vacuum. The same applies to our other bilateral international economic relationships.
The tabulated statistics refer only to direct investment where an overseas investor has 25% or greater ownership, and control is intended. It is important to note that the Australian Bureau of Statistics (ABS) uses the more stringent threshold of 10% to indicate a degree of control, which is consistent with international standards (BPM5). This also implies that investment statistics from the Australian Bureau of Statistics and Statistics New Zealand may not be comparable.
It turns out that the investment relationship with Australia is important not only as an example: in 1999 New Zealand investment in Australia constituted 71% of all New Zealand direct investment overseas. That proportion has risen rapidly from 42% in 1993, the first year for which we have data. In dollar terms it has almost tripled: from $3.314 billion to $9.563 billion during that period.Australian Investment In NZ Has More Than Doubled
In the other direction Australian investment in New Zealand the absolute level is much higher, at $22.504 billion in 1999. It has more than doubled since 1993, from $10.341 billion. In 1999 it constituted 36% of all foreign direct investment in New Zealand, a proportion that has remained relatively stable over that period.
So the investment relationship is dominated by Australia: New Zealand investment in Australia was only 42% of Australian investment in New Zealand in 1999. Though that was higher than the 32% in 1993 (the oldest figure available for investment stock), the ratio had been as high as 49% (in 1995), falling to 36% in 1998 (see Table 1).
Data is available on investment flows for a much longer period. We tabulate data since 1972 well before the beginning of CER in Table 2. A comparison is made with investment flows to and from the whole world. Reflecting the stock of investment, the flow has been predominantly Australian investment in New Zealand. Over the period 1972 to 1999, $6.801 billion (or 69%) more was recorded in flows from Australia to New Zealand than in the other direction.
These flows confirm that New Zealand-based overseas investors are much more reliant on Australia than Australian-based overseas investors are on New Zealand: Australian Bureau of Statistics data show that only 5-7% of all Australian investment overseas (i.e. including non-direct investment) was in New Zealand between June 1994 and June 1999. And New Zealand investment in Australia, although it has grown in absolute terms, was only 2% of all foreign investment in Australia during that period. So New Zealand is not nearly as influential economically in Australia as Australia is in New Zealand.
This disparity has apparently worsened over the period of CER. Bollard, McCormack and Scanlan noted in their study of CER in 1985 that the Australian "share of foreign direct investment in New Zealand is over 30%. In comparison, New Zealands share of foreign investment flows into Australia has never been over 3%". They are referring to flows (rather than stock) of investment. Between June 1994 and June 1999, New Zealand investment flows into Australia were between 1% (i.e. disinvestment) and 5% of all investment into Australia, according to the ABS. On the other hand on average, in the CER period, 42% of all foreign direct investment flows into New Zealand came from Australia, and 46% in the five March years 1994-1999. Over those last five years almost all New Zealand net overseas investment (96%) went to Australia largely because of large disinvestments from the rest of the world in two of those years (see Table 2 below).
Looking now at income from investment, official statistics for direct investment income between Australia and New Zealand are available only until 1995. Statistics New Zealand however kindly supplied indicative data for the years 1996-1999 (unofficial, not for publication), which have been used to estimate the income flows for the whole period.
They confirm a spectacular rise in investment income being remitted abroad since 1992 a significant loss of resources to New Zealand. That was already indicated by the official data for the years 1993-1995. In 1992, $140 million was returned home by Australian companies. That leapt to $638 million in 1993, $973 million in 1994 and $1,109 million in 1995. The indicative data suggests this loss of resources has continued to rise rapidly the annual loss probably doubling again to 1999. The average remittance over the seven years 1993-1999 was over six times the previous seven years.
Yet the counterpart, income to New Zealand investment in Australia, has increased relatively sedately. New Zealand direct investment income from Australia less than doubled over the 1993-1999 period. By comparison, the average return to New Zealand over the seven years 1986-1992 was almost identical to that in the reverse direction ($217.4 million vs. $214.1 million).
Over the whole period 1972-1999, New Zealand investment income from Australia was only 36% of Australian investment income from New Zealand. The investment relationship with Australia therefore contributes significantly to New Zealands current account deficit. In 1999 the investment income deficit was probably around $1.5 billion.Takeovers, Not Investment
Because significant components of the Balance of Payments are not available from Statistics New Zealand, it is not possible to analyse the balance of payments with Australia. The best that can be done on the current account is to look at the partial balance of payments constituting merchandise trade and direct investment income. Missing are services, transfers and other investment income. This is presented in Table 3.
The deficit on this partial current account is tabulated. The deficit as a proportion of export plus direct investment income payments is also provided to enable comparisons to be made over the period. It shows that this deficit was steadily improving prior to the advent of CER at the beginning of 1983, and continued to improve until the early 1990s. Then initially because of the investment income deficit, but since 1996 reinforced by a significant merchandise trade deficit it rapidly worsened. By 1999 it was back to levels similar to the start of CER: a deficit of 31% of merchandise exports plus direct investment income, compared to 43% in the year to March 1983, and 38% in 1982.
The situation may be even worse. Companies resident in New Zealand which invest in Australia are counted as bringing investment income to New Zealand even if they are themselves overseas companies. For example, Lion Nathan, Carter Holt Harvey, Fletcher Challenge and Telecom have substantial investments in Australia, but are themselves overseas controlled. So much of the income from their Australian investments will not remain in New Zealand but be sent to the parent companies Kirin (Mitsubishi) in the case of Lion, for example.
Though investment has not been an explicit part of the formal CER agreement, the much more open investment policy pursued by New Zealand during most of the period since its signing has led to an unbalanced result, and one that in the long run is probably unsustainable.
Even though investment is not formally part of CER, discussions with Australia led to a significant relaxation of New Zealands already bungy-like regulations in 1999. The threshold for Overseas Investment Commission approvals for investment (other than those involving land or fishing quota) was increased from $10m to $50m in a move that was controversial both because it was a further step backwards, and because it was put into effect just weeks before the general election.
An argument could be made that New Zealand has benefited from the increased Australian investment in New Zealand. However that has yet to be demonstrated, and it is probable that the great majority of it is takeover rather than "greenfield" investment. That would be consistent with the general case.
Most recent foreign investment has been takeover rather than creation of assets and jobs. For example the now abandoned but official Foreign Direct Investment Advisory Group estimated that the sale of privatised State assets "accounted for approximately 42% of total inbound investment to New Zealand over the decade [1986 to 1996]" . Among published Overseas Investment Commission decisions in 1995, just half (50%) of the investments appeared to be greenfield activity, but these were worth only a quarter (24%) of the value, the great majority being in forestry. The remaining 76% by value were takeovers or restructuring of the ownership of existing investment.
One only has to recall recent activity that has led to the spectacularly increased flow in investment income from New Zealand to Australia: Australian takeovers of the Bank of New Zealand, ASB, Postbank, the Trust Banks, and a number of other financial institutions; Goodman Fielders acquisitions in New Zealand, Australian Gas Lights increasing interests in New Zealand, including both gas and electricity takeovers, the St Lukes Group (the second most profitable property owner in New Zealand in 1999 according to Management magazine, December 1999), and FAL/Progressive in supermarkets (30% of the grocery market with Countdown, Foodtown supermarkets and 3 Guys SuperValue and Fresh Choice brands) and a number of other major retail chains.
That is on top of longstanding holdings such as ANZ, Westpac, a number of insurance companies, Goodman Fielder, CSR, and so on.Closing In NZ & Moving To Australia
There has also been a pattern of the closure of successful New Zealand operations in order to move them to Australia to be either closer to markets or to benefit from government incentives. This has not necessarily been a result of Australian ownership, but rather of the open trade and investment relationship with Australia, which has allowed this to happen. Examples:
On top of these are companies which have moved head offices to Australia. The most prominent was Lion Nathan, but so has Fernz, and Carter Holt Harveys paper products division and many others. It is also the effective outcome of a takeover, even if a New Zealand branch office remains. The practical effects, on top of the loss of control and influence, include loss of professional skills and high level employment opportunities to New Zealand, and reduced demand for office space and support services such as legal and accounting. It is difficult to imagine that New Zealand and New Zealanders will figure as highly in the priorities of a Sydney-based executive.
Thus there are demonstrably damaging aspects of the investment relationship with Australia. Counterbalancing benefits also must be demonstrated, rather than asserted on faith or theory, before a favourable judgement can be made on its current state and sound proposals made for future developments.
There is a desperate lack of data on which to judge the success or otherwise of CER and other aspects of our relationship with Australia.
However, it seems clear that the investment relationship has been an unequal one, in which Australia is the winner, and which is leading to loss of industry, economic control, jobs, expertise, and resources (in the form of Australian investment income).
We strongly oppose the abandonment of the New Zealand currency (see Watchdog 94, for the details. Ed.). On the contrary, we should be rebuilding our ability to manage our relationship with the rest of the world rather than throwing away almost the last purpose-built tool, inadequate as it is. Monetary union with Australia would not be viable (for New Zealand) without political union. That is something New Zealanders would, we believe, oppose.
On an international level, in order to make the currency more effective and defensible, the Government should be pursuing a policy of international action to control the movement of capital.
Table 1: Australian Direct Investment Stock in New Zealand
(Source: Statistics New Zealand. Note that the investment income totals to 1999 include indicative figures provided by Statistics New Zealand see text.)
Table 3: Partial Balance of Payments between
CAFCA press statement, 11/9/00
("Australia Has Already Got One Tasmania: Single Currency To "Attract US Investors" Is Problem, Not Solution")
"The Prime Minister is following where National started, by kite flying on the issue of New Zealand and Australia having a single currency. Her stated reason that a common currency would attract US investors, which is presented as a good thing must be firmly rebuffed.
"New Zealand has one of the most unrestricted foreign investment regimes on Earth. We have had decades of American (and every other sort of foreign) investment. What have we got to show for it?
"New Zealand has had ample experience with all sorts of American investors - do we want more greedy profiteers such as Telecom or companies indifferent to their workers safety, such as TranzRail? Why does the PM want to attract more of them?
"If such a single currency does come to pass, the only step left is to become a state of Australia. What possible benefit would that be to New Zealanders? We would simply be the poor cousins, the eastern isles, neglected and forgotten. Why would the Aussies want us theyve already got one Tasmania to forget and neglect.
"Trying to hop into the kangaroos pouch for the feeble reason to "make us attractive to American investors" really shows how desperate this Government is. Yet more foreign investment is not the answer for New Zealand; decades of unrestricted foreign takeovers are actually the problem. The Government would be more gainfully employed doing something about rolling that back, not looking for more of it".
Foreign Control Watchdog, P O Box 2258, Christchurch, New Zealand/Aotearoa. December 2000. Email
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