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Alan Bollard argues New Zealand needs to consider whether our economic policies are fit for purpose in a new world, and whether our government should be working in the interest of New Zealand or New Zealanders

Alan Bollard argues New Zealand needs to consider whether our economic policies are fit for purpose in a new world, and whether our government should be working in the interest of New Zealand or New Zealanders

By Alan Bollard*

When Donald Trump calls attention to the US trade deficit with China, he is selectively focusing on only one thing – the bilateral difference in merchandise trade with one trading partner. He ignores all the other US trade relationships, forgets the US services trade surplus, omits the returns on US investment abroad, and also the many other advantages that the US holds in its international economic relationships.

Yet maybe he does us a service by drawing attention to the fact that globalisation has changed, and this is causing countries to think differently about cross-border economic flows. When it comes to New Zealand, this raises an interesting question: are we becoming a leaky economy? Is value that originated in this country now flowing to other countries at our expense?

Our globalised world works through markets and international rules. The US played a key leadership role in promoting these rules: the Bretton Woods agreements and exchange rate convertibility, the GATT now the WTO, the post-war European alliance now the OECD, the Bank of International Settlements now the Basel banking supervisory system, and the rest of it, which we loosely called the Washington Consensus.

Since the 1980s New Zealand has adapted to those rules, liberalising unilaterally, in order to open up its trade flows, reduce border barriers, and carry out domestic economic reform, all in the context of growing globalisation. Overall, these policies have benefited Kiwi consumers and pushed local producers to be more efficient.

But globalisation has itself been changing. The so-called “Globalisation 4.0” has seen increased mobility of almost all factors of production across borders. This means production, jobs, competitiveness, and people are moving between countries faster than ever before. The implication is that we may need to rethink whether some of our established international economic policies are still fit for purpose.

This has become more complex, because the US has itself responded in a nationalistic way: now much of the rules of the game, the Washington Consensus, are at risk at the hands of the US Administration, with their WTO disruption, withdrawal from the TPP, unilateral trade negotiations, and growing trade – tech – financial war with China.

With some well-known exceptions, New Zealand exports are still based on low value commodities. Asia-Pacific trade flows have changed: more sophisticated supply chains, more embedded services, increased use of electronic commerce, and a relentless movement up the value chain towards the customer. Some exporters (manuka honey, green-lipped mussels, merino garments) are taking advantage of this. But the big commodity exporters still seem comfortable to get by with minimal domestic processing and export in bulk. But this is leaving sophisticated process transformation to customer in the hands of overseas business, with value being left on the table.

An example is the export of New Zealand milk powder to Singapore; most of it is transformed by multinationals using sophisticated R&D, marketing techniques, branding, packaging, and market arrangements, converting it into high-value consumer product for the middle class East Asian markets. Analysis appears to show that Singapore could be getting higher returns from New Zealand milk powder then does New Zealand! The export of New Zealand raw logs to China represents an even sadder similar story. New Zealand company balance sheets are heavy with land and machinery, in contrast to their downstream East Asian counterparts who have invested in intangible assets such as intellectual property and market assets.

International capital has always been mobile. But new investment instruments, fintech, crypto-currencies, cross-border international transfers, et cetera, are making it much easier for New Zealanders to invest abroad, reduce domestic tax exposure, et cetera et cetera. New Zealand has proved a very fertile seedbed for new business start-ups, both resource-based and high-tech small companies. However the limitations of our small market size and relative isolation mean many companies must look offshore very early in their life. This may involve offshoring of finance, markets employees, location, design, or migration of the complete company. As firms grow this may ultimately be inevitable, but if it happens early it means a loss of domestic growth, domestic taxes, domestic ideas and business ingenuity.

And what about our people? New Zealanders have long been big international travellers. But now they are becoming big migrants as well. The traditional O.E. pattern - overseas experience followed by young Kiwis returning home to start a family is changing. Now there is an expectation of moving overseas to a professional job to pay off student debt, joining the growing international expatriate diaspora communities, a professional workforce educated at New Zealand expense but working for foreigners. This is migration rather than travel. Such mobility may bring private benefits but social costs, as we publicly educate young Kiwis then lose them It is now estimated by the OECD that one quarter of our professional workforce is working overseas.

We need to consider whether our economic policies are fit for purpose in this new world. This raises another interesting question for such a globalised small economy – should our government be working in the interest of New Zealand or New Zealanders? Are we working for the populations who were born here, or citizens, residents, taxpayers, voters, or those with other interests or rights in the country.

Some policies already promote “stickiness”. For example, our requirements that students repay loans faster if they leave the country, the discussion on taxing cross-border revenues, and some aspects of housing policy. Our competitor countries have been (sometimes overly) creative with policies designed to keep value within their countries. We need to learn from the better examples.

* Alan Bollard is professor of practice at Victoria University of Wellington Business School. Previously he has been Executive Director of the APEC Secretariat in Singapore, Governor of the Reserve Bank of New Zealand, Secretary to the New Zealand Treasury, and Chairman of the New Zealand Commerce Commission.

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Is value that originated in this country now flowing to other countries at our expense?

The answer is yes , and to overcome this , we should insist that if a company is listed on the ASX or NYSE that the share should have a supplementary listing ( or dual listing ) here on the NZX .

Think of the Banks , Countdown ( Woolworths ) McDonalds insurers , etc

By doing this , we would have access to these shares as PIE investments and therw would be a more level playing field AND more of the dividends would stay here .

If people haven't noticed, the youth are starting to revolt around the world, because the have been squeezed by the trickle up neo liberal economic mantra.

Democracy suggests governments, in the future, will have to tax wealth to keep in power. Clearly that isn't currently happening, as wealth is being transferred to tax havens, or parked on companies balance sheets.

We all know the solutions to these problems, and a financial transaction tax would sort this. Western governments or their politicians (through fear of being slammed with trade sanctions or shot by powerful multi national companies) will not go their presently. However they are early signs of a financial transaction tax creeping its way into France. When the US currency loses its reserve status; and there are early signs of this too, these multi national bullies will lose some of their power also.

As this relates to NZ, we have to be patient developing overseas markets. Xero is a good example of this, and so are a number of bontique food and clothing manufacturers. When you're small, you have to focus on quality and service. Adjust your price as demand allows.

As for Bollard, I find it rich he can now give advice when he was at the wheel for an extended period heading off in what was clearly the direction of smoke and mirrors. Free market trade and agreements that go with it are nothing more than multi national company protectionism.

He doesn't mention energy or resources, or the Limits to Growth.

So he's effectively ignoring the underwrite for all 'economic' activity. The question is really in two parts:

What will the other side of the Limits to Growth graph look like, and where will equilibrium be reached - if at all?

How should NZ adapt, infrastructurally, population-wise and ecologically, to meet question one?

Sorry, but we need to go back to basics - ask what wealth is, that kind of thing. Sure, we need to look to ourselves, and sure, we need to avoid being sucked dry (of our resources, by others). But alone, at this juncture, that's not enough. Real sustainability and a goodly measure of resilience are what we need.

Also it should be considered as to whether returning kiwis who have spent all/much of their working life overseas should be fully eligible for our non means or asset tested pension.

Good question. As an expat, I have thought about this as it pertains to my own circumstances. In relation to this, let's imagine an expat has kept a sum of say $200,000 in a NZ bank account for say 10 years. Could you surmise that this contributes to the NZ economy by juicing the lending-property bubble mechanism? I would think so. Probably not to the same extent as a money laundering agent, but that's beside the point.

I agree. Even though some may leave a deposit or own a property in NZ, they dont spend here, pay income tax here, or pay GST here.

on average, a kiwi earns ($50,000 p/a) (stats NZ)
and pays; average PAYE (8,000 p/a), ACC ($695 p/a)
Assuming theyre in default kiwisaver

Lets say the average person works from 21-65 years of age (to compensate for university, apprenticeships etc)
Over this period, they have paid;
$352000 in PAYE
$30580 in ACC
they have earned after tax and kiwisaver have been deducted;

It could be argued those returning from overseas are able to take advantage of the infrastructure and pension that those who remained have paid for. Therefore, a non means or asset tested pension would be unfair to the remaining kiwis that have contributed more to the resources

I'd go further than that; given we have high migration from people who want to live here and pay taxes here - and people who have lived here the whole time and contributed struggling to find things like housing - I can't help but think we need to be asking a lot of questions about the rights of offshore NZers when it comes to things like property and voting.

I can't help but think we need to be asking a lot of questions about the rights of offshore NZers when it comes to things like property and voting.

Fair enough. At least Peter Thiel is not draining the taxpayer. Similarly with the anyone involved in money laundering.

Are you sure on that?

I thought government provided some seed capital and tax breaks to Thiel's enterprises. Then loaded it up in debt, and sold it off to overseas interests. The enterprises now pay no local taxes; other than paye, while profits are declared in offshore tax havens.

All this guy knows is now to exploit government grants and tax loop holes. I call guys like this a venture capitalist vulture (VCV).

You seem to have overlooked the point that if someone has worked for 20 years in UK or Australia then returns and works here for another 30 years, then the UK or Australian governments will be contributing two-fifths of the NZ pension that person gets. Not sure about other countries.

Very good point, which appears to be frequently overlooked.

May I clarify the "then the UK or Australian governments will be contributing two-fifths of the NZ pension that person gets":

Any NZ pensioner that gets pension payments from overseas will have his/her NZ pension reduced by the amount of the pension payments from overseas. And because most OECD countries have personalised pension fund accounts, with much higher contribution percentages, it does not take many years of working overseas before these pension payments exceed the NZ pension.

Until recently, even the spouse's pension was reduced, which was rather unfair. Fortunately, that is no longer the case.

Vice-versa, most OECD countries allow their residents to collect pension payments from all countries they have worked in over their lifetime. Effectively adding up to a full pension from all years worked in all countries. Not so in NZ.

Some policies already promote “stickiness”. For example, our requirements that students repay loans faster if they leave the country, the discussion on taxing cross-border revenues, and some aspects of housing policy. Our competitor countries have been (sometimes overly) creative with policies designed to keep value within their countries. We need to learn from the better examples.

Classic, but ignored bad examples:
We need to talk about that red carpet rollout

Why would an overseas buyer pay more for an asset than a New Zealander? Is it because they can accept lower returns on capital? Perhaps. Is it because they can sweat the asset more? Again, perhaps. But Chalkie reckons one reason stands out - tax.

There are huge tax advantages available to overseas investors that simply cannot be accessed by locals. They crank up the returns available to foreign buyers and make New Zealand assets worth more to overseas owners than to New Zealand residents.

One of Chalkie's favourite examples is Wellington Electricity Distribution Network, owner of the power lines carrying electricity around the capital.

Apple pays zero tax in NZ despite sales of $4.2 billion

Consumer electronics giant Apple paid no income tax to Inland Revenue over the past decade despite selling billions of dollars worth of iPhones and iPads to New Zealanders.

The revelations about Apple's local tax bill - in addition to international concerns about its use of havens such as Ireland - have sparked concerns a recently announced government crackdown on multinational tax avoidance may not go far enough.

Phantom FDI for Tax Avoidance.

"FDI is being used to minimise companies’ tax liabilities rather than finance productive activity.

FDI comes from domestic banks - with consequences!

While the reality is;
“Economic Growth & National Income are almost entirely determined by a factor that is decided at home, namely, the amount of bank credit created for productive purposes" Prof Werner

NZ needs to stop relying on overseas money to build business. Most of the damage is done when we just keep selling off land and other assets to foreign owned entities. This actually increase the cost of living with increased prices.

That's a symptom of running current account deficits for ~forty years.

Absolutely, in part a symptom of NZ'rs love affair with things foreign, huge demand for online purchases (save gst), overseas holidays, etc.. Of course there is stuff which cannot be produced economically in NZ, but no excuse to go past NZ owned banks, supermarkets and many other local suppliers...perhaps not the cheapest but come with some extra benefits...being able to talk to the owner being just one. And how many Kiwis are flodding into the new cut price chemist "warehouse" whose move into our small market will surely kill many of our small town pharmacies?
Talk about shooting ourselves in the foot! The solutions lies within ourselves...not some change in gummit or the reserve bank.

Bollard s dream is a little simplistic.
We do have successful companies exporting retail products, Stabicraft, Gallagher’s, F&P incubators, but they started with a strong domestic market and added a lifetime of patience
Throwing money at a problem is pretty inefficient, check out Fonterra or Kiwibuild.
Still, I don’t have a problem with commodity markets, just make sure they are high value kiwi fruit..

We should be open as a Financial Centre for Pension and Mutual funds , a forex trading hub , and do what Ireland did to attract high-paying jobs in IT ............ I just dont know why we dont just do it ?

Instead we rely on tourism ( piss-poorly paid cleaning rooms and working as waiters) , milking cows, picking fruit and cutting down trees ............ what kind of future does this hold for us to grow into a high wage economy ?

We dont have enough successful business of scale ......... like Australia or Malaysia or even South Africa . Even our food companies are small and weak , South Africa has many food companies with staff over 20,000 people , we have ............... 1 ( Fonterra)

We are hobbled from exploiting minerals , gas or oil by the environmental brigade , so we will remain low wage , low savings country without enough capital formation to fund growth

Our banks are owned offshore because we dont have big enough capital markets to fund them .

We hardly manufacture anything with enough scale to compete internationally .

We should be looking after ourselves better than we do

Good that Mr Bollard is thinking about the subject, not at all clear he is thinking about the right things. He seems overly concerned with tax harvesting opportunities, which are a secondary issue. The primary issue seems to me to be more about ownership and foreign investment and how this distorts our country. We don't need more trade, we need to retain more profit, instead of shipping it offshore. An investigation into the mechanism of this is required. The RBNZ seems to be a major mechanism for funnelling that profit to the foreign banks that have bought our country wholesale, turning us all into debt serfs along the way. No one can save and buy a house, I mean actually buy, you know, for cash.

Hi Alan,
Same stats as when you were in office by the way.

Nice to hear your views but you might be coming to the table too late.

$2 out for every $1 profit made. $20 Billion out to Foreign owned Co's per annum.

Tab 7, Current Account and Investment account deficit.

Investment income from foreign investment in New Zealand, shown $ in millions eg June 2017 $4.542 is in fact $4.5 Billion for the Quarter. This would represent bottom line profit, not turnover by the way.

Jun 2017 Sep 2017 Dec 2017 Mar 2018 Jun 2018 Sep 2018 Dec 2018 Mar 2019 Total.
4,542 4,705 5,069 4,408 4,885 4,911 4,800 4,675 $38 Billion.

$38 Billion going to Foreigners since June 2017.

I would like to thank (not) all previous Politicans, Reserve Bank Officials, Treasury, The Business Round Table for this TRAGIC let down to all hardworking NZ'ers and especially those doing an honest day's work but finding themselves continually struggling financially to make ends meet.

You have been badly let down. These numbers have been published for over 30 years, but have been chosen to be ignored.

Instead the media celebrate Foreign Banks making $5 Billion profit last year as a Rock Star economy.

This portrayal of Foreign Ownership and our need for Foreign Capital to survive (Govt Asset Sales, Land Sales, Business Sales) is so far from the truth it leaves me speechless.

The exact reason we seek Foreign Capital is because we have given away our profits which used to be the very source of local Capital we could rely on.

"My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel"

p.s. the Land Rover may actually be an e-Land Rover.

It was said, around relative financial circles , during his time that the RB has a penchant for arriving too late, doing too much and staying too long.
What is interesting though is the acknowledgement that NZ exports predominately depend on volume in the lower bracket of commodity value. That is accurate and fair comment. For instance there has recently been some rather giddy media comment espousing the great prices being returned for meat exports, in particular lamb. If that is so, then ask yourself why, processing plants are closing, rather than anyone anywhere building a new one.?

Maybe Alan answer why these dividends exported were ignored? And why business aggregation of core services was good for our country?

Alan, your previous jobs suggest you know more about this than me, so lets have some answers to the above questions.

I don’t know exact stats & don’t have time this arvo to look, but this discussion has highlighted some of the issues we are facing, mostly “overseas drain” type issue’s associated with globalization. But globalization also has a large effect on services & local supply type businesses in NZ (a large chuck of economic activity in the country), which cripples the heart of the nation directly hurting citizens in the back pocket (wage stagflation).
These global companies can enter a country the size of NZ and run the NZ division at a loss for a period of time to then mop up the remnants of it’s targeted NZ industry.

Or the large overseas company has a supply chain management organization that can effectively manipulate a small supply market like NZs and grind the dependent supply market to a pulp over years until they realize the supply industry is about to collapse and then drip feed it with annual rate increases that are less than inflation.

A large segment of NZ business is trapped between a Revenue ceiling governed by multination corporates and an ever increasing minimum wage floor that is a political football. Then everyone stands around wondering about average wage stagflation & productivity…..

Looks like people are waking up and walking from the stock market 1.4% drop so far today.

The lack of Nz investment isn’t going to be altered by artificial rules forcing local listing. The issue is a product of a low savings rate, and undue focus on high risk, illiquid property and low risk bank deposits.
As a country we need to save move, and increase investment in diversified portfolios, with much greater emphasis on equities compared to property. As a small unstable economy, we should be encouraging our FDI, not bemoaning others investment into Nz. Nz share imputation already substantially advantages Nz and Aust equities held by Nzers..

Dead right. NZers naively fall for the line that all business is good. But never ensure the actual benefit flows to them.


1) Our tax system is rigged towards property investment which is the worst unproductive use of capital (its simply a wager on rising land prices, nothing more)

2) The immigration rate is too high thus depressing gdp/capita growth. It needs to come down to a sustainable level and managed to maximise gdp/capita growth as well as price stability and full employment.

3) The higher than needed immigration rate requires a high amount of spending in infrastructure improvements which requires tax dollars (especially in Auckland where most immigrants remain and there are dis-economies of scale). This again is not productive use of capital when compared to the option of using the capital in value added export businesses.

On 3) It would be a productive use of capital, because not doing comes with a cost; congestion costs time, money and mental health. None of this is new. The problem is that we have both the immigration and only vague commitments to the required infrastructure, with no political pressure to make it actually happen. Rather, the only political pressure is ideologically driven to the extent there's no alternative solutions proposed, and other regions are being played off against Auckland by some opposition MPs because Auckland dared to ask what for it needed.

For 3) the point is if the immigration rate is lower and more sustainable, then less funding would need to be diverted to new infrastructure, and the the dis-economies of would be lower.

That would be true, but we've been on this merry-go-round that we're already seriously behind the eight ball on this stuff. I would argue that the planned infrastucture in the pipeline over the next 30 years is almost entirely deferred. Many large scale waste-water and transport projects for Auckland are badly needed now, to service the population we had five years ago, not in ten years when they might actually be finished.

Seems like things are going unconventional.

See the RBNZ for last month here (round the 24 min mark re dairy debt, dairy lenders).

Then consider QE for the people, driving a debt to equity swap in order to reset.

If not, why not?

Any intelligent self respecting NZer should gap it out of NZ as quick as possible without shame as their place will be filled tomorrow by 2 people who can do the same job for less, with lower socio-economic expectations.

Everyone's socio-economic expectations have risen and that's the big problem

How dare we be dissatisfied with cold homes!

So, what are the specific suggestions from Mr Bollard to fix the things he says are broken or will break soon ?
Does he expect the commentators here to come up with the solutions ? Who is going to read, understand and implement them ?
Does Mr Bollard have the ears of any one influential in the government ?
Is he advising them ?
These online discussions may be interesting and even useful at individual level, but at the national level, who is taking notice of these ?

Nice article, you sound like Mike Moore did in the 1980s when I was at highschool, shows how things have pretty much stayed the same if not gone backwards for the economy despite all the liberalisation. It was as I suspected simply done to allow resource extraction by MNC's not for our benefit. Your tenure as RB Gov was disapppointing btw, causing the recession that only compounded the effects of the offshore unwinding that eventually spiralled into the gfc was incompetance in its worst form, I think the economy and the population is still paying for your poor judgement.

Alan Bollard proves his own argument. APEC quickly shoulder tapped our best Reserve Bank Governor by light years and now he is now lost to the country.
NZ's problem has always been a lack of entrepreneurial ability. Citizens and businesses that have it are quickly sucked overseas, leaving many duds behind. Xero and Fonterra are cases in point.
By all means, we should rework things like tax rules so we're not just giving it away to foreign businesses. But the main reason foreign businesses have so many wins against domestic ones is they just do things better.

Best RB Governor by far? If thats true we need to demand a lot better. I'm sorry but have you forgotten Bollard reduced the economy to deep recession in his misguided attempts to deal with the early 2000s inflationary bubble, which left the economy out cold on the canvas when the GFC blew in...APEC better watch out!

Bollard used interest rates to clamp down on speculative bubbles that had got way out of hand. Remember, the GFC was global and we came through in far better shape than most, thanks in part to Bollard. The benefits of not being dragged into a deeper recession are still accruing to NZ today. It is a peculiarly NZ disease that we don't recognise competence when we see it.

BS...we can all work out what that stands for.

All Bollard is and was a 'yes minister'. The pattern is keep on the side with the establishment, and you'll get another cushy appointment. Roderick Deane followed the same path. So did Roger Douglas, but didn't quite understand that Air NZ, while close to a monopoly locally, is a pup internationally that got taken to the cleaners by Murdock.

These guys have caused train wrecks where ever they have gone, where excessive profits have been privatised and loses socialised.

You really should try stand up comedy because I wet myself laughing at your post. How could purposefully crashing the NZ economy into deep recession when the writing was already on the wall that the global economy was in trouble be recognized as competence? It simply made a bad situation deeper and more damaging to our economy than it really should have been. But you probably think 9 years of 'surpluses' from National were a sign of success, even if it resulted in bankrupting the functionality of country in the process?