RBNZ's Wheeler says NZ must improve productivity, open up more to foreign investors and return to budget surplus to improve prosperity

By Bernard Hickey

Reserve Bank Governor Graeme Wheeler has laid out an ultra-orthodox prescription for New Zealand to improve its prosperity, including improving productivity, opening up to more foreign investment and returning the government's books to surplus.

Wheeler detailed his views in a luncheon speech to the Canterbury Employers' Chamber of Commerce in Christchurch.

He said New Zealand's economic destiny was largely in its own hands.

Improving New Zealand’s productivity and competitiveness was critical to improving prosperity, Wheeler said in his second speech of his Governorship. He said there was no easy formula for boosting economic growth rates as New Zealand was a commodity-producing economy dependent on growth in world output and trade.

He said there were ways to build prosperity in the longer term and the Reserve Bank was committed to helping "cement the foundations for this growth."

"As well as ensuring price stability and reducing the risk of inflation surprises, the Bank is strengthening financial sector regulation and supervision to promote a stable and efficient financial system," Wheeler said, adding that strong international demand for New Zealand’s commodity exports would also help build prosperity.

"However, we need more investment to help with job creation and market development Instead of welcoming foreign investment, we have one of the more restrictive frameworks among OECD countries," he said.

"We should re-examine the factors, including tax and regulation, that diminish and distort the incentives to both save and invest.”

Wheeler said returning to fiscal surplus and lowering public sector indebtedness would also strengthen the economy’s resilience and create more room for responding to future economic shocks.

"Improving education and employment outcomes, especially for Maori and Pacific Islanders, will also help to strengthen New Zealand’s skill base, improve productivity, and reduce inequality," he said.

“We’ve much to do in continuing to build our global linkages and addressing government spending and regulatory issues that diminish productivity and competitiveness. But addressing these will create valuable payoffs for our future given our major resource endowments, our impressive agricultural and primary production engine, and the potential in our education, tourism and other sectors.”

Will talk about exchange rate later in Feb

Wheeler opened the speech with a brief discussion of the global drivers and touched briefly on exchange rates.

"With official interest rates close to zero in the major advanced economies, investors continue to search for higher yields in countries with stronger growth rates, favourable commodity price outlooks, sound macroeconomic policies, and higher interest rates," he said.

"As with Australia, Canada, Sweden, Norway and some Asian and Latin American countries, the ensuing exchange rate appreciation affects the growth of our import substitution and export sectors," he said, adding he would return to talk about this issue in greater depth when addressing the New Zealand Manufacturers and Exporters Association (NZMEA) later this month.

Wheeler then went on to talk about New Zealand's poor productivity record.

"Since 1990, our labour productivity has grown at an annual rate of one percent, about one and three quarters percent below the seven largest OECD economies. This is the main reason why our real per capita GDP is now 25 percent below the OECD median. This is striking given the high international rankings for the quality of our institutions, control of corruption, ease of doing business, and according to the World Bank, the highest per capita endowment of renewable resources in the world," Wheeler said.

He said this was partly due to New Zealand's small size and distance from markets, but this wasn't the whole story.

"Besides market size, we perform poorly on our macroeconomic environment, and especially on our budget deficit and low national savings. But regulatory and performance-related factors also diminish our growth potential. Many of the remedies to substantially improve our ranking lie in our own hands, and groups such as the 2025 task force, the Savings Working Group, and the Productivity Commission, emphasised reforms that can raise our living standards," he said.

'Save more and invest better'

The first issue was to raise New Zealand's level of saving and investment, and then to improve the quality and productivity of that investment.

He pointed out that the best performers had been Asian countries which had savings and investment rates of as much as 30% of GDP, while New Zealand households had run net savings deficits of minus 2.25% in the last 25 years, the lowest in the OECD.

"Our desire for such high levels of consumption was met by borrowing the savings of foreigners. As a consequence, our net foreign liability position is 73 percent of GDP, one of the highest ratios in the OECD, and not much different from some countries that have been at the centre of the financial crisis in the euro area. The build-up in external debt increases our vulnerability to economic shocks and the high propensity of New Zealanders to borrow means that higher interest rates than elsewhere are required to achieve similar inflation outcomes," he said.

"Much of our investment goes into housing rather than more productivity- promoting investment, and in 2011, 70 percent of households’ net wealth was in the form of net equity in housing," he said. "We need more investment, including foreign investment, that can bring benefits of job creation, technology transfer and market opening."

'Cut government deficits and reduce debt'

He said the government needed to focus on returning to surplus and lowering public debt.

"Increasing fiscal deficits mean that monetary policy has to be tighter and interest rates higher than otherwise, and this adds to the exchange rate pressures on the export and import substitution industries," Wheeler said.

"This constrains output and employment in sectors facing international competition - sectors where productivity growth potential is usually higher. Instead, resources often find more attractive returns in the non-traded or sheltered sectors where, although measured productivity is lower, producers face less international competition and can raise prices more readily. This is one reason why it’s critical to cut back ineffective government spending, and ensure that our welfare spending is targeted better at those in need."

'Improve equality and education of the poor'

Wheeler said modern growth theory stressed the importance of human capital, knowledge and skills, which meant the quality of education was critical in creating opportunities for growth in real incomes.

"Globalisation and technology have widened the distribution of income within most advanced economies, including New Zealand, over the past three decades. In the mid 2000s we had greater income inequality than most OECD economies, and this is unlikely to have changed," he said.

"The bottom income deciles are populated by those with lesser skills, and those who experience prolonged and recurrent spells of unemployment. Addressing these groups would both promote productivity and reduce inequality."

Wheeler pointed to New Zealand's relatively high ranking of 7th out of 65 OECD countries for high school students maths, reading and science.

"But, we have the greatest difference in reading performance between students from different socio-economic backgrounds out of all OECD countries, and the PISA scores for Maori and Pacific Island students are much lower than the average for students of European descent," he said.

'Price stability crucial'

Wheeler said the best way for the Reserve Bank to help was to preserve price stability because that helped long term planning and reduced incentives for buying speculative properties such as investment properties.

Elsewhere, he said the bank was working on macro-prudential tools, confirming comments from his Deputy Grant Spencer last week that consultation would begin in late March.

"Later next month, we will consult with financial institutions on a framework for the potential use of macro-prudential instruments. These instruments, which include the counter cyclical capital buffer, sectoral capital requirements, the core funding ratio, and quantitative restrictions on high loan-to-value ratio lending, are designed to increase the resilience of the financial system to shocks, and dampen the financial cycle when concerns increase about systemic risk."

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We just need half a dozen new mines and a couple of new oil wells and she'll be right. It's called investing in productive capacity. You can have too much of a good thing of course, but we have too little.

Can Mr Wheeler please provide evidence that Foreign Investment.Ownership is going to improve the NZ economy more than Local owned investment? 
If the underlying asset is not held by a residential NZ'er then only the production income of that asset is beneficial. The income off an asset regardless of ownership would have occured.
The words Foreign Investment and Foreign Ownership have become intertwined. There should be a clear distinction.

Quite agree, but new productive capacity would be good, owned by NZ residents. Might as put that kiwisaver $$$ to work instead of just bidding up the price of existing stuff.

Good points,  Wheeler could more specific in defining his vision of foreign investment. I recall an interview with heterodox economist Steve Keen in which he argued foreign investment was good if it created something new. He contrasted GM manufacturing cars in Australia in which the only innovative difference to the US cloned vehicle was a steering wheel on the right side, and that of investment into China in the eighties in which foreign corporates had to take on a Chinese partner who had to have a specific level of ownership after five years.

and when the holes are empty what then?

and when the holes are empty what then?

and when the holes are empty what then?

I think you can get stuck if you try to solve too many problems too far ahead. This is dangerous if it causes you to fail to address the more immediate problems.

And when the Sun dies, "what then"?

Sounds like the same recipe the IMF just published for Europe. Read the CEPR news release
Washington, D.C.- A new research paper finds that the International Monetary Fund (IMF) has been pushing for reduced spending, shrinking government, and cutting social protections for broad sectors of the population in Europe Union member countries, often regardless of a country’s specific economic circumstances. The paper, “Macroeconomic Policy Advice and the Article IV Consultations: An EU Case Study,” from the Center for Economic and Policy Research (CEPR), also finds that the IMF has repeatedly emphasized cutting spending, including on public pensions and health care, and raising the retirement age  -- despite the pro-cyclical nature of some of these policies and despite the already severe impact of the economic recession confronting Europe.

As my geologist friend (now very senior in Australia) said to me in 1969: "per square mile NZ has more mineral wealth than OZ, the big difference between us being we don't want to dig it up - so no complaining".

....um yes.....but Australia can dig up thousands of hectares of  what is little more than dessert to get at it.  Whereas much of what we have is located in very fragile areas - areas of which we also like to promote our 100% green fallacy.  We are already extracting huge value from our lands in the form of tourist $$'s.... the dig dig dig brigade keep overlooking such facts.
In the years ahead, the experiance of enjoying and visitng  a pristine environment while be worth top $.  This is where our greatest wealth lies... not with lands polluted by minning waste. 

The speed of long distance transportation have been stalling at 1000kmh for jet flight and 33kmh for container ships for 50+ years.
Anyone can make a leap forward on the speed will increase global productivity.

A new internet cable or 3 would certainly help. Such a same the Pacific Fibre project didnt come to fruition.

That's true.
A lot of transport time is due to the necessity of the current hub and feeder system, though. Sending a parcel to Xi'an, for example, requires a flight into one of the main entry points such as Beijing, Shanghai, or Guangzhou, from where it can then be flown to Xi'an -- simply because there is no direct air service to Xi'an from Auckland. Add the time spent in warehouses waiting for scheduled freighter/airline flights/trucks, and you double the point-to-point time of delivery of an item, at least. Doubling the speed of the longest transport legs will only take a portion of the time off the total delivery period.
When we've got energy fields working to deal with the acceleration forces, and could send parcels using sub-orbital ballistic trajectories: why, then you'd get your parcel in just a few hours! ;) Perhaps 3D printers could be something for the future, too  -- just feed in some raw material, and there you go...

problem is energy. and it looks like you know little abut engineering.  eg a 10% increase in speed == 14% increase in fuel.  I was on faster ships in the 1980s....25, 28knot container ships that they then ripped the steam turbines out of and installed deisels....then 21knots.  Oil has gone from $25USD to $95USD since then, a conatiner costs $k instead of $1k to NZ...

As soon as you break the sound barrier, the fuel bill goes through the roof. Wait for "free energy" for that one.

how z LSE?

"Improved productivity"...show us how Mr Wheeler....show us how the RBNZ can improve productivity..............Mr Wheeler?.....hello........jeez that pom moved fast.

No one knows how. Or whoever knows how have been muted for the past many decades.
You will never get an answer from Mr Wheeler because he is on the monetary side.

wolly: is wheeler a pom? really?

..... and is it a known fact that " poms " are slow movers ?
The one's I bought stuff from in the pub , have been fairly nippy on their toes .... very fast ankle work ....

Not according to NBR..iconoclast...Mr Wheeler, a New Zealander, lives in the United States and runs his own advisory business.

Haha Wolly - the RBNZ could sell their shares in Fletchers and get the Government to relieve Fletchers of the EQC work.....that should help. My productivity is very low....I spend far too much time doing compliance BS each week.....get rid of most of that and productivity would improve significantly. 

Interest.co.nz - Here's a poll for you...the one on corruption by our civil servants. 

It's Friday...................Yay...!
It would appear the Governor has fallen victim to the Dopeler effect...!
The tendency of stupid ideas to seem smarter when they come at you rapidly. 
 Ayhoo celebrating new vanacular to be found in the new age commonspeak, I picked out some  worthy of note.

Ignoranus (n): A person who's both stupid and an asshole.


Sarchasm (n): The gulf between the author of sarcastic wit and the person 

who doesn't get it. 


Cashtration (n.): The act of buying a house, which renders the subject 

financially impotent for an indefinite period. 


Bozone (n.): The substance surrounding stupid people that stops bright 

ideas from penetrating. The bozone layer, unfortunately, shows little sign 

of breaking down in the near future. 


Esplanade (v.): to attempt an explanation while drunk. 


Flabbergasted (adj.): appalled over how much weight you have gained. 


 Abdicate (v.): to give up all hope of ever having a flat stomach. 



Christov another that could be added to your list.
Govtration: The ACTS applied to the subjects to obtain their wealth.

Friday already , gosh darn ...... here's Gummy's contribution :
The great hypnotist Kreskin is invited to a retirement village , to provide some light entertainment for the senior citizens ....
..... he is in the lounge room,  and  starts by telling the audience  that he will proceed to mass hypnotise them , that he'll have the whole room full under his spell all at once ......... and he pulls out an aged , but stunningly beautiful gold watch on a chain .
..... " this watch has been in my family for many generations , it has never failed the great lineage of Kreskin , hypnotists the the stars , to kings , queens and princes , to ladies and gentlemen , and to John Banks " ....
...With that , he proceeds to swing the timepiece , " watch the watch " he intones , " watch the watch ..... watch the watch ....  "
In no time at all , the oldies are going under , and as the last one succumbs to his spell , the chain on the watch breaks , and the beautiful heirloom crashes to the floor and shatters into a hundred pieces ....
" SHIT ! " screams the great Kreskin ...
... it takes the retirement village staff 3 days to clean up the mess ....
The great Kreskin is never invited back .

You've obviously sat in a few monetary group meetings at the RBNZ.  As a mere shorthand typist in the late 90's I did just that to take the notes of such policy meetings.  Don Brash was the Governor at the time and in the end he had to put out an edict that the members of the committees speak "plain" English as I don't think even he could understand what the so-called (YOUNG) executive policy experts were talking about.  It seemed to me that they were all trying to out-do each other in being smart.   And no, the minutes of those meetings were not lost in my transcription.  I'm good at my job (or was!)  I had no idea of course what they were talking about at the time because of their smart-speak.  So how is anything different now!  It was all gobbledygook and I think it still is. 
Time someone just stood up and told the truth.  New Zealand is looking more like a third world country every day and time also someone with some leadership stood up and be counted. 

I can't believe it.  Another unelected dope at the wheel.  When will we stop having old men controlng our little economy.  Old men who can only spout forth what they were taught 40 years ago.  God help us because it won't be Wheeler.

Why should your god help Patricia...look where we are...has this god been away watching footy....or investing in making new worlds in another star system...or galaxy!

It wont be god either, doesnt exist but then lots of ppl believe god will save them and god says its ok to pillage the planet....etc etc. 
It also depends on what they were taught and have learned since then and recently, the last is how fast they can re-learn.
My problem with Wheeler is I dont think he can relearn and fast enough but then by the looks of it he's in good company with every political party I can see.
I'd also throw in that even older mean and women who lived through the great depression have a far better prespective. So age simply isnt a factor.
Our economy isnt really controlled by us, its conrolled by the world economy, best we can do is some adjustments.

You said food for thought, then shut the door on thought with "glad we are not printing" 
PS that first piece at least is so shallow it isnt worth thinking on. Then praised Thaterism which only survived due to its ability to exploit North Sea oil....no magic really.  Now if you want to compare how Norway delt with its petro-income v UK fair enough...the Norwegians managed it expertly....mot so the British.