Niue of the OECD, Part II

The Stiff Winds of Global Competition

The New Zealand economy desperately needs to lift its game. It is slipping further and further down OECD rankings, being outstripped by other nations. Our government appears largely to have its head in the sand. Even if the Prime Minister and his inner cabal realise the truth, it must be politically unpalatable to tell it, let alone develop rational and appropriate policies to address the issues.

The first inescapable reality that everyone in the country needs to face is that nobody in the whole wide world owes us a living. This is a bit of a shock to the average born and bred New Zealander. Believing that we have a right to be comfortable, healthy, wealthy, safe, educated—and that someone else has a duty to provide these things—is a grievous national malaise. However, when we project that idea on to the rest of the world, we move from error to egregious folly. Other nations owe us nothing, period. In the global grand scheme of things, New Zealand is just a rounding error.

Secondly, and flowing from the above, New Zealand has to earn its way to better living standards. This means, crudely put, producing tradeable goods and services which the global market place wants to buy. New Zealand Inc is no different from the corner dairy at its most basic level. But we have largely lost sight of this reality. If we do not produce sufficient goods and services at an attractive price and compelling quality to attract and retain customers, we will eventually go bankrupt. Now, most economic pundits would agree with us, to this point. But thereafter, we tend to part company with a good many.

Earning one's way to a higher standard of living means that we have to compete against other nations--their corporates, businesses, and factories--that don't care a fig about New Zealand, and nor should they. They, for their part, are striving to crowd us out of the global market place by being more effective and productive than we are. They want to take the business off us. They want to take care of their own and thus fulfill their fundamental responsibilities to their owners, their staff, their families, and so on. And good on them.

Most of the rest of the world is focused upon earning its way to higher living standards—and it consequently is playing us off the park. New Zealand is a cargo-cult nation. We sit around waiting for a hand out. We, as part of our national malaise, expect that rest of the world will turn up to pay us for nothing—because we are entitled to it. As a nation we have come to think this way about most things in life.

There are two necessary ingredients to earning our way to prosperity: ready access to cheap capital and skilled labour. We are short of both. Why? Because we have not worked out yet that both essential ingredients are mobile—or what economists call, fungible. Skilled New Zealand labour is mobile in the sense that it can make its way overseas to where it can garner a higher and greater reward than is possible in New Zealand. The reality is that we compete in a global market place for skilled labour—and the smart folk leave. And good on them. Who can blame them. They are taking responsibility for themselves. They are taking care of their legitimate interests.

All the chardonnay chatter about the quality of New Zealand's lifestyle compensating lower standards of living is banal. Departing New Zealanders have been telling us for years by walking off what we absolutely refuse as a nation to face: incomes are too low and prospects are too dim in this country for skilled labour. They can do better elsewhere. They leave. You cannot grow an economy while your skilled labour force persistently shrinks through migration.

Around about now, some stupid ostrich will lift its head out of the sand and mutter something about education and “upskilling” and “getting people off the dole.” Rubbish. Don't you get it yet? The market place for skilled labour is global. What is the point of spending millions in a vain attempt to educate people further, just so they can leave to further and advance themselves in higher paid offshore opportunities? Labour is fungible. Get it! Education and upskilling only works if people can earn a globally competitive income by staying in New Zealand.

Also, around about now, another stupid ostrich will lift its head out of the sand and mutter something about immigration. We can make up for our labour shortages by bringing in migrants. Well! Strike a light, mate. Why didn't we think of that! You still have not got it. Skilled labour is fungible. All immigration will do is get people into the country who will happily increase their skill base (learning English as they go) and then they will move on to greener pastures (Australia, for one) where their hard work and personal investment will earn them a better return.

So, New Zealand ends up clutching the wooden spoon. The nation pays up the not-insignificant cost of helping immigrants get “westernised” and upskilled, only to have them move on to better opportunities elsewhere. We are left economically weaker and more hollowed out than before. So much for the wonderful attractive kiwi lifestyle.

The only way to attract and retain a skilled high quality labour force is to compete for it in the global marketplace—which is to say, we have to ensure that it gets paid at or above global wages and earnings.

But that is not enough. Attractive income, globally considered, is unsustainable unless the NZ worker is able to produce more goods and services at higher quality than an equivalent can do overseas. Our labour productivity rates must match or exceed those who compete against us. In order to achieve that, the skilled worker needs to be put to work with the best capital, plant, equipment, and resources available in the world. This is the second leg of the stool.

In order for New Zealand Inc to lift its game, it must have access to large amounts of relatively cheap capital. But here's the problem. Capital also is fungible. It flows around the world to where it can get the best return for the least risk. Capital is global. It owes this country nothing. The unpleasant reality is that presently New Zealand struggles to compete for capital globally. It is too far behind the game. In order to attract capital, it has to offer higher returns than elsewhere.

Capital starvation shows up in at least two ways. New Zealand businesses, striving to increase their productivity, migrate offshore. More often than not they are seeking not just more productive and lower cost labour. They are also looking for better access to cheaper capital. Selling yourself to offshore conglomerates is one option. Secondly, New Zealand interest rates are consistently higher than our trading partners. This tells us that capital is in sort supply, and New Zealand is not a particularly attractive destination. Moreover, businesses and corporate New Zealand are forced to use debt issuance rather than equity raising because capital is scarce and it prefers to reduce risks whenever it can. Equity is always the higher risk because equity gets paid out last. If capital were plentiful, interest rates would be lower, and equity investing would be more attractive.

So, like it or not, New Zealand is forced to compete globally for capital and labour; both are scarce and fungible. Both can find much more attractive opportunities elsewhere. No government policy or regulation is going to change that. Which is to say that fundamentally, as things stand, the New Zealand economy is stuffed in the longer term. It's just that politicians and pundits won't face up to it, or if they have, they dare not say so out loud, lest they be vilified and spat upon.

New Zealand will inevitably gradually sink lower and lower, becoming the Niue of the OECD.