Tenants in Our Own Country, Part I

Foreigners and Serfs

A populist debate has burst forth again on the dangers of selling our assets to “furrigners”—by which, it would seem, we mean Asians, and particularly Chinese, who seem to have more money than most these days. At least they have more money than high consumption, high spending, high indebted Kiwis.

Our Prime Minister, John Key, whilst acknowledging that our economy is dead in the water if fails to attract and welcome overseas investment into this country, has hit a very responsive nerve when he expressed discomfort with the notion that we New Zealand citizens risk ending up as little more than “tenants in our own country”. The spectre is that Chinese investors will buy up the majority of our dairy farms, and we, citizens in our own country, will be consigned to working for foreign landlords. Moreover, the earnings from those dairy farms will merrily trot off overseas and the New Zealand will devolve into a peasant economy and its citizens into serfs.

This is a spectral prospect indeed. It is not hard to understand why New Zealanders recoil from it. Nor is it hard to understand the Prime Minister's concern. But before we race off to Wellington to pass a few more ad hoc restrictions and regulations, let's pause to think through the wider issues.

Firstly, what we are seeing here is but a symptom of a wider and deeper problem. Beware the snake-oiler treating symptoms but ignoring causes. Why is there not enough capital owned by Kiwi citizens available to invest in dairy farms and milk-processing businesses? There are at least two possible reasons.

In the first place, the price of dairy farms may be way-too-high. If this is the case, overseas investors are coming in as “bigger fools” to purchase inflated assets. Unable to pack up the land into wheel barrows and repatriate it, they will end up on-selling it when it dawns on them that their capital is unproductive because they overpaid. In the meantime, the Kiwi-money is the smart-money, not willing to pay inflated prices for dairy farms.

There is a lot of historical evidence for this being close to the truth. Most dairy farms in New Zealand have returned far less on invested capital than could be earned in relatively risk-free ten year government bonds. Yet, this has not troubled aspiring and expanding dairy farmers in the past. Many enjoy the rural lifestyle and thus receive intangible value way and above their after-tax return on invested capital. (Ironically, they would still enjoy this as tenants on a foreign owned dairy farm, for far less capital outlay.) Moreover, dairy farmers have always born in mind the terminal value of their business—the amount of capital they will receive when they on-sell their farms and retire. Here, they rely upon the existence of an even “bigger fool” to come and pay them an even more inflated price for their farm.

To the extent that current dairy farm prices are based upon expected terminal values, which in turn rely upon the bigger fool coming forth, the sector itself is arguably a speculative pyramid which will eventually collapse back down to more realistic economic values. The appropriate response would be--if this were the reason Kiwis are unwilling to buy up farms like the Crafar conglomerate--would be to take the foreign money and run.

The second possibility is we do not have enough Kiwi capital investing in dairy farms because we do not have enough capital, period. Let us assume that the prices being sought by vendors are economically rational and are at fair market. New Zealanders are maxed out on debt, having spent up large on consumption extravaganzas and there just aren't sufficient capitalized people left able to invest in dairy.

This explanation quickly morphs into concerns about our lack of savings—and, inevitably, to considerations about how to increase our savings levels. On cue, and inevitably, the eyes of Unbelievers begin to lift in supplication to Wellington. The Government must do something. Compelling people to save is once again upon the table. Something must be done to lift our woeful saving rate! Government must do it! Government is our god, and by that god, the government must be what it is.

We acknowledge that there is a certain perverse logic to this. After all, why would any intelligent, rational Kiwi save for the long term? The government hands out, ostensibly free of charge, one of the most generous taxpayer funded retirement incomes to everyone over 65 in the world. On top of that, the state funds healthcare. In addition, all kinds of emergency grants from the state are available to anyone caught in a spot of impecuniousness. Why bother saving? Eat, drink and be merry for tomorrow our government will take care of us is the credo of our age.

Of course, when you actually “get there” you find that the great socialist paradise is hardly that. Socialised health care is strictly rationed; waiting lists are long; less-terminal ailments can reduce someone to a life of constant pain—even agony. Moreover, unless you have a mortgage free house and are prepared to live very simply, New Zealand tax payer funded superannuation is hardly adequate. But the widespread perception is that the socialist paradise for the aged really does exist. And it is a myth which successive governments are more than willing to perpetuate. So, why bother denying oneself now, in order to save for the future?

One obvious solution to increase our savings rate would be to cut current and future government entitlements. It is abundantly clear that those developing countries in Asia which have low social welfare entitlements are also those with rapid and growing capital formation due to high savings rates. Whilst there are doubtless other factors involved, the brute reality that it is family-or-nothing provides a powerful motivation to save.

But such a solution in New Zealand would be electoral suicide—as we have seen repeatedly. Any government that has moved to cut entitlements has unleashed a torrent of anger and vituperation that has consigned the guilty politicians and parties to a wasteland of ignominy for a very long time. Thus, the next solution, is to keep the entitlements in place, but increase government's control and intrusion by making personal long-term saving compulsory. Of course this will inevitably come in New Zealand, as long as men continue to look to government as their providential provider and their god. Without a revival of true Christian faith in the hearts of the people, there is only one direction to our drift into soft-despotism. That lady is definitely not for turning.

But here is the rub. The Prime Minister has said he would not like to see the day New Zealanders are reduced to being tenants in their own country. But, in fact, that happened a long time ago, as our next piece will argue. With respect to foreigners buying dairy farms, we are only facing just one more manifestation of New Zealanders being reduced to the status of being tenants in their own country.