Bowden is a former Professor
of Economics and Finance at the
Victoria University of Wellington.
a visiting research fellow in
financial system design at Ulm University in Germany. He
has worked at a number of offshore institutions, including the
New South Wales
as Professor of Finance. In addition Roger has been visiting
Professor of Economics at the universities of
British Columbia; held a Humboldt Foundation Senior Research
; and visiting fellowships or appointments at the
, CEPREMAP in
, and the IBRD Development Research Department in
. He holds the degrees of BA,
(mathematics and econometrics,
), PhD (economics,
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in our own shop?
the face of it, the euromess is an old story. Populist governments and
rampant bureaucrats are expensive indulgences at the best of times. With
the global economic hangover we call the global financial crisis (GFC), to
spend too much and save too little is downright dangerous, and not just
for your own taxpayers.
in NZ, the government seems to have taken the principle on board, even if
some of the budget measures look like simply reshuffling the deckchairs.
[Yes, the Families Commission wonít be missed, but just look at whatís
going to replace it, the ĎSocial Policy Evaluation Research Unití! The
uncharitable might wonder a bit just how that one got off the ground.]
I think the real lessons of the euromess lie elsewhere, with structural
changes precipitated in this case by global economic realities. The
tradable product menu of Spain and Portugal is not all that distinctive
and is shrinking, as with the fate of the once proud motor industry in
Spain. Even Italy is in some strife with motor cars, though it still has
some very tradable differentiated products e.g. fashion apparel for the
Chinese upmarket. Of course, thereís always tourism, and thatís a
natural endowment for the likes of Italy or Greece (17% of GDP). Living in
the past can be profitable, though the packaged holiday market is more
subject to competition e.g. as between Italy and Croatia in the Adriatic,
or Greece and Turkey in the Aegean. Moreover,
spending on holidays is highly discretionary, so the GFC amounted to
double jeopardy for such countries. The
deflated building boom for all those yucky holiday apartments predisposed
the Spanish economy to collapse.
does look like some of the Southern European countries and perhaps
Ireland, need to reinvent their economic mix (or for the latter, a bit of
Irish luck with oil). Something of the same is true of France as well,
especially the industrial south east and the ring of social depression
that now circles major cities. A pessimistic outcome is that some of these
regions become remittance economies, gast arbeiter sending money from Germany (or the UK and Sweden) to
support the folks back home.
what are the structural implications for Godzone, if any? In
the short run, not much, even given the euro-driven Chinese slowdown,
though I note commodity prices have come well off the boil in the interim.
But the NZ dollar is a commodity currency with some interesting dynamics
all its own, so this can buffer any adverse shock to commodity prices, in
the absence of interest rate pressures. Having our own currency is a help
in bad times.
the other hand, the long term is problematic. It is troublesome that so
many of our best and brightest are leaving for economic Ėand I suspect
social Ė reasons, for that does close off a few differentiated product
options for the economyís future. It amounts to a drain on our stock of
productive human capital. The resulting age distribution will also raises
the cost of medical and other services, which in turn will be a drain on
the taxpayer. And there may be adverse implications for the real estate
market, already hit by tax changes.
human capital aside, right now we have a distinctive trade profile, based
on commodities and tourism, amounting to a comparative advantage, in trade
theory terms. (We also have other exports like education services, though
this is really just selling residence). Especially over the last 13 years
itís been a highly productive profile, in spite of doomsayers of the
Ďsixties like the World Bankís Raoul Prebisch. Tourism is a global
growth industry; and if you want to see just how efficient you can be
about milking cruise ships (which we donít), visit Dubrovnik on the
the first thing that gives me pause is the issue of ownership of the
factors of production. Thatís the real payoff to our comparative
advantage, and itís what we may be about to screw up.
Crafar farm sale, now. The
farms will evidently be managed by Landcorp, so the labour side of things
weíll hang on to, more or less as a fixed base return component. But the
returns to capital, which is the real option from growth, will accrue to
Shanghai Pengxin (or whoever they sell to). That includes the growth
return from the rising prices of dairy products in China, and we could
also think of rising meat prices by way of scope extension.
this might be OK for just one sale, but how about more? Thatís a
prospect as milk powder prices come off their temporary high, and there
are more farm sales, whether distressed dairy farm conversions, or old cow
cockies retiring and cashing in. The point is that we donít have all
that much really productive farmland. Does the Overseas Investment Office
have a model for the point at which a halt might be called, and how could
such a decision ever be defended in litigation?
of production can also encompass natural monopolies. In this context you
might think of one or two of the forthcoming state asset floats, e.g.
Mighty River or Meridian in the context of electricity generation. I
suspect these governmental rushes of blood to the head are about to get
extremely expensive for both consumers and taxpayers, with some actual or
implicit Ďcompensationí contingencies for iwi not priced into the
original decision, on top of the
deadweight flotation costs.
do not mean by all this to weigh in against all state asset sales. Solid
Energy is more solid in this respect, though I wonder whether the float
price will correctly price in the option to convert coal to urea, which is
having a real boom on world commodity markets. Likewise, I can see no real
reason for hanging on to Air New Zealand, especially given the way they
annoy their adult passengers (e.g. that deafeningly unfunny safety video
and the rap music!).
thereís oil and gas, now correctly recognised as a key resource, a bit late I suspect. The
max (5% ad valorem or 15-20% accounting profit) royalty rate on oil
strikes me as low by international standards; by way of contrast the 2009
Review actually increased the royalty for minerals. The Government cites
NZís Ďisolationí as a discouragement.
Hang on, what about Alaska, Siberia, the Amazon, and Make Benefit
Glorious Nation of Kazakhstan? Moreover, NZís (relative) political
stability must count against the potential danger of ex post non
contractual tax hikes or expropriation. If Tag Oil and Apache do strike it
big with tight oil onshore in Hawkes Bay (my guess is they will), then a
royalty of 20% of accounting profits will look overly generous.
moral of all this? If you want to sell the shop, price it to span all the
future real options and true costs; and identify
correctly what those might be. If you canít, donít sell.
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