May 24, 2010

We cannot go on borrowing our way into a hole

New Zealand has had three decades of current account deficits.  These deficits have piled up since Britain entered the EU in 1973.  As a nation we have spent more on imported items than we earn from exports.  We have borrowed to make up the difference.

Selling assets for cash has also been used as a short term palliative by the NZ government in the 1980s.  But this tends to mean that we end up having assets in NZ owned by overseas investors.  The dividend outpayments on those investments then become another overseas cost we have to meet and is usually added to the country's overseas debt. The culprits have tended to be NZ households and the private sector.  Asset sales are not a long term answer to resolving our indebtedness problem. With the right controls and given sufficient domestic capital savings they may be a useful vehicle to grow local shareholding ownership.

Foreign investment can certainly play a positive role in a country's economy - especially when local residents do not or cannot afford to invest.   But if we end up with most of the economy owned offshore then we would need to call into question the meaning of national sovereignty in such a context.  To turn it around we need to steadily build a much larger pool of domestic savings here in NZ.  Enhancing full participation in Kiwisaver would help towards an effort to re-New Zealandise the economy by having local families and companies buy shares in those organisations that own the productive assets of our economy.  I'm not a great fan of tariffs and import substitution because it tends to hurt low income consumers and it hides inefficient companies from more efficient competitors. A solution would be to do more to promote high value premium exports to markets around the world.  Increased focus on technology, innovation and improved productivity are all part of the solution to this major structural challenge.

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