Don Brash: Paying off debt beats backing winners as driver of growth

No prudent homeowner would start investing in shares until the mortgage was paid off.

Last Wednesday, your correspondent Fran O'Sullivan wrote an article urging John Key "to drive his Government to concentrate on the key sectors which will drive New Zealand forward", to back winners and generally to emulate the Singaporean model of development.

She went on to suggest that, unlike Singapore, the Government shouldn't worry too much about getting its own books back into balance.

I usually have a high regard for what Fran O'Sullivan writes, but this time she is way off beam.

She suggested that we already implicitly pick winners "through the various trade negotiations New Zealand has with other nations". But bilateral free trade agreements are a second-best strategy to let markets work in the absence of further moves towards global free trade.

She noted with approval that "behind-the-scenes work is being done on a number of sectors like aquaculture, which officials believe can be scaled up to the point where New Zealand producers can adequately compete in international markets". But private sector aquaculture would have flourished if the Government had not imposed a complete moratorium on the development of new aquaculture areas for most of the last decade.

She urged that the Government create a sovereign wealth fund to invest in the New Zealand economy, though noted that "purists will inevitably chime in that the Government should retire its own debt before setting up another investment vehicle". But isn't it completely sensible to use any available funds to retire debt rather than create some new investment vehicle?

We know that since it was first set up the New Zealand Superannuation Fund has earned less than would have been achieved by paying off government debt. No prudent homeowner would start investing in shares until the mortgage was paid off.

And of course we don't have any "available funds". The Norwegian and Singaporean governments have real wealth to invest. In New Zealand, by contrast, the Government is borrowing more than $200 million every week, and the country faces more intractable fiscal problems than it has for decades.

So why, in a world increasingly nervous about sovereign debt, would anybody recommend borrowing still more in order to take a punt on investments which, if they were profitable, the private sector would be keen to fund itself?

For the Government to be borrowing in order to do so-called "nation building" by buying Shell service stations, or shares in Auckland International Airport, as it is doing via the Superannuation Fund, is absolutely nuts.

Sadly, the record of New Zealand governments backing winners is poor - the "Think Big" projects are perhaps the best-known examples but there are many others, most recently the grossly excessive price paid for KiwiRail.

As the 2025 Taskforce concluded in its report, "the case against active government industrial policy is that whatever the shortcomings of private enterprise in generating growth, government is worse". Not every project governments back fails, but most do. Ministers and officials simply don't have the incentives to get it right more often than not.

There is much that I admire about Singapore. Through the extraordinary vision of Lee Kwan Yew, that country has lifted itself from being a seriously poor developing country 50 years ago to the point where its GDP per capita is now among the highest in the world, and around 85 per cent higher than New Zealand's.

But no doubt because there is no social welfare system and no minimum wage, Singaporeans save in a way which New Zealanders don't even begin to understand. Last year, public and private consumption spending in New Zealand was 80 per cent of GDP.

In Singapore, the comparable figure was under 50 per cent. The enormously high saving rate in Singapore implied by that low consumption number, together with a deeply undervalued exchange rate, explains why Singapore enjoys a balance of payments surplus of around 20 per cent of GDP, whereas we have a balance of payments deficit of 5 per cent of GDP.

And before somebody says "Ah, the solution must be Singapore's compulsory savings scheme", Hong Kong has had a similarly high savings rate and, until recently, no compulsory savings scheme. I'm sure our savings rate would be much higher also if we had no social welfare system, though of course I certainly do not recommend that.

So what really marks out Singapore? One of the most important things is that Singaporeans work more hours per capita than any other country for which there is reliable data (60 per cent more than hard-working New Zealanders).

By advanced country standards, Singapore's productivity performance is poor: GDP per hour worked is below that in troubled European countries like Italy and Spain. And despite the high GDP per capita, the living standards of ordinary Singaporeans are well below those of most advanced countries.

The results suggest that this highly government-directed development model is not one New Zealanders should have any interest in emulating.

What we need instead, and what the 2025 Taskforce recommended, is a thorough-going hard-headed approach that balances the Government's books, takes pressure off the highly over-valued exchange rate, and provides a better environment for the private sector to seize the abundant economic opportunities New Zealand could offer.

The two countries most culturally similar to us are probably Australia and the United Kingdom. Both now have much higher incomes than we do - and much higher productivity than Singapore. Both countries embrace the market as the route to continued economic prosperity.

Markets don't work perfectly, but they are the best wealth-creating mechanism yet discovered. New Zealanders, and the New Zealand Government, need to embrace them, not bet on the ability of smart officials or ministers to outperform them.

* Don Brash is the chairman of the 2025 Taskforce.