Inconsistent policy blamed for poor growth

By JIM EAGLES

Why hasn't plenty of foreign investment made New Zealand richer?

University of Waikato professor Peter Enderwick says the answer can be traced back to inadequate and inconsistent economic policies.

It is because of these policy problems, he says, that "the growth and developmental impacts of foreign direct investment have been much lower than expected".

Enderwick has been intrigued about why New Zealand has not benefited from foreign investment in the same way as countries such as Ireland and Singapore.

He gave his conclusions in the first of Waikato Management School's 2003 research seminar series in Hamilton.

The paper on which his lecture was based pointed out that "on almost any measure, New Zealand emerges as one of the nations most dependent on inward investment".

Between 1986 and 1991 the annual inflow of investment averaged 3.5 per cent of gross fixed capital formation in developed countries generally but 19.2 per cent in New Zealand.

By 2000 foreign investment stock in New Zealand was equal to 49.1 per cent of GDP compared with the average in developed countries of just 17.1 per cent.

Yet over the same period "the New Zealand economy has continued to decline, relative to other OECD economies".

"This is surprising, as other small, open economies such as Singapore and the Republic of Ireland have been able to use inward foreign direct investment to transform their economic performance and to achieve very high levels of international competitiveness."

What New Zealand's performance shows, he says, is "that what matters is not simply the amount of foreign direct investment a country receives. The form of that investment and the recipient environment is also important."

Most of New Zealand's foreign investment has been in the form of mergers and acquisitions, he says. Furthermore, half of the greenfield investment in the late 1990s went into the property sector.

As a result, Enderwick says, the investments contributed little to value-added manufacturing or to New Zealand's exports.

This is at least partly because policy towards foreign direct investment "is perhaps best described as passive" with few conditions and no follow-up.

"The result has been a disparate pattern of investment and little analysis of its likely impact."

Another factor, he says, is that business and economic development have not been prioritised in in the same way as in other small open economies.

Enderwick says his research identified five key factors that have restricted the positive impact of foreign direct investment by reducing the incentives to expand, limiting the spillover of new technology and restricting the spread of improved productivity.

* Uncertainty due to the changing balance of policies - between economic liberalisation and social regulation - which varies according to the state of the economy and the ideology of the party in power.

* More uncertainty over the implementation of policies as a result of the lack of constitutional checks, exacerbated by the impact of MMP.

* Yet more uncertainty over a rising level of pragmatic intervention in the economy, often in an idiosyncratic fashion, "signalling an apparent disregard for property rights".

* Lack of investment in areas such as education and training, research and development or infrastructure.

* Failure to tackle constraints to business growth and development.

Enderwick says it is notable that since the adoption of MMP the flow of foreign investment has tapered off.

But, his paper emphasises, improving the impact of foreign direct investment on the economy "is not simply a matter of increasing the quantity or raising the quality of investment".

Rather, "the only way in which it can be expected to dramatically raise economic growth is if present policy weaknesses can be overcome".

"This will require constitutional reform and a radical shift in policy emphasis. Equity issues must be tempered with efficiency gains and not confused with equality."