KEY POINTS:
An email arrived this week from an overseas-based New Zealand businessman containing the simple question: "How can a vibrant NZ economy ticking along at 3-4 per cent growth just go into such severe reverse, particularly when the dairy industry is booming?"
The same day David Skilling, the outgoing chief of the New Zealand Institute, was quoted as saying: "My view increasingly over the last several years is that the real challenge facing New Zealand is that we don't know what we actually want as a country."
We also discovered this week that more finance companies are in trouble, there was a net outflow of 31,500 New Zealanders to Australia in the past year, the current account deficit is much higher than anticipated and GDP contracted by 0.3 per cent in the March quarter.
This begs the questions, "where is the New Zealand economy heading?" and "why does it go from boom to bust so quickly?"
The New Zealand economy is rudderless, there is no consensus on the direction it should take.
Some would like to turn New Zealand back to the golden days of the 1950s when we ranked third of the 20 countries in the accompanying table in terms of GDP per capita.
Others want the focus on a sustainable economy, even if this means lower GDP growth, while there is a small percentage who believe we should forgo economic growth altogether.
However the vast majority of New Zealanders want a prosperous modern economy offering world-class education, stimulating career opportunities for the 18 to 65 working age group and a generous superannuation scheme along with excellent healthcare for the elderly.
One of the biggest tests for a modern economy is its ability to meet the aspirations of its younger generation. Perhaps the biggest difference between New Zealand and Ireland, which have been the two biggest movers in the accompanying table, is in this area.
From the mid-1800s to the 1990s Ireland was a large exporter of labour because it could not fulfil the aspirations of its young and New Zealand was one of the main destinations.
The trend has been reversed in recent years with Ireland having a migration inflow whereas a large number of New Zealanders are crossing the Tasman because of better career opportunities in Australia.
This trend has to be reversed for a number of reasons.
* The Australian economy will benefit from an inflow of well-educated, taxpayer-funded New Zealanders.
* The prosperity of a country depends on its ability to retain and attract the best and brightest.
* A lower percentage of the population is now in the 15 to 65 working age group compared with Australia. This puts an increasingly heavy burden on taxpayers in this country.
New Zealand is losing its best and brightest and has slipped from second to 19th of the 20 countries included in the table, yet none of our political leaders seem to have a big picture vision or any idea how to reverse this long-term underperformance.
The economy will continue to underachieve until we have inspired political vision and leadership.
The recent boom and bust is a consequence of this long-term underperformance.
Most New Zealanders aspire to have a modern home, a beach house, overseas holidays, a late model motor vehicle and high-definition television. Unfortunately we are not earning sufficient income as a country to pay for all these items.
During the recent international credit boom the domestic banks were flush with funds and aggressively encouraged individuals to borrow. New Zealanders took advantage of this situation to borrow money to pay for items that they couldn't afford. A high percentage of this money was sourced from overseas savers and invested in residential housing, both the main and holiday home.
Interest payments on this overseas debt, and other outgoings associated with our international liabilities, have grown more rapidly than the country's dairy exports. In the four years ended March 2008 milk powder, butter and cheese exports rose by $3.5 billion, from $4.9 billion to $8.4 billion, while the outflow associated with the country's international liabilities increased by $4.4 billion, from $12.5 billion to $16.9 billion.
A boom and bust cycle is much more likely to develop when borrowed funds are invested in underutilised holiday homes instead of productive assets that create long-term jobs and export earnings.
The New Zealand economy was in trouble once the international credit bubble imploded because credit had been a major contributor to the economy's recent performance. The banks have pulled their horns in, the finance company sector is in meltdown and the residential property market has serious problems.
There is no quick fix for a credit-driven boom and bust, particularly when most of the borrowings have been sourced from overseas.
The country's long-term decline is due to an absence of visionary political leadership, a lack of consensus as to where the country is going, too little saving, too much borrowing and a cultural attitude - and tax system - that diverts far too much investment into property instead of the productive sector.
A sustained economic recovery is dependent on our political leaders adopting, and publicly promoting, the following objectives as soon as possible:
* A strong productive private sector must be the backbone of the New Zealand economy, particularly sectors with an emphasis on foreign exchange earnings. These successful, domestic-owned companies will create exciting career opportunities for the younger generation and generate tax revenue to pay for the country's education and health needs.
* There has to be a huge emphasis on savings. KiwiSaver will help in this regard but the Inland Revenue's investor communications are hopelessly inadequate and we are seeing some sectors of the financial planning industry diverting money into areas where they receive the highest fees rather than where the investor will obtain the highest return.
* All tax incentives for residential property should be abolished and taxation obligations on housing profits enforced. A flattening out of the residential property market, with annual price rises no more than the rate of inflation, would be a positive step for the domestic economy.
* Investor protection should be a major priority. Investor confidence has been seriously eroded by a number of unregulated disaster areas, including the 1980s sharemarket, finance companies and a number of commission-driven financial planners with limited investment expertise.
We have to compare ourselves with Australia because there is free movement of individuals across the Tasman and the two countries had a similar GDP per capita until the 1970s. The gap between the two countries has widened substantially since then because our next-door neighbours have a much clearer economic vision and sense of purpose.
A strong economy delivers more than just monetary benefits. When New Zealand was at the top of the GDP per capita table it was a world leader in social development, including being the first country to allow women to vote in 1893. It is extremely difficult for a poorly performing country to be a world leader in any important development areas, keep up with other countries or meet the aspirations of the brightest and best of its younger generation.
Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management.
