New Zealand needs to provide an environment to foster talent and commercial ability, or risk losing significant human wealth and capital for the benefit of other economies. Pursuing greater international competitiveness has long been the aim of New Zealand governments and business.
Strengthening links between the economies of Australia and New Zealand has had a similar emphasis. In this personal essay, Partner Nick Wells explores whether these objectives are, in fact, mutually supportive. While proposals for a Single Economic Market (SEM) seem the natural way to build on CER, he asks whether a SEM will frustrate New Zealand’s broader economic aims.
Throughout the 1890s debates raged as to how Federation in Australia would operate. New Zealand was a staunch participant in those debates but, in the end decided to remain friendly and not become an Australian state. While Federation is still off the table in 2007, some 20 years after CER, high levels of immigration, labour and capital flowing between New Zealand and Australia point to an obvious question: should we pursue a single economic market? In this writer’s view finding our own path and remaining connected to but independent from the Australian economy is still in the national interest.
The concept of a Single Economic Market has been on the trans-Tasman agenda for a number of years as an initiative to build on the successes of the existing CER partnership. The New Zealand Government argues that entry into a SEM will provide New Zealand and Australia with a joint market of 25 million people, and "advancing the Single Economic Market agenda is an important element of our strategy to increase our international competitiveness". But it is questionable that a single market will achieve that fine aim and a number of aspects of a SEM are unappealing.
A single market is seen as a way to increase the international competitiveness of both Australia and New Zealand by establishing a trading block which would generate annual GDP to the equivalent of the ASEAN nations. But from New Zealand’s point of view, it is questionable whether taking this approach with Australia is the best way to improve international competitiveness as the joint economy will still be relatively small. So steps are needed to ensure that New Zealand’s own competitiveness is not damaged by entry into a single market. Relative to New Zealand, Australia is bigger in every sense – five times the population; six times the economy; and 29 times the landmass. So, while a "together against the world" approach may seem attractive, our inferior bargaining position based on these relative differences suggests a real prospect that New Zealand’s voice in SEM negotiations will be drowned out.
A clear distinction needs to be made between making New Zealand and Australia jointly competitive as a region, and retaining the individual competitiveness of each country. New Zealand still needs to be able to compete against Australia, (which is not in fact the recipient of the majority of our trade despite being our leading partner in a number of areas) and not merely be subsumed by it. While harmonisation may help larger New Zealand companies in the trans-Tasman market by reducing their operating costs, the majority of smaller New Zealand companies may be negatively affected by it. New Zealand has already started to be hollowed out by Australian investors acquiring New Zealand businesses and this means New Zealand is continually under threat of becoming the branch office for a number of Australian-owned corporations and being viewed as the seventh state of Australia anyway, despite having turned down that role in the past. Becoming the weaker party in a single market where New Zealand’s economy would be outranked by at least three Australian states would exaggerate New Zealand’s falling competitiveness and the benefits to New Zealand are likely to be minimal.
It will be assumed that because of our inferior bargaining position a SEM will automatically adopt the Australian way of doing things, and by doing so New Zealand would be giving up its international competitiveness. New Zealand would need to ensure that the policy decisions reached are in the best interests of both parties, not just those of Australia. To do this the practices of both countries must be viewed as being equally valid17 (and policies from other countries should also be weighed into the mix) before a decision is reached on the "best practice" to be adopted for a Single Market. There is no quick-fix solution to shining on the world stage – the secret is focusing on excellence and doing a lot of things right, in which case, working to find the "best practice" model to adopt is imperative.
New Zealand’s economy is more vulnerable to the volatility of mobile factors, illustrated in the skilled labour market where New Zealanders often go to Sydney or Melbourne in search of greater job prospects. "Since 1979, a net average of 15,700 New Zealanders a year have departed on a permanent or long-term basis for Australia". Adopting another country’s policies, especially those of our biggest competitor, could see our position weakening further. According to David Skilling of the New Zealand Institute "New Zealand is probably the most exposed country in the developed world to the forces of international factor mobility" and the international trend is that "people, firms and capital tend to concentrate because higher returns can be earned in larger centres of activity". We must compete twice as hard to attract those mobile factors to New Zealand rather than let them continue to leave our shores.
The need for New Zealand to compete with Australia has been recognised in the latest 2007 New Zealand Budget where the corporate tax rate has been dropped to 30 per cent, matching Australia’s. Political journalist, Colin James previously commented that "for as long as the tax regimes and rates are as different as they are now they will affect the competitiveness of the two countries’ businesses". The corporate tax rate reduction is a step in the right direction and illustrates government recognition of the need to compete with Australia. But is that enough?
Why follow when you can lead? New Zealand’s competitive advantage
Business laws will only be one consideration for any foreign investor. In a number of other areas New Zealand can claim a competitive advantage over Australia as an attractive investment destination. The 2007 Forbes "Capital Hospitality Report" ranks New Zealand fifth as an investment destination compared with Australia’s ranking of eleventh, and the 2006 World Bank ‘Ease of Doing Business Ranking’ gives New Zealand a ranking of second to Australia’s eighth.
As a lawyer practising on both sides of the Tasman, I firmly believe New Zealand’s pragmatic and less bureaucratic approach to regulation should be protected and enhanced. Australia’s federal system of government increases the red tape and bureaucracy in its economy. Australian Federal Attorney-General Philip Ruddock has commented "Australia is a nation of only 20 million people, yet we have a complex patchwork of laws that would be laughable if the consequences were not so serious". An example provided by Ruddock is in the area of Personal Property Securities where Australia has 70 different pieces of legislation dealing with the area. In comparison, New Zealand has just one, the Personal Property Securities Act. Any single market that favours Australian policies would remove the competitive advantage of a less bureaucratic approach in New Zealand.
New Zealand also out-performs Australia in a number of other international indices, including Transparency International’s ‘Corruption Perceptions Index’ which ranked New Zealand first equal in 2006 in comparison to Australia which was ranked ninth equal.
New Zealand does lag behind Australia in some areas, however. It is ranked well below Australia in OECD rankings of GDP per capita, and New Zealand’s per capita income is 30% less than Australia’s. This does not help when New Zealand is trying to compete with Australia to retain its skilled labour capital. New Zealand is also recognised as lacking the capital base of Australia to provide for national-based investment in New Zealand companies. "Increasing Australian ownership of the New Zealand economy will continue for as long as New Zealand’s household savings rates remain low, as there will not be sufficient capital to fund the expansion of New Zealand companies". The introduction of KiwiSaver is seen as a "good start, but much more is required" to begin overcoming these issues.
All these factors would form part of the decision-making process for an investor, and where New Zealand does have a competitive advantage over Australia this should not be easily given up. David Skilling suggests that a system of Mutual Recognition is preferable to the formation of a SEM where investors would head straight to Australia.
As mentioned in my article "No Bowing Down to Oz" things can be done to get ahead and a number of New Zealand companies have shown they can compete internationally without the help that a SEM would provide. For a small and geographically isolated country we have always punched above our weight in the global economy and a number of New Zealand’s international success stories illustrate this.
- Rakon claims to be "the world leader in the development of high performance frequency control technology based on quartz crystals, which lie in the heart of all electronic products". The success of the company has come "through the ability to combine highly innovative technology with a practical ‘hands-on’ approach to meet customer specifications".
- Icebreaker, the hugely successful manufacturer of merino outdoor clothing, began as a cottage industry run by a small high-country merino farmer36 until its current CEO, Jeremy Moon bought into the business in 1995. Within five years the brand was the largest in the Australasian outdoor clothing market. It is now sold in 1500 stores in more than 22 countries. In 1995 the original range fitted into one small leather suitcase and was marketed around New Zealand by Moon and his flatmate.
- Phil&Teds Most Excellent Buggy Company has become an "international brand with attitude" and its export sales have increased 14,000% since 1998. Phil&Teds won the 2006 Creative Exporter of the Year Award and "designs and markets innovative and world-leading nursery hardware products". The company already trades in over 40 countries and has just signed a "breakthrough deal with Mothercare International" which has chosen it as the "first premium international brand to be rolled out in all of their 300 stores in 42 countries". This is a huge coup for the little New Zealand company which began in a small Wellington garage.
Ventures like these prove New Zealand businesses can make it on their own in the international market, and their successes should be celebrated as much as international sporting wins. According to Investment New Zealand, New Zealand businesses succeed through "a culture of innovation, adaptability and risk-taking", and Phil&Teds exemplifies this culture by its use of the "New Zealandness" of the company as a key part of its sales strategy. This is something New Zealand and New Zealand businesses should be careful not to lose given that our "highly educated workforce, right talent, experience and can-do attitude" help provide New Zealand with an important competitive advantage. We must provide the environment to foster that talent otherwise we are subsidising incredible human wealth for the benefit of other economies.
National sovereignty and policy control
The decision to enter into a SEM with Australia needs to take into account more considerations than just those of business and trade. Entry into an agreement where all policy decisions would need to be kept in line with Australia would see New Zealand ceding a great deal of its independence to Australia or some form of joint authority.
The ability to retain control over policy is important, especially as a means to retain international competitiveness. Independent control over policy development is one of our few competitive tools and should not be surrendered easily. Small companies need to be able to succeed at home first before they can tackle the international market, and ceding sovereignty over the policies and regulation that allows small companies to thrive may not provide them with the assistance they need.
Because of New Zealand’s small size and geographical isolation, an independent, simple and stable regulatory regime is needed to overcome the inherent difficulties these structural factors cause.
Relations between Australia and New Zealand have not always been as positive as they are now. Aside from cycles of divergence and convergence over policy, much has depended on the nature of personal relationships between individual leaders. Despite the good relations now, New Zealand should be wary of ceding too much policy control to any joint body without a clear view of the agenda and policy setting process. The harmonisation that has already taken place between Australia and New Zealand has been largely issue-specific, and it may be wiser to continue at this more natural and considered pace. Entry into a SEM would require harmonisation in a broad range of areas, and trying to complete it all at once could mean that many aspects of a more nimble policy environment may be lost. It has been suggested that New Zealand should not adopt a herd mentality regarding harmonisation of the regulatory environment. Each decision must suit its particular sector, so a best-practice policy is adopted in each area, rather than just adopting one country’s practice.
A recent report of the Australian Productivity Commission into the harmonisation of New Zealand and Australian law in the areas of competition and consumer law found that the barriers to trans-Tasman trade are not currently high enough to be a significant impediment to trade or warrant any significant changes in the laws of the two countries. This finding further implies that the costs of ceding New Zealand’s independence will not be outweighed by the benefits of any SEM with Australia at this point in time.
In a world where the features that make up New Zealand’s economy are so mobile, we have to use all our abilities and advantages to attract and retain talent in and to New Zealand. At a policy level this will mean competing with all nations. In terms of Australia, this means remaining a close friend as opposed to being the smaller goldfish in a two-fish pond. David Skilling suggests that "the end-game is to grow a strong and successful New Zealand economy, not simply to become part of an Australasian economy", and only a small part of it at that. New Zealand has the ability to stand on its own two feet and compete on the world stage. Our challenge is to find the best way to do so.