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Dependence on foreign capital limits income growth - report

Tuesday 9th September 2003

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While New Zealand’s economy has grown over the last 10 years, we may have grown even faster if we had saved more, according to a research report prepared for AMP.

“The use of foreign capital has undoubtedly helped New Zealand grow over recent years. However, the benefits accruing to each of us in terms of our incomes would have been higher if we had contributed more of our own capital through higher savings,” says AMP Managing Director Ross Kent.

“We’re certainly not saying that foreign investment per se is a bad thing, but the research suggests that relying too much on money from overseas is limiting New Zealanders’ income growth.

“There’s a price to pay for consistently using other people’s money for investment, and that price is lower incomes for New Zealanders relative to the rest of the world,” says Kent.

The research, prepared for AMP by the New Zealand Institute of Economic Research, shows that:

  • New Zealand’s reliance on foreign capital is extreme compared with other OECD countries
  • There is a significant gap between the output of New Zealand, measured by gross domestic product (GDP), and the incomes of New Zealanders, measured by gross national income (GNI) because a portion of the country’s ‘profits’ are sent overseas
  • Capital costs more in New Zealand than in other countries and this has shaved investment spending and capital formation
  • In combination, the research shows that these factors have contributed to low real income growth in a generation and a large decline relative to the rest of the world.

“For years we have looked at our national savings rate only in terms of the implications for access to investment capital. New Zealand’s ability to access global capital markets, and the willingness of foreigners to lend us money, has been considered a good thing.

“However, it may be time to consider some of the costs as well. It certainly looks like the old adage that money doesn’t grow on trees applies to the country just as much as it applies to a 10-year-old wanting a new bicycle,” says Kent.

Key findings of the report are:

  • A comparison of cumulative current account balances from 1975 to 2001 shows that New Zealand is the OECD nation that is most dependent on foreign capital.
  • New Zealand’s reliance on foreign capital has contributed to a ‘risk premium’ on money we borrow. It is possible that the risk premium a country pays rises exponentially compared to the amount of money borrowed.
  • Investment in New Zealand would probably be higher if the risk premium was lower. Partly as a result of lower investment rates, New Zealand’s capital stock is lower than it might have been.
  • New Zealand’s GNI grew at a compound rate of 1.26% between 1970 and 2003, compared to 1.37% compound growth in GDP. As a result, the gap between GDP and GNI has widened from just under $400 per capita in 1970 to $1600 per capita by 2003 (both amounts in 95/96 prices).
  • While incomes in New Zealand have grown since 1970, there has been a large decline relative to the rest of the world – dependence on foreign capital is one contributing factor.

Read the full report here

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