NZ must focus on core strengths

OPINION: Some people still believe that the only way the New Zealand economy can truly grow strongly in the next few years and perhaps catch up with Australia (no chance) is if we develop some entirely new industries – perhaps those which have proved successful overseas, writes Tony Alexander this week.

One suggestion put to us in an email this week is that because the financial services sector has proved so successful for some countries overseas we should change legislation to boost it into a large sector servicing offshore clients from New Zealand.

This sounds like a good idea and there are operators in New Zealand who provide specialised services for folk abroad. But there are a few objections.

First, this was a grand idea touted in the 1980s when the sharemarket and property market were booming. Then the 1987 crash came and we saw no growth for five years.

We shattered our reputation internationally with that performance and proved that the time advantage (first financial market to see the sun on Monday) was worthless.

What happens on Mondays is that investors stay asleep overseas until Singapore opens – then they trade.

Second, boosting one's financial services sector to try to match those in other countries hasn't worked too well for Iceland or Ireland.

Third, there are already some major operators with critical mass reached decades, if not centuries ago, who have natural advantages from their physical locations, gathering of massive legal, accounting, insurance, and funds management operations such as New York, London, and Hong Kong.

Fourth, regulators are clamping down on the global financial services industry – especially in Europe. That might mean opportunities to service those unhappy about such things.

But clampdowns are also under way in traditional tax escape locations like the Cayman Islands and Switzerland, and operators in the sector are unlikely to want to escape down here to earn maybe a single figure percentage of what they can still earn in the big markets

Fifth, one of the most basic economic theories shows that you do best by concentrating on things you have a comparative advantage in. In New Zealand we have shown the world how to lose money by trying to build industries outside such a competitive advantage – synthetic fuel processing, vehicle assembly, steel making, etc. We have no comparative advantage in financial services.

For a government with limited resources in terms of money, analysis and legislation time, developing a new financial services sector is a non-goer.

Instead it is pleasing that when extra funding announcements are made they are in areas where we do have a comparative advantage – high quality-assured primary products and tourism .

So just this past week we have seen an extra $20 million allocated to tourism, and a joint funding arrangement with Zespri of $36m over seven years to develop new kiwifruit varieties.

MFAT and NZ Trade and Enterprise are devoting resources to furthering interconnectivity of our audio-visual and wine industries with Hong Kong , and trade negotiations focus strongly on improved dairy access.

New Zealand's biggest export earner is dairy – accounting for almost 18 per cent of goods and services export receipts – followed by tourism at near 16.5 per cent. These are areas in which strong attention needs to be focused – hence the Prime Minister appointing himself Tourism Minister.

There will always be niche export industries – thank goodness - because we need some insulation for when the big ones occasionally tank. But our future lies with doing more efficiently, more cleanly, more safely what we always have done.

And thankfully it is exactly those industries the rapidly growing Asian economies want us for, especially food. Long-term prospects for New Zealand look quite good.

But we must remember that sometimes the short-term we always live in can prove a shocker as dairy farmers have found out. The higher Fonterra payout will definitely go on debt reduction. But is it getting time to buy a farm at 30 per cent less price than two years ago?

Worth thinking about for those who can do it without large recourse to debt financing.

» Tony Alexander is the chief economist for the Bank of New Zealand.

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