Regime uncertainty is a concept developed by the economic historian Robert Higgs. The idea sets out to capture the uncertainty of investors in their private property rights with regard to their capital, and the income it yields, caused by government action. Put simply if investors don't believe that they will capture the returns to their investment, because of government policy, they will not invest. Uncertainty can be driven by many things ranging from simple tax-rate increases, to the imposition of new kinds of taxes, to outright confiscation of private property. Various kinds of regulation, of, for example, securities markets, product markets, labour markets, can also cause uncertainty for investors. The security of private property rights rests not so much on the letter of the law as on the character of the government that enforces, or threatens, presumptive rights.
Regime uncertainty is an issue I have often thought important for New Zealand. Life under Muldoon being the classic example. Given his use of budgets and mini-budgets and his control of bodies like the Reserve Bank no one was ever sure from one year to the next, or one month to the next, what changes to economic regulations, taxes, subsidies, and import and export controls were likely to occur. This did not make for a great environment for private investment.
Post 1984 things have improved however. But may be not as much as I had thought. In a recent article in the National Business Review, 8 July 2011, Roger Kerr reminded me just how threatened property rights in New Zealand still are. Kerr writes,
And where breaches of property rights and contracts are concerned, the damage to a country’s reputation as a secure place for investment is much greater. New Zealand governments have often been cavalier in this regard. A review of just the last decade or so throws up numerous cases in which property rights were compromised without compensation:Creating regime uncertainty will do nothing to help with investment in New Zealand and thus with New Zealand's productivity problems and therefore with its economic growth. For the sake of future investment and well-being more needs to be done to make governments, at the very least, acknowledge and justify any incursions they wish to make against property rights and the rule of law.
Regrettably, there is no end in sight to this damaging pattern of behaviour.
- the cancellation in 2000 of the 1994 West Coast Accord which provided for the sustainable harvesting of rimu. Westco Lagan, which had invested in significant sawmilling business on the basis of this accord, was left out of pocket and uncompensated;
- the National government’s move to partially open up ACC to competition was repealed by its successor, leaving insurers which had raised large amounts of capital to enter the market with no prospects of new business;
- the 2004 Foreshore and Seabed Act which limited the jurisdiction of the Maori Land Court to hear customary rights claims;
- the forced unbundling of the local loop, which allowed Telecom’s competitors the right to place equipment in its roadside cabinets (likened to giving a neighbouring farmer a right to use your milking shed), which shaved some $3 billion off Telecom’s share price.
- the initial proposal to allow public access to private land (with the possibility of stock loss through open gates and biosecurity risks) without the consent of the landowner;
- the operation of the Resource Management Act which can involve major regulatory takings of property (without triggering the compensation provisions of the Public Works Act); and
- the intervention in the bid by a Canadian pension fund for a shareholding in Auckland International Airport, which stymied the bid and cost shareholders some $300 million. The Regulations Review Committee of Parliament upheld a complaint by the Business Roundtable and the Wellington Regional Chamber of Commerce that the intervention was in breach of Standing Orders. This action reverberated around the international investment world.
Recently the Labour Party has stated that it “reserved the right” if returned to office this year to overhaul both the government’s broadband legislation and government contracts with Telecom. There was no suggestion of negotiation over changes or compensation for losses.
The Business Herald has also reported that Labour may repeal legislation it had previously supported governing leases of Crown land to farmers. Labour is again threatening to reverse any move to open up ACC to competition.