Tuesday, 12 October 2010

Is foreign ownership of land so bad?

Stephen Hickson asked this question in yesterdays Press here in Christchurch. Steve teaches in the Department of Economics and the MBA programme at the University of Canterbury. The short answer is, of course, no but Steve explains it better:
Many New Zealanders also object to the inevitable consequence of foreign ownership of any New Zealand asset or business which is "profits going overseas". In August of this year, Winston Peters declared that he would ban the foreign ownership of rest homes. No doubt Mr Peters would strike a sympathetic chord with many when he says that in foreign ownership he sees "foreign owners getting rich at the expense of the elderly".
Hmmmm, Winston is against it, can't help thinking that means it has to do good!!! But Steve continues by asking an obvious, but not often asked question: Why do we have foreign investment in New Zealand?
New Zealand is a great place to do business and there are lots of good opportunities to grow businesses and create jobs. To grow requires funds and so businesses either borrow money or issue shares in order to finance that growth. This requires someone who is a saver to lend the money or buy the shares.

However, the pool of savings in New Zealand is too small to fund this expansion and so we use the savings of people overseas who are willing to invest in a great place with great prospects.

Naturally, those overseas who lend us money or buy shares in our businesses need to be paid interest or dividends - hence profits going overseas.

Take rest homes as an example and suppose we do not allow foreigners to own New Zealand rest homes. If we want the same number of rest homes to be built then we will have to build them with New Zealand savings.

To do this might mean building less of something else, perhaps schools, shops, roads or wind farms. Or maybe we could increase our own savings to pay for those rest homes.

To increase our savings is very simple - as a nation we just need to consume less. Of course the reality is never as simple as all that.

Are we prepared to reduce expenditure on health and education in order to save more? Remember the Government is a consumer and a saver as well. Are we prepared to reduce our standard of living in some other way? New Zealanders don't appear to be very willing to do so.

Alternatively we could just build fewer rest homes. That will reduce choice for New Zealanders looking to use rest homes and most likely push up the price of going into a rest home.
Now if these outcomes are not too appealing then we have no choice but to dip into the savings of the rest of the world. What then are the impacts that follow from restricting foreign ownership?
The most obvious impact of restricting foreign ownership in New Zealand is that we restrict the opportunities for business growth and job creation.

While some profits head overseas as a result of foreign investment, much does not and of course the wages, businesses and land stay right here.

Foreign owners, just like any business owner, want to see their investments perform as well as possible so they are also likely to reinvest and create even more value for New Zealand.

When we restrict foreign investment some New Zealand worker now finds it just that little bit harder to find a job than they otherwise would have.
There are other impacts,
New Zealand is a small trading nation in a much bigger world.

That bigger world has a lot to offer us and every time we restrict foreign ownership we also reduce our access to the best knowhow that the world has to offer.

For every foreign buyer looking to buy there is a New Zealander looking to sell. By restricting or preventing foreign ownership we are preventing a fellow New Zealander from selling what they themselves own for the best that they can get.

New Zealand is a nation that values freedom and choice.

One of the cornerstones of our society is that we are all free to buy, sell and own land and businesses.

When we impose restrictions on some people in society we tread dangerously on that freedom.

When it comes to private businesses, assets and land it is odd to think that "we" own them. On the day before a New Zealand farm is sold to a foreign owner, I didn't own it and I had no right to say how that farm should be used.

The day after it is sold I still don't own it and I still don't have any rights to say how it is used.

The new foreign owner is also subject to the laws of the land just as much as the previous owner. If a piece of land is important for, say, access to a river or beach then that should be written explicitly into the title of the land.
So if you don't want foreign ownership then the choice is, keep consumption constant and and have less investment, or increase investment and reduce consumption. If neither appeals then welcome foreign ownership.

Roger Kerr has also written on the topic of foreign ownership in New Zealand. In an article in the Otago Daily Times on the 8th October 2010 he said,
Start with some basic economic perspectives.

First, New Zealand has a freely floating currency. A foreigner wanting to acquire a New Zealand asset has to buy New Zealand dollars. The New Zealand dollar seller will be paid in foreign currency, which will logically be used to acquire some other overseas asset (maybe a farm). The country’s net asset position is unchanged.

Second, for a given balance of payments position, more restrictive rules on purchases by foreigners of some class of asset (say land) will automatically mean greater foreign ownership of some other assets (eg businesses). Are there sound grounds for biasing overseas investment in this way?
and added
The spokesman also said that “once land is gone it’s gone.” This is also incorrect. Some years ago a New Zealand company owned Land’s End and John O’Groats in the United Kingdom: iconic sites par excellence. Then it sold them to an English buyer.

Likewise Carter Holt Harvey, with forest land interests, was majority owned by US company International Paper. Then Graeme Hart bought it back (and has purchased land in many other countries).

You can’t physically take land away, nor can you force any owner to sell to foreigners.
There is also the question of if we stop foreigners owning property here should we also not stop New Zealanders owning property overseas?
Another aspect of globalisation is New Zealand investment in agriculture abroad. Fonterra and individual dairy farmers are investing in farms in China, India, Brazil and other countries. New Zealand Farming Systems owned farms in Uruguay (now being onsold to Singaporean interests).

Should other countries ban such New Zealand investment?
Do we really wan t to stop Fonterra and other firms from investing overseas?

Roger Kerr ends this article with a similar point to Stephen Hickson:
Nevertheless, New Zealand governments are entirely at liberty to impose tighter restrictions for non-economic reasons. If they do, however, the community should understand that they come at an economic cost.
or as Hickson put it:
The amount and type of foreign ownership that New Zealand allows is a political choice that we make as a society via the ballot box but there are consequences to the decisions that we make.

If we are to restrict or, in some cases, ban foreign ownership then we should be fully informed and understand the consequences. We might not find some of those consequences appealing.
There is no such thing as a free lunch. Restrictions on foreign ownership come at a cost.

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