what ails the economy: turning new zealand’s small size from a weakness to a strength 16 th march...
TRANSCRIPT
What ails the economy: turning New Zealand’s small size from a weakness to a strength
16th March 2011New Zealand Institute, Wellington
Nicholas Gruen [email protected] @nicholasgruen
Outline
The facts Looking for suspectsMy best guessWhat to do about it
– Capital flows, tax competition and finance– Broaden (not necessarily intensify) economic reform – Exporting from bases of domestic excellence
GDP per capita ('000 constant USD)
10
15
20
25
30
35
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
'000
USD
, con
stan
t pric
es
Australia New ZealandOECD Ave
Reform
A diagnosis• There has been more continuity in Australian policy. The political
consensus for change has been stronger, and there has been limited backsliding despite changes of government . . . . Indeed, by contrast with New Zealand's record of stop-start reform . . . Australia has adopted a remarkably consistent, coherent and credible strategy of economic reform over the last two decades.
Roger Kerr, NZBR• Australia is a much lower taxing country, especially in terms of
income tax, CIS
What’s driving this?– Not lack of funds but – Lack of investment opportunities
What’s driving lack of investment opportunities?– Lack of political consensus – stop start reform
But . . . Timing problems with the explanation“New Zealand halted most major reform in 1993, and has increased tax and regulation since 2000.” Phil Rennie, Why is Australia so much richer than New Zealand? CIS
Did MFP rise mainly because ECA took investment pressure off business?
But . . . Big access to capital differences
01234567
Jan-
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Jan-
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Jan-
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Jan-
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Jan-
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Jan-
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10
Jan-
11
Australia New Zealand
Sharemarket capitalisation/GDP
0
50
100
150
20019
88
1991
1994
1997
2000
2003
2006
2009
Australia New Zealand
Gross Savings rate
10
15
20
25
3019
72
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
Australia New Zealand
-15
-10
-5
0
5
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Australia New Zealand
Current account deficit
Gross external debt
0
20
40
60
80
100
120
140
160
2004 2005 2006 2007 2008 2009 2010
Australia New Zealand
Building knowhowR&D/GDP (%)
0.000.501.001.502.002.50
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
Australia New Zealand OECD Ave
Business expenditure on R&D/GDP
0.00
0.50
1.00
1.50
2.0019
81
1984
1987
1990
1993
1996
1999
2002
2005
2008
Australia New Zealand OECD Ave
Services exports/share of exports
5
10
15
20
25
3019
70
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
Australia New Zealand
Sophisticated services exports/share of exports
5
10
15
20
25
3019
70
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
Australia New Zealand
21
Reduction in inequality due to public cash transfers and household taxes
Point reduction in the concentration coefficientPublic transfers in cash Household taxes
0.00 0.05 0.10 0.15
KOR
USA
JPN
AUT
FRA
CAN
FIN
LUX
ITA
OECD-22
NLD
NZL
GBR
DEU
NOR
SVK
AUS
IRL
CZE
BEL
DNK
SWE
0.00 0.05 0.10 0.15
KOR
USA
JPN
AUT
FRA
CAN
FIN
LUX
ITA
OECD-22
NLD
NZL
GBR
DEU
NOR
SVK
AUS
IRL
CZE
BEL
DNK
SWE
Gravity theory of tradeThe estimated negative impact of distance on trade rose around the middle of the century and has remained persistently high since then.
– Distance effects decreased slightly between 1870 and 1950 and then began to rise.
– Distance impedes trade by 37% more since 1990 than it did from 1870 to 1969.
“The Puzzling Persistence of Distance on Bilateral Trade”, Disdier and Head, 2006
GDP per capita (% deviation from OECD ave)
-30-20-10
0102030
1950 1960 1970 1980 1990 2000 2010
Australia New Zealand
New Zealand has a more ideological political culture
– RBA v RBNZ• Ideological purity => two extra recessions
– BCA v NZBR– Douglas v Keating
• Top tax rate 62-49.5% v 66-33%• CGT and FBT v GST• R&D concession (1985 v 2007)• Compulsory super• Labour market reform• Welfare reductions• Gini coefficient during reform
BCA’s Policy Agenda
A Role for BusinessEmissions ReductionGlobal EngagementHealthy AustraliaTax ReformBusiness RegulationEducation, Skills and InnovationInfrastructureWorkplace RelationsWorkforce Participation
Solutions
Australia/Global GDP = 1.3%New Zealand/Global GDP = 0.17%
Political Stability, English language and institutionsSmall size and distance from markets a huge problemAlso an opportunity
– Unitary Parliament – Unitary State
Solutions
Small countries can compete for– Financial capital– Financial Skills
A new kind of reform:Which targets improved domestic outcomes (both economic
and social => excellence=> exports
Solutions
Am I in favour of governments picking winners?NoThe opportunities I’m talking about are all there for the taking
– they require governments facilitating, not subsidising– they are in areas in which output is a joint product of government and the private sector
Tax
An ideological focus has the New Zealand debate focused on
– Total tax take (which only matters at extremes)– Top Marginal rate (which only matters at extremes)– Domestic capital gains still untaxed (distorts domestic
investment)– Capital taxation of foreigners not a major focus
The open economy argument:Tax and foreign investment
A substantial body of research considers . . . the effects of taxation on investment. . . . The first generation of these studies . . . reports tax elasticities of investment in the neighborhood of –0.6. [So] a ten percent tax reduction (for example, reducing the corporate tax rate from 35 percent to 31.5 percent) should be associated with six percent greater inbound foreign investment. More recent evidence suggests that foreign direct investment is even more tax sensitive than this.
Hines, J and Summers, L, 2009. “How Globalization Affects Tax Design”, NBER
Djankov, Shleifer et al, 2008, NBER
Company tax and growth - empirical evidence
Tax cuts and growth - empirical evidence
– Lee and Gordon (2005) • Strong negative correlations between company tax rates and economic
growth – 10 percentage point cut in the company tax rate increases per capita annual
growth by between 0.57 and 1.82 percent• Little or no correlation between top personal tax rates and economic
growth
– Hassett and Mather (2006)• Strong negative correlations between company tax rates and wages and • Little or no correlation between personal tax and wages
Labour supply response according to MITTS
-0.2
0.3
0.8
1.3
1 2 3 4 5Household Income (Quintile)
Ela
stic
ity
Married men Married women Single men Single women
Lifting thresholds versus cutting top rates
The case of Ireland
Ireland’s economic renaissance dates to 1987 when it aggressively courted foreign investment with tax cuts
Its out-performance is commensurate with Lee and Gordon’s and Djankov, Shleifer’s results
Ireland has a huge gap between top personal (42%) and company rate (12.5%)
-100
-50
0
50
100
150
200
250
300
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009G
DP
per c
apita
(198
7 =
100)
-10
0
10
20
30
GD
P pe
r cap
ita g
row
th (%
)
Australia Ireland New Zealand
Australia Ireland New Zealand
-100
-50
0
50
100
150
200
250
300
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009G
DP
per c
apita
(198
7 =
100)
-10
0
10
20
30
GD
P pe
r cap
ita g
row
th (%
)
Australia Ireland LuxembourgNew Zealand Australia IrelandLuxembourg New Zealand
Dividend Imputation
Credit for company tax payments is passed on to shareholders with their dividends
– We know its theoretical justification• To improve tax neutrality between debt and equity investment • To reduce double taxation of dividends
– But is it cost effective as a capital taxation expenditure?– It now costs over $20 billion– How much does it lower the cost of capital?
Dividend Imputation in economic theory
Foreign investors are the marginal, more elastic investor
=> So they disproportionately determine share prices.
=> But they don’t benefit from imputation credits. => So imputation credits are not represented in foreign demand for shares and so in share prices
=> Dividend imputation doesn’t lower cost of capital
Dividend Imputation – the evidence
Most reputable studies suggest imputation credits worth 50 cents in $. Cannavan, Finn and Gray 2004 had zero valuation.Introducing imputation didn’t increase share prices (Ickiewicz, 2006)Removing similar credits to UK super funds produced substantial reallocation of ownership, with negligible price effects. (Bond et al, 2005)
Recycling imputation revenue as lower company tax
So we could ‘cash out’ an inefficient tax expenditure for an efficient company tax cut.Allows cuts of up to 11 percentage points (Hathaway and Officer, 2004)Company tax could go as low as 19% even without behavioral responsesIreland cashed out its own dividend imputation system as lower company tax
Abolition of DI => sale of NZ equities to foreigners. Produces negligible price fallsWith lower company tax, FDI would rise substantially.Improved post tax return on foreign investment in NZ lifts
foreign investment and NZ share prices – Lowers cost of capital. – Increases investment
Improves equity by increasing effective tax on NZ capital owners, compensated by increased share prices
Abolishing imputation to lower company tax
Sophisticated services exports/share of exports
5
10
15
20
25
3019
70
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
Australia New Zealand
Successful exporters of financial services
– Traditional centres• London, New York
– Legitimate low tax high service financial centres• Ireland, Luxemburg
– Offshore tax havens• Macau, Bermuda, Cayman Islands and many others
Traditional centres of large countries or empires
Small countries
Small countries
Successful exporters of financial services
– Almost all a product of government involvement– Luxemburg took action in the 70s– Ireland took action in the 80s
Britain's most lucrative industry owes its dynamism to many things, including globalisation, innovation and the good fortune to be based in an old imperial trading city that sits handily between Asia and the Americas. But there was nothing pre-ordained about London's success as a financial centre: it happened largely thanks to an inspired piece of state intervention 20 years ago that opened the doors to foreign talent and foreign capital.
The Economist, October 19th 2006
Tax Treaties
The tax jigsaw for global funds
Asset
Fund
Investor
Regulation as a service
– Sounds like a contradiction– But regulation as a service is very common
• Telecommunications firms compete with standards being provided collectively – by government and/or industry standards bodies
• ASX is a private provider of regulation of corporate governance• Delaware is the corporate regulator as service provider par excellence
– Irish financial regulation is tough on basics of investor protection, but flexible and responsive to collective industry needs
– Firms and their collective regulation co-evolve
Co-evolution
Regulatory co-evolution in global financial centres
Co-evolution of finance and financial regulation
Hosting global funds, Ireland’s and Luxemburg’s regulators construct new corporate forms to optimise tax transparency
– Luxemburg’s special tax exempt vehicle for foreigners rendered void by European Commission
– New compliant regime introduced in four months• Note Luxemburg residents pay tax on receipts but not in the
vehicle
Tax transparency In addition to trusts and companies, Luxemburg has a contract based
fund structureRecently imitated and improved on by Irish regulators over several years of close collaboration with major global firms
Irish common contractual funds (CCFs) create a network of contractual relations rather than a new entity which enables cross border pooling
– This enables tax authorities to ‘look through’ the fund at the investments and apply taxes (including withholding taxes) at rates appropriate to the investments’ and the investors’ domicile – not the fund’s domicile
Sticky fingers
We don’t mind paying Australian tax. We don’t want tax breaks on our profits in Australia. We’ll pay the going corporate rate. What we can’t live with is the Australian government taking a cut of our investors’ money on the way through. Foreigners won’t invest with us and we can’t build serious capacity to export funds management from Australia if there’s even a hint of sticky fingers. If we can’t get that certainty, we’ll just keep doing it from Dublin.
CEO of a foreign owned Australian fund manager
What is at stake
– Global financial centres are almost uniformly very wealthy– Finance employees earn almost twice Australian average,
• ~ three times the New Zealand Average– Margin remains even after allowing for education and skill– Tax incentives could assist in transforming NZ into a financial centre
• As they did in Ireland and Luxemburg– But they’re not the most important thing – And will fail if we can’t generate a responsive tax and regulatory regime
for global funds• Hint – don’t guarantee foreigners’ deposits or banks’ wholesale borrowing (See
Ireland and Iceland)
GDP per capita (1980 = 100)
0
50
100
150
200
250
300
35019
70
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Austria Belgium DenmarkFinland France GermanyGreece Iceland IrelandItaly Luxembourg NetherlandsNorway Portugal SpainSweden Switzerland United Kingdom
Absolute GDP per capita (US$ in 2000)
0
10000
20000
30000
40000
50000
60000
70000
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
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2008
Austria Belgium DenmarkFinland France GermanyGreece Iceland IrelandItaly Luxembourg NetherlandsPortugal Spain SwedenSwitzerland United Kingdom
Regulation as a service: Co-evolution in Delaware
Regulation as a service: Co-evolution in Delaware
Source: US Institute for Legal Reform
Regulation as a service: Co-evolution in Delaware
Source: US Institute for Legal Reform
Delaware: It’s lonely at the top
Source: US Institute for Legal Reform
Where is
the juris
diction of c
hoice fo
r Asia
Pacific
litigati
on?
Information, reputation and exports from domestic excellence
Hayek 1936,
Stigler, Arrow, Akerlof and Stigliz 50s-80s
The new information economics substantiates Hayek's contention that central planning faces problems because it requires an impossible agglomeration of information. It agrees with Hayek that the virtue of markets is that they make use of the dispersed information held by different participants in the market. But information economics does not agree with Hayek's assertion that markets act efficiently.
Joseph Stiglitz
Information and reputation
Information and reputation
Reputation is the principal means through which a market economy deals with consumer ignorance John Kay
Yet we regulate against the grain of this insightWe make investment decisions via a combination of:
– 100 page product disclosure statements no-one reads – advised by advisors whose quality no-one knows
The alternative – regulate to enhance reputational quality
Investment advisors
Encrusted in regulationBut it’s more about conflict of interest than advisory skill or valueRegulation could require advisors to keep sample portfolios
With reputation suasion can achieve a lot
Can investment advisors meet John Key’s challenge and keep a sample portfolio?Governments can lead in getting standards to form without regulating.
Windows on Workplaces: Job satisfaction and management quality
Most firms survey their employeesWhy don’t they release the information
– The good ones have an incentive– But to compare requires a standard – And a standard is a public good
Government suasion and leadership – eg with public agencies could help one formAnd we could have ‘excellence driven’ improvement
Health exportsApollo Hospital, New Delhi, charges $4,000 for cardiac surgery v $30,000 in US.
– Global medical tourism grossed ~ $60 billion in 2006. – Will rise to $100 billion by 2012
McKinsey
Health exports and quality assuranceHealth exporters often have physicians with internationally respected credentials, with training in the United States, Australia, Canada or Europe.Accreditations
– 120 hospitals accredited by the US Joint Commission International (JCI)– 20 accredited through ISO; – Some countries are adopting their own accrediting standards.
Some exporting hospitals owned, managed or affiliated with prestigious American universities or health care systems eg Cleveland Clinic, Johns Hopkins International.Several US companies operating hospitals in Mexico to American standards for American (and wealthy Mexican) patients.Patients also use online communities to inform themselves.
Health information regulation
Just as in finance, strong regulation for integrity and transparency enhances competitiveness
Gruen Tenders
Provide unbiased estimate of the prognosis of a clinical procedure.This can be used for
– measurement of clinical safety, – allocation and – funding of clinical work
Well suited to self contained clinical event with reasonable chance of undesired outcome from which full recovery expected - obstetric delivery, setting a fracture, cardiac surgery
Real estate or other sales
Agent 1Agent 2Agent 3
Prognosis420,000$ 415,000$ 450,000$
Accuracy of past prognoses
5%-2%-15%
Expected price
441,000$ 406,700$ 382,500$
Indicated Service provider
Litigation
Provider AProvider BProvider C
Raw Prognosis
85.0%91.0%95.0%
Correction for accuracy of past prognoses
13%0%-5%
Expected chance of success
96.00%91.00%90.00%
Indicated Service provider
Medical procedure
Hospital AHospital BHospital C
Raw Prognosis
2.0%4.0%1.5%
Correction for accuracy of past prognoses
-30%25%30%
Expected chance of adverse event
1.40%5.00%1.95%
Indicated Service provider
Gruen tenders and reputationNormal reputations
– Usually based on poor information– Backward looking– Crude and undifferentiated – doctor’s good or bad
Gruen Tenders enable fine grained reputations to form– Based on considered prognoses and comparative prognoses–Not just for types of clinical activity but for individual patients or
groups of patients– Enable forward looking prognoses, facilitating innovation
Gruen tenders minimise perverse incentivesThere is no incentive to turn anyone away, just to reduce the
attractiveness of the ‘bid’No incentive to ‘reclassify’ risk rating
–Because risk rating is not imposed extrinsically, but intrinsically to the clinical unit
–In the ‘prognostic bid’.
Gruen tenders reinforce intrinsic motivationInformation that aligns with intrinsic motivation should
reinforce itIncreasing the intrinsic motivation of the bestIdentifying worse performers for redeployment and
specialisation
Gruen tenders assist central funders and managers, and educate patients
Gruen Tenders generate a mass of data on top of the basic performance data currently used for report cards.
– Data from prognoses, and availability of comparative prognoses on the same case
Re the lack of consumer response to report cards, Gruen Tenders put the info – and the issue in front of patients.
Health is a ‘big data’ business
Global Competitions
State of the art 70%
1½ weeks 70.8%
Competition closes 77%
Predicting HIV viral load
Accuracy of Prediction (1 – 100%)
• Revenue or sales forecasts
• Traffic forecasting• Energy demand• Predicting crime• Tax/social security fraud• Hospital casualty demand• Identifying great
• Teachers• Schools• Hospitals
• and their best practices
US$500
We could not be happier with the result. The Kaggle approach has set a new benchmark in Government for the development of successful predictive models, delivered quickly and very cost effectively.
In particular, the flexibility of the winning predictive model will enable its application to other major transport routes to the CBD and allow for the addition of other factors such as weather and incident.
Susan CalvertDirector, Strategy and Project Delivery Unit
Forecast Eurovision Voting
Dr. Derek Gatherer, UK
Take on the Quants 1 & 2
John BlatzBaltimore
Edmund & AdrianLondon & USA
Jason TriggPennsylvania
Chih-Li Sung & Roy TsengPenghu & Taipei
Jure ZbontarLjubljana
Thomas MahonyCanberra
Emir DelicAustralia
Glen MaherCanberra
Predict HIV
Chris RaimondiBatimore
Claudio Perlich USA
Gzegorz SwiszczGera
Edmund & AdrianLondon & USA
Tourism Forecasting Part 1
RajstennajBarrabasUSA
Jason TriggPennsylvania
Felipe MaiaUppsala University
Lee BakerLas Cruces, New Mexico
INFORMS
Cole HarrisTexas
Nan ZhouPittsburgh
Chess Ratings
Uri BlassTel-Aviv
Giuseppe RagusaRome
Robert Warsaw
Tourism Forecasting Part 2
R Package Recommendation Engine
IvanRussian Federation
The top 3 competitors for:
Philipp Emanuel WidmannHeidelberg, DE
Dr. ChristopherHefele, New York
Chris DuBoisPortland
Where’s Wally?Where’s Wally?
Jeremy Howard
Where’s Jeremy?Where’s Jeremy?
Where’s Wally from?Where’s Wally from?
Why am I tellin
g you this?
Why am I tellin
g you this?
Because New Zealand has a unitary health syste
m
Because New Zealand has a unitary health syste
m
– – unlike most other places o
n earth
unlike most other places o
n earth
You are in control of th
e whole syste
m!
You are in control of th
e whole syste
m!
E [email protected] T @nicholasgruen