MORE ON ECONOMIC JOURNALISM

Brian Fallow isn’t the only journalist given to economic howlers (see the last point in my blog of 28 January).

Here is Tracy Watkins in the Dominion Post the next day making the same mistake:

There are no guarantees, meanwhile, that their sale won’t ultimately exacerbate New Zealand’s foreign debt position, given the possibility of shares ultimately being traded into foreign hands.

And here is Simon Collins in the Herald of 29 January:

Partial foreign ownership of our economy will increase” because “New Zealanders will be free to sell at least some of their shares to foreigners.

To spell out the point I made in my 28 January blog, here are the answers to Questions 4 and 5 of this report by Phil Barry:

4 Hasn’t privatisation led to more foreign control over New Zealand?

No. First, privatisation does not lead to a change in net claims by foreigners over New Zealanders. Rather, privatisation changes the mix of foreign liabilities, with the proceeds of any investment by foreigners being used effectively to repay foreign debt. Secondly, regardless of whom the shares are sold to, the assets stay in New Zealand, as do the jobs and the government’s sovereign powers to tax and regulate. Further, there are very good reasons for allowing foreigners to participate in the sale process. The number of (potential) bidders is increased, thus increasing the likely sale proceeds for the taxpayer. In addition, foreign ownership facilitates the transfer of international industry-specific expertise to the domestic firm. This transfer will in turn also increase the expected revenue raised from the sale (in a widely marketed sale, the purchase price will reflect fully the discounted expected cash flows)50 and the expected efficiency of the firm. Potential ownership by foreign companies also broadens the pool from which managers can be selected. Listing the firm in foreign share markets may also offer some advantages through increased monitoring, potentially extended information disclosure requirements and a ‘deeper’ market for the shares.  Finally, it is not the case that all the Crown assets have been sold to foreigners. Analysis of the residency of the buyers of assets (refer Annex 4) shows that around two-thirds of the assets (by number and value) were sold to combinations of foreign and domestic owners and around one-third to predominantly (that is, over 75 percent foreign-owned) or solely foreign-owned concerns. 50 As long as property rights are expected to be secure: refer to Maskin (1992).

5 Hasn’t New Zealand lost out from the huge sums of money sent overseas in dividends by the former SOEs? Hasn’t privatisation been a significant factor behind New Zealand’s large current account deficit?

Some observers point to the dividends being paid to foreign owners by former SOEs  as ‘proof’ that privatisation has increased New Zealand’s current account deficit. But privatisation is not to blame for the deficit.

With a floating exchange rate, when a foreigner buys NZ$1 of New Zealand assets, they must exchange it for a NZ$1 claim on foreign assets. The net claims on New Zealand from the rest of the world are unchanged. It is only if subsequent returns on the New Zealand or foreign assets are different from those expected at the time of the sale that there will be a (positive or negative) effect on the current account. Returns on individual investments by foreigners in New Zealand and by New Zealanders offshore will, in some cases, have exceeded average market returns and in other cases they will have been below average market returns.

But, as noted in response to question 2 above, there is no reason to expect that the returns on investments in privatised assets in New Zealand will have systematically been above average market returns.  As noted in response to question 4 above, privatisation did not increase (or decrease)  the country’s net foreign liabilities. If the assets had not been privatised, it is true that there would be less dividends going offshore, but there would also be more interest payments going offshore as New Zealand’s overseas debt would be commensurably higher. The overall effect on the current account would be very similar.

I can see that demythologising privatisation myths among journalists (and many members of the public) may be a lengthy process.  I might start a special blog on it.

ECONOMIC JOURNALISM GETS A FAIL MARK

Some of what passes for economic journalism in New Zealand is not impressive.

A case in point is this article in yesterday’s New Zealand Herald by Brian Fallow. Headlined ‘Ideology and tribalism behind questionable policy’, it poured cold water on the government’s partial privatisation announcement.

‘Ideology’?  Around the world governments of all political persuasions have been getting out of running commercial businesses for over 25 years.  Labor governments at federal and state levels in Australia, for example, have been to the fore. The only ‘ideological’ underpinning of policies in the world today seems to be the socialist attachment to ‘public ownership of the means of production, distribution and exchange’ in a few countries like Cuba – although even Cuba is changing – and North Korea, and in the policies of the last New Zealand government.

“There isn’t all that much family silver left in the cabinet.” Well, just a mere $18 billion, according to the December Investment statement, all or most of which belongs in the private sector. ‘Family silver’: is this economic analysis or politicised rhetoric?

“It does nothing to deal with the … perilously high reliance on foreign capital and credit.” This is a reference to New Zealand’s large current account deficits and increases in external liabilities under the last Labour government. These were due in part to a loss of international competitiveness as the government turned its back on efficiency-improving reforms such as privatisation.

Then the inevitable foreign ownership bogey: “once sold, it would be difficult … to prevent the new owners from selling them to foreign investors”.  No explanation is given as to why foreign investment would be a bad thing. A large part of the shareholding of companies like Telecom is inevitably and desirably in foreign hands: it would be unwise for New Zealand institutions to hold large parcels in their portfolios.

Then a real howler: “To the extent that these shares end up in foreign hands, they would increase the country’s net foreign liabilities …”  But a foreigner buying shares has to purchase them in New Zealand dollars, and the seller than acquires the same amount of foreign currency assets. The country’s net liability position is unchanged.

Fortunately, the Herald did better in an editorial the same day which supported the privatisation initiative.

Myths about privatisation abound, even though they have been debunked many times. For a rebuttal of some of them, see this report by Phil Barry.

A Perspective on Ireland’s Economy

Philip Lane is Professor of International Macroeconomics at Trinity College Dublin.  He is also a managing editor of the journal Economic Policy, the founder of The Irish Economy blog, and a research fellow of the Centre for Economic Policy Research.  His research interests include financial globalisation, the macroeconomics of exchange rates and capital flows, macroeconomic policy design, European Monetary Union, and the Irish economy.

Last week he visited New Zealand as a guest of the Treasury, the Reserve Bank, and Victoria University.  During his visit he presented this guest lecture on the troubled Irish economy, drawing on his recent report to the Irish Parliament’s finance committee on ‘Macroeconomic Policy and Effective Fiscal and Economic Governance’.

Some highlights from his talk (also reported here by Brian Fallow in the New Zealand Herald) were:

• Ireland’s is a real depression: 15% fall in GDP 2007-2010
• The Celtic Tiger 1994-2001 was no mirage
• The domestic bubble (2003-2007) was partly the result of Ireland’s membership of the Eurozone, which produced interest rates that were too low for a booming economy.  When it burst, the problems were compounded by the global crisis
• The banking crisis followed.  The excessive government guarantees to subordinated and senior bondholders were a major mistake (although bank shareholders were punished)
• This precipitated the fiscal crisis, with successive austerity budgets and ultimately the EU/IMF bailout
• Ireland has ‘bitten the bullet’ with cuts to public spending, wages, the minimum wage and welfare (although the cuts return most payments to around 2006 levels).  This amounts to an ‘internal devaluation’ given the fixed currency, and has boosted prospects for the real economy
• The consensus in Ireland is to return to the core principles of the ‘Celtic Tiger’ era.

Asked whether Ireland would raise the 12.5% tax rate on inward investment, Professor Lane’s answer was, “never, ever”.

His account of Ireland’s rise and fall contrasts starkly with those of critics who saw Ireland’s predicament as a failure of ‘the neoliberal model’.

An example is this article by New Zealand journalist Alison McCulloch (‘Folly of Tiger is a warning for New Zealand’, New Zealand Herald, 24 April 2010).

I wrote this article in reply but the Herald declined to publish it.