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.