Capital Market Regulation: Less is Better

Please find attached a Business Forum column which appeared in the Dominion Post today, 29 January.

Capital Market Regulation: Less is Better

There has been much handwringing about the state of New Zealand’s capital markets. Typical laments have been the paucity of initial public offerings, the delisting of some major companies, and the acquisition of mid-sized firms by foreigners as they out-grow the New Zealand market.

These have been accompanied by calls for more government intervention.

There are issues for debate here but, like the guns of Singapore in World War II, much commentary is pointed at the wrong targets.

Some claims are particularly naïve. A common one is that Australia is awash with investible funds due to its compulsory savings regime, and as a result Australian firms are taking over New Zealand businesses.

But Australia has been running a sizeable current account deficit, indicating that it has a deficit of savings relative to investment. There are similar laments across the Tasman that foreigners are hoovering up Australian firms and that Australia is becoming a branch economy.

This is populist nonsense. In many respects the current account deficits of Australia, the United States and New Zealand are a sign of economic health: these countries are attractive to foreign investors who are willing to supplement domestic savings. The current account surpluses of Japan over the past decade have been a sign of a sick economy: Japanese savers have wanted to put their money elsewhere.

‘Branch economy’ talk is equally shallow. Ireland is sometimes described as a branch economy of the United States, but foreign investment has brought skills, technology and market linkages to Ireland, and been a major factor in its strong economic performance.

In an era of globalisation, economies and businesses are increasingly linked, reflecting the gains from specialisation and trade. It makes no more sense to call New Zealand a branch economy of Australia than to call Taranaki or Southland a branch economy of Auckland.

Contrary to some commentary, savings have been encouraged in New Zealand by moves such as an anti-inflationary monetary policy, the introduction of GST, lower income tax, and retirement income policy changes. The best evidence available indicates that New Zealand households are generally saving at adequate levels to fund their retirement, given current retirement programmes.

Moreover, there are no grounds for intervention to actively favour future consumption (the purpose of saving) over current consumption. Such action would be particularly harsh on people with low or modest incomes who already have enough trouble making ends meet.

In Australia, aggregate and household savings rates have both fallen since compulsion was introduced. And even if forced saving promoted economic growth (which is dubious), why would it make more sense than forcing people to work longer hours to increase output?

The McLeod Tax Review of 2001 found there was no evidence that New Zealanders are poor savers, and no subsequent inquiry has overturned that finding. It advised against the kind of special inducements for saving that the government has introduced.

The main issues lie elsewhere.

High rates of increase in government spending and over-taxation have reduced the potential growth of private savings.

Capital markets are suffering from over-regulation. The Sarbanes-Oxley legislation in the United States has seen the New York stock exchange lose business in favour of centres like London and Hong Kong. There are now moves to relax it.

The New Zealand stock exchange promoted or acquiesced in similar regulation in New Zealand, despite the absence of Enron-type problems. Takeover regulation, mandatory publication of executive salaries, continuous disclosure and more onerous audit requirements have pushed up costs and made public markets less attractive.

Private equity has been boosted as a result. Some of the best and brightest in business, like Graeme Hart, have gone private in the interests of privacy and greater freedom of business operation. The less regulated exchange Unlisted has attracted business.

Besides the Business Roundtable and the Shareholders Association, few voices criticised the expropriation of property rights in the Telecom unbundling legislation. There are similar proposals to expropriate forest owners’ property rights by preventing land conversion. Tax on foreign equity investment raises the cost of capital to New Zealand firms. The government is opposed to privatisation on ideological grounds. None of this is good for New Zealand’s capital markets.

In a recent Business Forum article, Rob McLeod noted that, in general, business lobbying in New Zealand has changed from promoting special interests to a concern for the national interest. A respected commentator observed that capital market lobbyists were an exception.

A focus on overall national interests, and on worthwhile goals such as lower and flatter taxes (which would encourage savings and reduce investment distortions in favour of housing), stronger property rights protection, the sale of government commercial operations, and less regulation would do more for capital markets than yet more ill-conceived intervention.

Roger Kerr is the executive director of the New Zealand Business Roundtable

ENDS

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