Ban on selling farmland to overseas investors would limit the gains delivered by the 'magic of capitalism'.

Sales of farmland to foreigners has become a heated issue just before the election.

Rather than getting steamed up, we should think about what results from such sales, and also about what would happen if we banned them.

What happens when anyone buys an asset such as a farm? Basically, capital gets recycled. Capital comes in, courtesy of the new owners, and capital gets taken out by the vendors.

This recycling process also produces something new. The new thing, a benefit over and above what the buyer and seller get, is a net gain to the economy, usually in the form of more spinoff enterprises and jobs.


It happens because the buyer and seller both intend to produce more value as a result of the exchange.

The buyers get an asset they believe can grow more value than currently. The economy gains because of that additional value, usually in the form of new profits and jobs.

The sellers get capital that can be applied to growing other ventures. The economy gains because of those new ventures, again usually in the form of new profits and jobs.

This extra value, on top of the sale exchange, is the magic of capitalism, producing the benefits that sustain us all.

Who knows what spinoffs will happen as a result of a sales exchange? In the case of Lochinver Station, the sale proceeds are to be invested in developing warehouses, factories and other commercial assets with the development of an estimated 8000 new jobs.

But that isn't the end of the story - these effects will have further ripple effects of their own, leading to more development, and so on.

There is another by-product when foreigners buy New Zealand assets: they tend to turn into Kiwis.

We are maybe the most diverse country on the planet. We all came from somewhere else and over a shorter or longer time we all change into Kiwis.

What would happen if we banned the sale of farmland to foreigners? The first thing would be that the owners would no longer be able to sell to the highest bidder, so the value of farmland would drop. Farmland can be fairly highly geared, so the drop in value would hurt not only farmers but the banks that own equity in the farms, making mortgagee sales more a feature of country life.

The second thing is that the magic of capitalism, the thing that produces extra benefit when sales exchanges happen, would slow down.

Not only because there would be fewer sales exchanges, but also because of the chilling effect of such a ban, as overseas investors got the message that New Zealand isn't open for business.

This would be to our great disadvantage. New Zealand's development and infrastructure was founded on overseas investment. There is no way a country so remote and with such a small population could have developed our present level of cities, towns, businesses, farms, infrastructure and amenities without it.

If overseas investment was to dry up, we would start going backward. Relying solely on our own capital, business and farm growth would shrivel, fewer houses would be built, and fewer people would get tertiary education, advanced health care or other benefits of modern life.

It's a fact that New Zealand is very exposed to the world economy. That's a good thing.

It means we are out there selling our food, beverages, software, movies and other goods to global markets, making vastly more money than could be made just selling to ourselves.

It means we are in tune with changing market desires and able to capitalise on them quickly. And it means we can tap into foreign reserves to grow our businesses and lives further.

Being part of the world economy and being open to others coming here brings huge benefits, financial, social and cultural. It can be exciting and scary. We should overcome any fears and seek to make the most of opportunities afforded both here and abroad.

The alternative is to be a fortress, closed to the rest of the world -- eating our own mutton, drinking our own milk and walking to work on carless days.

The debate over selling farms to foreigners is a good thing if it helps us focus on the real benefits we gain from our openness to the world.

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Phil O'Reilly is chief executive of BusinessNZ.