John Gascoigne: Only domestic investment can raise our economic fortunes

The experience of Ikea in Danville, Virginia proved foreign direct investment isn't necessarily the magic panacea for a small economy. Photo / Getty Images

Opinion

COMMENT

It was recently suggested New Zealand invite super-wealthy migrants who could invest $50 million of equity capital into productive assets to settle here. More recently, former Air New Zealand chief executive Rob Fyfe reiterated the need to attract investment and people to create jobs and bring value to New Zealand.

An endemic shortage of investment capital is the striking feature of New Zealand's economic history. This constraint simply reflects our low domestic savings. Hence the argument foreign investment is critical to meet our savings shortfall.

New Zealand's shortage of investment capital is the result of successive governments' failure to ramp up our savings rate through savings mobilisation. This is the process by which developing nations increase their domestic savings and channel those savings through financial intermediaries - principally development banks - into their productive sectors to increase national income.

The criticality of domestic savings in the development process cannot be overstated. High economic growth requires high savings.

New Zealand will only achieve rich-nation status through a huge expansion of its productive sector. We will prosper only as an export powerhouse; in other words, think big and plug into the world. And that will require massive investment capital. Hence misplaced calls for foreign investment.

There are two types of development strategies, autonomous, based on domestic investment capital and dependent, based on foreign investment.

Both historical and contemporary real-world experience warn against reliance on foreign direct investment ( FDI ). Foreign investors' primary concern is profit maximisation, not host nation development.

In the 1890s the infamous United Fruit Company invested extensively in the tiny Central American republics, establishing plantations and constructing roads, railways, telegraph networks and ports. Consequently, those tiny nations - the "banana republics" - grew but never developed, a pattern repeated throughout South America.

Ireland's spectacular economic transformation between 1987 and 2008 - the "Celtic tiger"- leveraged off FDI. Predictably, neoliberals ascribed that transformation to deregulation, low tariffs, low wages and low corporate taxes. But the Celtic tiger was almost entirely dependent on the inherent volatility of America's high-tech sector. When labour costs rose and the euro strengthened, the foreign-owned IT corporates - like reef fish - simply relocated to Poland.

Few linkages developed between the new high-tech sector and the Irish economy. Unemployment subsequently soared, inequality spiked and low corporate tax rates dramatically shrank the tax base, leaving Ireland exceedingly vulnerable to external shocks.

The iconic Swedish furniture manufacturer Ikea, lured by $20 million in incentives, built a massive plant in Danville, Virginia, in 2008. But their workers' not unreasonable expectations of generous Nordic-level wages, benefits and conditions were immediately dashed. While Ikea's unionised Swedish workers enjoyed high wages and five weeks' paid vacation, their American counterparts were paid the minimum legal wage with just 12 days' unpaid annual leave. Endless labour disputes, lawsuits, absenteeism, high staff turnover and rising costs forced Ikea to close the Danville plant in 2019.

New Zealand must implement an economic development strategy to become an export powerhouse. Rich-nation status or quaint economic backwater? It's our choice.

But the development effort has to come from New Zealanders themselves. The cargo-cult argument that we need foreign capital and migrants to create jobs and bring value to New Zealand is totally implausible. After all, there are no calls for the migration of Springboks to lift the national game and enhance our prospects for the next Rugby World Cup.

• John Gascoigne is a Cambridge-based economic commentator.