Insights
15 June 2012, Issue 1
In this issue:
Fix the super roof while the sun is still shining
Far, far from the troubles at the home front, Prime Minister John Key was visibly enjoying the military honours and his joint press conference with Chancellor Angela Merkel on his visit to Berlin last week. A better use of his time would have been studying the effects of delaying superannuation reforms.
Although last month’s budget once again confirmed the rising costs of superannuation, the Prime Minister ruled out reneging on his 2008 campaign promise not to increase the age of eligibility. It was not needed, as the system was working well, Mr Key told journalists on Tuesday.
If that sounded so familiar to me, it is because I am German. Germany still provides the best case study for a country that forgot to fix the pension roof while the sun was shining. Now it is trying to weather a demographic storm with a leaky roof.
Demographers have been warning since the 1970s that the country’s pension system was financially unsustainable. When it was introduced under Iron Chancellor Otto von Bismarck in 1889, life expectancy was barely 40 years, and you had to wait until 70 to be eligible for a small pension. Over time, German life expectancy almost doubled while the pension age was actually lowered to 65; pensions became more generous too.
You did not need to be Einstein, Rutherford or an actuary to see what was wrong with this scheme. Regardless, German governments pretended everything was fine. A pensions minister of the 1980s famously ran a big advertising campaign under the slogan, ‘One thing is safe: Pensions’.
As it turns out, the only thing that was safe was the hole it burnt into public finances. Pensions were originally designed to be an entirely contributions funded scheme. Today, more than 17 per cent of Germany’s federal budget is diverted to the pensions system to prevent it from collapsing under its obligations. Only in 2006 was the pension age adjusted to 67. Even this won’t come into effect until 2029.
New Zealand should study the German case study carefully. The Prime Minister is right when he says superannuation costs are affordable in the short term. But that’s missing the point. Germany could also afford its pensions in the 1980s – but it should have fixed the system before costs started spiralling out of control.
Once you realise the need to reform eligibility, the earlier you start the better. No election promise is worth keeping if it jeopardises the country’s fiscal future.
Should anti-dumping legislation be scrapped?
Since the 1980s, New Zealand has had a relatively free and open economy. Abolishing most forms of protectionism has benefited consumers and made the economy more resilient. However, remnants of the old edifice remain, including the trade remedies regime, commonly known as anti-dumping.
Trade remedies take three forms: 1) anti-dumping measures that stop goods from being sold for less in New Zealand than in their home markets; 2) countervailing duties that offset subsidies by foreign governments; and 3) safeguard measures that impose duties in response to sudden import surges.
The rationale for these measures is to level the playing field and give domestic firms time to adapt when faced with an influx of imports or subsidised competitors. The rationale is understandable – competing with highly subsidised competitors or foreign state-owned firms dumping products in another country does not seem fair.
However, these measures can come at considerable cost. Businesses can be incentivised to lobby for government protection when foreign threats arise instead of improving productivity and quality to stave off competition. This can make recipient industries less resilient in the long run.
Consumers also lose out on two fronts. First, they forgo the benefit of lower prices. Second, they have to fund bureaucrats to administer the remedies regime.
The good news is that the New Zealand government seldom uses trade remedies. The last safeguard measure, on men’s and boys’ underwear, expired in 1993, while the last investigation, into abrasive disks, was in 1995.
Countervailing duties see similar levels of use. The last full investigation, into canned peaches from the European Union, was in 1998. The resulting duties expired only in 2009.
Anti-dumping measures have been somewhat more heavily used – 12 are currently in place – but are still small in scale. As a result, New Zealanders are paying more for preserved and canned peaches (a popular target), wire nails, galvanised wire, plasterboard, bound stationery, diaries, reinforced steel bars and coils, and hog bristle paintbrushes. The paintbrush measures have been in force since 1988!
Parliament is currently debating the Trade (Safeguard Measures) Bill, which updates but perseveres with the safeguard measures.
Overall, it is time to scrap the regime altogether. Isn’t it enough that we have been paying extra for artificially expensive paintbrushes for the last 24 years?
Time for New Zealand to look East
‘Charles pushes past Wills as preferred successor’, read a headline in the Herald last Sunday. Following a wave of enthusiasm after the Queen’s diamond jubilee and last year’s royal wedding, the question of who will succeed to the British throne continues to capture New Zealanders’ interest.
Most kiwis still see New Zealand as part of the Old World and the wider Anglosphere. We’re also happy with the idea of being ‘reigned over’ by a British monarch, and are familiar with her likely successors.
But few would be so familiar with another historic leadership transition occurring closer to home, with much greater significance for our long-term economic and security interests.
Two factions of China’s ruling elite are immersed in a fierce lobbying battle behind closed doors to determine who will lead the country in the coming decade.
This once-in-a-decade affair is set to determine all nine positions in the powerful Politburo Standing Committee, and will be the first leadership transition of non-revolutionary era leaders. Most China observers see the likely outcome as an orderly transition to a factional balance between the elite ‘princelings’ – the privileged children of top revolutionary era leaders – and the Communist Youth League of China, drawn from China’s poorer, less-developed interior regions.
As the leadership transition approaches, Beijing faces immense social, economic and environmental challenges. The new leadership’s approach to these issues will have a major impact on the way New Zealand conducts its political and commercial relationships with China.
As a small, open economy, New Zealand is critically dependent on international trade. China is our second-largest trading partner after Australia, and with its economy predicted to overtake America’s as early as 2016, China can only get more important. Annual exports to China now top $6 billion, up by about $1.1 billion since last year, mainly led by the dairy industry.
However, the bulk of New Zealand’s businesses are SMEs, many of which have little or no experience in Asia, and are yet to take advantage of the lucrative opportunities presented by China’s growing middle-class market.
But it’s not a one-way street. We need to accept that the economic centre of the world is moving eastwards. We should embrace our growing Asian population and ensure that New Zealand is attractive to new Chinese investors, not just old Western friends.
All things considered …
- Green jobs are all well and good, but which jobs count? It turns out there are more petrol-based green jobs in the United States than you would think.
- It seems political correctness is a relative measure. In Captain Robert Falcon Scott’s time, the mating habits of penguins were considered too depraved to be published.
- It may not be depraved, but leaving your child at the pub does have a certain social stigma, even if you are the British Prime Minister.
- The Christchurch earthquake has seen a revival of trust and civil society down south. It has even produced its own charitably inclined caped crusaders.
- Oh, the irony! All those award-winning economists couldn’t save the Nobel Prize from quantitative easing – its returns have dropped and prizes are being scaled back.
- Money printing, oops, ‘Quantitative easing’ is also undermining the value of British pension funds. Whodathunkit? Not the Bank of England, evidently.
- But not all is bad in Britain. London Mayor Boris Johnson has offered asylum to New York fizzy drinkers, the latest victims of public healthistas’ war on pleasure.
- Speaking of war on pleasure, Wednesday’s Herald ran a thoughtful piece by the University of Auckland’s Dr Valerie Grant, reminding us that smokers are people too.
- And finally, following on from last week, the travails of Miss Universe New Zealand continue. The most beautiful girl should win, but it would be better if she were blonde.
On the record
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