A good idea finally gets the nod

First, the good news.

On Thursday Paul Goldsmith, the Minister of Commerce and Consumer Affairs, announced a welcome change to New Zealand's anti-dumping regime. In future, the plan is, domestic producers won't be able to have cheap peaches or tomatoes or building materials shut out of the New Zealand market unless they can show that the damage to them is more than the damage to New Zealand consumers. Which it often won't be: there's only a  few of them, and there's lots of us. A process that has been much abused for protectionist reasons, both here and abroad, is finally getting defanged.

But why has it taken so long?

The Ministry of Business, Innovation and Employment, MBIE, first came up with options for changing the anti-dumping regime in the middle of last year: I wrote about them last July. It was extremely obvious at the time that this new "consumer interest" test was the way to go: as I said, "Free trade often struggles to prevail against producer interests, but even so this should be the easiest, "where do I sign", shoo-in of a policy contest that's ever been run".

Last year rolled by. In December I wondered where the dumping reform had got to: with a number of other small but promising reform proposals, it seemed to have gone to ground within MBIE. Finally, in August, over a year after the obvious way forward had been identified, it gets the tick, though it's still got to go through Parliament. It'll be next year at the earliest before the changes see the light of day.

I understand that there's got to be time allowed for public consultation, and for Ministers to get their colleagues' heads around things. I understand that the legislative hopper can get backlogged. But we like to think we're a small but informal and flexible country, and in any event we need to be if we're going to be internationally competitive. This speed of reform is just too slow.

Stats NZ has the good FDI oil

Last week I commended KPMG's analysis of the Overseas Investment Office's data on approved foreign direct investment (FDI) into New Zealand: it was a big improvement on what the OIO itself provided. And I went on to say that Statistics NZ ought to take the exercise over.

What I should have known, but didn't, is that Stats was already on the case, and already produces comprehensive data on the sources of direct investment. What's more, the official data are based on actual investments (the KPMG analysis is based on approvals of intended investments, which may not be carried through, though most will be), and also cover investments from Australia that don't turn up in the OIO data (because Aussie investors typically don't have to go through the OIO hoops for investments worth less than $477 million). There is one wrinkle - the data show the FDI by country of immediate investor, rather than by country of ultimate owner - and Stats tell me they're looking into the possible implications of that, but otherwise this is the heavy duty source of FDI info.

If you want to explore the official data yourself, you can start here, or you can go to Infoshare: select 'Economic indicators' and then 'International Investment Position', where you'll find a bunch of 'directional basis' statistics at the top of the list (I fell into a heffalump trap when I first went looking, hence the roadmap). In any event I've summarised the latest data for you in the graphs below. 

The first one shows the major inwards flows of FDI for the two-year period to March '14 (partly overlapping with the KPMG timeframe), and the other shows the outstanding stock of FDI in March '14. The data for the year to March '15, by the way, aren't far away (September 24).

 

I have little or no sympathy with anti-FDI agitation, which mostly seems to me either unpleasant or misguided. But putting that aside, and just looking at the facts, they don't show the Asian takeover that critics have been frothing about. The largest inflows in the past few years have come from the UK and Australia: Hong Kong's third, but some distance behind. And over time, far and away the largest direct investor into New Zealand has been Australia, followed by decent but much smaller chunks from the US and the UK.

Not that the facts ever get in the way of the xenophobes' ravings.

I'm not there! Are you?

Bryce Edwards' Twitter feed pointed me towards an interesting new piece of research from the Lifestyles Research Group at the University of Otago - 'Change, Challenge and Choice: A New Zealand Consumer Lifestyles Study'. It's an interesting insight into our collective beliefs and behaviours, and rings true, sometimes almost archetypically: I was amused to see that one of the statements New Zealanders most disagree with is "I keep my wardrobe up to date with fashion".

This is the sixth instalment of what is now becoming a pretty impressive longitudinal survey (dating back to 1979). The guts of it is a derivation of seven different consumer segments, based on cluster analysis of quite a large survey sample (2,036) and a large number of questions (almost 600). Here is the key result: there's more detail on each segment in the full paper.

The cluster analysis fits the data pretty well, and no doubt marketers, and others, will be thinking up cunning plans to pitch to the different segments.

I've got only one, eentsy issue with it: I don't seem to fit any of the boxes...what about you?

More on entry

No sooner had I posted about the competitive impact of new entrants on incumbents than the Commerce Commission published its fascinating analysis of what actually happened after the event to the mergers it cleared.

It's a tricky thing to do, because you can't see the (dreadful-word alert) counterfactual - what would have happened in the merger markets but for the merger. And even if you could, you'd still be left with the problem of sorting out what was down to the merger and what was exogenous, and you're very often not going to have the granular data you'd need to answer that question. So if you're going to try and figure out whether you made the right call, you're in all likelihood going to have to use some blunt instrument.

That said, blunt instruments can be surprisingly effective, and this latest exercise from Lilla Csorgo (chief economist in the Commission's competition branch) and Harshal Chitale (assistant economist, ditto) is well worthwhile: I can see other competition agencies following their lead. What the Commission did was this:

the Commission’s new approach to ex post reviews pulls back from the question of whether a particular decision was right or wrong. Instead it focuses on particular aspects of its original analysis to see which ones held true. In particular, the Commission reviews whether certain market conditions developed as predicted. This is done with the aim of refining and improving the tools and techniques used in making those predictions

The paper singles out 18 mergers involving 40 markets, where the decision hinged (broadly) on One Big Thing - entry/expansion, existing competition, divestment, and an aspect of countervailing power (buyers of the merged entity's product sponsoring new entry). Here are the results.

I mentioned yesterday that a competition authority doesn't want to be either congenitally upbeat or congenitally downbeat on the prospect of entry/expansion, and ought to try and steer some informed middle path. On these facts, maybe you could argue that the Commission was a tad too optimistic about entry/expansion turning up, with five instances where, in the end, it didn't - though as the paper notes, and I mentioned yesterday, in those five cases you couldn't "preclude the possibility that the threat of entry, or some other source of competitive discipline, helped assure pre-merger competitive outcomes" (my italics).

The analysis throws some light on why, in New Zealand circumstances, entry doesn't always happen when you might have expected it. Exchange rates can be wrong; general market conditions in the potential source of new imports may not be conducive; overseas companies may not give a monkey's about New Zealand (the paper puts this in proper 'opportunity cost' language). And it sensibly recommends adding those factors to the checklist of things to consider when you're weighing up the likelihood of new entry.

I liked this paper: if you haven't come across it before (it was presented at this year's NZ Association of Economists' conference), give it a go. As well as being intrinsically interesting, and a good example of identifying and institutionalising improved practice, it's a good accountability exercise: as it notes

Competition agencies have for years been under pressure to show their effectiveness by demonstrating that their decisions were “really the most appropriate ones that could have been taken.

It also raised something I hadn't thought about before. Competition authorities have generally moved on from mechanical analysis of mergers: there was a time when allowing five competitors to merge down to four, or four to three, or (especially) three to two, or (even more so) two to one, would have been completely out of the question. These days, things like the number of players and the concentration ratios take a backseat to competitive conditions, and rightly so.

But, as the paper says, there can be an underappreciated risk in this:

While there [are] often reasons to be concerned by mergers that result in duopolies, another is that the competitive consequence of withdrawal of one player, which can happen for any number of exogenous reasons, is monopoly. Given that not all exogenous changes are unforeseeable, greater consideration should be given to the possibility of such eventualities in more concentrated markets. 

That's good advice.

The threat of entry

We've just seen a classic example of how the threat of entry can impose competitive constraint on an incumbent - Air wars: Air New Zealand slashes fares ahead of Jetstar arrival.

In the airline market, it's clear that actual entry on new routes is not far away, but in the extreme case, incumbents might be held in check merely by the possibility of entry, without entry ever actually happening - the theoretical world of the 'perfectly contestable' market, where incumbents perpetually have to keep looking over their shoulder to check that 'hit and run' entrants aren't on their way.

I have to confess at this point that I get little red dots in front of my eyes when people diss the general idea of contestability. Of course it's true that the 'perfectly contestable' market is a straw man, and no regulator or competition authority in their right minds would rely on it when (say) thinking about approving a merger. But equally the general idea of contestability - which for me looks very like the reverse side of the barriers to entry coin - makes sense. My go-to resource, Viscusi/Vernon/Harrington's Economics of Regulation and Antitrust, says (p164) that "the theory of contestable markets is quite controversial", and that's certainly right, but it also says that "if nothing else, contestability has been instrumental in causing antitrust analyses to reduce their emphasis on concentration and take proper account of potential competition". Right on.

Doing so, however, is no easy matter for a competition authority, especially when it comes to the L-for-likely leg of the LET test: "The LET test is satisfied when entry or expansion in response to a price increase or other exercise of market power is Likely, and sufficient in Extent and Timely enough to constrain the merged firm" (from para 3.96 of the Commerce Commission's Merger and Acquisitions Guidelines). It doesn't want to be a soft touch - waving through every merger because it thinks someone or other will turn up sooner or later and compete effectively with the merged entity. As the guidelines say (para 3.98), "The mere possibility of entry or expansion is insufficient". Equally though it wouldn't want to go to the other extreme, either. There will be occasions (like this airlines one) when it can clearly see who's coming, and when, and how much. But there will also be occasions when there isn't a competition problem, even when the authority won't be able to tell exactly in whose colours the planes will be painted.

Isn't it strange, by the way, that every man and his dog can see the immediate and positive connection between competition and good outcomes for consumers when it comes to air travel, yet many of those same people would die in a ditch to stop the same competitive pressures bringing us better outcomes in health or education or infrastructure?

Well done, KPMG

First of all, well done KPMG for coming out with another edition of their analysis of foreign direct investment (FDI) in New Zealand, this time for 2013-14 (link to KPMG's summary here, and full pdf here). And well done again for serendipitously prompting what looks like some serious action to get better official data on what's going on.

On the data themselves, I must admit I was somewhat surprised, when I first heard the results on the radio, that Canada was the biggest single investor: I'd have expected Australia. Chances are, though, that Australia still is, there or thereabouts: as the report notes, following a sensible extension in 2011 of CER, Australian companies typically don't need to bother getting approval from our Overseas Investment office (OIO) for transactions under $477 million (and we don't need to get approval from their equivalent for anything under A$1 billion or so). That threshold was way higher than the $100 million that applied prior to March '13. So potentially there is a lot of Aussie investment in the $100 million to $477 million range that would have turned up in KPMG's analysis of 2010-12 but that won't have turned up in the 2013-14 data.

In any event, given the lumpiness of FDI deals, league tables are likely to jump around over short term time periods: over the longer haul there is some greater consistency. In the previous survey (summary here), North America, Europe and Australia accounted for some 70% of everything, and this time round they accounted for 59%, and would likely have been in the 60s somewhere if the Aussie threshold hadn't changed.

KPMG have done a fine job with the data, such as they are, though the data have their inherent shortcomings. As KPMG said, for many purposes the net data rather than the gross numbers are probably more relevant. The example KPMG give is this:

On a net basis, the numbers are considerably smaller, at around 35% of the gross numbers, though that probably won't stop the "we're becoming tenants in our own land" types from banging on about the gross numbers. The data are also approvals, not necessarily consummated transactions, and there's also the issue (perforce, given the Overseas Investment Office source of the data) that we don't know whether the stock of previous FDI has dropped as a result of later sales back to New Zealand entities. The data only covers new FDI, as approved by the OIO, and we don't know what happens to it later on.

All up, KPMG have provided a useful public service here, especially given that interest in the topic is very high: for my sins, I listen to most Parliamentary Question Times, and foreign investment is a recurrent theme (including today, re the possible foreign ownership of Landcorp farm disposals).

That said, I'm beginning to think that given the importance of these data, they should be taken over by Statistics New Zealand and developed so that some of the kinks can be ironed out. There's only basic summary info (here) provided by the OIO (none of the country-source or sector-destination data estimated by KPMG, for instance), which is not good enough: these are important facts collected on citizens' behalf by the OIO, and we deserve a better view of them. The politicians on all sides seem to be moving the same way and asking for more info, too, as this report from interest.co.nz says, but the pollies seem to be be leaving the OIO as the statistical source, and as things stand, that's just inadequate. Stats would also be well placed to deal with the confidentiality issues: it's something they handle all the time. And having these data produced to professional statistical standards would fit very well with Stats' existing compilation of our net international investment position (which you can find here).

So hats off to KPMG: a good idea well handled. And keep it up if there's no progress on industrial strength official data. But ideally I'd say it's time for Stats to run with it from here.

A credit boom?

Judging by recent page-views, and despite the fact that they have better things to do with their lives, people seem to be pretty interested in the overall topic of monetary policy - where it is now, where it should go, has it been managed well in the past, should we stick with what we're doing, what's happened to inflation and what'll happen next.

So I thought I'd chuck in another way of looking at current monetary conditions (and also because I've been having a wee exchange of views on Twitter about whether bank lending is growing quickly or not). Here it is: it's the difference between the year on year growth in private sector credit to NZ residents (or 'PSC(R)' as it's called), and the year on year growth in nominal GDP. It's sometimes been called 'excess credit growth', and it's positive when credit is growing faster than the economy as a whole and negative when credit is growing more slowly. The data run from March 1989 to March of this year (we don't have the June quarter GDP yet).

Credit growth is strongly linked to the business cycle, as you'd have imagined. As growth picks up, firms borrow to invest, there's pent-up demand from consumers so they borrow to buy things, and away we go. On occasions, the process gets carried away: that boom in credit in the pre-GFC mid 2000s foundered later, as (in particular) lending on commercial property went awry.

Should we be worried about the current rate of credit growth? I'd say not: given the recent strength of the economic cycle, and based on what's happened in other strong cyclical periods, you might well have expected it to have risen more than it actually has. There may be regional issues if (for example) the banks' increased lending has been heavily into the incandescent Auckland housing market, but there's little sign of an outsize national surge in bank lending.

The graph could be a little dated, and it's possible that this 'excess credit' measure may have picked up since March. The year on year rate of growth in PSC(R) has picked up from 5.4% in March to 6.4% in June, but on the other hand the March quarter nominal GDP growth was unusually low (2.2%) and may also have picked up since: net net the 'excess credit' measure may not have increased very much (we won't know for sure till we get June quarter GDP, which comes out on September 17). So no red (or even amber) lights flashing at this point, but something to keep an eye on a few months down the track.

29th is not good enough - neither is 27th

I'd no sooner posted a piece on our relatively poor infrastructure than I discovered that Ireland's National Competitiveness Council had come out with its latest annual assessment (pdf) of Ireland's competitiveness.

It picked up on exactly the same point: as it happens, Ireland scores almost exactly the same as us (a global 27th for them, a global 29th for us) on the perceived quality of infrastructure. Here's how the Irish showed the picture from their perspective: they happened to include us in their graph.

It's interesting to see that the rating of Ireland's infrastructure has improved, for a mixture of good and unfortunate reasons: "Perceptions about the quality of Ireland’s infrastructure have improved since 2010, reflecting both the impact of a decade or more of investment, and the reduced capacity constraints as a result of the economic downturn" (all quotes are from p17 of the report). Ours is also better than five years ago, but only slightly. Despite the Irish improvement, "Ireland, however, still lags behind the OECD average and scores significantly less than leading performers", and the same is true for us.

The Irish policy conclusion, which I think applies with equal force to us, was

As the economy continues to improve, further investment growth is forecast for 2015. However,projected public investment levels are insufficient to address the emerging infrastructural needs of a growing economy and population, particularly as a significant proportion of public funds will be absorbed in maintaining the existing stock, leaving less funding available for new investment. While recognising the importance of maintaining sustainable public finances, further additional targeted investment is urgently required to address constraints which could undermine the economy’s growth prospects, dampening productivity growth, increasing costs, and weakening Ireland’s attractiveness as an investment location (for both foreign and indigenous investors). To achieve the improvements required, prioritisation will be required such that over the medium term, investment is directed to those areas of the economy which can have the greatest impact upon competitiveness. It is critically important to put in place the appropriate policy and regulatory frameworks to facilitate this targeted approach.

Speaking of those "appropriate policy and regulatory frameworks", I discovered from Joel Mokyr's history of the Industrial Revolution, The Enlightened Economy, that the Birmingham Canal was authorised by Act of Parliament in 1768 and completed in 1772. I looked it up here: it was some 22.5 miles (36 kilometres) long, and took only 13 months from the first public meeting to regulatory approval. The first 10 miles were built in only 18 months, and the whole thing from approval to completion took four and a half years.

I seriously doubt we could match that today.