To grow strong businesses and more financially secure households, our capital markets need to be dug over and replanted. Last week's taskforce report offers a hoe with which the government can start digging
The government's economic platform for 2010 has been laid over the past year by the work of three taskforces – tax, productivity and capital markets. Politically, they are the government's finger in the wind, testing public response to the ideas mooted, and its softening up crews. So what to make of them?
Prof. Bob Buckle tax group won't release its report until late January, but it's dominated by a bunch of rich, white, male free-marketers. That sort of membership pre-determined the advice it will offer, and was a missed opportunity for genuinely fresh thinking. But it has been refreshingly transparent; you can see its work here.
Don Brash's productivity group issued a report that was little more than an ACT party political broadcast, harking back to the kind of policies that stretched the gap between New Zealand and Australia in the first place, as I've written previously. The government's already distanced itself from that taskforce's 'save the forest by cutting down the trees' approach.
Which leaves us with last week's report by the Capital Markets Taskforce, a group formed by the previous government. For me, it was always going to be the most important report and, happily, there's a lot to like in there. It's practical and seems to be more interested in new ideas, rather than old dogma.
As the report makes perfectly clear, we essentially want two things from our capital markets – they should help New Zealanders grow their personal wealth and they should help New Zealand companies source the investment they need to grow. At the moment, they're simply not working.
The clearest evidence of that is our booming property market. Every one of the $200 billion sunk in investment property declares that ordinary New Zealanders don't trust our share market. They're voting with their feet, and that's stifling start-up opportunities, national savings, export and productivity growth and local ownership.
The tragedy is that in its small, messed up way, our sharemarket at least hasn't been a bad place to invest your savings. Brian Gaynor did the sums for his Herald column earler in the month and found that in the past 15 years, New Zealand houses have risen in value by 159 percent. Great return. But together "all companies" listed on the sharemarket had grown by 200 percent.
Many New Zealanders, however, remain wary of the market, because they don't understand it in the way they understand bricks and mortar, and because it seems too loose, volatile and risky. And business leaders don't seem willing to share that risk (just look at Hanover).
Part of that looseness stems from an obsessive strain of thought in New Zealand public life that declares markets must be left alone, untouched and untainted by rules, government and any other representatives of the people. The flaw at the heart of that thinking is that markets are human-made constructs, not perfect entities that are handed to us by the gods, and so are tainted to begin with. I'm not sure whether I should be worried that the taskforce members didn't seem aware of this prior to commencing their work or delighted that they figured it out along their 18 month journey. But I was intrigued by this comment in the executive summary:
We have come to understand that, in large part, the way our markets work is a result of deliberate choices that we have made – as individuals, as businesses,
and government. Accordingly, different choices can substantially improve things.
Interesting, no? And essential they acknowledged that. We have alternatives.
One choice the taskforce would have the government make – and the one that got the most media attention – is partial privatisation of state assets. Given that we've got at least 18 months before the government could do this, given National's 'no privstisation' election promise, we have the blessed opportunity to have a careful and considered look at this. The taskforce is right to point out that such policies have been enacted in other social democratic countries, from Australia and Britain to Scandinavia. So how successful have they been? That needs investigation.
Many in cabinet would tear off down this path if they could, but the politics of ownership will make it tip-toe instead. It could be a happy half-way house that the public would support, but in return that public will require political protections to stop it being the thin end of the wedge leading ultimately to full privatisation. Perhaps a superior majority of two-thirds or more to be able to expand privatisation. Perhaps some explicit wording in whatever act is passed to allow this, or some covenant. But if this government doesn't want to spend the 2011 election campaign on the back foot, it will need to come up with some strong chains to anchor any part-privatised state companies in government ownership.
But with 60 recommendations, the taskforce had a lot more to say. Mary Holm's input on protecting investors seems to have been particularly welcome, and I did enjoy the frankness of some of the language about that. Put simply:
Our capital markets have not served retail investors well.
A unified, tough regulator is recommended, as is more independent advisers (Gaynor, again, deals with that better than I ever could here). Talk of improved financial literacy remains, and while that's all well and good as far as it goes, it's simply unrealistic to expect people outside the markets to understand their complexity. We ordinary punters rely on ethics, advice and enforcement.
It's rather knee-trembling to see the taskforce urging enforcement that is "swift, fair and visible". If it's not now, no wonder New Zealanders are reluctant to invest.
A new agricultural capital market is suggested (interesting comment here from Rob Hosking of the NBR), as is turning New Zealand into a hub for back office financial services. They're fascinating new ideas.
But then this country is full of good ideas. The point of all this is to capitalise on them. To actually do them. I'm told by people who know that, for all the criticism to the contrary, we've been pretty good at commercialising innovation in the past decade; it just takes time for companies to grow. Keith Ng wrote a great piece for Unlimited pointing out that 12 percent of our exports are sold by 12,000 companies.
In other words, there are green shoots all over the place. The trick is creating capital markets that offer the right fertiliser. The Capital Markets Taskforce seems to have that goal, spelling out specific targets to measure them by:
We would like to see 10 to 20 new companies growing to greater than $100 million in earnings over the next 10 years, with five going on to become billion-dollar companies. We want to see our public markets double in size over the next five years. Our recommendations can deliver that.
Our PM was sold to us as a markets genius; this is the area he knows best. Let's hope that come the new year John Key has the courage play the role of gardener-in-chief, using this report to boost growth.