6 Concluding comments
Periodically, concern is expressed about New Zealand’s external account imbalance. However, what is sometimes neglected in this debate is the positive role that foreign capital inflows make to New Zealand’s economic development. When foreign funds finance expansion of the domestic capital stock, the rise in external liabilities is matched by an increase in the level of plant, equipment, buildings and dwellings. In turn, this allows for greater production of output, economy-wide. Extra real capital therefore leads to higher national output per worker and a rise in real incomes.
In this paper we have estimated these national income gains using a growth accounting approach. This yielded average income gains of $2,600 per worker arising on a cumulative basis from capital inflow over the period 1996 - 2006.
Similarly, from a stock perspective, as long as foreign capital inflow contributes to an enlarged domestic capital stock, the increase in external liabilities is matched by higher fixed assets in the national balance sheet. By constructing a prototypical national balance sheet, we estimate that growth in the value of New Zealand’s assets has greatly exceeded the rise in external liabilities to the extent that national wealth per head has risen by $14,000 in 2007 prices between 1996 and 2006.
The inference that the rise in external liabilities constitutes a macroeconomic problem implies that resident enterprises that have borrowed offshore to finance the acquisition of real assets have been acting imprudently, and have consequently put the economy at risk. Yet, in the case of foreign borrowing, borrowers, lenders and the institutions channelling the funds should normally be expected to assess whether the income stream generated through the use of foreign capital would be sufficient to meet future repayments.
The evidence presented in this paper is that the contribution of foreign capital has indeed been more than sufficient to meet the cost of borrowing. The contribution of this analysis is to dispel any fears that foreign capital may not have made a positive contribution to real national income. Any intervention which might limit the inflow, other things equal, would result in New Zealand foregoing the real income gain that accompanies the use of foreign capital.
Unfortunately there are no available data to indicate the destination of foreign investment; this would add a richness to the analysis in future research. Likewise the currency denomination and maturity structure of foreign borrowing would be a valid area for further work, but lay outside the scope of this paper. In addition, our results are “partial” in the sense they do not develop a full counter-factual position in the absence of foreign capital flows. This would be a much larger undertaking requiring a more general equilibrium model for simulation.
We have abstracted from the explicit identification of the contribution of human capital to economic growth in order to focus on the contribution of foreign and domestic capital. The impact of investment in human capital would be incorporated in the contribution of productivity growth.
The evidence we present meets the necessary condition for long run sustainability; ie, that the additional income generated is more than sufficient to meet the higher debt servicing obligations incurred by the use of foreign savings. However, this does not necessarily constitute sufficient grounds to take a benign position with respect to the level of the foreign debt. Whether the stock of accumulated debt represents a potential problem for the stable evolution of the economy is a different question. Furthermore, these results carry no inference about whether the national savings rate is optimal or not. While recognising the real concerns that might arise from holding an “excessive” level of foreign debt, this paper has focused on the contribution of borrowing. Here the evidence is encouraging.
