Who's been 'buying up' New Zealand?

There's a huge interest in foreign investment in New Zealand - it's front page news when Chinese investors aren't allowed to buy farms, or Asian investors are supposedly snapping up Auckland houses, and the piece I wrote about Statistics NZ's data on foreign direct investment has had by far the biggest number of pageviews of anything I've written recently. Yeah, yeah, yeah, I know, they're not Krugmanesque numbers, but still.

Yesterday Stats released an update to the numbers, showing the situation at the end of March '15 (the spreadsheet with the numbers is here). First, here's the total stock of foreign direct investment in New Zealand, which includes the likes of those farms.

One country overshadows everybody else. Australia has more invested here ($51.4 billion) than the rest of the world put together ($48.2 billion). There are bite-sized chunks from the US, Hong Kong, the UK and a range of other Asian and European countries, but the story starts and ends with Australia. Most of Australia's interest is the banks: I don't have a complete industry-by-country breakdown, but given that there's $32.1 billion of overseas investment in our 'financial and insurance services' sector, and that by far the bulk of that will be the Aussie-owned banks, you can say that about 60% of all Australian investment is in the finance industry.

And what about all those farms being sold out from under the feet of our own farmers? Nah. Total FDI in 'agriculture, forestry and fishing' is $5.9 billion, a small proportion (5.9%) of the total investment, and roughly on a par with foreign investment in the retail trade ($5.7 billion). 

It's also a very small proportion of the total value of farms and forests, which at a heroic guess (as I'm no expert on the data in this neck of the woods) I put at around $340 billion. That's 14.4 million hectares (2012 Agricultural Census, here) times an average price these days of some US$15,000 a hectare (which I got from this article), or NZ$23,500 or so at today's exchange rate. So roughly only 1.7% of agriculture is owned overseas, and of that I'd guess a fair slab is foreign institutional fund ownership of forests. The proportion of the archetypal family-run sheep and beef or dairy farms owned by overseas interests must be very small indeed.

For those who might be agitated that we're all in hock to the People's Bank of China, that doesn't show up, either. Here's the picture of total foreign portfolio investment - everything from government stock to listed shares to unlisted equity to money lent to New Zealand entities. Essentially it's the UK, the US and Australia, with roughly equal amounts, and there's a modest bit from Japan. Everything else is relatively insignificant.

The curious case of the concierge and microeconomic reform

Many years ago, I fetched up in Paris on a quiet summer Sunday afternoon, and went to look up a friend who was living there at the time.

When I reached her address, I found it was one of those old Parisian houses converted into apartments, with a large central door which (I guessed from the outside) would lead, on the typical Paris pattern, through an archway into an interior courtyard and to staircases up to the apartments.
The door was closed. Nobody came or went. I couldn't get in. And this is long before you'd get your mobile out and ring up to be let in.

In those days - and for all I know, still - Parisian apartment blocks tended to come with a live-in manager cum overseer cum general busybody, the concierge. I took a punt that the shuttered windows on the ground floor might be the windows of the concierge's apartment, and knocked on them.
Nothing happened. I knocked again.

The shutters banged open and the concierge appeared: indeed, the concierge of all concierges, a wizened old hag with a voice that could file horseshoes at a hundred metres.

I did my polite best to explain that I was a friend of Mademoiselle R, but she interrupted me.

"Do you work on Sundays?"

"No, Madame..."

"Neither do I!", and she slammed the shutter in my face.

In her grizzled Parisian way, she was doing no more than stating the law of the land: Sunday trading was (in theory) not allowed, until liberalised to a degree in 2009. The sorts of places you might imagine should be open on Sundays (cafés, restaurants, petrol stations, museums, markets, and places like florists and fish shops with perishable produce) were allowed to be open on Sundays as of right (there's a bit of extra legal hoo-hah, but that's the gist), and other places could apply for permission.

Fast forward to today, and France is embroiled in a series of industrial disputes over both Sunday trading and late night opening.

Sephora, a fancy jewellery store, used to keep its flagship Champs Elysées outlet open till midnight: it's been forced to close at 9.00pm instead (never mind that it did a good slab of its trade after 9.00pm). Two DIY/hardware places, the likes of our Bunnings or Mitre 10, have been told to stop trading on Sundays at their outlets around the Paris region, much as our own Ministry of Labour dogsbodies harass garden centres that open on Easter Sunday (to their credit, they've told the local tribunal of jobsworths to stick their ban).

Maddeningly, the latest dispute is about exactly the sort of place you'd imagine should be open 24/7. Monoprix runs a chain of those centre-city mini-supermarkets you pop into when you need to pick up dishwasher powder or a pint of milk on the way home. Now, it's been told that the stores that used to open till 10.00pm (and a few that used to open till midnight) will have to close at 9.00pm.

Even more maddening again, the court only got involved in the first place because of a demarcation dispute. Younger folk will likely not know what a demarcation dispute is: it's when there's industrial action because of a fight between unions as to who's got the right to something. We used to have a lot of them, as did Australia, as we'd both imported the virus from the UK. In Monoprix's case,
management had actually cut an entirely voluntary deal with some of the unions representing its workforce, which had included sizeable pay increases (the company says 25% to 35%), time off in lieu, and other bits and bobs. But the biggest union, the CGT, wouldn't go along. And under French law, it can stymie the arrangements Monoprix made with the other unions.

There's good news here, and there's bad news.

First, the bad news. If there's a single thing that many of the Eurozone economies could do to revitalise their moribund economies, it would be to deregulate their service industries, and on this evidence they're still not doing it. They're riddled with inefficient, inequitable service industries that are a drag on the economy in multiple ways (I'll do a post shortly on 'employment protection' arrangements). Every man and his dog, from the IMF and the OECD and the European Commission to their own 'wise man' panels have told them the same thing, and they're still resisting despite the damage the existing arrangements are doing to consumer welfare, employment, cost competitiveness, innovation, flexibility, and economic growth.

But second, on the more positive side, there is, perhaps, a smidgeon of evidence emerging that the great European public is getting mightily sick of all of this.

In the sidebar on the left there's one of those online opinion polls that newspapers run (in this case from L'Express). It asks for readers' views on Sunday opening.

Only 9% took the unions' line ("une atteinte" etc, "an attack on workers' rights"). 9% were opposed on the reasonable enough view that "Sundays should be special". And 12% couldn't give a damn either way (that's the "cadet de mes soucis" answer).

But 9% said it was handy for shopping (the "bien pratique" answer, which includes one vote from me). And fully 67% of the responses were in favour of Sunday trading as "makes good sense in a period of high unemployment" (I didn't pick that one, because my view is that it makes good sense at any time).

Maybe we're seeing the beginning of a pushback from consumers finally pushed too far by one idiocy too many. Maybe. We'll see how it plays out.

How microeconomic reform helps the young find jobs

There's quite a bit of revisionism going on at the moment. In potted format the logic is that deregulation of finance helped, led towards, or even caused, the GFC, hence deregulation in general (or liberalisation, structural reform, microeconomic reform, 'economic rationalism', Rogernomics, call it what you will) is a bad thing, too. Given that microeconomic reform always had its sceptics or outright opponents even pre-GFC, people making this argument have got the wind in their sails. There's some risk that this is becoming the latest conventional wisdom.

I think this line of argument is deeply wrong, and jeopardises many well-deserved successes for microeconomic reform.

Putting finance to one side for a moment, the reality is that in many markets deregulation has produced more flexible, efficient and equitable outcomes than previously, and it is becoming increasingly clear that the economies that took the liberalisation route is the 1980s and 1990s are making a better fist of coping with the post-GFC world than the ones that didn't.

Here's one particularly good, though socially tragic, example of what I mean.

In an earlier post about how the OECD has come up with a very good way of presenting data on unemployment rates in the OECD area, I mentioned in passing the unusually high rate of youth unemployment in France (with its fossilised labour market policies) and how it compared badly with the US's 'sack at will' regime, and in another I noted how France's largely unreformed labour market compared badly with Germany's, which has had a dose of microeconomic reform (adding to the efficiency of a market that was already doing pretty well).

Now four researchers - two French, two German - have just published a discussion paper, "Youth Unemployment in Old Europe: The Polar Cases of France and Germany" (available here) which shows, first, the poor youth unemployment and inactivity outcomes for France and the much better ones for Germany, and second, goes on to analyse why the two large Eurozone economies have behaved so differently.

The relatively poor French outcomes came despite France being hit relatively lightly by the GFC: as this graph from the paper shows, the immediate post-GFC hit to French GDP was significantly less than the hit to Germany's (though Germany subsequently has recovered faster and more strongly).

Here's the NEET (not in employment, education or training) rate for 20-24 year olds for the same group of countries: the French rate has generally been high, and in the past few years has been rising, while Germany's has fallen substantially.

Why these patterns? It's down to the microeconomics of labour market institutions and policies.
Germany has a respected, effective apprenticeship system that efficiently matches employers' needs and education provided. In France, apprenticeships are somewhat sneered at (I'm  paraphrasing here, but that's the gist) and the link with business isn't there: "in particular [French] SMEs are reluctant to hire apprentices"(p12).

A national minimum wage in France shuts out many low-skill young workers: "A large number of young people in France are not sufficiently qualified to be as productive as the minimum wage requires them to be" (p13). Germany has more flexible, locally negotiated minimum wage rates, with the predictable result that "The vast majority of skilled younger workers still have good prospects of entering open-ended contracts in Germany" (p13).

The French labour market is also highly segmented, with an 'insider' group (my description) of "employees in permanent contracts, protected by many rules, often leading to contentious litigation, and not effectively protecting employees while at the same time resulting in very uncertain outcomes for employers" (pp14-15), and everybody else on, at best, short-term contracts. Germany's no paragon, either, but it doesn't have anything like the rigidity of the French system, which again hits the young and inexperienced particularly hard.

It doesn't help that the French network of local placement offices is nigh on useless (much like large swathes of the rest of the French bureaucracy), though to be fair there probably isn't a lot they could achieve, even if they got their act together, when faced with all the other institutional rigidities of the French labour market. And finally the demographics don't help, either, with modest increases in the size of French youth cohorts in coming years (Germany doesn't have the same issue).

The bottom line is that "The situation in France is very alarming and the future prospects of French youths are increasingly dire. This is a socially explosive situation and politicians must act now to avert a lost generation" (p21). The authors are unambiguous about the reason for this social tragedy: "The roots of the problem are located in the structural design of national labor markets and education systems. Hence, Europe’s youth unemployment disease has to be cured with structural reforms" (p25, their emphasis), and they've got a bunch of reform proposals lined up (see the Table, p22), recognising that you can't readily 'cut and paste' things that have taken decades to embed, like the German apprenticeship system, from one country to another.

There are over 5.5 million young people unemployed in the European Union. For them, liberalisation and deregulation isn't the problem: it's the answer.

A cunning plan...

In many industries, consumers rely on effective infrastructure based competition. Or to put it in plainer English, if you're going to get a good deal on your mobile phone service, or on your internet service provider,  or on your airline, or on your pay TV, or your car ferry, or on your cataract operation, or on many other things you might want to buy, you need to be able to choose between companies that have rolled out their own equipment on the ground. Without their own gear actually deployed, in many industries companies can't compete for your business effectively.

There is an argument, and often enough I can go at least part of the way along with this, that incumbents don't actually need a real competitor on the ground, in order to be disciplined to offer you a fairer deal. The buzzword here is 'contestability': if a market is 'contestable', meaning that new entrants can give it a go without too much bother, then  incumbent rip-off merchants can't push their luck. If they do, grossly excessive prices and profits will attract new entrants, the last thing the incumbents want. So the incumbents will set their prices at some sort of less-than-screw-you-over-completely level, and we're all sweet.

Sometimes, this isn't a bad description of how the real world can operate. Contestability - the threat rather than the actuality of competition - may well figure into the the strategic planning of any incumbent with market power, and in their own enlightened self-interest, they might well figure that a better deal for their customers today might well be worth more to them in the long run than facing an aggressive battle for the market with a new entrant competitor.

The mere threat of competition, we can probably agree, can help keep powerful incumbents constrained to some degree. Fine. But is the threat as effective as the reality? Almost certainly not. Someone actually deploying planes or trains or ships or optical fibre or hospitals or web servers or power stations, and buying advertising time in the media and signing up customers - now it's game on. The incumbents had better sharpen their pencils, because if they don't, the new entrant, and the consumer, win.

This is all in the realms of Microeconomics 101, and to be honest you wouldn't need any course in economics to figure it out for yourself.

In the light of all of this, you'd think that, if a government was looking at a market where there were concerns about ripoffs, the one thing they would absolutely want to ensure was (at a minimum) the 'contestability' of the market. All of which makes the following news, which I've only just come across, so difficult to understand.

Here's the news: it relates to something that originally happened back in 2002, but has now become topical again. And it's about the long running issue of opening a second big airport in Sydney.

The incumbent Sydney Airport is desperate to avoid having a second major airport in Sydney, for, you might well think, obvious protect-its-monopoly reasons. The Airport, though, says it has legitimate reasons. Its chief executive recently said that there's no need for a second Sydney airport, as, suitably rejigged and improved, the existing airport can handle all the projected increase in demand. In any event, he said, as reported here, and which I didn't know until he said it, was ''remember, when the time comes for a second Sydney airport, we hold a first right of refusal to develop and operate it". And when I checked it out, I found that the airport's chairman had said the same thing earlier: Sydney "has first rights to operate a second airport within 100 kilometres of the CBD".

As the young folks say when texting, WTF?

Let me be upfront here. I don't have the time or inclination to fully explore the history of what looks like a bizarre policy decision, but I gather that the right of first refusal came as part of the overall package that the Australian Government offered to bidders when it sold Sydney Airport in 2002, and which one Australian travel journalist last year described as "an almost unbelievable lapse of judgement by the Howard government, which negotiated that clause".

That assessment sounds right from a competition and consumer perspective, although the Howard government very likely benefitted in dollar terms from doing what it did. Selling the airport with a monopolising provision attached probably helped to jack up the price the government got (A$4.2 billion, higher than initial estimates) compared to selling it with the prospect of a future competitor in its bailiwick. It's not the first time a government has gone for the money with an asset sale, and banked the higher price you can get for selling off a monopoly.

I suppose you could argue that the taxpayer didn't lose from all of this. The taxpayer benefitted from the high sale price and the paydown of government debt with the proceeds. You could argue that the public got a lump sum, up front, that compensated them for the likely price exploitation later on.

And it's even possible that these pre-emptive rights that Sydney Airport were given were actually part of some bigger regulatory compact (Sydney operates with curfew limits, for example), and that airlines and the general public got some compensating benefit (less noise at night, say) that might have justified this entrenchment of Sydney's market power. It's possible that the knackering of potential competition was worth enough to Sydney Airport for them to have offered some compensating value to its customers, or was fair compensation for other regulatory requirements.

"And then", as George Orwell once said, "you wake up".

Or to go back to the economics again, what you get with this sort of deal is the total loss of the 'dynamic efficiency' benefits of competition. Even if you believed (and it's a stretch, in my opinion) that citizens got enough in the sale price to pay them upfront for being exposed to the pricing and service behaviour of a monopoly, that is a static view. It ignores the innovation and service benefits that the public and the airlines would have got, over time, from two airports competing for their custom.

And if you want to see a real-life example in the industry, look at the budget airlines in Europe and America. Much of their advantage over the incumbent airlines came from a radically different business model, but they were also helped by being able to get good deals on landing charges from smaller, secondary airports. That's the sort of consumer-friendly industry change that you forego when you sign up to Baldrick-style "first refusal" plans.

Who do hotels rip you off?

Okay - I was down in Wellington on Wednesday, and staying overnight, so as to go to the Budget analysts' lock-up on the Thursday morning. As I was checking in at the hotel - not where I usually stay, since Wellington accommodation was apparently nearly all taken up, maybe because of the Budget, and I had to take what I could get - I happened to notice a sign at the counter, advertising the exchange rates the hotel used to convert US dollars or Aussie dollars into Kiwi. In both cases, the hotel offered a ludicrous rip-off exchange rate. According to the hotel, a Kiwi dollar would cost you US$1.05 or A$1.05, where in reality it actually costs more like 83 or 84 Aussie or US cents, if you were to buy it at a bank.

Why do hotels do this?

As I was thinking about it, it reminded me that I'd read something once, about a similar phenomenon - why does popcorn cost so much more at the cinema than it does in the supermarket? It took me a while to track it down, but it was a chapter in Steven Landsburg's wonderful book, The Armchair Economist: Economics & Everyday Life (The Free Press, 1994). One reviewer, by the way, described this book as "An ingenious and highly original presentation of some central principles of economics for the proverbial Everyman. Its breezy tone conceals the subtlety of the analysis. Guaranteed to puncture some illusions and to make you think", which you might think is nice but no more than the usual puffery of a new book, until you notice that the reviewer was Milton Friedman.

I'd like to be able to tell you that Landsburg had the definitive knock-out answer, but he didn't. He dismisses, for a variety of reasons, what you might call the layman's explanation, which is that the hotel guest, or the moviegoer, is the temporary captive of a monopoly seller. I didn't think that could be the answer, either: if there's workable competition in the hotel (or movie) market, and there likely is, then a hotel or cinema shouldn't be able to get away with it, since the hotel or cinema around the corner would scoop all the business at a better exchange rate.

The best Landsburg could come up with (and I haven't advanced the thinking much, either) is that the hotelier or cinema owner is pursuing some sort of price discrimination strategy in a world where willingness to pay for popcorn and willingness to pay for cinema tickets varies across cinemagoers, and that could explain why all the other hotels and cinemas do it, too. He may not have had a clearcut answer to what's going on here, but even so read the chapter. It's an excellent explanation of price discrimination, and the rest of the book is equally informative and entertaining.

What bothered me about this price discrimination explanation, if that's what's actually happening, is that it clearly has the capacity to backfire in a highly embarrassing way. Prices that consumers know are exorbitantly above cost have a number of unpleasant consequences for the companies that charge them. For one thing, consumers are likely to think: if they're ripping me off on popcorn, they're probably ripping me off on everything else. They'll start thinking: why pay to go to the cinema at all? If they're ripping me off, I'll rip them off: I'll download the film for nothing over the Internet. Or, in another context, one consumer making a huge song and dance in the newspapers about the $2,000 bill for their smartphone roaming charges, probably puts off many hundreds of other consumers from turning their phones on in Sydney or London. If the cinema owner had a strategy of lower-than-otherwise movie tickets and higher-than-otherwise popcorn, now he's brassed off the popcorn eaters, and he's left with lower revenue from the ticket-only customers. And in areas where there may be some doubt about the degree of workable competition in the market, you're positively inviting in the prospect of regulation with open arms, mobile roaming being a classic example.

Maybe the silly popcorn price, and the silly exchange rate, are rational strategies from some perspective or other, but if they are, they still strike me as high-risk strategies to pursue. I wonder if there's something else going on?

Pricing for profit

I've just read an excellent article in the Sydney Morning Herald about how the promoters of the latest, low attendance, City-Country NRL game could have made more money from the event and got more spectators along, if they'd paid more heed to some standard economics principles.

But I'm also reminded that you can push your luck on price discrimination: I appreciate it's been around for a while and maybe you've seen it already, but if not, give this a go.