A country like NZ, where the household savings rate is low, may still be able to have high levels of investment by attracting foreign savings and foreign investment. That's what National and ACT are saying they can achieve by removing lots of regulations around foreign investment and by holding the Invest NZ Conference in a few weeks time. There is just one hitch. It turns out, on average, that countries have been remarkably unsuccessful at doing so, even when they do remove restrictions and make it easier for capital to flow into the country, like the Coalition is now doing. In the "real world", it turns out that in countries with high levels of investment, it is more often than not financed by domestic, not foreign, savings. This is sometimes called "home bias".
That is, people's savings tend to be invested locally. It is called the Feldstein-Horioka puzzle and is one of the great unresolved questions in international economics. Take a look at your own investments - they are probably highly biased toward NZ. Take a look at one of the richest men in the US - Warren Buffet. Most of his investments are in the US. He remains a firm believer in the American dream, often saying to his shareholders that one should “never bet against America.” He ain't attending the Invest NZ conference. Charles Horioka, the Japanese inventor of the puzzle, visited Auckland University's Economics Department, mainly to see my colleague, Debasis Bandyopadhyay, last year, and I invited him to dinner. He is a former President of the Japanese Economic Association and is Director of the Asian Growth Institute. His co-author, Marty Feldstein was his Harvard PhD supervisor and a former President of the American Economic Association & Chair of the US President's Council of Economic Advisers.
So here is the graph (below) plotting domestic investment against domestic savings, using World Development Indicators (WDI). It is strongly upward sloping. That is, the more locals tend to save, the higher investment tends to be in their own country. Should they be lousy savers, then they cannot rely on domestic investment being financed by foreigners (in which case the graph would be flat). It is for this reason that folks like me support finding ways to increase the national savings rate. Although PM Luxon & Finance Minister WiIllis are often comparing NZ to Singapore, they've omitted levelling with the Kiwi public about the key reason for Singapore's success. Namely an exceptionally high domestic savings rate. In NZ we tax and spend about 34% of GDP. In Singapore they only tax around 17% of GDP and the other 17% goes into personal savings accounts that help pay for retirement and health-care. (Their corporate tax rate is half ours). Those funds are saved in the Central Provident Fund. Both the PM & Willis and their libertarian advisers strongly oppose Singapore-style mandatory savings accounts, which is the reason behind its exceptionally high standard of living and high investment rates. So although our top two politicians have never heard of the Feldstein-Horioka Puzzle, and would no doubt label it a bit of silly academic economics, since both of them have shunned our economic profession since being elected, it is actually an observed fact which may be the undoing of the Coalition's ambitions.
Click to view
That is, people's savings tend to be invested locally. It is called the Feldstein-Horioka puzzle and is one of the great unresolved questions in international economics. Take a look at your own investments - they are probably highly biased toward NZ. Take a look at one of the richest men in the US - Warren Buffet. Most of his investments are in the US. He remains a firm believer in the American dream, often saying to his shareholders that one should “never bet against America.” He ain't attending the Invest NZ conference. Charles Horioka, the Japanese inventor of the puzzle, visited Auckland University's Economics Department, mainly to see my colleague, Debasis Bandyopadhyay, last year, and I invited him to dinner. He is a former President of the Japanese Economic Association and is Director of the Asian Growth Institute. His co-author, Marty Feldstein was his Harvard PhD supervisor and a former President of the American Economic Association & Chair of the US President's Council of Economic Advisers.
So here is the graph (below) plotting domestic investment against domestic savings, using World Development Indicators (WDI). It is strongly upward sloping. That is, the more locals tend to save, the higher investment tends to be in their own country. Should they be lousy savers, then they cannot rely on domestic investment being financed by foreigners (in which case the graph would be flat). It is for this reason that folks like me support finding ways to increase the national savings rate. Although PM Luxon & Finance Minister WiIllis are often comparing NZ to Singapore, they've omitted levelling with the Kiwi public about the key reason for Singapore's success. Namely an exceptionally high domestic savings rate. In NZ we tax and spend about 34% of GDP. In Singapore they only tax around 17% of GDP and the other 17% goes into personal savings accounts that help pay for retirement and health-care. (Their corporate tax rate is half ours). Those funds are saved in the Central Provident Fund. Both the PM & Willis and their libertarian advisers strongly oppose Singapore-style mandatory savings accounts, which is the reason behind its exceptionally high standard of living and high investment rates. So although our top two politicians have never heard of the Feldstein-Horioka Puzzle, and would no doubt label it a bit of silly academic economics, since both of them have shunned our economic profession since being elected, it is actually an observed fact which may be the undoing of the Coalition's ambitions.
Click to view
Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi from where this article was sourced.
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