Zoran Rakovic - Shadows Over Capital: How Regulatory Uncertainty is Stalling New Zealand’s Economic Future

From Lucas to de Soto, what the world’s greatest economists can teach us about our stifled growth.

New Zealand's prosperity is being quietly strangled—not by taxes, but by regulatory uncertainty. From Lucas to de Soto, the world’s leading economists warn: without clear, stable rules, capital flees. A must-read analysis of where we’re headed and why.

In the quiet calculus of capital, nothing is more chilling than uncertainty. Not tax rates. Not wage pressure. Not even geopolitical shifts. It is uncertainty—particularly the kind born of volatile, opaque, or ideologically reactive regulation—that paralyses decision-makers, suppresses ambition, and deters the very investment that underwrites national prosperity.

New Zealand, long admired for its clean institutional settings and lean public sector, now finds itself drifting into precisely the kind of uncertainty that the world's most respected economists have warned against for decades. The symptoms are familiar: flatlining productivity, anaemic business investment, rising informal economic behaviour, capital flight, and a growing chasm between economic potential and performance. The causes, though many, converge on a singular problem—an erosion of regulatory clarity, credibility, and constraint.

This is not a call for deregulation, per se. Rather, it is a call for intelligible, stable, and limited regulation—laws that can be known in advance, applied consistently, and reformed deliberately. To trace this path requires not only an account of New Zealand's contemporary failures but also a grounding in economic thought. For if we are to exit the mire, we must understand how we entered it.

Robert Lucas Jr., the father of modern macroeconomic expectations theory, warned against the folly of shifting policy goalposts. The so-called "Lucas Critique" taught us that economic agents are not passive—they respond to policy changes, not just in the moment, but in anticipation of what might follow. When investors detect that government rules may change, especially in response to ideological whims or coalition pressures, they defer investment. Capital becomes cowardly. In New Zealand, the lack of finality in planning law, tax settings, infrastructure priorities, and resource allocation has done exactly this. Property developers hesitate to break ground, waiting to see if zoning rules might shift. Exporters hold back on supply chain investments, unsure whether carbon compliance regimes will tilt again. Foreign investors reconsider entry, wary of a jurisdiction where legislation is written with the pen of politics rather than the chisel of principle.

Douglass North, another Nobel laureate, offered a broader frame. Institutions, he said, are the “rules of the game” in a society. These rules—formal laws, bureaucratic procedures, judicial interpretations—determine the incentives for economic actors. When those rules are reliable, investment follows. When they are malleable, manipulated, or misaligned with productive incentives, growth withers. In New Zealand, the proliferation of delegated authority, the blurring of lines between policy and politics, and the ideological capture of regulatory agencies have generated a dense fog over the “rules of the game.” Whether one is seeking to open a new manufacturing facility, establish a private school, or develop renewable energy, the regulatory path is anything but clear. And worse, it is not just unclear—it is capricious.

Consider the insights of Hernando de Soto, whose work on informality and economic exclusion in the developing world speaks volumes even in an advanced economy like ours. De Soto showed that where the cost of legal compliance is too high—or the outcome too uncertain—people will operate outside the system. He called this "dead capital": assets that exist, but cannot be leveraged, invested, or protected under law. In New Zealand, this is taking new forms. Small businesses, faced with ever-shifting regulatory compliance costs, quietly close shop or turn to under-the-table contracts. Homeowners, exhausted by planning rules and heritage overlays, abandon renovation dreams or pursue illegal builds. Māori and non-Māori entrepreneurs alike encounter red tape that makes legitimate investment so arduous that opportunity is lost before capital can flow. This, too, is dead capital—not in the technical sense de Soto meant, but in the deeper sense of human potential unrealised because the state placed its hand too heavily or too erratically on the scales of ambition.

Dani Rodrik, in his famous growth diagnostics framework, made clear that one of the key constraints on national growth is a lack of policy credibility. He was not speaking only of emerging markets. Any country that fails to signal clear, stable, and enforceable rules suffers from what economists call a “risk premium.” Investors demand more return to take on more uncertainty. If the uncertainty is too high, no return will suffice. In New Zealand, this is no longer theoretical. Infrastructure investment is delayed not just by funding bottlenecks, but by the unreliability of consenting processes and the unpredictability of cost-sharing mechanisms. Agricultural enterprises wait months—sometimes years—for decisions from regulatory agencies whose mandates are now so layered with social and political objectives that economic outcomes appear secondary.

Daron Acemoglu has warned, alongside James Robinson, that countries governed by extractive institutions—ones where political actors can alter the rules in their favour or suppress market entry to protect vested interests—fail to generate sustained prosperity. While New Zealand remains a far cry from the oligarchies or dictatorships that Acemoglu studied, there are signs of institutional drift. Lobbyists now embed themselves in the drafting of regulations. Public servants double as policy advocates. Civil society voices are granted veto rights over democratic mandates. These are not the ingredients of inclusive economic institutions, where rules apply to all and opportunities are open to the many.

Paul Romer, architect of the Charter Cities concept, saw a path forward. He believed in creating new jurisdictions within countries—zones governed by transparent, fixed rules that would attract investment and entrepreneurship in a way that the wider system could not. While his Charter Cities proposal has struggled politically, the underlying insight is profound: where regulation is predictable, growth flourishes. Where it is muddled, business stagnates. In recent years, New Zealand has floated regional economic strategies, special development zones, and urban intensification tools. But these are built on the same wobbly regulatory foundations as the national framework. No city, no region, no council, can guarantee the rule of law when the law itself is unclear or the mandate of enforcement is subject to political redefinition.

Friedrich Hayek, long before these debates arose, warned about the dangers of “legal positivism”—the idea that whatever the legislature says becomes law, simply by virtue of saying it. Hayek insisted on a deeper rule of law, one that required predictability, generality, and non-discrimination. A law that applies differently depending on your race, your industry, or your political affiliation is no law at all. A regulation that can be waived for some but enforced for others is not regulation—it is discretion. And discretion, in the hands of power, is a tax on the unconnected.

William Easterly, writing with the clarity of one who had seen the failures of aid-dependent economies, warned that top-down economic control leads not only to inefficiency but to the suffocation of human initiative. In our case, well-meaning bureaucracies now write economic prescriptions for problems they barely understand. Housing regulators dictate densities without consulting builders. Climate offices issue mandates without modelling infrastructure impacts. Economic development funds are granted not on return potential, but on compliance with non-economic criteria. The result is misallocation—of capital, of labour, of hope.

Simeon Djankov, through his work on the World Bank's Doing Business reports, offered a quantitative roadmap to regulatory reform. His data-driven approach showed which countries had made it easier to start a business, to get a permit, to enforce a contract. New Zealand once sat at the top of these rankings. But those rankings have since been shelved under political pressure, and our own performance has dulled. Permitting delays, council dysfunction, and the explosion of pseudo-consultative processes have all added friction. We are now an economy where the ease of doing business is more legend than lived experience.

Alberto Alesina’s work showed that political instability—particularly coalition fragmentation and lack of policy continuity—has a measurable impact on investment and growth. His insights apply with force to our current moment. As coalition governments bounce between ideological poles, and as ministers attempt to satisfy incompatible demands, regulatory frameworks bend and wobble. A proposed law enters Parliament in one form and exits in another, rewritten not by evidence but by exigency. Businesses—especially small and medium ones—watch in disbelief. How can they plan, hire, or borrow when the rules themselves have no half-life?

What binds these economists across time and ideology is a shared respect for the institutional scaffolding of prosperity. Not just free markets, but fair ones. Not just government, but good government. Not just regulation, but regulation that is clear, stable, and limited. New Zealand risks forgetting this heritage.

Our national story has long been one of pragmatic reform, institutional clarity, and economic agility. But if we continue to muddle our regulatory purpose, allow our legislative frameworks to drift, and subject investors to ideological guessing games, we will lose not only growth—but trust. And trust, once lost, is far harder to re-establish than a supply chain or an industry.

The solutions are not impossible. They begin with humility in law-making, discipline in delegation, and a return to the principle that the role of regulation is to clarify, not control. The cost of failing to do so is visible already: in lost investment, rising pessimism, and the quiet exit of capital that no headline will ever announce. This is not just an economic crisis. It is a crisis of confidence.

If Lucas, North, de Soto, Rodrik, Acemoglu, Romer, Hayek, Easterly, Djankov, and Alesina have taught us anything, it is that rules matter more than rulers. Ideas matter more than ideology. And certainty—blessed certainty—is the foundation on which a nation builds its future.

Zoran Rakovic is a structural engineer with nearly 30 years of experience, who has helped design and strengthen buildings across New Zealand—particularly in Christchurch’s earthquake recovery - while balancing life as a dad, granddad, and outdoor enthusiast. This article was sourced from his BLOG.