High immigration is masking poor productivity: NBR Rich Lister Stephen Jennings

NBR Rich Lister Stephen Jennings told TVNZ’s Q+A programme that high immigration is masking poor productivity.

“New Zealand has some fantastic strengths. There’s no denying that. We have tremendous institutions. We’ve had exemplary fiscal policies. Our debt situation is very good by Western standards," Mr Jennings said.

"So one has to acknowledge the things that have been achieved but those growth numbers are inflated by immigration, they’re inflated by the hours worked, and we had a huge peak in our terms of trade but we didn’t have a huge peak in our growth rates. So the warning was actually several years ago when we had best terms of trade for 25 years and we still only had moderate growth rates.”

Mr Jennings, the CEO of Rendeavour, says the government needs to fix the inequalities in our education system: “Because the range of outcomes that we have, and the correlation of outcomes depending on what earning decile you’re from, is as high here as anywhere else. So, our education system is failing people in the bottom two deciles. Our education system is failing Māori and Pacifika students. They’re being left behind to a degree you don’t see in other countries.”

RAW DATA: Q+A transcript: Stephen Jennings interviewed by Corin Dann

Watch the interview here

JESSICA Stephen Jennings is in the country to speak at a New Zealand initiative dinner.  Emerging markets are his expert area after building his business first in Russia and now Africa. But his speech also focused on what he believes New Zealand must do to lift its game. And as you're about to see, he has some very strong views.

STEPHEN I think the bigger context is the Western world as a whole is under stress. The Western model is breaking down, and we see that in the economic performance in the social divisions in the US, in the UK, and the very rational political discourse that’s emerging. But you have the same issues in Europe. And then, in our case, compounding those issues we’ve had this long history of very very low productivity growth. So our ranking in global per capita GDP has fallen very dramatically.

CORIN Well, what do you mean, ‘productivity growth’? When you talk about low productivity, what do you actually mean?

STEPHEN What we are generating for every hour we work, so what our inputs are generating. And ultimately, that is the determinant of our incomes, that’s the determinant of our prosperity.

CORIN Some might argue, though, that, in fact, New Zealand’s done pretty well, comparatively, compared to other Western countries, certainly. We’ve got through a global financial crisis, an earthquake. We’re growing at around 3% and have done for three years or four years now – and a big dairy slump, our biggest commodity export. Isn’t that a pretty good performance?

STEPHEN New Zealand has some fantastic strengths. There’s no denying that. We have tremendous institutions. We’ve had exemplary fiscal policies. Our debt situation is very good by Western standards. So one has to acknowledge the things that have been achieved, but those growth numbers are inflated by immigration, they’re inflated by the hours worked, and we had a huge peak in our terms of trade, but we didn’t have a huge peak in our growth rates. So the warning was actually several years ago when we had best terms of trade for 25 years and we still only had moderate growth rates.

CORIN What’s the consequences, in your view? Looking from afar, from overseas, you look back at New Zealand, where do you see it all ending up if we don’t change?

STEPHEN We were a top five nation in terms of per capita GDP. We’re now slipping out of the 20s. We have one of the lowest productivity growth rates in the world over the last 50 years. So we can fall from being a top 30 country to being a top 50 country. And that has implications for, for example, our education system. So our education system is clearly deteriorating very rapidly against international standards and the equity of the education system is deteriorating. So if we have that ongoing decline in productivity and growth, it will be almost impossible to fund a world-class education system, for example.

CORIN You talk in here about the contrast between the emerging world and the enormous growth that we’ve seen there and the fact that globalisation has helped the middle classes, particularly in China, hundreds of millions of people moved into the middle class, yet there’s been a stagnation in the Western countries, and you raise the question if that might even get worse if we see other third world countries develop and speed up. What’s going on there?

STEPHEN The emerging market’s share of global GDP is 60%. As recently as 2000, it was only 40%. And you’ve got billions of people in very low income emerging markets who are converging. So, you’ve got everyone in India, everyone in Sub-Saharan Africa. So we’ve got billions of people coming on stream. So the competitive and labour market pressures from those countries, that our country will be subject to, that process is at a very early stage, actually.

CORIN Is that the type of force that is driving people to Trump, that is driving Brexit, that this Western feeling that they’re going nowhere in the West?

STEPHEN Yeah, it is, and you’ve got a huge section of the community in the United States, but you’ve got the same thing in the UK, who really haven’t benefitted from growth and the elites and the establishment haven’t really designed policies to create a framework that is going to help those people.

CORIN So the thing that’s getting blamed for that is globalisation, and it is neo-liberal economics. But that’s, in some ways, a prescription that we need to do more of.

STEPHEN Globalisation helped create the unprecedented earnings and life expectancy and the benefits that we have today. Globalisation is not going to go away, because the emerging markets will be more ascendant, they’ll be more powerful. They’ll have more impact on the global economic framework. So we can’t fight that.  We have to make the most of it and we have got to get in front of some of the issues that have created such a mess in the US and the UK.

CORIN But, I guess, the point is we are seeing a backlash against what people call neo-liberal, free market economics, and the backlash is that there hasn’t been a trickle-down - that they said there was going to be - of wealth from the top down to the bottom. It’s all stayed up at the top 1%.

STEPHEN Well, we went through a period of incredible growth and raising standards of living for quite a few decades, actually, and the benefits of that were very widely felt. But in the case of New Zealand, it’s not about more market or less market, it’s about better government and it’s about generating better outcomes. Some of the problems we have here, our education problems are very serious. Our housing issues, they’re efficiency issues but they’re also income-distribution issues. The planning complexity that we have in the regions is stopping a lot of regional development.

CORIN Let’s deal with a couple of those. On the housing issue, you, in your speech, are a strong advocate for a capital gains tax. Now, you seem to be suggesting that’s an issue about equality, about the fairness factor involved in a capital gains tax.

STEPHEN We have a lot of glaring fairness issues. So we have one of the most unfair education systems in the developed world, full stop.

CORIN Why?

STEPHEN Because the range of outcomes that we have, and the correlation of outcomes depending on what earning decile you’re from, is as high here as anywhere else. So, our education system is failing people in the bottom two deciles. Our education system is failing Maori and Pacifika students. They’re being left behind in a way or to a degree you don’t see in other countries.

CORIN What is your solution to that? It seems to be you’re saying pay teachers more, performance pay. Are we saying more charter schools? Is that the prescription?

STEPHEN We are too scared in New Zealand and we’re too afraid in a lot of Western countries to confront the power of the teachers and the teachers’ unions. The teachers and the quality of teaching, as everyone agrees, is at the centre of a quality education system. But you can’t have a situation where 99% of teachers go through an appraisal process and are promoted. You can’t have a situation where good performance isn’t properly recognised and developed.

CORIN How would you recognise what a good teacher is, though? Because that is not an easy thing, necessarily, to do, because there is a subjective element to that.

STEPHEN I don’t think there’s a single sector I’ve been involved in in reforming where the starting position hasn’t been, ‘We’re different. You can’t reform us. The normal rules of economics don’t apply to us.’ You have countries where you have very good private sector education, including a lot of the emerging markets. They don’t raise that as an issue.

CORIN But there’ll be people watching who will say that’s the point, though, that you don’t want economics in education, that it’s a core public service, and as soon as you bring economics into it, you’re messing with it.

STEPHEN Well, it is a core public service, but the bottom 10% of teachers have a huge impact on average educational outcomes. And we have a system which enables the bottom 10% of teachers to stay within the system throughout their entire careers, and that is hurting our education outcomes, but it’s particularly hurting our lower income and disadvantaged people.

CORIN Coming back to the housing, would a capital gains tax slow the housing market, or are you saying that it’s about people making just too much money in housing?

STEPHEN The key issue with housing is about planning. Less than 1% of New Zealand is built upon. We’re not talking about Manhattan here. We’re talking about very simple regulatory issues. So, if the planning constraints were eased - in the case of Auckland, if it was easier to have greater density and greater height - those issues would go away very quickly. They’re not fundamentally complex issues.

CORIN But I guess why I’m coming back to capital gains tax is this is one of those issue that politicians in New Zealand simply do not want to deal with. We’ve got a bright line test, which is a sort of pseudo capital gains tax, but, heaven forbid, we better not call it that.

STEPHEN If we look at the experts, if we go back to the major tax enquiry, the McLeod Report in 2001, if you go back and read it, they say our current treatment of housing causes investment distortions, our current treatment of housing is inequitable. Clearly it is. And then they say it would be politically unpalatable to implement a tax on housing. But the reality is many other countries have taxes on housing. It’s a question of political will.

CORIN Do you see any of that political will here? The last government and this government have been very big on incremental change. They don’t want to make big, difficult, confronting changes.

STEPHEN I’m not really qualified, because I don’t live here, to comment on the detailed dynamics of politics. But it’s very very clear we have a set of issues that if we don’t address are going to cause major problems, including the kind of political chaos and lack of intelligent discourse that you now see in the US and the UK. We’ve got the opportunity to get in front of those issues. And these are issues that cut across left-right party divides. But if we don’t get in front of those issues, the economic chickens and the social inequality issues are definitely going to come home to roost for us.

CORIN You’re spending most of your time in Africa at the moment, and I guess that must be quite a contrast to what you’re seeing in the West – rapid growth. Just give us a sense of what it is like there to be doing business, what’s happening on that continent?

STEPHEN So, Africa’s been growing at 6% over the last 15 years. Six of the 10 fastest-growing economies in the world are African. Obviously from a very very low base, but, yes, very broadly based, steady growth, modernisation, political reform and the likelihood that that will continue for a long time to come.

CORIN Should Africa be on New Zealand’s radar? Is it too far away or should we be trying to get in there?

STEPHEN I think we have to accept globalisation is here to stay, and we have to get geared up. Our large exporters, our government agencies, have to be much more geared up to integrating with these fast-growing, new emerging markets, because they are the future. It doesn’t matter that it’s a long way away. They’re mainly English-speaking countries; many of them have a Commonwealth background. Big markets, low barriers to entry and a lot to do with agriculture, so another linkage for us

CORIN It’s interesting because you also spent a big part of your career in Russia and in your speech you do mention about Fonterra and some of your disappointments that they weren’t able to take advantage of the Russian market. You see some problems with Fonterra and the structure around that company?

STEPHEN In the time I was there, the Russian economy grew six times. When I went, Russia has a smaller economy than The Netherlands. It has one of the biggest open dairy markets in the world, and it’s an opportunity that we really lost by not having the vision and not being entrepreneurial enough. So Africa will be much bigger, but it’s at an analogous stage where our major primary producers need to go in and build brands, build distribution, build infrastructure.

CORIN But is Fonterra’s structure inhibiting it, in your view?

STEPHEN I believe it absolutely is inhibiting it. It’s not a brand-driven business. It’s not a highly entrepreneurial, risk-taking business. And if you benchmark Fonterra against companies like Danone or Nestle, which I’ve worked with in many jurisdictions, in many markets, there’s just a very different business philosophy. 

CORIN So what? Should we take away its monopoly power? What should be done with it?

STEPHEN I don’t think it should have any monopoly power, but I think we would be better off having several smaller entities which are forced to compete, forced to build brands, forced to be more innovative. If you look at our wine industry, look at our growth in revenues, look at our growth in production, look how high our price point is, but it’s been entirely driven by these very focused, brand-driven enterprises.

CORIN But wasn’t that the whole point of Fonterra? That if they merged, they would stop being able to played off by supermarkets in the UK?

STEPHEN Well, I think if you look at the wine industry and the value that’s been created and you look at Fonterra and what they’ve achieved, I think there answer is right there, actually.

CORIN You talk about Russia, Africa. We, of course, are focused heavily on China. Have we put too many eggs in that basket?

STEPHEN China has had a great run. It’s been growing in a straight line since 1978, but it has a lot of structural issues. It hasn’t begun its political transition. So there will be a major shock and a very major shock in China at some point. No one knows when that’s going to be. It’s great to have the China exposure, but we don’t want to be overexposed to China.

CORIN Is that why we need to be looking at Africa but also things like the TPP?

STEPHEN We need the TPP, but we need a different, more entrepreneurial approach to the emerging markets, generally. And in my view, we need a less top-down, group-think type approach that allows more experimentation, different solutions.

CORIN How would a government go about fostering that?

STEPHEN I think our trade capabilities can definitely be improved. My exposure to working with our embassies in our trade efforts – they’re pretty weak compared with what I’ve seen with many other countries, including the Australians. I don’t think we hunt as a pack in the way that we could. I don’t think we’re as transparent about what we’re trying to achieve. I don’t think there’s a lot of accountability. So I think that’s definitely an area that needs to be tuned up.

CORIN Is that just a problem of we’re a small country and we can’t go everywhere? Or do you think there’s just a lack of…?

STEPHEN I think there’s an issue in philosophy and accountability. Having worked with the Aussies in quite a few geographies on trade issues, they have very good people, they’re very punchy, and they do whatever it takes to achieve the objectives that they have in mind.

Tune into NBR Radio’s Sunday Business with Andrew Patterson on Sunday morning, for analysis and feature-length interviews.