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Cablegate: New Zealand Business Between Complacency and Fatalism

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PP RUEHRN
DE RUEHNZ #0009/01 0250333
ZNR UUUUU ZZH
P R 250333Z JAN 08
FM AMCONSUL AUCKLAND
TO RUEHC/SECSTATE WASHDC PRIORITY 0510
INFO RUEHSS/OECD POSTS COLLECTIVE
RUEHNZ/AMCONSUL AUCKLAND 0735

UNCLAS SECTION 01 OF 03 AUCKLAND 000009

SIPDIS

SENSITIVE
SIPDIS

FOR EAP/ANP

E.O. 12958: N/A
TAGS: ECON PGOV NZ
SUBJECT: NEW ZEALAND BUSINESS BETWEEN COMPLACENCY AND FATALISM

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This message is sensitive but unclassified. Please protect
accordingly. This message was cleared by Embassy Wellington.

1. (SBU) Summary. New Zealand's business leaders - like their
compatriots - are uneasy about their economy's ability to
compete in a globalized world. While the cliche is that cheap
travel and the Internet have made the world smaller, New
Zealanders still feel disadvantaged by their small size and
distance from the world's big markets. They don't agree,
however, on how serious the problem is and whether anything can
be done about it. End summary.

Not a Business Paradise Perhaps, but Not Bad

--------------------------------------------

2. (SBU) At first glance, it is hard to find much to fault in
the New Zealand business environment. While interest rates are
high (the New Zealand Reserve Bank's official cash rate is
8.25%), the economy is growing (at 2.7% annually as of September
2007), although not as fast as many would like. The education
system is generally strong and nearly all business leaders the
CG spoke to report no problem finding qualified new hires in
each year's crop of graduates. Unemployment (3.5% as of
September 2007) is amongst the lowest in the OECD and consumer
spending is high. New Zealand offers an extremely high quality
of life that attracts many expatriate professionals.

3. (SBU) Business leaders find the current administration
easier to work with than might be expected of a Labour
government allied with an environmental party. The regulatory
environment is transparent and predictable; officials are
willing to listen to, if not always act on, input from the
business community. Indeed, the World Bank ranks New Zealand
the second-easiest country in the world to do business, after
Singapore. New Zealand places behind only Hong Kong and
Singapore on the Heritage Foundation's economic freedom index.

4. (SBU) Yet conversations with Auckland business leaders make
clear that many share the wider New Zealand population's vague
anxiety about the robustness of their economy and ability to
compete globally. That is in part because much of the New
Zealand economy's "strengths" are due to underlying factors that
are much less positive.

The Flip Side of Success

------------------------

5. (SBU) New Zealand's low unemployment is a case in point.
Business leaders the CG spoke to attributed this not to the
ability of the New Zealand economy to create jobs but rather to
the ease with which Kiwis can head to Australia to earn
significantly higher pay. Depending on who is doing the
counting, GDP per capita in Australia is 25-40% higher than in
New Zealand; only Tasmanians, living in Australia's poorest
territory, have a per capita income lower than that of New
Zealanders. Auckland business contacts - whether from high-tech
firms, traditional manufacturers, or service industries - report
themselves unable to compete with salaries in Australia, leading
to a vicious cycle in which the emigration of the strongest
employees hampers profitability and thus wages which, in turn,
encourages employees to move abroad for more pay. According to
Statistics New Zealand, 3,000 Kiwis permanently migrate to
Australia each month, 70% more than four years ago.

6. (SBU) This wanderlust may also serve to limit how big Kiwi
companies can get. One partner at a major Auckland accounting
firm told the CG that his firm was spending more and more time
helping sole proprietors nearing retirement who are having
trouble liquidating their businesses. He described a generation
of founders who started small businesses in the 1960s and 1970s
and built profitable little companies with annual revenues
reaching tens of millions of dollars. Now looking to retire,
they find that their most obvious heirs apparent (either their
children or most ambitious employees) have left to pursue
options abroad. Lack of capital hampers consolidation within
sectors, meaning sole proprietors can't sell out to the
competition. This means septuagenarians who should be off
spoiling their grandchildren or hitting slices into the deep
rough are instead staying at work because they can't bear to
close up their companies. (Problems raising capital will be
discussed further in a future message on entrepreneurship in New
Zealand.)

7. (SBU) Likewise, business leaders attribute high consumer
spending to a splurge on imports made cheap by the strong New
Zealand dollar. While buying a new iPod or cell phone puts
money in the coffers of the companies that import them, the
strong dollar hurts New Zealand exporters.

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8. (SBU) Further, a number of business leaders complain that
New Zealand has become, as one put it, "a land of middle
managers." The removal of barriers to trade and investment,
particularly with Australia under the terms of the Closer
Economic Relationship, has seen many Kiwi firms snapped up by
competitors across the Tasman while multinationals run their New
Zealand branches as mere subsidiaries of their Australia
operations. Like the salary differential, this sends a signal
to the ambitious that, if you want to rise to the top, you need
to leave New Zealand.

What Brain Drain?

-----------------

9. (SBU) Not all business leaders are downbeat. Some are
dismissive of the "brain drain" problem, arguing that most of
the talented young people who seek their fortunes overseas will
eventually return - with lucrative skills and useful experience
- when they are ready to start families. The overseas
experience ("OE"), an almost universal Kiwi right of passage in
which young New Zealanders head abroad (mostly to the U.K.) for
a year or so of travel and work, is something employers simply
have to manage, many business contacts argued. IBM New Zealand,
for example, offers new hires a 12-month leave of absence after
only two years of employment. Many multinationals work to place
their New Zealand employees in excursion assignments in the U.S.
and Europe so their workers can satisfy their wanderlust without
leaving the firm.

10. (SBU) To some, Kiwi restlessness is an advantage. The head
of one American multinational was asked why his company
maintains an independent New Zealand operation rather than run
New Zealand as a subsidiary of Australia. He replied that his
bosses do not see his operation as only a profit center, but
also as a proving ground for young executives. He ticked off a
list of Kiwis now working for the firm in mid-level and senior
management all around the world. Part of the mandate from his
home office, he said, was to find good hires and be prepared to
pass them on to the parent company.

11. (SBU) Other business people are less concerned than their
peers about New Zealand's wage disadvantage and resultant brain
drain. They argue that the disadvantage of relatively low wages
is offset by quality of life. There is more money to be made in
London or Sydney, their argument goes, but it will all be spent
on housing costs and free time will be spent commuting.

12. (SBU) Finally, the most fatalistic repeat the oft-heard
mantra that New Zealand is very, very small and very, very far
away and thus cannot do much to change its economic
circumstances.

Is There A Fix?

---------------

13. (SBU) Not all business leaders were so complacent. Our
more action-oriented interlocutors, particularly those in the IT
sector, stressed the need for a government-driven, top-down
economic development plan like the strategies that, in their
view, led to extraordinary growth in places like Ireland and
Singapore. Aside from tax cuts, and better and cheaper
broadband, these bosses pushed for substantial investments in
infrastructure, including better roads and public
transportation, to make Auckland a "world class" city. (Not all
global economic rankings are as kind to New Zealand as the two
noted in para 3. New Zealand is 24th in the WEF's Global
Competitiveness Report, its score weighted down by poor
infrastructure, high taxes, and weak technology.) However, many
resentful non-Aucklanders believe that New Zealand's largest
city already draws more than its fair share of resources and so
won't support the investment needed to make it a destination for
global business.

14. (SBU) Many other leaders simply shrug when asked what must
be done. When the CG asked what Wellington should do
differently to help New Zealand business, many interlocutors
could not name anything besides lower taxes. Indeed, in a poll,
business leaders asked what they wanted from government mostly
came up with platitudes like "move away from bureaucracy" and
"waste less."

Comment: Complacent Pessimism

------------------------------

15. (SBU) What does this mean for the upcoming political
season? While the conventional wisdom holds that incumbents

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survive or fall on the public's perception of the economy, the
opposition National Party can't readily exploit gloomy economic
forecasts as a tool to easily win over the average Kiwi voter.
Former National Party leader Don Brash suffered political defeat
when conventional wisdom turned against him and his party
because of the public's (mis)perception that powerful business
interests were secretly at work attempting to sway voters to
National's side. Meanwhile, the Labour Party is not shy to
provoke the voters' antipathy to big business especially if they
anticipate political gain. In a bit of grandstanding, Finance
Minister Cullen couldn't resist using his bully pulpit to affix
NP leader John Key (a former Wall St. broker) with the epithet
of "rich pr!ck - sc*m bag."

16. (SBU) Most New Zealanders will tell you that mild pessimism
is a national characteristic; they are, as one said, "a wee bit
dour." Most Kiwis seem to expect that the overall economy will
be less successful than they might hope for. Optimism, like
excellence, strikes most Kiwis as more than they have a right to
expect. New Zealand Institute Director David Skilling laments
that New Zealanders are trapped "between complacency and
fatalism." Most Kiwis, in his view, either see nothing too
wrong with the New Zealand economy or believe the country is
powerless to do anything about it.
DESROCHER

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