VZCZCXRO0722
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 
 
AUCKLAND 00000009  001.2 OF 003 
 
 
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. 
 
AUCKLAND 00000009  002.2 OF 003 
 
 
 
¶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