Hmmm, suspicious … (New Zealand as a financial hub)

I have nothing against the idea of a “financial hub” per see.  We can make an argument for “infant industries” or “positive spillovers” to justify government involvement.  However, the burden of proof is on those making the claims.

That is why the Herald story on this makes me suspicious.

Making New Zealand an international finance centre with “middle and back-office functions” in the funds management industry was one of the recommendations of the Capital Markets Taskforce report last month.

It found the “hub” notion viable but kept the detail of its advice on how to implement the plan out of the report, giving it directly to Mr Key instead.

Usually, people avoid putting things into reports and give them straight to ministers when their analysis is suspect …

Furthermore, look at these claims:

Mr Key says early advice is that between 3000 and 5000 jobs could be created if the plan comes off.

The benefit would be the creation of back-room jobs and taxing the fund administrators. The funds themselves would not be taxed.

On the face of it this is fine.  We shouldn’t tax the funds as we are just an intermediatary – we should tax the value added bit.  Cool.  Furthermore, there are jobs, implying that value is being added which creates labour income, cool.

However, HOW do they plan to make us a hub.  This is the important question.  Do these jobs come from subsidising an industry and thereby moving workers from one sector to another.  If so there are opportunity costs – and we better well have some damn good analysis about why market prices aren’t providing the right signal.

Now, it is trivial to state that a government action COULD have a positive impact – give me a possible policy and I can make up a model that would make it sound like a good thing to do.  In truth, we need details so we can ask if we think it WILL have a positive impact – a situation which is only a small subset of all the “could” situations.

And of course, to do that we would actually have to see some analysis – which we have been told was not put in the report.


10 replies
  1. Kimble
    Kimble says:

    NZ a hub for back office work for fund managers? I dont see it.

    Our financial regulations and requirements of disclosure are some of the weakest in the world. Is this a competitive advantage that puts us into a position to accommodate the requirements of dozens of different domiciles?

    Makes about as much sense as calling Las Vegas a US alternative to Mecca.

  2. ben
    ben says:

    The hardest argument to mount is whether being a hub will increase the wealth or incomes of New Zealanders. It is not as if the 3-5000 people this scheme will employ are currently sitting around idling. They are engaged in other activities. So the question is whether the hub arrangement could add value over and above the activities these diverse people are currently involved.

    Good luck with that analysis. I believe Hayek would tell us there is no way the smartest public servants could ever know whether their scheme will work or not. The details of time and place required are overwhelming.

    Indeed, there is good reason to think making NZ a financial hub will not add value: precisely because politicians think it’s a good idea. Governments consistently pick losers for a reason, which is partly that they cannot know enough to plan, because they face poor incentives in their selection, and they face a severe selection bias: individuals specialising in their fields should be able to pick winners long before Prime Ministers do, leaving only the dregs for politicians.

  3. steve
    steve says:


    “the question is whether the hub arrangement could add value over and above the activities these diverse people are currently involved.”

    Anecdotal and theoretical evidence would suggest additional benefits. Being the financial hub would create knowledge spillover benefits, captured by more than just the people employed in the industry. This would be a new source of knowledge spillovers, feeding innovation, and increasing economic growth. While there is unlikely to be evidence from data in NZ, I’m certain articles exist for financial hubs facilitating knowledge spillovers and improving economic growth.

    The question is whether government policy can overcome the tyranny of distance on this one and at low enough cost that we still reap the benefits – and this analysis is no doubt a bit hairy, but not something to ignore.

  4. Matt Nolan
    Matt Nolan says:




    My opinion is that nothing can be ruled out. However, without the actual analysis I can’t come out in favour or against it.

    My post is mainly criticising the way that they “kept the detail of its advice on how to implement the plan out of the report, giving it directly to Mr Key instead” – no matter what the policy was, this rings alarm bells.

    Also Kimble, I can’t see NZ as a financial hub either – and the last private sector attempt at that found that the difference in time zone was no advantage (as people generally wanted to be around closer to the opening of the American markets). Furthermore, the absence of large fixed costs makes me wonder why it wouldn’t just happen if it were optimal.

    The answer is of course “complementarity” – if one group enters NZ other groups have an incentive to. Now we have to ask whether the impact given these complementarities is worth it given the cost, and the possible reaction of other nations (who might see themselves as competing for the given industry).

    Again, the burden of proof relies on those making the claim of intervention – which is why hiding the detail concerns me.

  5. Kimble
    Kimble says:

    Craig Stobo reckons the structure is already there to tax overseas investors in overseas assets through NZ PIE funds at zero percent. He is right.

    NZ PIE funds already have to distinguish between overseas and domestic assets for tax purposes, and they are able to differentiate between tax-paying and non-tax-paying investors.

    But I still dont think the culture of disclosure in NZ will match with the demands of sophisticated foreign clients. And the time zone problems will persist, as I dont think NZ workers will be willing to work non-normal hours without substantially higher compensation. Then there are the potential problems with the image of our local trustees.

    Also I reckon there is little hope that jobs will follow the creation of a tax-exempt status. Why wouldnt the NZ fund structure just become a rubber stamp, with genuine back office work still being done cheaper overseas (perhaps in India or China, or even Malaysia or Thailand for that matter).

  6. Robbie
    Robbie says:

    This idea is deeply bogus. The race to offer tax concessions is very competitive and NZ will always be at a disadvantage as it is so removed from the markets.

    What do you want when you look for financial administration? Regions that have successfully attracted this sort of work (Ireland and Singapore) offer low costs, simple regulations, and proximity to markets, as well as some basic infrastructure. Of these the most important are low cost and low regulation. In neither of these areas does NZ have a competitive advantage. Tthe competition is fierce and the tax concessions offered by the likes of Singapore and Ireland are deep and have involved wholesale overhaul of financial regulation systems. Even if we were to create an attractive proposition, we would only do so until another government is even more desparate to attract funds administration work and is willing to offer even deeper concessions.

    What does offer significant competitive advantage is proximity to financial centres. Lots of funds are administered in London and New York, despite the high costs and complex regulation, because it’s just easier to have everything close together. In this respect NZ is at a significant disadvantage. It may explain why Australia with its comparatively large financial services sector has been more successful at attracting this work than NZ, despite the modest wage premium.

    Moreover, financial administration work is highly susceptible to recession. When the financial services industry takes a dive, work declines and less staff are required to administer the lower volume of transactions. The natural result is mass redundancies. Singapore and Ireland have been hit heavily during the recession as their financial services sectors are back-office based. The Singaporean press reported the redunancies by the tens of thousands each month during the recent GFC.

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