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.

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).

@ben

@steve

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.

“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.

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.

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.