To an economist, investment is adding to the stock of physical capital, in the form of buildings and plant, machinery, and equipment for use in the production of other goods and services. It can also involve adding to the stock of human capital. The purchase of financial assets and existing physical assets, including land, is not investment to economists.
Economists use the word ‘investment’ differently from the general public. To the public, an individual’s investment is the purchase of any asset with a view to gaining a return on it, whether the asset is a bank deposit, a share in a company, a house to rent out or land to farm. But to an economist, investment must increase the whole economy’s capacity to produce.
Changes in the stock of physical assets increase the productive capacity of an economy. In contrast, buying and selling existing assets, be they shares, second-hand machinery or land, does not add to the productive capital. It only involves a change of owner.
Economists exclude from the definition of investment assets acquired for consumption, such as a refrigerator bought for a house. But if a refrigerator was bought to allow a shop to sell more cold drinks, then it is an investment. When a house is built or enlarged it is investment, but if an existing house merely changes hands it is not. Economists call investment ‘capital formation’.
Investment can be broadly separated into increases in the following kinds of assets:
Investment is important to an economy for two reasons.
Low prices and rising production costs led farmers to increase livestock slaughter rates in the 1960s. This led to a rapid growth in meat output, but at the cost of future growth, because numbers of breeding stock were reduced.
Disinvestment, which is often called depreciation, can occur because an asset becomes worn out and its productive capacity diminishes, or because the technology it embodies has been superseded by new technology and become obsolete. When tractors were introduced onto New Zealand farms, draught horses became less valuable. An asset may also suffer economic depreciation because there is no longer a demand for the goods that it is designed to produce. For example a machine that made top hats depreciated in value when such hats went out of fashion.
At times New Zealand’s capital stock has actually decreased. In the depression in the early 1930s, and again in the recession of the early 1990s, the amount of investment or capital formation was less than the amount of disinvestment. As a result the value of total fixed capital stock decreased.
Earthquakes, fires and floods that destroy productive assets also lead to a drop in capital stock, at least temporarily. Investment activity to rebuild the capital lost will boost gross domestic product (GDP) but will not improve the overall productive capacity of the economy.
It is possible to describe Māori economic activity before Europeans arrived in New Zealand in terms of investment and disinvestment.
Examples of Māori infrastructure investment include pā fortifications, which involved trenching, terracing and building palisades. Pā protected gardens, and enabled large-scale crops, some grown for gift or exchange. Investment was also made in routes for the portage of waka (canoes) between adjacent bodies of water like the Manukau and Waitematā harbours, and Pelorus and Queen Charlotte Sounds, to reduce the costs of transport.
Investment in land improvement included clearing land for growing crops. Soils were modified in cooler areas where growing kūmara was a challenge, by adding small chips of stone which retained heat into the night and reduced the risks of frost. Low walls were built to provide protection for crops from winds.
Eel weirs and seine nets for fishing were sometimes constructed on a big scale.
The most marked forms of disinvestment were the hunting of moa to extinction and of seals to near extinction, and deforestation, which made some resources scarce. But they allowed increased consumption of other resources, such as fern root.
In response to the numbers of Europeans visiting New Zealand and settling in Australia, some Māori, especially in the north, produced potatoes and wheat for sale from the 1820s onwards. They invested in land clearance, and built vessels for the coastal trade and flour mills for grinding wheat. Church and school buildings were another form of investment.
Early European economic activity in New Zealand concentrated on sealing, whaling, flax buying, and the gathering and rudimentary processing of native timbers. These activities, except for logging, needed little in the way of physical capital apart from vessels, and these were generally imported.
From the 1840s organised European settlements invested in buildings such as houses, commercial premises, churches and government buildings, and in infrastructure including local roads, land clearing and rudimentary port facilities.
From around 1870 public and private investment grew rapidly as more settlers arrived in the country, and farming increased in economic importance. Residential property and agriculture were key private-sector investments. Rail dominated public investment, especially during the 1870s.
The disinvestment involved in the substantial forest clearance and swamp drainage in the North Island is hard to measure, and it is difficult to estimate whether this was sufficiently compensated by the rapid rise in agricultural production.
Private houses and farm assets such as woolsheds, yards, fencing and equipment like ploughs accounted for about 65% of total private investment spending over the last 30 years of the 19th century.
There was some investment in manufacturing, especially for the production of goods which were low-priced but bulky to ship, like beer, or for which production from largely local raw materials for the local market was efficient, like timber and joinery for buildings, and foods such as biscuits and jams.
From the mid-1880s until the mid-1890s there was a period of economic stress, culminating in a financial crisis in the banking sector in the mid-1890s. But while there was a significant drop in residential property investment from the mid-1880s to around 1895, there was no noticeable drop in farm investment, apart from the impact of generally falling prices.
Public investment was largely in infrastructure, in response to farmers’ need to transport goods to market. About 75% of public investment was in transport and communication, with rail alone accounting for approximately 40% of public investment spending.
In the early 20th century private investment was driven by population growth and changing economic opportunities.
The development of refrigerated shipping from the 1880s encouraged meat and dairy production, and as commodity prices rose from the mid-1890s there was investment in new stock and processing equipment. In periods when prices paid for agricultural output were especially high, such as during the First World War, there was an incentive to increase production. So investment rose in land improvements, farming stock and agricultural machinery.
The dredging boom prompted investment in dredges, crushing machinery and electrification. Coal mines and their related infrastructure were developed to provide fuel for shipping and rail as well as households.
As the area in native forest steadily diminished, from the 1910s both private and public investment occurred in exotic tree planting.
The ongoing growth in population prompted investment in residential accommodation, particularly in the rapidly growing cities in the North Island – from 1911 more New Zealanders lived in urban than in rural areas.
A sharp depression following the First World War affected the farming sector and depressed investment levels in the early 1920s. By 1923 investment had resumed.
Through the three decades before 1930, two new forms of energy, oil and electricity, prompted investment. Investment in trucks, buses, petrol storage tanks and service stations created a new ‘oil’ economy. Investment in electrical energy included hydroelectric power stations, the reticulation of electricity to rural areas and the electrification of industrial plants.
Investment collapsed again in the world-wide depression of the 1930s. This had a major negative effect on the level of investment. Private house building was drastically reduced.
There was some investment in public works schemes, established to keep the unemployed busy and reduce the risks of domestic unrest. But this spending was modest compared to the end of investment on railways, and sharp cutbacks on road building, public buildings and hydroelectric development. Public works expenditure, over £8 million in 1930–31, was less than £2 million in 1932–33.
The use of public works to stimulate the economy was boosted by the election of the first Labour government in 1935, and public investment reached over £10 million annually by 1938–39. But the government was facing financial difficulties.
The Second World War led to new investment in defence. But if war had not intervened the government would have had to curtail public works spending, and probably private investment, to help improve the balance of payments – more money was being spent overseas than was earned through exports.
The Second World War had countervailing effects on investment. House building and land improvement on farms largely ceased. Resources were diverted to the war effort. Construction of public buildings and hydro dams ceased, but road, rail and airport projects with military significance were completed.
There was some development of domestic manufacturing for supplying the war, or to provide essentials the war had made difficult to obtain. There was massive investment in military equipment and defence facilities for the New Zealand war effort, totalling nearly £33 million (almost $2.5 billion in 2009 terms). In addition, the United States invested heavily in facilities for its troops based in New Zealand or in action in the Pacific, including a number of hospitals which were converted to civil use after the war.
After the Second World War ended the government set about addressing a backlog in residential house construction and infrastructure investment. The housing situation was made worse by the speed with which returned service personnel formed families, and their own lack of resources to finance housing because of income foregone during the war. There was a surge of state house building throughout the country.
Depression, which had followed the First World War, was avoided. Economic conditions in the United Kingdom, New Zealand’s major export market, remained difficult for nearly a decade after the war, but it continued to buy New Zealand produce in large quantities.
US assistance to rebuild Europe under the Marshall Plan, and its decision to stockpile commodities as the Cold War turned into conflict on the Korean peninsula, led to buoyant times for New Zealand farmers, especially sheep farmers. The levels of investment in land clearing and farm equipment rose as farmers, whose ranks had recently been swollen by young and enthusiastic ex-servicemen, responded to the buoyancy by increasing capacity. Private capital investment doubled its share of national income between 1945 and 1951.
Construction of the Roxburgh hydroelectric power station on the Clutha River was announced in 1949, and completed in 1956. Seven dams were built along the Waikato River. The last of these, Aratiatia, was completed in 1964. The maturing forests of the Volcanic Plateau attracted both private and public investment, in the New Zealand Forest Products plant at Kinleith and the Tasman Pulp and Paper plant (part state-owned) at Kawerau.
From the beginning of the 1950s the post-war baby-boom generation started school, and there was a surge in public investment in primary schools to cater for the increased numbers. The bulge in demand for education gradually worked its way up the education system. There was increased investment in secondary schools from the mid- to late 1950s, and in universities from the mid- to late 1960s – Massey and Waikato universities were built, and Canterbury was relocated. In 1960–61 public investment totalled £73 million (nearly $2.9 billion in 2009 terms), a third greater than in 1951.
The balance of payments difficulties that had developed before the war returned, and foreign exchange control and import licensing (to control overseas spending) became entrenched as major features of economic policy for almost 30 years.
Over time import licensing became increasingly focused on protecting domestic manufacturers from lower-cost or more efficient overseas competitors. This promoted investment in manufacturing in New Zealand that would not have occurred without protection. Much of this investment was economically inefficient. People believed the country could benefit economically from hosting a car assembly industry, but with six or so plants producing exclusively for a tiny domestic market it did not. Similarly, investment in the production of cotton textiles did not provide an economic advantage to the country.
From the early 1980s until the mid-1990s private investment grew considerably faster than public investment. During the 1970s private investment accounted for about 65% of total investment, but by the mid- to late 1990s this ratio had increased to an average of 84%. Subsequently the ratio declined and in the 2000s the percentage of private investment fell below 80%.
The fluctuations were caused by a period of economic reform from 1984 until the mid- to late 1990s. There were tighter controls on government expenditure, and many government trading activities were corporatised and became state-owned enterprises (SOEs). A number of SOEs were privatised. The most significant changes were in transport and infrastructure – the telecommunications arm of the Post Office, Air New Zealand and New Zealand Railways were sold. Most electric power stations were transferred to SOEs. The change to SOE changed the classification of investment in these enterprises from public to private.
In the early 2000s New Zealand had a more interventionist Labour government which was keener on public investment in assets such as hospitals and schools than were its immediate predecessors. Air New Zealand and the railway system returned to public ownership.
There was a small investment boom in computer equipment during 1999. This was motivated by concern that computers and computer-controlled equipment needed to be upgraded to avoid ‘Y2K’ meltdown from older computers not programed to handle a calendar change to a new millennium.
New Zealand total investment, as a percentage of gross domestic product (GDP), is around the OECD median. The level of investment in plant, machinery and equipment, and housing as a share of GDP is similar to comparable countries. But overall business investment, including investment in other business assets, such as non-residential buildings, transport equipment, land improvements and intangible assets, is below the OECD median.
A comparison of New Zealand’s business investment with Australia’s is striking – the Australian level of business investment was almost 50% higher in the early 2000s. It is not clear why there is such a low level of business investment, but the high cost of capital in New Zealand (with interest rates usually more than 2% above other OECD countries) is one cause. The low level of business investment lowered labour productivity in the country.
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