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Pressure is coming on the Government to improve business competition to push down prices for cash-strapped Kiwis as the cost of living emerges as the top concern in an election year.
Weak competition in some markets is making it easier for businesses to pass on cost increases to customers, Reserve Bank chief economist Paul Conway noted in a recent speech on inflation.
As a small, remote country, some industries in New Zealand are dominated by a few big players.
“When I look at the two building companies, the two supermarket chains, and the four banks that dominate their respective markets, some of that is typical of a country of this size – it’s not that unusual,” says Sam Stubbs, managing director of non-profit Kiwisaver provider Simplicity.
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“That means that actually government have a bigger role to play here. It’s not as if you just leave it to market forces to ensure competition.”
Stubbs says business activity is influenced by both the carrot and stick, and he doesn’t think there is enough of the latter.
“The great carrot for businesses is profit, but the stick is government and regulation, and you need a mixture of both. Where there’s not perceived to be enough stick, then business will take advantage of it and make super profits. It’s a very natural reaction.”
Economic Development, Science and Innovation Committee
Former Food & Grocery Council boss Katherine Rich voiced her concerns about supermarket covenants in June.
University of Auckland economics professor Robert MacCulloch says lack of competition is at the heart of the cost of living crisis.
“There is tremendous market power in this country around a lot of different industries and I don’t genuinely think National or Labour know how to deal with it,” he says. “That’s the crux of the cost of living issue – why are the mark-ups big?
“I don’t think either party really have a plan to reduce those mark-ups. They don’t know how to do it.
“It’s going to be probably the main issue of the election, that we’re just not that competitive.
“The cost of living is the top concern of everyone in the country now and my opinion of that is a lot of it has to do with this issue of lack of competition.”
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University of Auckland economics professor Robert MacCulloch says a lack of competition is at the heart of the cost of living crisis.
There have been some steps taken to try and make the country’s big industries more competitive, but commentators say little has been achieved as a result.
In October 2018, the Commerce Commission gained the power to undertake market studies, which look at factors affecting competition for particular goods or services to find out how well competition is working and whether it could be improved.
So far, market studies have covered building supplies, supermarkets and fuel retailers and there is speculation a study into the banking sector is looming.
But the market studies have limited power, with the commission restricted to making non-binding recommendations to the Government.
MacCulloch says the commission investigations have not resulted in anything dramatic that would change the dominance of key players.
Like Stubbs, he highlighted the dominance of the two main supermarket companies which operate New World, Pak ‘n Save and Countdown, building supply firms Fletcher Building and Carter Holt Harvey, and the main banks, Westpac, ANZ, ASB and Bank of New Zealand.
“It’s not as though either party is saying we’re going to break up any of those big companies, so I don’t think they have any plans to really radically change it,” he says.
Instead, he says they appeared to be addressing the rising cost of living through more welfare support to low income people.
“But the thing is, that’s not addressing the root cause of the problem,” he says. “That’s just saying, well, some people are bankrupting, and let’s give them some more higher benefits. But the issue is, why is the cost of living so high? Why can’t people afford it, to live better?”
MacCulloch says that while some countries like the United States had cheaper goods and services available for low income people, that wasn’t the case in New Zealand.
“My impression in New Zealand is that even for quite low income people, the cost of living is still very high,” he says.
“There are not really places you can buy extremely cheap food, you’ll have to bank at the big banks and if you want something fixed in your house, the tradespeople and renovations are so expensive for everyone. I think that’s what’s biting.
“If you’re low income here, there aren’t really cheap ways out.”
MacCulloch says political parties should be focused on why people were in trouble in the first place as increasing welfare payments made people more dependent.
“Why aren’t they able to get by themselves? Well, it’s because they can’t afford stuff. They’re not really addressing that,” he says.
“Things are just too expensive.
“The irony is it’s a cost of living election, but neither National nor Labour know how to lower the cost of living and paying more benefits to someone is not really addressing the root cause.”
Chris McKeen/Stuff
Simplicity managing director Sam Stubbs sees a role for Kiwisaver funds like his to disrupt markets and improve competition.
Stubbs says the Government could encourage competition through regulation allowing easier access to markets or by regulating pricing power where there is cartel-like behaviour.
He believes governments are not taking harsher action because they have been captured by industry lobbyists and are fearful of industries falling over or withdrawing from New Zealand if they don’t make enough money.
“The reason these businesses do these things is because it works,” he says. “They have learnt over a long period of time that if you call the Government’s bluff, they’ll blink.
“They need to get a bit more spine.”
He says until recently banks had operated in a very regulatory light environment because governments were scared of the big Australian banks exiting the country, leaving Kiwis in the lurch.
Westpac threatened to exit its New Zealand business when the Reserve Bank brought in tougher rules requiring it to hold more capital. The Reserve Bank stuck to its guns and Westpac remained.
Stubbs remains frustrated at the slow pace of change, lamenting that while all political parties appeared to support a banking inquiry, none had been announced.
He sees a role for Kiwisaver funds like his to disrupt markets and improve competition, noting that Simplicity is now providing mortgages and building homes for rent.
And he would like to see the Government act on Commerce Commission recommendations.
“These things seem to take an inordinately long period of time,” he says.
“It is simply too expensive to live in New Zealand and government doesn’t get away with saying it’s somebody else’s fault because they have regulatory and legislative powers.
“This is critical to the long-term welfare of New Zealanders. We have to address this because it’s one of the fundamental reasons why we have such a high cost of living. We just don’t have proper competition in a whole bunch of areas.”
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