Explaining the New Zealand economy to a Latin American

The following response to three questions (in italics) was published in a prestigious Uruguayan weekly newspaper Brecha. It may be of interest because I am responding to the Latin American economic debate which is slightly different from the New Zealand one (but only slightly). Sorry for the included material necessary for an audience outside New Zealand. Thankyou. Nicola, for checking the translation from Spanish

1. New Zealand had a downward trend in terms of GDP per capita and fell behind several OECD countries in the last quarter of the 20th century. What are the main factors that explain New Zealand's relative lagging after the 1970s?

 The New Zealand economy tends to grow at the same rate as other rich economies. But in 1966 it experienced a dramatic fall in the long-term price for wool, then its main export, amounting to a 16 percent reduction of total export revenue. This meant that resources had to be redeployed out of the highly productive – but now less profitable – sheep industry. That adjustment slowed down economic growth so that New Zealand grew more slowly than the rest of the rich economies for over a decade. The resulting structural adjustment has involved substantial diversification of New Zealand’s export products and destinations. The value of wool exports is now exceeded by dairy products, tourism, meat, horticulture, viticulture, fish, forestry and some services. (Forty years ago two-thirds of exports went to Britain; today the Chinese, Australian, US, Japanese, and Korean markets all exceed the British one.)

            The New Zealand economy is now again growing at about the same rate as other rich economies, but on a lower track because of the loss of productive capacity from the fall in the terms of trade and the consequential restructuring. Indeed it has grown faster than many rich countries since the Global Financial Crisis of 2008, in part because half of its exports go to Asia which was not as hard hit and also because of a strong demand for dairy products – especially infant foods to China. The level of public debt was low, making credible tax cuts possible. It has since increased, but New Zealand’s level is still low by international standards.


2. It has been said that the liberal reforms introduced by the Labour Party government in 1984 were a radical response to New Zealand's economic crisis and the subsequent economic stagnation. In the light of New Zealand's economic performances in the last three decades, how do you assess the results of liberal reforms regarding relevant economic variables such as economic growth, employment and income distribution?

Compared to other rich countries New Zealand was a laggard in the market liberalisation which followed the unwinding of controls imposed during the Second World War. The Third Labour government addressed the controls and other interventions but in the simplistic and extremist way of neoliberalism. The economy stagnated for seven years - also contributing to the loss of its international per capita GDP ranking. There is not total agreement why this stagnation happened. Some argue it was the incompetence of economic management, some that it was the inevitable consequence of the disinflation and liberalisation, some that it was the tail-end of the restructuring following the wool price crash.

            Instructively, many of the more extreme market liberalisations have been reversed (despite having entrenched strong self-interests for their preservation). Today’s New Zealand government would not be described as neo-liberal (except by anti-market extremists) but operates in the traditional New Zealand way of a close interaction between government and business. Some would call it corporatism, but the most common term is ‘NZ (Inc.)’.

            Once the neoliberal economic management ended, the New Zealand economy returned to a low-inflation growth rate similar to that of other rich economies, with an unemployment level a little lower than the OECD average. However the income distribution remains much more unequal than it was before the market liberalisation, because the tax and social security cuts benefited those on the highest incomes. In international terms New Zealand is not exceptionally unequal because there is no hyper-finance sector, while the investment market is too small and the richest have moved (and invested) offshore.


3. Several analysts suggest that the future of New Zealand's economy and its integration into the global economy depends on a debate between intensifying the exploitation of its natural resources (agriculture and tourism) and diversifying its exports of goods and services with more products intensive in knowledge and technology. What would be the best way for New Zealand to find a development path that puts it again among the leading OECD countries?

As has happened in other rich economies, New Zealand has had a major fall in the share of manufacturing in the last quarter of a century, in part because of a major reduction in the external protection regime in the 1980s, but also because its main source of manufactures is now East Asia. Aside from its primary-product processing the economy has never had very advanced manufacturing – typically it has had the sort of activities which low-wage East Asia has now taken over. A major factor has been that its industrial centres have been too small to generate the strong economies of agglomeration which are necessary for sophisticated manufacturing. (The largest city, Auckland, has just over a million population.) Given New Zealand’s location far from other industrial centres, it is not practical to be in the middle of supply chains. An additional issue is that the training of the labour force has been poorer than world-class manufacturing requires.

            Internally, the service sector has grown to fill the production and employment gap – in much the same way as happened elsewhere.

            Foreign borrowing has added to the available foreign exchange, although it is argued that it – and private foreign debt – is too high, both increasing the vulnerability of the New Zealand economy to world volatility but also pushing up the exchange rate, choking off some export activities.

            New Zealand’s foreign exchange earnings come primarily from resource-based exports (including tourism) with value added by the manufacturing sector. Primary exports can be very sophisticated. For instance, components of milk are stripped out and used to make pharmaceuticals. Its production often requires high standards of quality control. There have been a handful of incidents of contamination of processed milk – although surprisingly few, given the huge through-put.

            Moreover there is an optimism that primary export prices in the twenty-first century are on a long-term rise, with an expectation of the reverse of the slide in New Zealand’s terms of trade which occurred during the twentieth century. The case for the change rests on the movement of manufacturing to low-wage East Asia resulting in relatively falling prices for manufactures, while generating a rising demand for food which supply cannot keep up with.

            The problem with many of the primary-product exports is that their prices fluctuate much more than those of manufacturing (in essence because it is not possible to control supply for primary products in the way that is possible for manufacturing). That means New Zealand faces a higher degree of volatility of supply of foreign exchange than many other rich countries. This was a major issue in the twentieth century but, for various reasons, it has not been so significant recently until the last year or so when key dairy prices plummeted.

            Another worry is that there may be an over-dependence on the Chinese market – its recent slowdown has contributed to the slide in dairy prices. Its resolution is further export market diversification; New Zealand has maintained an aggressive program of negotiating free trade deals – the most recent was with South Korea.

            This has led to a contrary view that New Zealand should expand exports of products which are not from the primary sector. Much of the argument harks back to the twentieth century, ignoring the changing world economy – and ignoring the sophistication of the primary sector. Thus far it has not produced much of an export boom.

            Perhaps the most surprising ‘new’ export has been feature films of which Peter Jackson’s Lord of the Rings trilogy is best known. ‘Wellywood’ (Jackson lives in Wellington) seems to have been serendipitous (it is where he grew up), although there has been some government money (including tax exemptions without which the industry would have moved offshore to more favourable tax locations, so New Zealand would not have got the tax revenue anyway).

            Making a film is not only a sophisticated knowledge-based activity but it requires international cooperation; for instance, the day’s filming may be sent by cable overnight to the US to be processed. This suggests that probably any ‘new export’ sector will be in sophisticated knowledge-based services, dependent on international IT connections – sometimes called ‘weightless exports’. There may be no ‘block-buster’ foreign-exchange-earning industry but lots of middle-sized businesses with their development, design and control based in New Zealand and any manufacturing offshore.

            Even so, it seems likely that the primary sector will remain the chief earner of New Zealand’s foreign exchange, although it will be a very different sector from that of one hundred years ago in terms of what, how and for whom it produces and its vital dependence on a knowledge base.