How Viable is the New Zealand Economy in the Long Run?
A Projection Suggests that in 2050 New Zealand will be a very different place.
The Climate Change Commission’s recommendations to government in March 2021 were partly based upon a Computable General Equilibrium Model called C-Plan (Climate PoLicy ANalysis). I was irritated at the time that the details of the model were not published so that I could not evaluate what seemed to me a strange claim, that the impact of the Commission’s recommendations did not affect total output (GDP) very much.
More of the model’s details have now been released and I find that the impact claim applied to only a narrow range of policies such as the electrification of transport and GHG caps. I am not surprised that their impact was low on total output; they may have major impacts on our life style which are not captured by GDP.
However, the issue which was concerning me – the overall sectoral change – was not so directly covered by the scenario variations. It is this which I want to focus upon. My particular interest here is the future export structure of the economy. (So here, I am not particularly interested in the climate change issues.)
The C-Plan model has a base projection which they call the ‘Current Policy Reference’ (CPR) case. It gives a GDP track to 2050. The CPR was calibrated to align Treasury’s Long-Term GDP projections – a perfectly sensible thing to do. It projects an average volume growth rate of 1.9 percent p.a. The population rises to about 6.2m in 2050 so the per capita income growth rate is around 1.2 percent p.a.
However, the Treasury does not provide a breakdown of how much each sector – such as farming, manufacturing, services and whole lot more – produces. I am not sure exactly how the C-Plan modellers did their sectoral projections. Apparently there was some consultation with industry, but it was not nearly as comprehensive as the National Development Conference modelling (led by Bryan Philpott) in the 1970s.
While Treasury does not project exports of goods and services, C-Plan projects them to 2050. (Warning: the export figures are in $US not $NZ). Here are the shares of exports as C-Plan reports for 2017 and 2050 for the Current Policy Projection scenario:
Share of Export Revenue by Year
Sector 2017 2050
Services 15.8% 27.7%
Transport 5.2% 5.8%
Fossil Fuels 2.4% 2.1%
Manufacturing 23.3% 27.2%
Food processing 43.9% 26.1%
Agriculture 4.7% 6.2%
Other primary production 4.6% 4.9%
The last three lines combine to the total export output of the farm sector (but also a little from fishing and forestry). According to the C-plan the share of the primary sector will fall from 53.2 percent in 2017 to 37.2 percent. Other tabulations attribute the fall to a slow rise in dairy exports and a fall in beef and sheep meat exports.
I take it that the farm projections assume that, for various reasons, farm productivity is near a peak and cannot increase much further. The lower meat production seems to reflect production land being taken over by forestry. The projection involves a reduction in beef and sheep farming land use; there is not an offsetting increase in forestry exports.
Suppose farm production is near peak or at least cannot increase fast enough to fund the imports we require for our living standards. (The C-Plan model assumes Import-to-GDP and Export-to-GDP ratios for 2050 very similar to the level for 2017.) C-Plan fills the gap from the low primary-sector export performance by some growth in manufacturing and major growth in services.
Once upon a time I was an optimist about the manufacturing sector, but I have become more cautious. Assuming that we are not competing with East Asian manufacturing – which would mean similar wage levels – we have to go for high-quality, technologically advanced, products. As my Globalisation and the Wealth of Nations points out, this requires economies of scale, of scope and of agglomeration. As a general rule, New Zealand’s manufacturing sector is far too small to reap these. Additionally, the costs of distance are against us. There will be some exceptional performers: Fisher and Paykel Healthcare is an example but the equally fine Fisher and Paykel Appliances moved overseas because of such factors.
A larger population would not improve the prospects of manufacturing much, given that we are so distant from everywhere else. I am not even sure that Australian manufacturing is viable except that the economy has a large mineral resource base. The New Zealand resource base is primarily farming.
Manufacturing exports increasing slightly faster than the economy may be feasible, although the probability is that the whole of the manufacturing sector will expand slower than the economy as a whole. So the burden of the export gap in the C-Plan projection is filled by the service sector.
Unfortunately the model treats the service sector as a single activity so there is no indication what, among the diversity of services, the model has in mind when it projects a trebling-plus of service exports over the third of the century. There are a number of potential activities, including those that can be delivered by cable. Even so, today’s single biggest component of export services is the tourist sector, which vies with dairy products to be our single largest export sector. The obvious conclusion is that the model is projecting tourist receipts to increase substantially – say by at least 2.5 times.
Is that feasible? To answer, let us ignore the gloomier scenarios that a world permanently riddled by Covid-SARS might suggest. Can we envisage a New Zealand dominated by tourism with two-and-a-half times more tourists than our last good year of 2019; two-and-a-half times more hotels, two-and-a-half times more traffic congestion from tourists? Would we want to live in that New Zealand? At the very least we need to ask whether this dependence upon the tourist sector for the future of New Zealand is wise or whether we can gear up the rest of the service export sector to meet the sector’s challenge.
This raises the question of whether the economy the C-Plan projects is viable. If it is not, the probable resolution will be a smaller population, with less immigration and more emigration than the Treasury thinks. Ultimately, then, the question is what population can the New Zealand resource base sustain? It is possible that under the economic assumptions of the C-Plan projection, the population of New Zealand will be smaller in 2050 than it is today.
We can, of course, leave answering such questions to mañana, allowing the potential crisis of an inability to earn our way in the world to creep up on us. Too often that has been the New Zealand way; as it has been with climate change.
Footnote. International tourism is an intensive generator of greenhouse gas emissions from the international transport involved. However these emissions are not included in the New Zealand emission totals, which follow the UNFCCC guidelines of accounting for and reporting emissions. Even so, there is a sense that the New Zealand economy may still be depending on emitting GHGs in the atmosphere in 2050.