In recent years the New Zealand economy has benefitted from tailwinds – strong Chinese demand for milk powder and raw logs, net inward migration driving up house prices, and, sadly, the need to rebuild our second-largest city. But should we be so happy to rest on our good fortunes, or are there long-term risks we need to manage? If so, how can we address them?

History teaches us that bad things can happen to small, wealthy agricultural exporting nations that don’t succeed in evolving up the value chain. Argentina is a great – and troubling – example. In 1900 it was one of the wealthiest countries in the world, with GDP per capita close to the US. At the time, Argentineans were living well off beef and wheat exports. But its agriculturally-based, heavily overseas-owned economy failed to generate new sources of wealth.

The result was a steady, century-long relative decline in living standards, punctuated by the occasional economic crisis:

Source: Wikipedia
Source: Wikipedia

Could the same thing happen here? It’s certainly a risk. Arguably, it is already happening. In the 1970s New Zealand’s GDP per capita began to slide below the OECD average, and it’s never really recovered in spite of the radical interventions of successive governments.

Can we do anything to avoid turning out like Argentina? In short: Yes, but it will take some re-thinking. Most importantly, it will require New Zealand to invest in better cities, as cities are the engines of future economic growth. Let me explain.

In 2008, a new National government promised that it would achieve two things by 2025. It would:

  • Raise New Zealand’s economic growth rate to enable it to catch up with Australia in terms of GDP per capita
  • Boost exports to 40% of GDP, a significant increase from contemporary levels of around 30%.

A lot of people welcomed this – it seemed like the sort of ambitious, long-term programme that could prevent us from becoming Argentina. Unfortunately, we haven’t heard much about the government’s 2025 targets in the last few years.

As it turns out, closing the gap with Australia and transforming New Zealand’s export mix is extremely hard. Here’s a graph of New Zealand’s exports of goods and services as a share of GDP. As you can see, there has been precious little export-led growth over the last six years:

Source: World Bank
Source: World Bank

In a recent column for the Herald on Sunday, business journalist Rod Oram diagnosed the reasons for the failure to lift exports. In essence, we’re increasingly reliant upon a small number of commodified agricultural products. Like Argentina, we are currently failing to generate new sources of wealth. Oram is worth quoting at length:

The trade data are revealing. In the year to June, the value of our exports to China rose 50 per cent, dairy exports were up 40 per cent, logs 20 per cent and our overall exports were up 12 per cent, thanks to the commodity spikes.

But net of spikes, the data show we are becoming increasing dependent on selling fewer, simpler products to one customer. China is our largest trading partner, taking 23 per cent of our exports in the year to June. While China accounts for some new business, a big chunk is merely redirected from other markets.

The growing dominance of commodity dairy exports is striking. They have doubled their share of our total exports over the past 20 years to about 27 per cent today.

However, the upside is limited. For example, Dairy NZ estimates milk production will grow at 2.5 per cent a year, below its long term average. This reflects farming limits imposed by new freshwater regulations and less land available for conversion to dairying.


We need a broader, more sophisticated range of exports to overcome our commodity constraints. But we’re going in the opposite direction. Manufactured goods have fallen from about 37 per cent of exports in 2003 to about 22 per cent today.

This increasing simplification of our economy towards low value commodities has accelerated in recent years, according to data from a long-term study of countries’ economic complexity run by Harvard and the Massachusetts Institute of Technology.

In 2008, we ranked 39th in the world in terms of economic complexity, in the company of countries such as Brazil, Russia and Greece. But by 2012 we had fallen to 52nd.

This is the kind of thing that sets off alarm bells in the minds of economists. But how can we fix it?

The one thing that will not work, long-term, is continuing to rely upon milk powder and raw logs to support our living standards. We can’t keep doing the same thing and hoping for different results.

Fortunately, New Zealand has a unique opportunity to do things differently. Investing in better cities can create an environment for the development of new ideas and the growth of new, innovative businesses. Agglomeration and productivity growth in large, dense cities is an integral part of economic growth in the 21st century.

If we look beyond our own dairy exports, we can see the role of agglomeration everywhere. Economists have extensively studied the role of cities in economic growth, and businesses are actively taking advantage of it. It’s why:

  • One-third of the world’s major companies are headquartered in just 20 cities
  • The tech revolution started in, and is still based in, Silicon Valley and San Francisco
  • London and New York sell financial services to the rest of the world
  • Auckland’s city centre is home to New Zealand’s most productive jobs – the average city centre job is 139% more productive than jobs outside Auckland.

Urban businesses are often innovative, highly productive, and actively looking for export opportunities. We’re already seeing how cities can create new sources of wealth for New Zealand:

  • Cloud-based accounting software firm Xero (based in Wellington and Auckland) is growing rapidly and creating opportunities for other Kiwi software firms
  • Video game developers are hiring fast and growing sales globally: “The New Zealand Game Developers Association’s 33 member studios collectively hiked their earnings to $36.3 million in the year to March, up 86 per on the previous year… Kiwi-made mobile games had been downloaded about 130 million times in the year.”
  • Weta Workshops and Weta Digital export expertise to the global film industry from Wellington
  • I work for a company that exports public transport planning services from the Auckland city centre to Australia and the broader Asia-Pacific region.

As the late, great New Zealand physicist Paul Callaghan argued, in order to grow in the long term we need more firms like this. And in order to get them, we need to create an environment that attracts talented people and smart businesses and supports knowledge spillovers and innovation.

Triumph of the City
Cities are fantastic environments for generating new ideas and new sources of wealth.

We call that environment a city. If we want to get better economic outcomes, we need to invest in better cities, starting with Auckland.

That means delivering a great bus network and integrated ticketing (as Auckland Transport is doing). It means expanding transport choice by investing in the City Rail Link and the Congestion Free Network. It means enabling people to build the medium-density, mixed use neighbourhoods that the market’s crying out for. It means delivering great people-oriented public spaces (as Auckland Council and Waterfront Auckland are doing). It’s not that hard!

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  1. Rod Oram speaks so much sense and the thing I like most about him is that he doesn’t subscribe to any particular “-ism”. This means that he actually goes back an examines the veracity of promised economic effects and the effectiveness of the change made, based on actual data. So of course he is ridiculed and criticised at every turn by “-ism” economists.

    I just don’t see that kind of retrospective examination from neoliberal economists. They just adhere to a philosophy and if any evidence is presented that it didn’t work, the answer is normally because it didn’t go far enough. It is like Soviet economics at its worst.

    I will recommend again the book “23 Things They Don’t Tell You About Capitalism”. It is the best retrospective examination of the neoliberal economic philosophy I have ever read.

    An example I saw someone say here is for the Holiday Highway. If this will help Northland’s economy so much, it should be easy to show that the toll road to Puhoi has already substantially lifted the economy there. Where is that evidence? Maybe it exists but I have never seen it – more just evidence that Northland is still languishing economically.

    I assume the argument would be that we need to double down because a road to Puhoi just wasn’t enough. Yet Warkworth is still not in the Northland province.

  2. We will always create things from animals and our environment. What is important is that we have the cities that can make more of these. Currently, a very large proportion of our forestry product is simply raw logs. No attempt is made to transform them into higher-value products with architectural value, and neither is there an attempt to diversify the wood produced. As a result, we don’t collect the extra value, that all goes overseas. We could support the economies of Northland and Tauranga with an investment in technology.

    China is no longer a low wage economy. Their wages have gone up sufficiently that the difference between there and anywhere else is often insufficient when the costs of transport and other inputs are added in, such that factories in China are rapidly, and the potential for work to remain offshore is high. We need to engage, or we really will lose out.

    1. A succinct summary.

      We could be milling logs produced around Gisbourne around Gisbourne and exporting them as a milled prduct leading to jobs in the regions, and the regional centres as well as economic complexity. We can write the software and build the machinery in Auckland Christchurch and Wellington and export those skills to the world. Instead we sell logs and suffer crippling rural poverty.

    2. Can I ask, say do you think we are a price taker or setter?
      You talk about raw logs, but what if the export markets ‘specify’ raw logs – i.e. J Grade and K Grade logs etc.
      What if they don’t want manufactured goods? Rather they want the raw material and will do their own manufacturing?
      What if say with logs there are many other countries / regions / companies that will happily comply with the “raw product / no product” demands?
      Do you not think we could be completely out in the cold??
      Or you want to just do the manufacturing and then..? ‘Hope’ the demand / market is there?

  3. Just leave it to the nats, guys. Their slogan is “Let’s keep doing what we’re doing but more of it”. What a buch of no-hopers. Actually that’s wrong as ‘hope’ is all they seem to rely on.
    The price of dairy products has plummetted thus putting their entire economic policy into crisis.
    It was very telling that when English was asked repeatedly to come up with just one new economic initiative he couldn’t. Pathetic.
    Anyway after what the Herald kept telling us was a huge historic win for National, it turns out they got less of a percentage of the vote than 2011. But one more seat (thanks to Craig and his 4% of wasted votes).
    Despite its economic woes BA is still one hell of a great city to live in if you have a reasonable income.

  4. A strange comparison. Argentina pursued vigorous import substitution policies and trade protectionism (a regular clarion call on the political Left here) that were massively inefficient, but diverted enormous amounts of resources and plunged the argentines into debt that they default on fairly regularly. They also underwent an extended period of dictatorship and effed around with their currency by pegging it to the US. Not to mention more endemic corruption and crappy governance all round.

    So the similarities are effectively (1) we’re both agricultural exporters and (2) we’re both located in the southern hemisphere. Likening NZ to the Argentines to make your point is pretty weak.

    1. Import substitution policies and trade protectionism are “a regular clarion call on the political Left here”? That’s news to me. You’d have to go back to before Lange to find examples of that from Labour. Some of the fringe parties, perhaps, but I don’t really see many people clamouring for that sort of thing these days.
      Broadening the Reserve Bank’s mandate to give a bit more focus on the level of the NZ dollar, sure, and that policy can be debated, but that’s still quite different than what you’re saying.

    2. And yet South Korea climbed from 3rd world status to 1st world using import substitution to get industry off the ground. Their government got involved in central planning and they restricted foreign ownership. They pretty much did the opposite of what the IMF and World Bank stand for and yet they got there and so many countries the World Bank ‘assisted’ didn’t. I think your comments on corruption and poor monetary policy are probably closer to the mark. Add in a lack of land reform and fiscal stupidity and a lack of social mobility due to an entrenched class system we might be closer to the causes of Argentina’s problems.

    3. As you point out, there are a number of institutional differences between Argentina and New Zealand. There are similarities as well: NZ also pursued a policy of heavy import protection and currency pegs for 50 years until Rogernomics started in 1984. I’ve highlighted the failures of those policies before:

      The point of mentioning Argentina wasn’t to say that they are a perfect comparison to New Zealand. That would be ridiculous. The point was that Argentina should be a *cautionary tale* for us – a wealthy agricultural exporter that failed to develop new sources of wealth.

      Finally, my policy recommendation – better cities! – should be seen as a *pro-competition* measure. Cities are great places for new ideas to develop precisely because they enable more competition between firms. It’s easy to run a mediocre restaurant in a small town wher.e there are few dining options – but it’s increasingly hard to make money selling lousy food in Auckland

  5. Love the article Peter.

    Don’t forget Christchurch’s Tait Electronics -“Today, Tait has offices in six countries and a network of distributors and dealers in another 150 nations. We employ about 800 people around the world and export around 95% of products from our Christchurch, New Zealand base.”

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