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:
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:
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.
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!