What does New Zealand do to pay its way, in the global context? And what could it do differently?

These are an important questions because New Zealand is a small, trade-exposed country. We produce some of the things that we need locally, but many other things must be imported, which means that we need to export something in return. For instance, I’m writing this post in a flat built from bricks that were (probably) fired in New Lynn and timber that was sawn locally, sitting on a chair that was made in Auckland. But the computer I’m writing it on was assembled in China using parts and patents from all over the world.

I’ve previously taken a look at what Auckland exports, both internationally and to the rest of New Zealand. This time, I want to look at the picture for NZ as a whole, and see how we compare with a number of similar countries using data from the World Bank’s excellent World Development Indicators dataset.

The following table summarises some economic and population data on New Zealand and nine other small OECD countries. New Zealand is one of the smallest (4.6 million people, equal to Ireland), with the second-lowest GDP per capita ($37,800 USD, just ahead of Israel). In terms of urban development, we have a mid-pack urbanisation rate (86% of us live in towns or cities) and quite a lot of land per person (second only to Australia and Norway, which have much more hostile climates).

Country2015 population2015 GDP per capita (current US$)2014 exports as a percent of GDP2015 urbanisation rate2015 and per capita (ha/person)
New Zealand4.6m$37,80828%86%5.7

As this data shows, New Zealand also exports a comparatively low share of its GDP – only 28% in 2014, second only to Australia (20%). Other small OECD countries tend to export a considerably higher share of their GDP, indicating that they are more engaged with global trade patterns and potentially more successful in carving out economic niches for themselves.

The composition of exports can teach us something about how countries’ economies work. I’ve broken down exports into nine broad categories – five types of goods exports, and four types of services exports – to understand what these ten countries trade. That’s shown in the following chart.

We can immediately see that New Zealand doesn’t export much, on a per capita basis – around US$12,000 per person. (I’m ahead of my quota for the year!) Interestingly, we’re on par with Australia, which has a considerably higher GDP per capita.

As you can (hopefully) see, New Zealand’s exports are very heavily weighted towards food – almost half of our exports fall into this category, reflecting our specialisation in agriculture. But we’re not the biggest food exporter. The Netherlands actually exports more food per capita than New Zealand, in spite of the fact that it’s much more densely developed, with an average of 0.2 hectares of land per person compared with 5.7 hectares per person in New Zealand.

Clearly, density is not destiny: an increasing population doesn’t have to crowd out agricultural exports, provided that farmers and food processors are willing to specialise in higher-value products rather than just extruding tonnes of cheap commodity cheddar, and cities are allowed to go up in order to minimise demands to develop farmland.

Via BrilliantMaps

However, the big difference between New Zealand and most other small OECD countries isn’t agricultural exports: it’s manufacturing and knowledge-intensive service exports. Notice the size of manufacturing exports (the blue bars) and computer, information, and communications services (the dark grey bars) in many of the other countries. Denmark, Finland, Ireland, Israel, the Netherlands, Sweden, and Switzerland all outperform us by a large margin in both areas.

What this data shows is that if we want to raise our standards of living, we will have to do different things than we’ve done in the past. We can undoubtedly get more value out of our agricultural exports – but, as the example of the Netherlands shows, the best way to do that is to invest in higher-value products, rather than increasing the dairy herd at great cost to water quality.

Ultimately, a transformative increase in New Zealand’s exports will require us to develop new products and services. For that, we need well-functioning cities. Manufacturing and knowledge-intensive services tend to be exported from cities, rather than rural areas. Increasingly, both industries benefit from agglomeration economies, such as the increased ease of sharing and generating knowledge in cities. They don’t necessarily occupy much land, but they do depend upon having a critical mass of skilled people and the right international connections.

What do you think of New Zealand’s export performance?

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  1. Well first things first, we have to start believing we can export more than just milk powder. A large number of us seem to have bought into this idea that we can *only* do agricultural exports, and that any attempts to stimulate other industry (such as R&D credits) is an attack on that meal ticket.

    I think Paul Callaghan did the best job of explaining what our strategy should be, it should’ve been required viewing for every New Zealander and played on national television during prime time. I think this is the right link: https://www.youtube.com/watch?v=OhCAyIllnXY

    1. agree. Information technologies are such an large and underrated contributor to NZ’s economy. NZ is actually home to a decent group of talented software programmers, data scientists etc. The fruits of whose efforts are much easier to transport overseas.

      Yet the government prefers to subsidize the trucking and dairy industries with massive roads and irrigation schemes. The former pollutes our waterways for relatively marginal benefit.

      Go figure.

      1. With all of the dairy “evils” I was stumbled upon this the other day while researching our rail lines: “Part of the line between Morrinsville and Waitoa remains open and is in use as the Waitoa Branch line, connecting to the Fonterra Dairy Factory at Waitoa.” https://en.wikipedia.org/wiki/Thames_Branch
        http://www.scoop.co.nz/stories/BU0411/S00168.htm (old news but i guess still operating like this – rail used for a number of their factories).

        1. Fonterra rail most of the their product from the factory to the port across NZ as it’s much more efficient that way. It of course travels by truck from farm to factory.

  2. How much of the poorer performance is due to geography? We are simply much further from markets than every other country in that comparison which no doubt has significant implications. As a result, one might guess that NZ probably has to be even smarter to overcome that hurdle.

    1. This report from the OECD estimated that NZ’s relative geographic disadvantage subtracts about 10% from our GDP per capita: https://www.oecd.org/eco/42506177.pdf

      In this famous analysis, Eaton and Kortum estimate the effects of distance on trade costs, and find that only Portugal and Greece are more disadvantaged. Although the data they use is now somewhat dated: http://onlinelibrary.wiley.com/doi/10.1111/1468-0262.00352/full

      General message is that *if* the government is going to subsidise a particular industry, *then* it should pick industries that are less sensitive to transport costs. Such as information technologies, especially software.

  3. This is already happening. An article late last year from NBR, summarized the TIN100 annual report with comment from Greg Shanahan predicting the tech industry to pass dairy as our biggest export in 3-5 years.

    To 31 March last year, tech exports were just shy of $7billion, up 13.5% from year previous. Dairy was $11.16b for the same period.

    Article here (paywall): https://www.nbr.co.nz/tin-100-2016-ck-p

  4. I’m surprised tourism (I assume that’s in your travel category?) is that small – I thought I’d heard it was our biggest export. Also I’d always thought education was a big export for us – is that included in any of those categories?

    1. As Ricardo notes below it is the biggest earner or contribution to GDP, which is different to the biggest export. GDP = Consumption + Investment + Government spending + Net Exports. A lot of the tourism spend shows up in consumption and probably investment when someone builds a new hotel or tourist facility. If we go to Rotorua for a weekend that is consumption.

  5. One of the big issues for NZ is that we struggle to turn good ideas into business. As a well educated and free society we generate plenty of ideas but what we lack is the infrastructure to turn those into businesses. If we compare this to Israel they are able to do that and will overtake us economically even with their tense security situation. Many trade delegations from NZ go to Israel see their innovation hubs but just can’t seem to replicate it here. I suggest two reasons for this. First, government and universities don’t provide the right structures that allow for this – in effect we don’t put the money where it is needed R&D, marketing, business know-how etc. Second, too many NZ business are run by accountants. Accountants know the cost of everything but the value of nothing – hence our low wage economy.

  6. Peter I you have listed exports rather than net exports. Doesn’t that twist the result a little. Ireland has exports as 100% of GDP but if imports are 105% then they are no better off. Actually in their case it probably includes the fake money flows of all the tax dodging international corporations and don’t represent any output by Ireland.

  7. I think Denmark is the interesting country. 130 years ago it was in our position -50% of its exports were food -Danish butter and bacon mainly -to a few destinations -the UK. But somehow over the intervening years Denmark has managed to diversify its economy. NZ should send a research delegation over to Denmark to do a broad and in depth study on how the Danes modernised their economy.

    My take, is that mentally New Zealander’s -especially outside of Auckland see New Zealand urban areas as at best a market towns dependent on a productive rural hinterland (with a bit of tourism on the side). They do not see our towns and cities as productive (or consumptive/tourist) entities in their own right. Because of that faulty mental picture New Zealand fails to put in place the public and private sector building blocks needed to make our urban areas more productive and attractive. Thus despite all the talking we fail to diversify our economy.

    I write about this here in an article called “Is Christchurch a big farm supply town, or a diversified urban economy?”

    1. Rod Oram made this point very well here:
      Denmark exporting $26K of goods and services per capita in 2009 vs $9K for NZ.
      I’ve been fascinated with companies like Vestas (wind turbines) in Denmark- a workforce of 20,000 – an order book with $10billion on it (550MW of new orders in 2017, and it’s 7 weeks old!), continuing to innovate, growth sector, high value…
      I think our government is too hands-off. It doesn’t have to pick winners, but having an industrial strategy that focuses on the likes of software and clean tech would be a good start.

      1. Thanks Biralo. For me it starts with achieving a widely held public consensus about how economic success is achieved -not some arbitrary funding arrangement from ‘experts’ in Wellington for some particular types of industry in regional towns and cities. In other words -first we need to answer ‘why’ type questions before we can consider ‘what’ we should do.

        For instance, in Finland where my wife comes from there is a widely held belief that the way to get ahead -both individually and for Finland as a whole -is education. This widely held consensus determines for individuals and for Finland’s society as a whole choices about investing in productive enterprises. I suspect Denmark also has some sort of belief system that underpins their productive economy choices.

      2. All of us can check our buying and investing habits.
        Choose Air NZ, Mitre 10, Kiwi Bank, Pal n Save, Queenstown rather than Jetstar, Bunnings, ANZ, Countdown , or Sydney.

        1. I’d argue that investing in the latter is just as good as the former. Given that foreign investment in NZ is seen as a bad thing, I can only assume the opposite – NZers investing in Australian companies must be a good thing. Although I think NZers investing in anything is always an improvement.

    2. Danes: by design, largely. There is a huge, conscious intent of better living by design, running through Danish society, since the 60s and 70s. They don’t have the culture that our society seems to, of aiming to get the cheapest possible price for the crappiest possible plastic Chinese import. Instead, they seem to have a deeper understanding and pride in their country’s design accomplishments, and they all seem to have at least one Louis Poulsen light, and a set of Arne Jacobsen chairs etc. actually, I wonder if many Kiwis could actually name a single NZ designer? All Black: yes. Designer: dunno.

    1. Excellent point Stu. Also there is a huge difference between GDP which is just output and welfare. For example the UK had great output during WWII but your welfare was low given that your son was at a battlefield, your daughter working long shifts in a dangerous factory, food was rationed and a foreign airforce was trying to kill you and destroy your home. If everything else is equal then higher output is better than low output, but everything else is never equal especially if you are comparing Israel with New Zealand.

      1. +1 I’d also like to see something on the intra-national variation in welfare. Ie compare the 1st, 2nd etc percentile of income earners from multiple countries to see how important GDP is to most people’s welfare.

      2. yes I agree. GDP is not equivalent to welfare, at least in the short to medium run.

        GDP does matter to fiscal outcomes, because taxes on monetary transactions tend generate government revenue. But it’s plausible we could be better off by higher tax rates on lower GDP, at least once you get beyond a certain level of GDP per capita and factor in well-being / externalities etc.

        Another (more spatial economics) way to think about the issue: Despite the presence of a ~20% gap in GDP/wage per capita between NZ and Oz, there’s effectively zero long term migration between the two countries. Why aren’t NZers still moving to Australia in droves?

        In my view there must be some compensating benefit to be had that is not reflected in the wage gap. Two obvious things spring to mind: 1) largely un-priced natural amenities are higher in NZ (e.g. outdoor activities like hiking and camping) and/or 2) people expect NZ to do relatively better than Australia in the future, e.g. due to political climate and/or environmental issues,such as climate change.

        Even though I’m personally frustrated by the unwillingness of NZ’s National Government for squandering money and failing to really take the neccessary steps to turbo-charge our socioeconomic performance, there’s still very few places on earth whose prospects compare as favourably as NZ’s right now.

        Of course a crash in property values could bring that all done overnight … 😮

        1. Re your last statement “Of course a crash in property values could bring that all done overnight … ”

          I think a decline in property prices is not necessarily a bad thing. I think it depends on if the ‘bubble’ pops like 2008 with a big slump in construction -with huge secondary effects on employment, wages, and bankruptcy in the finance sector, versus housing prices becoming more affordable due to a ramp up in building more affordable housing -which would not have the negative secondary effects on employment, wages and bankruptcy rates…..

          Some pretty serious economists in the US believe that the US would be $trillions better off if housing supply was more responsive and affordable. Stu check this article out. “Why Falling Home Prices Could Be a Good Thing -Popping the housing bubble in the American mind”

        2. oh I definitely ***agree*** falling property prices would be a great thing for New Zealand. Best thing ever perhaps.

          If we saw property prices decline in real terms by say 3-5% p.a. for the next 5-10 years then I’d be very happy.

          Just not a crash — they’re messy.

        3. Good point. Houses are treated as just another more fancy kind of bitcoin. Just like bitcoins, there’s systems in place to make it hard to create additional ones. And just like bitcoins, prices are decoupled from any utility value. There’s only the expectation that you’ll make profit as prices will rise further. That’s a bit more extreme with bitcoins—you can’t really do much with a bunch of bits, but there’s essentially no cap on house prices. In Silicon Valley, $2 million is the new $1 million.

          Too bad you actually need a house for shelter.

          On the other hand, nobody thinks about houses as something you have to do properly (because, just saying, you’re living in it). You can get your nice looking lights, or furniture, or a floor which is a bit more pet-proof or baby-proof than carpet. Make sure the only power point in your living is not in a corner behind your sofa or something silly. In Europe we call that “making your house a bit nice”. Here we call that “overcapitalising”.

          Cultural differences I guess.

      3. But in the war the big difference was transport, the UK rail network was extensive, in our little town we had 2 railway stations and a goods yard that provided all the supplies we needed, I walked to school on almost empty roads, we didn’t waste fuel on personal transport, public transport was cheap and frequent.

        We waste to much of our imported energy on personal transport we don’t convert it into GDP just blow it out of our exhaust pipes as waste.

  8. We could boost our GDP massively while still exporting our basic MPI products of milk, wine, and timber. We are not bad at getting top dollar out of our wine industry, but we are terrible with milk and timber. Why does the Netherlands beat us at food exports? Cheese! If we forego Fonterra’s basic bulk product push, NZ could do so much better by value-adding through better quality, higher cost cheeses. But logs, for me, is the big one. We should stop every single bulk log exported right now. Instead, we can make engineered wood products, CLT planks, LVL beams, high quality wood pulp, or even make high quality furniture from our timber, as the Danes do with their forests.

    1. Of course, that might be easier if we hadn’t sold off all / most of the Cutting Rights to the forests, to China, Canada, Japan, and the Harvard pension fund. All of whom are very happy for us to plunder our land for them, so they don’t have to do the same to their own countries. Similarly – difficult for us to make better wood pulp we have sold off all our wood pulp plants to overseas concerns. Whirinaki: Japanese owned. Kinleith: foreign owned. (Norske Skog?). We have such a short-sighted government and a lousy OIC.

    2. “But logs, for me, is the big one. We should stop every single bulk log exported right now. Instead, we can make engineered wood products…”

      Where is NZ’s competitive edge in adding this “value”? We have expensive labour (cf. most of the world), expensive finance (banks would rather lend to property speculators and buyers of ludicrously-priced houses), expensive imported machinery and poor appetite for business risk. I can buy imported Chilean plywood at my local Mitre 10 for considerably less than locally-made plywood.

      As for furniture manufacture from our timber… radiata pine is the garbage of timber and barely suitable for house framing, let alone furniture. Native timber would be highly suitable (we spent a small fortune on a Rimu dining table and chairs) but who is going to plant new native trees when they cannot, by law, be harvested?

      1. it always confuses me that you cannot harvest Rimu at all. Commercial forestry would be a great way to ensure continuing existence of the species and equivalent protection to the existing rules could be achieved by only allowing harvest on land converted from Forestry or pasture.

        BTW, given that all of the current processing is foreign owned expensive local capital is hardly a problem if it’s raised overseas. Wood processing is highly mechanized now so labour cost isn’t really relevant. It would also be way cheaper to export milled wood as you don’t have to transport the scrap wood or the air between logs which don’t stack perfectly.

    3. Fontera has just in the past month built a $60 million factory to make mozzarella cheese. The process for them will take a day to make. It previously took several months. The science was developed by Fontera, a world first and will give them a huge competitive advantage.

  9. New Zealand tend to pay a premium on imported goods and advance technologies.

    For example the same gadget in nz sells double price, compares to US.

    The same construction material, we pay 2-4 times more than in Europe and US.

    Same applies to machinery, cars, medical devices, books, etc.

    It means most of the consumers are being ripped off here, forcing people to only afford entry low quality products instead of cutting edge products.

    Without cutting edge machinary and technology, we couldnt stay competitive with other countries that do. Also our quality of life suffers.

    Also since prople are on low base wages, after being ripped off they couldn’t have much disposable incomes nor savings.

    Therefore we won’t have the wealth to re-invest back into our own economy and get capital to regain control from oversea dominance.

    Instead our profit flows into australia and oversea big corporates.

    1. To me this says we should then continue with:
      1. Bulk export of commodities but improve our environment (make things green and more organic) for many reasons including:
      2. Keeping tourism a big winner (this leads to better airport infrastructure needed!) – what we make up for in isolation we gain with beautiful countryside.
      3. Information / smart technology innovation etc which is cost effective to export & we seem to increasingly be doing well with this.
      4. …fill in blank here

  10. Thanks Peter – highlights that getting cities right, and particularly our downtown spaces is pretty vital to NZ’s long term economic performance.

    So if we want to provide the fertile urban conditions for innovative, service-based new export industries to develop what should we be doing? A few things spring to mind:

    Make sure our dense, high-productivity centres are accessible to workers – PT investments like CRL, affordable housing in central areas
    Make sure our centres are high-quality urban environments that encourage serendipitous meetings on the street, easy interaction between businesses – shared spaces, quality urban realm, connected street networks
    Ensure that planning regulations provide for a diversity of employment spaces in central locations – we need cheap start-up spaces as much as glitzy downtown office towers.

    Sounds a bit Danish.

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