Economy of New Zealand

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The Economy of New Zealand is a market economy which is greatly dependent on international trade, mainly with Australia, the United States of America, China and Japan. It is strongly dependent on tourism and agricultural exports, and has only small manufacturing and high-tech components. Economic free-market reforms of the last decades have removed many barriers to foreign investment, and the World Bank has praised New Zealand as being the most business-friendly country in the world.^[1]

[edit] Profile

This is a chart of trend of gross domestic product of New Zealand at market prices estimated by the International Monetary Fund with figures in millions of New Zealand Dollars.

Traditionally, New Zealand's economy was built upon on a narrow range of primary products, such as wool, meat and dairy products. Due to the high demand for these products - such as the New Zealand wool boom of 1951 - New Zealand enjoyed high standards of living. However, commodity prices for these exports declined, and New Zealand lost its preferential trading position with the United Kingdom in 1973, due to the latter joining the European Economic Community. Partly as a result, from 1970 to 1990, the relative New Zealand purchasing power adjusted GDP per capita declined from about 115% of the OECD average to 80%.^[2]

Since 1984, the government of New Zealand has accomplished major economic restructuring, moving an agrarian economy dependent on concessionary British market access toward a more industrialised, free market economy that can compete globally. This growth has boosted real incomes, broadened and deepened the technological capabilities of the industrial sector, and contained inflationary pressures. Inflation remains among the lowest in the industrial world. Per capita GDP has been moving up towards the levels of the big West European economies since the trough in 1990, but the gap remains significant. New Zealand's heavy dependence on trade leaves its growth prospects vulnerable to economic performance in Asia, Europe, and the United States.

New Zealand's economy has traditionally been based on a foundation of exports from its very efficient agricultural system. Leading agricultural exports include meat, dairy products, forest products, fruit and vegetables, fish, and wool. New Zealand was a direct beneficiary of many of the reforms achieved under the Uruguay Round of trade negotiations, with agriculture in general and the dairy sector in particular enjoying many new trade opportunities in the long term. The country has substantial hydroelectric power and sizable reserves of natural gas, much of which is exploited due primarily to major Keynesian import substitution-oriented industrial projects (See Think Big). Leading manufacturing sectors are food processing, metal fabrication, and wood and paper products. Some manufacturing industries, many of which had only been established in a climate of import substitution with high tariffs and subsidies, such as car assembly, have completely disappeared, and manufacturing's importance in the economy is in a general decline.

The New Zealand economy has recently been perceived as successful. However, the generally positive outlook includes some challenges. New Zealand income levels, which used to be above much of Western Europe prior to the deep crisis of the 1970s, have never recovered in relative terms. The New Zealand GDP per capita is for instance less than that of Spain and about 60 % that of the United States. Income inequality has increased greatly, implying that significant portions of the population have quite modest incomes. Further, New Zealand has a very large current account deficit of 8-9% of GDP. However, despite this, its public debt stands at only 21.2% (2006 est.) ^[3] of the total GDP, which is comparatively small compared to many developed nations. However, It has also been noted that net foreign debt has increased 11-fold between 1984 and 2006, now reaching NZ $182 billion, NZ $45,000 for each person.^[1] The combination of a modest public debt and a large net foreign debt reflects that most of the net foreign debt is held by the private sector. One reason why New Zealand runs persistent current account deficits, that drives the net foreign debt upwards, is that earnings from agricultural exports and tourism fail to cover the imports of advanced manufactured goods required to sustain the New Zealand economy.^{[citation needed]}

[edit] Unemployment

New Zealand unemployment (at 3.4% as of December 2007) stands at its historically lowest level since the current method of surveying began in 1986, and has been very low for several years. This gives the country the 5th-best ranking in the OECD (with an OECD average of 5.5%), with the low numbers attributed to the robust economy with its large backlog of job positions at all levels.^[4] Before economic shocks of the 1970s in particular (Britain joining the EEC), actual unemployment was also very low, possibly even lower than today - in 1959, only 21 people were officially unemployed, and the joke went around that the Prime Minister knew the name of every unemployed person.^[5]

The percentage of the population employed also increased in recent years, to 68.8% of all inhabitants, with full-time jobs increasing slightly, and part-time occupations decreasing in turn. The increase in the working population percentage is attributed to increasing wages and higher costs of living moving more people into employment.^[4] The low unemployment does however also have disadvantages, with many companies unable to fill jobs.

[edit] Regulation

[edit] Regulation and 'Statism'

Historically, New Zealand had a highly protected, regulated and subsidised economy. This stemmed at least partly from trends started in the first half of the 20th Century, when socialist (or in modern parlance, social-democratic) governments introduced both social security systems with for the time very wide-ranging scope (from state pensions to unemployment benefits and free healthcare), while also regulating industry, mandating trade unionism and industrial arbitration. Imports were also heavily regulated. While called 'welfare statism' by some, it was accepted that until at least the 1950s, both main parties (Labour & National) generally supported this trend, even though critics pointed to negative effects on the general economy and argued that increasing emigration could be blamed to a large degree on these policies.^[6]

To a substantial degree, the economic restrictions remained in place or were even sometimes extended in the early second half of the 20th Century. However, reforms in the 1980s and early 1990s were then to turn this situation into its opposite.

[edit] Reform and liberalisation

Due to the deregulation of the postal sector, several postal operators can install mail collection boxes in New Zealand’s streets.

Since 1984, government subsidies including those for agriculture have been eliminated; import regulations have been liberalised; exchange rates have been freely floated; controls on interest rates, wages, and prices have been removed; and marginal rates of taxation reduced. Tight monetary policy and major efforts to reduce the government budget deficit brought the inflation rate down from an annual rate of more than 18% in 1987. The restructuring and sale of government-owned enterprises in the 1980s and 1990s reduced government's role in the economy and permitted the retirement of some public debt, but simultaneously massively increased the necessity for greater welfare spending and has led to considerably higher rates of unemployment than were standard in New Zealand in earlier decades. However, unemployment in New Zealand is again low, hovering around 3.5% to 4%.

The reforms created a very business-friendly regulatory framework. A survey 2008 study ranked it 99.9% in "Business freedom", and 80% overall in "Economic freedom", noting amongst other things that it only takes 12 days to establish a business in New Zealand on average, compared with a world-wide average of 43 days. Other indicators measured were property rights, labour market conditions, government controls and corruption, the last being considered "next to non-existent" in the Heritage Foundation and Wall Street Journal study.^[7]

[edit] Foreign business relations

New Zealand's economy has been helped by strong economic relations with Australia. Australia and New Zealand are partners in "Closer Economic Relations" (CER), which allows for free trade in goods and most services. Since 1990, CER has created a single market of more than 22 million people, and this has provided new opportunities for New Zealand exporters. Australia is now the destination of 19% of New Zealand's exports, compared to 14% in 1983. Both sides also have agreed to consider extending CER to product standardization and taxation policy. New Zealand initiated a free trade agreement with Singapore in September 2000 which was extended in 2005 to include Chile and Brunei and is now known as the P4 agreement. New Zealand is seeking other bilateral/regional trade agreements in the Pacific area.

U.S. goods and services have been competitive in New Zealand, though the strong U.S. dollar created challenges for U.S. exporters in 2001. The market-led economy offers many opportunities for U.S. exporters and investors. Investment opportunities exist in chemicals, food preparation, finance, tourism, and forest products, as well as in franchising. The best sales prospects are for medical equipment, information technology, and consumer goods. On the agricultural side, the best prospects are for fresh fruit, snack foods, specialised grocery items (eg. organic foods), and soybean meal. A number of U.S. companies have subsidiary branches in New Zealand. Many operate through local agents, with some joint venture associations. The American Chamber of Commerce is active in New Zealand, with its main office in Auckland and a branch committee in Wellington.

New Zealand welcomes and encourages foreign investment without discrimination. The Overseas Investment Commission (OIC) must give consent to foreign investments that would control 25% or more of businesses or property worth more than NZ$50 million. Restrictions and approval requirements also apply to certain investments in land and in the commercial fishing industry. In practice, OIC approval requirements have not hindered investment. OIC consent is based on a national interest determination, but no performance requirements are attached to foreign direct investment after consent is given. Full remittance of profits and capital is permitted through normal banking channels.

This free investment by foreign capital has also been criticised. Groups like Campaign Against Foreign Control of Aotearoa (CAFCA) consider that New Zealand's economy is substantially overseas-owned, noting that direct ownership of New Zealand companies by foreign parties increased from $9.7 billion in 1989 to $83 billion in 2007 (an over 700% increase), while 41% of the New Zealand sharemarket valuation is now overseas-owned, compared to 19% in 1989. Around 7% of all New Zealand agriculturally productive land is also foreign-owned. CAFCA considers that the effect of such takeovers has generally been negative in terms of jobs and wages.^[1]

[edit] Recent trends

Economic growth, which had slowed in 1997 and 1998 due to the negative effects of the Asian financial crisis and two successive years of drought, rebounded in 1999. A low New Zealand dollar, favourable weather, and high commodity prices boosted exports, and the economy is estimated to have grown by 2.5% in 2000. Growth resumed at a higher level from 2001 onwards due primarily to the lower value of the New Zealand dollar which made exports more competitive. The return of substantial economic growth led the unemployment rate to drop from 7.8% in 1999 to 3.4% in late 2005, the lowest rate in nearly 20 years.

However, the large current account deficit, which stood at more than 6.5% of GDP in 2000, has been a constant source of concern for New Zealand policymakers and has now hit 9% to date as of March 2006.^{[citation needed]} The rebound in the export sector is expected to help narrow the deficit to lower levels, but the budget deficit continues to increase as of 2005, especially due to increases in the value of the New Zealand dollar in the 2007-2008 period.

[edit] Other indicators

The Tiwai Point Aluminium Smelter has been noted as providing a significant boost for the country's overall trade balance, and is one of the country's largest industrial sites.

Tourism, like here on the Milford Sound (special bus with viewing gallery), is New Zealand's largest 'export' earner.^[8]

Agriculture (especially dairy farming - such as for the Fonterra plant shown) is another major export earner.

Industrial Production Growth Rate: 5.9% (2004)

Household income or consumption by percentage share:

• Lowest 10%: 0.3%
• Highest 10%: 29.8% (1991)

Agriculture - Products: wheat, barley, potatoes, pulses, fruits, vegetables; wool, beef, dairy products; fish

Exports - commodities: dairy products, meat, wood and wood products, fish, machinery

Imports - commodities: machinery and equipment, vehicles and aircraft, petroleum, electronics, textiles, plastics

Electricity:

• Electricity - consumption: 34.88 TWh (2001)
• Electricity - production: 38.39 TWh (2004)
• Electricity - exports: 0 kWh (2001)
• Electricity - imports: 0 kWh (2001)

Electricity - Production by source:

• Fossil Fuel: 31.6%
• Hydro: 57.8%
• Nuclear: 0%
• Other: 10.7% (2001)

Oil:

• Oil - production: 42,160 barrel/day (6,703 m³/d) 2001
• Oil - consumption: 132,700 barrel/day (21,100 m³/d) 2001
• Oil - exports: 30,220 barrel/day (4,800 m³/d) 2001
• Oil - imports: 119,700 barrel/day (19,000 m³/d) 2001
• Oil - proved reserves: 89.62 million barrel (14,250,000 m³) January 2002

Exchange rates:
New Zealand Dollars (NZ$) per US$1 - 1.3869 (2005), 1.5248 (2004), 1.9071 (2003), 2.1622 (2002), 2.3788 (2001), 2.2012 (2000), 1.8886 (1999), 1.8632 (1998), 1.5083 (1997), 1.4543 (1996), 1.5235 (1995)

[edit] See also

• Communications in New Zealand
• Energy in New Zealand
• Transport in New Zealand
• Reserve Bank of New Zealand
• New Zealand Electricity Market
• Economy of Oceania
• New Zealand Ministry of Economic Development

[edit] References

• Harcourt, T. (2005). Closer Economic Relations. Australian Trade Commission Website
• This article contains material from the CIA World Factbook (2005 edition) which, as a US government publication, is in the public domain.

[edit] External links

• OECD's New Zealand country Web site and OECD Economic Survey of New Zealand
• Ministry of Economic Development Web site

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