In the wake of the Fonterra contamination scare, BNZ economists are warning that the country needs to spread its economic risk more.
"We are not anti-Chinese and we are not anti-dairy but the last thing New Zealand wants to become is nothing more than a milk powder exporter to China," BNZ's head of research Stephen Toplis said in an "economy watch" report.
"Economic diversification is as important as investment diversification from a risk profile perspective. The answer is not to kill off existing trading relationships or reduce dairy production but to look to other sectors to play a bigger part, he said.
The "concentration risk" for the economy is "getting stronger by the day", he said.
"Policy makers need to pay more attention to this and New Zealanders, in general, need to be more aware of the risks."
Toplis said the "concentration risk" for the economy largely revolved around our export mix and the destinations to which we exported.
"However, the argument for excess concentration might also be applied to regional development. While there is a strong body of literature saying that larger cities are more efficient it must also be true that economic dependence on a single city must also bring with it increased vulnerability. The vulnerability of places like Wellington and Christchurch are readily apparent but Auckland is not immune to regional disaster."
Toplis said that excess concentration on a single market or product typically led to increased export revenue volatility which in turn was strongly linked to growth volatility.
"So not only is the economy more vulnerable but also, typically, it records lower growth than a more diverse economy."
Toplis said that in the 1950s New Zealand was a highly successful country exporting frozen lamb carcasses, wool and butter to the UK. And, then in the late 1960s wool prices collapsed and threw the economy into recession. Wool as a share of New Zealand’s merchandise exports fell from 30% in 1966 to 19% in 1968. In the 1970s along came the EEC and "the wheels well and truly fell off", leading to a long and painful adjustment for the New Zealand economy.
"We’ve spent much of this century developing a much more diversified economy but, more recently, things have again been going the other way."
A country did not want to be hostage to a single product just in case something went wrong with either the demand for, or supply of, that product. Likewise a country did not want to be hostage to a single purchaser anywhere in the supply chain.
"An economic slump can drive demand lower or, if the purchaser becomes too dominant, they might work themselves into such a position of power that they can take monopsony control of the sale price."
Toplis said around three quarters of the country's export growth over the past five years could be attributed to the expansion in dairy exports, while the rest is dominated by forest products.
He said it was worth noting that New Zealand was not only benefiting from its export of goods but services exports to China are also on the rise. The most obvious of these was tourism.
"The importance of tourism to the economy should not be underestimated. Travel receipts actually exceed meat sales. China has gone from providing almost no tourists to New Zealand to now accounting for over 8% of inflows. In the month of January 1990, 72 Chinese tourists arrived in NZ. You could just about have named them all. In January 2013, there were almost 19,000 arrivals.
'Those keen to stop the Chinese flow of capital into New Zealand should recognise that they can’t hope for the Chinese to remain such strong drivers of our economic expansion at the same time.
"New Zealand can be very thankful to the people of China, and elsewhere in developing Asia for that matter, for keeping our economy afloat. In the same vein, we can also be very thankful that we have had an agriculture based economy that has produced the right goods at the right time for the right part of the world."
Toplis said New Zealand’s future would remain dominated by its increasing integration with Asia and the comparative advantage we have in producing agriculture output.
"This is to be celebrated. However, we need to be very wary that we are creating a concentration risk that leaves us extraordinarily vulnerable to a single product and a single market. The sustainability of our prosperity may be highly dependent on ensuring that this this does not get out of hand."
31 Comments
New Zealand's climate and natural resources are the envy of the agricultural world. Converting all productive land to a great big poo run off ramp is shockingly short sighted. A better strategy would be to grow far more cash crops, with a supporting infrastructure to add value to the primary products we then export to the likes of China. Thats a recipe for wealth, not the 'flip this house', ticket clipping economy we've now moved to. The value of land developed for horticulture is much higher than dairy, but that would require intelligent investment, and banks don't like complicated sums, they'd rather just load up their debt serf farmers to buy the dairy unit next door at 5% ROC before borrowing costs; after all, land prices only go up right, how can a bank lose, if the famer goes broke, they'll find another mug.
BNZ are damn right .
We actually need to look not just beyond dairy , but beyond agriculture .
- Natrual Gas for one is a good prospect .
- Tourism is another
- We have the skills , the technology , and the educated wrokforce to establish Auckland as a Financial Services hub for Banking , Re-insurance Forex Trading , Pension fund Administration , for the Asia Pacific region .
Cash crops are problematic for three reasons
1) There is not enough land freely available to convert to the scale of cash crop growing needed particularily for staples .
2) The labour intensive requirements , combined with the high wage rate is a real issue for cash crops here in NZ .
It explains why for example Premium South American and South African Wines are sold here at Countdwon for $6.00 bottle.
We pay the minimum wage of $13,50/Hour , but wine farmers in the Cape pay the equivalent of NZ$ 2,34 /Hour. (ZAR R150 per 8.5 HOUR DAY)
3) Our weather patterns are also problematic for many cash crops , which are better suited to tropical climates such as Queensland , think of most pip- fruits , sugarcane , bananas, etc.
We have the skills , the technology , and the educated wrokforce to establish Auckland as a Financial Services hub for Banking , Re-insurance Forex Trading , Pension fund Administration , for the Asia Pacific region .
Are you sure? Read more
NEW ZEALAND is making a hash of its legal structures, tinkering with legislation and losing its reputation as a place where the legal system can be trusted to produce authoritative and internationally respected judgements, Tony Molloy, QC, said last week.
And that combination could torpedo any ambition John Key's government has left to promote New Zealand as an international financial services centre.
"It is making New Zealand an international laughing stock at a time when we are aspiring to recognition as a recognised international trust and funds jurisdiction," Molloy said in a paper presented to a forensic accounting conference in Auckland.
Yes, well Helen Clark's authoritarian decision to cut our legal system off from the Privy Council was an act of cultural vandalism of the highest order. This was a major constitutional leap of great stupidity. The legal knowledge, systems and institutions of the City of London underpin the working of worldwide trade and finance. Why would you choose to reduce our links to that? Isolationism? A desire to return to the Stone Age?
No, not unless you are a whitey bigot and specifically from the UK. It was time to move on, away from the corruption that is the so called "city" if you want. I would see it as a Nation's own maturity that we handle our own laws, end to end for all our own ppl.
regards
Justice from a UK whitey bigot perspective maybe. Personally I think we have more than enough ppl capable of seeing justice done. All the better to be away from the excessive influence of one far away nation whos laws here tended to benefit a particualr % and not all, IMHO.
regards
The president of the Court of Appeal has been told he should probably surrender the knighthood he received in the New Year honours list.
Wellington lawyer Tony Ellis told Justice Mark O'Regan that the system of giving honours to sitting judges needed to be overhauled because it offended against the principles of judicial independence.
He said it was nothing personal, but the system was wrong and needed to be changed.
Steven I agree with your sentiment, but to safely replace the Privy Council as our top court we need an independent way of appointing judges.
See my comments about the Speaker and think how much better a neutral Speaker who was appointed by unanimous or near unanimous vote would be at appointing our top judges, other key public servants and being a neutral referee in Parliament.
My suggested way of appointments is to prevent the US politicising of the judiciary and public service. The problem in the US is there is no neutral entity in the political system, they are all either Republicans or Democrats and of course the Presidents appoint the Supreme Court, which is kinda what Helen wanted but instead here it is the Attorney General? which of course the PM appoints.
2) Its not so simple IMHO. Before I came here in 1995 I could buy NZ wines cheaper in the UK than here...I actually bought I thnk 15 or 20 bottles of NZ wine and got a huge discount off Air New Zealand, which was then my 3 month Holiday (I never went back). I landed and was gob smacked at the price on NZ wine here, it was more expensive. Try going over to Blenheim, invariably I find local wines in the shops there more expensive than home here in Wellington (for the same wines).
regards
The question is how to diversify?
We have tried state intervention -Think Big. Then Laissev Faire neoliberalism -Rogernomics. Then state intervention lite -Anderton regional development. Now we are trying state intervention-crony capitalism.
None of them worked.
What about diversifying how political structures to encourage a diversification of our economy? That is what other countries do and it works for them. Can I say that would include more powerful local government or will someone tell me to shut up again.
... that is the key , Brendon , fixing our systems ---- rather than picking winners ..
Create a low tax , easy to negotiate regulatory framework , a level playing field ... which encourages entrepreneurs ( or at least doesn't hamstring them ) ... and accept whatever emerges ...
Gummy you seem like a succesful person that Jonkey might listen to. You could have a word him and tell him to stop favouring the Boards of Meridan, Chorus and Rio Tinto etc, at the expense of the poor old consumer. Some of those consumers will be entrepreneurs struggling for takeoff who need cheaper energy and communications. http://www.interest.co.nz/opinion/65808/bernard-hickey-says-government-hoping-households-and-voters-wont-notice-impact-some-bi
There is no systems thinking coming from National under Jonkey.
I've no problems with any of Gummy's proposals there, but I am puzzled as to why Brendon seems so keen on them.
How does this match up with the proposal for "diverse political systems"?
Doesn't that imply that some regions, or levels of Government, should instead have high taxes, complex regulations and direct resources towards particular companies or industries?
I suspect we are coming from different mindsets. I'm with Deng the reformist leader of the Chinese Communist party, “It doesn’t matter if a cat is black or white, so long as it catches mice.”
All businesses need regulation and some public services -educated workers, transport infrastructure etc. There is no country with successful businesses where the country is an anarchy.
So the issue is not whether to have regulations and public services or not, it is not free market versus socialism, black cat versus white cat. The real issue is about good regulations and public services versus bad ones. Does it catch the mice.
I believe we are more likely to get the good quality regulations and public services if we have diversified political institutions.
I think any appraisal of history or successful countries elsewhere will confirm this argument.
By this do you mean the head of Treasury trying to resell a repackaged but nonetheless, previously bankrupt company to the same citizens still holding the damn near worthless share certificates - I call that hucksterism not entrepreneurship. Read more
"But if you group private and public debt together it is a pretty uncomfortable position. So the Government absolutely has to do its job and ensure that its debt is kept as low as possible.
"And over time - because we are not going to fix this quickly - we do need to help households have different and better opportunities to [save]," he says.
One of the important reasons for the programme of selling down state-owned power companies and Air New Zealand is to provide more places for people to put their money, he says.
"We do think that people are not saving enough.
Oh dear .. I had such high expectations of you Stephen Hulme
Here you go quoting that imported "archangel" Gabriel McGoof who would be the most un-inspiring messenger of god I have read or listened to - every time he opens his mouth it sounds like his latest update of his job application
He has only been here a year and here he is telling us what we should do, how it should be done, what is good for us, and where we should put our money .. Air NZ indeed
Brendon: Now there is an interesting comment. Expand the power of our local political structures! I can work with that idea. Even if our current local government is a nightmare of high cost non productivity. And an obstacle rather than a leader.
Local power can also derive from local ownership. It seems to me that local industries can be and are very successful. They get shifted away, sometimes because of the combination of success, and ownership being elsewhere. Not because they intrinsically failed.
Plenty of high tech, high skill industries in Dunedin for example. Usually operated by the founding family. Destroyed once the financial service boys get their hands on them. Sold off and shifted.
And don't knock dairy. It's there, we can do it and can be successful. (yes we do know of this weeks issue) The problem of the concentration is that we have failed at so much else.
We can build our trains, we used to and we can again. etc etc.
Small, complex industries are the way. I don't hold much hope for the big bang ideas of, say, "being a world leader in financial services". Success means being good at something small and then letting it grow.
Plenty of very clever small industries in New Zealand. Seems we put them down, rather than encourage them.
Exactly KH, the Mittlestad model -small mostly family therefore locally owned companies focusing on some small specialised industry that they can become world leaders in.
Christchurch too has examples of these -Tait electronics, leaders in emergency service communication devices. Hamilton Jet -jet boat engines etc.
These businesses need local support -specialised vocational education for example.
This is much more likely to come from local rather than national political institutions.
NZ's relience on a single market and a single product is just one side of story.
The other side of story is that the World needs NZ's dairy product BAD!!!
NZ's share in Chinese market and global market:
China World
WMP 95% 53%
SMP 59% 23%
Butter 88% 57%
Cheese 40% 14%
In today's world, supply chains are more and more globally and vertically intergrated. Diversification does not only mean to develop more proudcts and to sell to more markets, but also, more importantly, to increase your value and dominance in the supply chain.
Yes Brendon. There are plenty of marvellous enterprises scattered around New Zealand. And what makes them work and stay here is the local ownership. Lots of them aren't small either.
So maybe we should focus on ensuring ownership.
Of course that is contrary to the financial service doctrine that ownership is not to be personalised. In their erroneous view ownership is a remote thing you just trade on the numbers. But look at the outcome of that idea.
KH I think New Zealand gets suckered into taking a Anglo Saxon model of business. The easily taken over public company works for the UK because they are a major financial centre, it works for the US because of the large size of its economy. But for New Zealand I think it just makes us easy targets for foreign takeovers by those who aren't really entrepreneural, they just want steady profits from 'clip the ticket' type businesses.
We don't have to just ship diary to China, we can send beef... Opps.
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10910957
well c'mon rest of NZ dont just leave it to us cockies to earn the money . no one is stopping you from finding another way to pay the countries bills. maybe Muldoon had the right idea with his `think big' policies ...? Glenbrook steel, mill etc. but in the meantime why the grumbles about farming?
everytime I read these sort of discussions I am reminded of that World war 2 cartoon that depicts 2 soldiers in a trench with bullets and bombs flying over. One says to the other....
`if you knows of a better `ole you go to it' .!
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