The curse of the $100 peach - Chapter 2 of Michael Parker's book about why New Zealand needs a great university

The curse of the $100 peach - Chapter 2 of Michael Parker's book about why New Zealand needs a great university

By Michael Parker*

[This is Chapter 2 of the book, The Pine Tree Paradox. The Introduction was previously published here » and Chapter 1 is here »]

Despite our enthusiastic embrace of the Washington Consensus in economic policy since the mid-1980s, New Zealand’s long-term economic decline versus the rest of the OECD continues even today. Further reliance on the agricultural sector is unlikely to arrest that trend.

“Go home, take a paper bag, cut some eye-holes out of it. Put it over your head, get undressed and look at yourself in the mirror. Really evaluate where your strengths and weaknesses are. And be honest.”
- Joan Holloway to Peggy Olsen, pilot episode of the television series, Mad Men

This simple instruction to new secretaries at a fictional 1960s Madison Avenue advertising agency is also the necessary starting point for any discussion of New Zealand’s economic development.

To understand our economic circumstance, it is necessary to confront the naked truth.

And sure enough, in most books about New Zealand’s economic future, there is an overview describing the evolution of our economy as an explanation of our current position. Of course, most New Zealanders have heard this recital so often that they could write it themselves.

The orthodox review of New Zealand’s economy generally begins with statistics. In 1960, New Zealand had the fifth highest GDP per capita in the OECD.

By 1970, we had dropped to eighth. By 1980, we were 20th. By 2000, we had dropped to 24th place; in 2008, we were in 27th position7—below Slovenia, Korea, Greece and Spain. Next in line to overtake us are the Czech Republic, Slovakia, Portugal and Hungary.

The writer of an orthodox recital of New Zealand economic history will generally feel compelled to provide an historical context to explain this monotonic decline: the Korean War, the decline of the British Empire, government overreach and the difficult path of agricultural economies in an age of globalisation.

The New Zealand Treasury website offers a standard formulation8:

“New Zealand emerged from World War II with an expanding and successful agriculture-based economy. In the 1950s and 1960s, a period of sustained full employment, GDP grew at an average annual rate of 4%. Agricultural prices remained high, due in part to a boom in the wool industry during the Korean War…

…In the late 1960s, faced with growing balance of payments problems, successive governments sought to maintain New Zealand’s high standard of living with increased levels of overseas borrowing and increasingly protective economic policies.

Problems mounted for the New Zealand economy in the 1970s. Access to key world markets for agricultural commodities became increasingly difficult. The sharp rises in international oil prices in 1973 and 1974 coincided with falls in prices received for exports…

… The combination of expansionary macro policies and industrial assistance led to macroeconomic imbalances, structural adjustment problems and a rapid rise in government indebtedness. After the next major shift in oil and commodity prices in 1979 and 1980, New Zealand’s position deteriorated further...”

The orthodox recital of our economic path will then offer a policy perspective, noting how the Fourth Labour Government opened our economy to the global marketplace in 1984. The 1980s is generally portrayed as a large-scale experiment: decades of protectionism and tight governmental control over the economy gave way to striking fiscal, monetary, trade and capital market reforms and eventually employment law reforms based on what came to be known as the Washington Consensus.

A geo-political survey of the 1980s may also be included at this point as part of a broad assertion about New Zealanders “coming of age” or “gaining a national identity”: Bastion Point, ANZUS, the Springbok tour, the nuclear-free legislation, the Rainbow Warrior and the Homosexual Law Reform Act.

The 1980s are often depicted as a “lost decade” economically.

But sometime in the early 1990s, the orthodox recital will suggest that we turned the corner and the country began a positive growth path that it has been on for most of the last 15 years. This inflection point is generally attributed to our transformation from an economy based on wool, meat and dairy exports in the 1950s to a broad-based economy based on wine and on tourism, on fisheries and on sailing technology, on luxury boats and on television and movie production.

The history lesson generally ends with a description of New Zealand in the first decade of the 21st century as a wealthier, more cosmopolitan, more exciting and more sophisticated place than ever before. The nagging problem of our declining wealth compared to the rest of the OECD is acknowledged as a challenge for the leaders of tomorrow.

The problem with this familiar recital of our economic history is that it is an unforgivable act of national self-deception. This received history provides virtually no information about our true economic position because it relies on three myths about the last 50 years.

The first of these national myths is the suggestion that Britain’s joining the European Union9 in 1973 remains a central event in our economic history. Our fixation with Ted Heath’s decision to take Britain into Europe in the early 1970s suggests that we still believe at some level that Britain is the appropriate market for our exports and that our exports should be agricultural. Under this view of the New Zealand economic development, subsequent events are a deviation from our true destiny.

If you disagree with me on this assessment, ask yourself: if you had a friend who got dumped by a girl in 1973 and he still brought it up every time anyone asked him how he was, wouldn’t you tell him it was time to simply get over it?

Of course you would.

An individual who traces his lot in life to an event from four decades ago verges on psychotic. And yet, as a nation, we give Britain’s joining the European Union in 1973 primacy in our received history.

We must stop acting like a spurned lover.

The second national myth is the idea that the social and free market reforms of the Fourth Labour Government in 1984 are still noteworthy.

At this point, virtually the whole world - with the exception of Cuba and Venezuela - has embraced the Washington Consensus of using monetary policy solely to fight inflation, floating the currency, limiting government involvement in industry and opening markets to the flow of goods, services and capital. Poland has embraced more radical free-market reforms than we have.

Continuing to include the first term of the Lange Government as the most significant period of change in our economic and social history suggests a Fukuyama-like belief that history has reached an end. This belief that we have already made all necessary economic and social changes is deadly to efforts to inject dynamism into our economy and society.

More corrosively, the focus in our received history on the events of the 1970s and 1980s effectively removes all of the oxygen from the room before the last 20 years are even acknowledged. In our collective memory, both the 1990s and this decade are nothing more than swelling violins over a montage of Anna Pacquin’s Oscar acceptance speech, Jonah Lomu’s highlight reel, the opening of Te Papa, the America’s Cup victories and the Lord of the Rings. We pay little attention to the last two decades in describing our economic position because our national mythology tells us that all the important stuff had already taken place by 1991.

The third national myth is the notion that our economic recovery since the early 1990s is a result of our identifying diverse global markets for our value-added agricultural products. This is - at a minimum - open to debate.

Between 1994 and 2006, as the OECD grew GDP per capita at an annual rate of 4.1%, we grew at 3.8%. By inference, the OECD excluding New Zealand did slightly better than 4.1%. It is quite possible that the “good times” in our collective memory were merely us being pulled along by the flood tide of globalisation and that our actions were doing little to assist. We simply assume that, because we all now have mobile phones and satellite TV, we are doing something right.

These three myths have, in combination, created a blind spot in exactly the period where the real action took place - the last 20 years.

Our received history ignores the last 20 years because nothing big really happened in New Zealand over that period. And that is exactly the problem: nothing big really happened in New Zealand over that period.

Meanwhile, for the rest of the world, the last 20 years has seen the rise of massive economies like China, India, Russia and Brazil and many smaller economies like Finland, Norway, Ireland and Australia.

Globalisation is the central dynamic that explains our time. And yet, in our received history, it gets barely a mention.

In an open global economy, almost every developed economy—including us—will benefit. Some will benefit more than others. On that measure, we can infer winners and losers and, at this point, we are not winning. This modern age of globalisation has provided tremendous opportunities for countries that have opened their markets, specialised in areas where they have advantages, embraced new opportunities and relinquished outdated ones

And this is the most coherent explanation for why we are losing in the global economy.

It has nothing to do with butter exports to Britain or the Rainbow Warrior. The best explanation for why our economy is growing slower than the OECD average is that we are not responding adequately to the economic imperatives of our age.

These imperatives are not new.

They are simply the conclusions reached from the economic analysis of Adam Smith10, David Ricardo11 and Joseph Schumpeter12 in 1776, 1817 and 1942 respectively.

What is new is that these imperatives have been adopted and embraced in all the economies that have flourished over the last 20 years.

Specifically, accept that the market is the most efficient allocator of resources.

Second, specialise in areas where you have an advantage over the competition.

And third, realise that there is a perennial gale of creative destruction running through the capitalist economy at all times and everywhere and that the only choice is to be that gale-force wind—or to get blown over by it.

Over the last 20 years, these three insights have been the ordering principles for almost the entire global economy.

Those countries that have closely followed these ordering principles have turned out the winners. And size of the economy or type of economic activity has not mattered that much. For example, Norway, Ireland and Finland experienced tremendous economic growth over the last 20 years because of global demand for the output of their extraction, services and innovative sectors respectively. At the simplest level, winning and losing economically is determined today on the basis of how an economy is responding to these imperatives. And we are not responding all that well.

The Invisible Hand

The first imperative of globalisation is the role of the invisible hand: accept that the market, not the government, is the most efficient allocator of economic resources. Almost every country in the world - and certainly every country in the OECD - has embraced the role of the market in the form of the Washington Consensus over the last 20 years.

The Fourth Labour Government, when elected in June 1984, adopted most of the reforms necessary to meet this first imperative. The protectionist approach to trade that had been championed by Muldoon and all post-war New Zealand governments was removed. Quotas, tariffs, subsidies and exchange-rate controls were abolished in June 1984. Why assemble cars here when they could be manufactured and assembled at scale and therefore at a lower cost in Australia or Japan? Why graze sheep when there is no market to sell their wool to profitably?

These are important questions with simple answers for all involved except the assembly worker, the farmer and the sheep.

New Zealand has successfully adopted these free-market policies. Continuing to squabble about whether the government should sell Transpower or Television New Zealand misses the point that, in terms of the first imperative of the age, we have answered the bell. But that first step is not enough.

Do What You Do Well

The second imperative of globalisation is the concept of comparative advantage and its clear directive to specialise in goods and services that you have advantages in producing. Nations should manufacture products, grow crops or extract minerals if they can do so better than anyone else (absolute advantage) or if that is the activity that they can do best (comparative advantage).

The power of David Ricardo’s argument is that every nation is better off if it specialises in certain products and trades for whatever else its needs.

A country that has an absolute advantage in everything is still better off if it specialises in the products where it has the greatest advantage and trades for everything else.

The corollary is that a country with no absolute advantage is still better off if it specialises in the products where it has the least disadvantages and trades for everything else.

The unmistakable first conclusion of this imperative is that there is no justification for protectionism. The second conclusion is that economies should make what they can sell most profitably.

New Zealand farmers and businesses have embraced this lesson, to a point. Subsidised Minimum Payments to farmers and various other quotas and tariffs for the manufacturing sector were removed in 1984. Farms and businesses throughout New Zealand slowly and painfully adjusted to operating in the global market by seeking out new, niche markets around the world where we could achieve high margins.

The apocryphal story that I first remember hearing in the late 1980s was of a Tokyo restaurant (or maybe was it a market?) that would pay $100 for the perfectly-formed, unblemished New Zealand peach (or was it an orchid?). Or maybe it was a $1,000 crayfish.

In any event, peach growers in Central Otago changed their growing, picking and sorting processes, adjusted their shipping schedules and started to air-freight peaches to Tokyo. Almost every export sector of our economy made similar adjustments. A somewhat more prosaic example of the same point is lamb carcasses.

In 1970 lamb carcasses made up over 90% of total lamb exported; by 2003 this had fallen to less than 4%13 as we started exporting vacuum-sealed French cutlets with “Product of New Zealand” proudly stamped on the front of the packet.

Today we grow and export what are, without doubt, some of the best agricultural products in the world. No one can touch our Sauvignon Blancs. What is better than New Zealand grass-fed lamb? How about our Braeburn apples? Or our Bluff oysters, our crayfish or our green-lipped mussels?

Today, Auckland International Airport is New Zealand’s second largest cargo port by value as $16 billion14 worth of product leaves the country each year in the cargo holds of commercial jets. That high-margin, fresh produce is flown to markets around the world where NZ-made is in big demand.

Yet we are not as integrated with the global economy - that is, as specialised - as we might think. New Zealand’s gross domestic product for the year ended 30 June 2008 was (in 2008 dollars) $180.1 billion15. The total value of exported commodities for the same period was $40.0B16 while the value of exported services was $12.7B17. Therefore, exports - both goods and services - were the equivalent of 29.2% of GDP in 2008.

Based on OECD data from 2006, our trade as a percentage of GDP was 30%18. As such, it was higher than that of the United States, France, Spain, Italy, Japan and Australia. However, at 30%, we are well below other small countries - Norway, Ireland, Finland, Estonia, Slovakia and Luxembourg - that have far higher trade percentages. And location does not explain our middling performance. Chile’s trade as a percentage of GDP was 64.5%.

Further, our trade level as a percentage of GDP first hit 30% in 1979. We have oscillated in a tight band around that number ever since. Chile’s trade as a percentage of GDP has grown by almost two-thirds since 1980. Australia’s has grown by over a third during that same period.

And, if the absolute level of trade is insufficient given the size of our economy, what is an unambiguous disappointment is how small many of our high-profile industries are.

Specifically, wine exports accounted for just 2.4% of total goods exported (or $972 million in revenue) in 2008—only slightly more than wool ($774 million)19. The exports of the wine industry continue to grow but - at barely a tenth of total dairy exports - it is more a feel-good part of our national identity than a significant driver of the broader economy.

In short, while our trading levels are respectable, we are hardly the champions of free trade that we often tell ourselves we are. Further, not only is our level of trade unremarkable, but what we trade is still concentrated around dairy, meat and forestry.

After a half century of economic transformation from an agriculture-based economy into a dynamic, diversified, modern economy, our most significant export has changed from wool (over 30% of the total exported commodities in the 1960s)20 to dairy products (22% of the total exported commodities in 2008). For true believers in the $100 Peach, this is no doubt a disappointment.

Between them, dairy, meat, wool and forestry today make up roughly 45% of goods we export. Drive around the New Zealand countryside and, for the most part, what you see are cows, sheep and trees. Let’s not be too surprised that these items dominate our exports. However, listen to New Zealanders talk about what is at the heart of our economy and you will hear a lot more about tourism and wine and movies than you will about trees.

It is true that exports of wool, dairy and meat have fallen since the 1970s as a share of total exports, while fisheries and forestry have risen. Wool accounted for over 30% of New Zealand exports in the 1950s and is now below 3%21. This is a clear instance of the economy moving away from production of a low-margin commodity. And selling a block of butter is very different from selling whey powder for body-building protein drinks—and the margins attained reflect that, even if the statistics record both sales as simply “dairy”. However, if the second imperative of the age of globalisation is to specialise and to trade, we are simply not doing a good enough job.

The Perennial Gale

The third imperative of globalisation is economist Joseph Schumpeter’s description of capitalism as “the perennial gale of creative destruction”22.

He argued that the power of the market was not merely enforcing competition in price, quality and sales effort. Schumpeter argued that the true power of the market and of competition was in creating the entirely new product or technology or source of supply that had the ability to render existing products outdated and existing supply chains uneconomical and to destroy the existing companies and industries that created them.

For some economies, relying solely on traditional industries has paid off nicely over the last 20 years - especially if those traditional industries involve extraction. Norway and Australia have enjoyed tremendous economic growth by exporting oil and a range of other minerals respectively. However, for economies like New Zealand that were traditionally more heavily involved in agriculture, winning or losing in the modern age of globalisation has required transition to other forms of economic activity. We haven’t done that.

It is on this score - the creation of the wholly new and innovative idea, product, technology or source of supply - that the New Zealand economy has most clearly failed over the last 20 years. The creative destruction insight is a test of dynamism. What are we creating that did not exist a decade ago? What is that product replacing? Are we the generator of the creative gale, or merely being swept away by it?

Our failure on this count is clear from a variety of statistics, including our exports of services. Exports of services totalled $12.7 billion in 2008 and grew over the five years from 2003 to 2008 at a cumulative annual growth rate of just 1.3%23.

Once travel and transportation are removed from exports of services, the total drops from $12.7 billion to $2.7 billion - less than 10% of the value of total exports. The five-year cumulative annual growth rate of services excluding travel and transportation was 3.0%. And, within that $2.7 billion of revenue, there are few bright stories.

How about our software segment? Computer and information services were $301 million. More depressingly, research and development services exported totalled $94.4 million. But worst of all, royalties and license fees were $224 million in 2008, the first time they had exceeded the $200 million mark since 2003. In fact, the only identified service category that grew at greater than a 10% cumulative annual growth rate between 2003 and 2008 was financial services. And all of these categories account for less than one percent of total exports.

On this third imperative of the modern age of globalisation, we are failing badly.

The examples where small economies have taken this lesson to heart and succeeded are clear. Finland developed a national champion in Nokia with a product that has defined the age. Ireland leveraged its location, tax policies and educated workforce to become a preferred European headquarters for American and Asian firms that, in a globalised age, wished to expand their presence in Europe.

The difference between Ricardo’s concept of comparative advantage and Schumpeter’s concept of creative destruction is the difference between the static and the dynamic view of an economy. Are we doing the best we can with what we have - or are we creating something entirely new? It is the difference between making a really good peach and making a really good movie. Currently, we are mainly making peaches.

For New Zealand, outperforming the OECD over the long term requires production of goods and services that simply did not exist before. We have to become the perennial gale.

We’re No. 1

Smith, Ricardo and Schumpeter stand for the proposition that successful modern economies are open, specialised and focused on establishing new areas of economic activity.

If New Zealand wants to grow at a rate faster than the OECD average, we have to focus our efforts on activities other than agriculture.

Of course, accepting the analysis of Smith or Ricardo or Schumpeter is not necessary in order to accept the proposition that New Zealand needs to base its economy on something other than agriculture.

The empirical evidence and simple micro-economic analysis lead us to the same conclusion. We cannot return to the top half of the OECD’s GDP per capita table by feeding people.

Continuing to believe that we can simply makes us all Captain Ahab, adrift in the middle of the Pacific Ocean, desperately hunting the White Whale - be it venison meat, angora goats, merino wool, pinot noir or the Rugby World Cup - that will bring us release from our long national slide.

And, all the while, we sail closer to madness and doom.

The Curse of the $100 Peach, just like the White Whale, is not that it does not exist. The curse is that it surely does exist, and that we are determined to catch it.

The Curse of the $100 Peach is that we have convinced ourselves that the peach will make us rich.

The problem is not grass-fed lamb or peaches or Sauvignon Blanc. The problem is that we live in the 21st century. Sustainable economic growth comes from the growing and nurturing of ideas, not of food. We cannot compete with high growth economies if our strategy is simply to feed people - even rich people.

This fact is hiding in plain sight on the OECD website. One of the few statistics where New Zealand leads the OECD is “food and agricultural raw materials as a percentage of total merchandise trade”. In that category, we are No. 1.

In 2003 (the latest data set available), 48% of our exports by value were food or agricultural raw materials24. In second place, by this measure was Greece at 22.7%, then Australia at 20.7% and the Netherlands at 19%.

Of the countries at the top of the OECD’s GDP per capita statistics for 2008, none of them had agricultural products as more than 10% of total trade. And the countries that make up the top of the OECD GDP per capita tables are (with one exception) not the industrial powerhouses you might expect.

Agriculture as a percentage of exports for
top-ranked GDP per capita countries
Rank                        % of Exports (2003)
1.     Luxembourg ...... 6.7
2.     Norway ............ 0.8
3.     United States ... 8.6
4.     Ireland .............. 8.2
5.     Switzerland ...... 2.7
6.     Canada ............. 6.5

I will not bore the non-economists and insult the economists by correlating GDP per capita with these agricultural export statistics. Global trade and economics are far too complex to be reduced to a single variant regression.

However, there is a simple observation to be made from all this: New Zealand may one day return to the top of the OECD in GDP per capita by exporting agricultural products. However, if it does so, it would be truly unique.

No country performs at the top of the table with a trade basket that is so heavily dominated by agriculture.

In fact, the opposite seems to be true. A significant reduction in agriculture as a percentage of exports has been coincident over the last 20 years with higher economic growth. The clearest example of this is Ireland. Ireland’s GDP per capita grew at an 8.3% cumulative annual growth rate between 1987 and 2003 versus an OECD average of 4.3%. During that time, Ireland’s agricultural products as a percentage of total exports fell from 26.5% in the late 1980s to 8.2% in 2003.

This trend is reflected for the OECD as a whole over this period from the late 1980s to 2003. Agriculture, as a percentage of total exports, decreased by appoximately one-quarter across the entire OECD. In countries where the decrease was greater, economic growth was higher.

For the countries in the OECD where data is available and the drop in agriculture as a percentage of total exports was greater than the average, GDP per capita growth between the mid 1980s and 2003 was 5.2%. For countries where the drop was less than average, the GDP per capita growth between the mid 1980s and 2003 was 4.2%.

And that 100 base point delta means a lot. Our GDP growth per capita over the period was 3.5%; had it been 4.5% we would be growing faster than the OECD average and we would be overtaking countries in terms of income per capita instead of falling behind. Among other things, this would be a very different book.

I don’t want to torture this data set any further. It’s a small sample size and I have been forced to exclude former Soviet bloc countries because of a lack of long-term data. However, the clear inference is that selling food is not the way to get rich - or, more specifically, we cannot outperform the OECD by selling them food.

In fact, no country that is already in the OECD can.

Money Doesn’t Grow on Trees… or in Paddocks or on Vines

The fact that we cannot outperform the rest of the OECD by selling food should be no surprise. It’s not just the empirical results. Micro-economic analysis leads us to this same conclusion.

Any outperformance strategy is reliant upon selling high margin products to other OECD countries. Simplistically, if the product of the average New Zealand worker’s labour is more highly valued than that of her counterpart in Greece, New Zealand derives more income on a per capita basis than Greece and we overtake Greece on the GDP per capita table. To outperform the rest of the OECD, the key is to produce highly-valued and therefore high-margin products (assuming equivalent employment levels and productivity).

High margins can only be sustained over time if the product being sold is scarce. If a company or country is achieving high margins selling a plentiful or easily replicated product, other companies in other countries will start making and exporting that product too. As supply increases, price - and therefore margins - will fall.

And that has been the story of our agricultural sector for the last 30 years. In the developed world, food is plentiful. In fact, food is so plentiful that today residents of OECD countries are almost uniformly struggling with obesity issues. Therefore, we cannot sell food at high margins. And, if we cannot sell food at high margins, we cannot outperform the rest of the OECD. No matter how delicious our kiwifruit or Sauvignon Blanc, Chile can make a comparable product. We may be able to charge a premium, but there is a limit to how much an international consumer will pay for a “Made in NZ” sticker.

This is the Pine Tree Paradox. Monterey Pine or the radiata pine is a straight, fast-growing softwood tree. It is the world’s most widely planted softwood plantation species. The radiata pine grows faster in New Zealand than in anywhere else in the world. In New Zealand, the average forest growth rate (measured in cubic metres per hectare per year) is 20.0, compared to 1.0 in Canada and 1.6 in Russia and 2.6 in the United States25.

This discrepancy in growth rates for a product in high demand globally feels like exactly the kind of sustainable, competitive advantage that should have made us the Saudi Arabia of timber and should have made us fabulously wealthy. It isn’t and we aren’t. The difference between agricultural economies and extraction economies is not obvious but it is fundamental: you cannot grow oil.

To compensate for the slower growth conditions in Canada, Russia and the United States, our forestry competitors simply have to plant more trees. One thing of which there is no shortage in Wyoming or in Alberta or in Russia is land. If you want to grow one pine tree, come to New Zealand; if you want to grow a million, go to North America.

And this is the trap that we repeat in our quest for economic growth through agriculture. It feels like the pine tree should be the answer to our economic despair. And so should the crayfish and the Bluff oyster and the Central Otago pinot. But it never is for the simple reason that our agricultural products can be replicated without tremendous technology or effort in other parts of the world with lower labour costs. Replication leads to declining margins. And low margins over a long period of time lead to economic underperformance. In short, we cannot outperform the rest of the OECD through agriculture.

And premium branding will not solve the problem.

Despite the best efforts of our marketing boards, our “value-added” strategies and campaigns like 100% Pure will not overcome the inability of agriculture to drive economic outperformance in developed countries. The conclusion here is categorical because we can test the proposition empirically using the ultimate branded agricultural product: champagne.

There is no product in the world with the pedigree, the brand, the history and the cachet of champagne. The French have built up the product for centuries and have been incredibly diligent in protecting the brand. The greatest luxury-goods companies in the world manage and market this product’s image and placement today. They have done everything right from a value-added perspective for a very long time. There is simply no real substitute for champagne. And without substitutes, the risk of margin pressure from low-priced alternatives is very low.

If it is possible to get rich from agriculture, surely the residents of the Champagne region of France would have done it.

Based on a study by the French National Institute for Statistics and Economic Studies, GDP per capita in 2005 in the Champagne-Ardenne region of France was €25,093. Converted to US dollars at the prevailing exchange rate in 2005 of approximately 1.2, this would have translated to just over US$30,000. In other words, if the Champagne-Ardenne region was a country, in 2005 it would have been the 18th richest country in the OECD.

Said differently, if the Champagne region of France were to gain its independence and join the OECD as an independent nation, it would do just a little better than average in terms of GDP per capita by exporting champagne to the rest of the world. In short, making food - even champagne - is not enough to get to the top of the OECD’s Rich List. This again is the problem of living in the 21st century.

Of course, you may argue that while Moët is made in Champagne, LVMH is headquartered in Paris and its shareholders - who actually receive the value created by the production of champagne - are all over the world. That’s exactly right. It is another problem with basing an economy on agricultural production. If we were able to turn Marlborough Sauvignon Blanc and Central Otago peaches into champagne-like global brands, it would work exactly the same way here. In fact, it already has: Pernod Ricard - a French company - is just one example of foreign ownership of New Zealand vineyards. Pernod Ricard owns, among other New Zealand vineyards, Montana, Corbans, Church Road, Deutz and Lindauer.

We live in a global market. We cannot control who owns the vineyards in Marlborough or the location from which operations are managed. An agricultural value-added strategy places us in the same position as the residents of Champagne-Ardenne—in the best-case scenario. In other words, if building high-margin brands from our agricultural products is our economic growth strategy, we should set 18th place on the OECD league table as the upper limit of what we can achieve.

No matter how sophisticated our brand management, we surely cannot do it better than Champagne.

But, more importantly, exactly how many Champagne-calibre products do we think we have in New Zealand? I like New Zealand mussels, but go and eat one of the mushy orange ones and tell me it tastes like champagne. Occasionally, one of our agricultural products will break through to international acclaim and its international market might expand - perhaps even permanently. But is that kind of continuous, lightning strike truly our “strategy”?

Instead of becoming a nation of Champagne regions, the likelier outcome is that we simply end up competing with Chile at every turn. Chile is a beautiful country with terrific people, an open economy, beautiful climate, fertile land and great sea bass. But we can be sure that each new success that we have exporting agricultural products will be mimicked in Chile. And that is the preferred scenario. The alternative is even less attractive: we start copying Chile.

In short, if our goal is to return to the top half of the OECD table in terms of GDP per capita or to be as wealthy as Australia by 2025, our sights have to be set higher than agriculture.

Our agricultural export sector is fantastic and it should be encouraged. New Zealand wine, seafood and produce have become - over the last 30 years - an important part of who we are and how we live. Agriculture is part of the unique lifestyle here. However, it is not going to make us rich. For that, we need something else.

To get on the right side of that perennial gale, we need to embrace innovation.

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7. OECD Stat Extracts, www.eastonbh.ac.nz viewed 25 May 2009

8. New Zealand Treasury website, viewed in March 2009

9. The fact that you are checking this footnote suggests that you may well know that the EU was called the European Economic Community in 1973. But the fact that we both know this is exactly my point. It is infuriating how lovingly we cling to even the petty details of the myths about our current economic circumstance.

10. Smith, Adam, Wealth of Nations, (Prometheus Books, 1991) [orig. pub. 1776]

11. Ricardo, David, Principles of Political Economy and Taxation (Prometheus Books) [orig. pub. 1817]

12. Schumpeter, Joseph, Capitalism, Socialism and Democracy (New York: Harper, 1975) [orig. pub. 1942]

13. New Zealand Treasury website, “Compositional change in New Zealand’s goods exports”, viewed 29 November 2009

14. www.airport-technology.com, viewed 29 November 2009

15. New Zealand Treasury website, viewed 29 November 2009

16. Statistics New Zealand

17. Statistics New Zealand

18. OECD Factbook 2008: Economic, Environmental and Social Statistics

19. Statistics New Zealand

20. Brian Easton website, www.eastonbh.ac.nz, viewed 25 May 2009

21. New Zealand Treasury website, “Compositional change in New Zealand’s goods exports”, viewed 29 November 2009

22. Schumpeter, Joseph, Capitalism, Socialism and Democracy (New York: Harper, 1975) [orig. pub. 1942], pp. 85

23. Statistics New Zealand, Trade in Services and Foreign Direct Investment

24. Economic Accounts for Agriculture, OECD database, Agricultural Policies in OECD countries: Monitoring and Evaluation 2005, OECD, Paris, 2005.

25. Forestry Insights website, www.insights.co.nz, The Preferred Species, viewed 29 November 2009

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This is the sixth part of a serialisation of the book, The Pine Tree Paradox. It will be published online here in eleven parts.
The Introduction is here »
Chapter 1 is here »
Chapter 2 is here »
Chapter 3 is here »
Chapter 4 is here »
Chapter 5 is here »
Chapter 6 is here »
Chapter 7 is here »

If you would like to buy a copy of the full book, you can do so by credit card here » (Visa or Mastercard only.)

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Michael Parker is an equity analyst living in Hong Kong. Originally from Wellington, he has spent the last decade in San Francisco, New York and - on good days - Waiheke. He has a law degree and bachelor of commerce from the University of Otago and an MBA from NYU. You can contact him here »

Used with permission. © Michael Parker. This book was originally published in 2010.

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