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."
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