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New Zealand Economy

Areas of Focus

When a kiwi (New Zealander) friend of mine visited the states this autumn, one of the aspects about the US was its large scale and how the economies of scale work to keep prices low. Until he visited, I had not given much thought to New Zealand other than the fact I'd like to vacation there someday, so I decided to explore more about that country, and have discovered that I know a bit more about NZ in particular the fact that its exports are showing a shift from an agriculture to a manufacturing economy.

My paper will focus on the economy of NZ, particularly in statistics. You may experience difficulty when prices and dollar amounts given in the statistics are in mixed format. For your reference, 1.00 USD American Dollars is equivalent to 1.41 NZD New Zealand Dollars as of December 19, 1996 (Zenon 1996).

Historical Background

New Zealand is a self governing country founded in the roots of British Colonialism located in the Pacific Ocean situated southeast of Australia. In 1840 the Treaty of Waitangi Maori allowed the British to establish a colony on this island located in the South Pacific. Today, majority of approximately 78% of its citizens are of European descent while Maori are about 13% of the total population. English and Maori are the official languages, with English being spoken predominantly, although it is mandatory that all citizens learn to speak Maori.

The climate is generally mild and seasonal changes are not severe. The land is often considered the most important resource of New Zealand. It is ideal for crop farming, dairy farming, and the raising of sheep and cattle. NZ also has abundant forests, mineral deposits, and natural gas. One could also make the argument that the people are their best resource since they are forward thinking (first western country to grant women suffrage), given strong government support to continue post-secondary education, and their police do not carry guns. One other interesting note according to Statistics New Zealand, there was an average of only 161 females and 4,371 males serving time in prison in 1993.

National Income

Ranked by the Swiss business school, IMD, New Zealand is a solid contender in the world's top ten competitive economies, it continues to be one of the world's most prosperous nations (The World Competitiveness Report, 1995). New Zealanders, or "kiwis" as they sometimes refer to themselves after the national (flightless) bird, enjoy a fairly high standard of living. Since NZ is heavily dependent on trade, one could speculate that much of the recent growth to income levels is directly related to a lessening of trade restrictions. In 1991, NZ was ranked sixth most competitive in the OECD based on over 400 criteria of eight factors of how well the country generates more wealth proportionately than its competitors in the world markets. Additionally, the IMD business school noted that "the strength of the NZD over the last year against the USD....the price of the basket of goods will have gone up in US dollars, but not in NZ dollars" when they compared the cost of living. The per capita reported by IMD in US dollars for 1994 and 1995 was $12,123 and $14,146 (The World Competitiveness Report, 1995).

Statistics New Zealand offers another look at domestic earnings. The table below outlines some average earnings per week and offers some average prices for items. What strikes me as surprising is that with average earnings and most exchange rate given by Xenon, my marginal propensity to smoke cigarettes would decline if I had to pay their equivalent to $4.70 a pack of Marlboro while only earning NZ average wage of $343.76 for average female earnings.

Average weekly earnings at Mid- 1992 1993 1994

February in NZ Dollars

Males $/week 610.33 619.40 628.34
Females $/week 474.55 478.01 484.85
Total $/week 549.44 555.72 563.52
Average prices for selected products appear below and are weighted average costs for retail items taken from the Consumer Price Index, June 1995 quarter:

  • loaf of bread $1.56

  • 2 liters of milk $2.37

  • 1 kg cheese $6.64

  • canned spaghetti 440g $1.32

  • white sugar 1.5 kg $1.69

  • hamburger $2.41

  • color remote controlled TV set $887.43

  • school shoes size med. $77.80

  • pack of 20 cigarettes $6.63

  • imported scotch 1125 ml $39.72

  • hairdressing (shampoo, cut, blow dry) $33.65

  • Film developing 24 color prints on 35mm $18.04

    In areas concerning inflation, investment growth of over 6% throughout much of 1994 augmented by "headline" inflation of 4% in the first quarter of 1995. Short term interest rates were considered to be high and speculation was whether or not NZ could keep their inflation within the target range. The growth of GDP in 1993 increased 5% and in 1994 increased 6%. Employment rates were up 5% in that first quarter of 1995 and outlooks from the OECD tend to favor a slowing of the economy in the near future (OECD New Zealand, 1995). Statistics New Zealand reports GDP per capita in 1995 to be $US14,400, while the NZ government reports that for GDP for 1991, 1992, and 1993 were (in millions) NZ$72,909, $76,111, and $80,864 respectively. Gross National Expenditure was (in millions) $70,261 $73,614 and $78,028 for those same years.

    The Reserve Bank remains firm in its commitment to keep inflation in the 0%-2% range. Currently there are concerns that that domestic demand may impact and rates may rise to 3% next year and then fall back.

    The Reserve Bank has "allowed" domestic interest rates to rise sharply during 1994, from a low at the start of the year of under 5% (for the 90 day bank bill rate) to a figure now approaching 10%. Of course the rates paid by businesses are often well above those levels and therefore many businesses have experienced a very significant increase in funding expenses. However if the central bank fails to keep interest rates at contract level, the governor of the bank gets fired. (Hanke, 1996)

    1994 has seen a continuation of the positive economic trends that emerged in 1993, in marked contrast to the five preceding years of recession. General business confidence is now at a high level. NZ's securities, in particular bonds and equities are undervalued. "Buy them and put them away" says Hanke. The last year has seen NZ undergo its strongest economic growth in more than 20 years. This surge of growth is expected to continue through 1997, although at slightly lower levels.

    Unemployment statistics have taken a most encouraging turn, showing a drop to 7.8% as of December 1994 to 6.3% for 1995 (NZ Government, 1996). It is significant to note that throughout 1994, 60,000 new jobs have been created.


    Exports and Imports

    New Zealand's internationally competitive products include jet boats, fiberboard, panelboard, furniture, carpets, plastics, metals, electrical appliances, electronics, quarrying equipment, stainless steel, electric fencing equipment, dairy machinery animal identification equipment, swim wear, food (fruit, cheese, ice-cream, chocolate) and wine.

    In the past, NZ's focus in specialization has been dairy, meat and wool. However, in recent years we have seen a shift to other products: forestry, horticulture, fishing, manufacturing, and tourism. The trend towards tourism as a major industry is likely to continue to increase within the next few years. On a side note, the NZ government reported that in 1993 there were 14 sheep per person.

    Trade Policies

    In 1995, the NZ dollar went to a floating exchange rate. Within a few years other moves towards freer trade were made. Import licensing controls in NZ were removed in 1992. Nevertheless, tariffs on imports remain as a primary support to business and industry.

    One policy which applies to all tariffs is the GST tax. The Goods and Services Tax became effective on October 1, 1986. The GST system is structured similarly to the United Kingdom's VAT system. The tax applies to those individuals or businesses who have sales of more than $30,000 a year.

    All imports are taxed under the GST at 12.5%. The chief exceptions are financial services and apartment dwelling rentals. The tax is not applied to exports and manufacturers may receive a credit for tax paid on raw materials. The tax rate on imports varies, depending on the country and classification of goods. Preferential tariffs have been established for Australia, Canada, and designated developing countries.

    The only types of goods which have excise taxes are alcohol, wines and tobacco products and petrol. The duty varies and is collected by the Customs Department. However, some goods, in fact a high proportion (15%) of tariff items are set at over 20% particularly in those protected industries as textiles, footwear, as well as motor vehicles (Orr, 1995).

    The following table shows some balance statistics

    1991 1992 1993
    Balance on merchandise trade 3591 3498 3115
    Balance on invisibles -5096 -4641 -1768
    Balance on current account -1505 1143 1652
    Net apparent capital inflow 3 1205 2389
    Net transactions in reserves -1502 62 738
    Official overseas reserves 5789 6171 6909

    Trade Agreements

    While New Zealand is a member of GATT they also have a trade agreement incorporating a free trade area with one of its largest trading partners, Australia. This formal agreement is called the Australia-New Zealand Closer Economic Relations Trade Agreement (ANCER or CER). In 1983 the CER was expanded to include trade in services. CER agreements generally only apply to goods which were produced in the Tasman trading area or if they are intermediary goods, then the final stages to the processing of the good must have originated in Australia or New Zealand (CER Agreement, 1996). Today, all quotas and tariffs are completely removed and have been since 1990. Exports to Australia have grown from 13% in 1980 to 20% of total export revenue in 1995.

    As mentioned previously, NZ is also a signatory to the General Agreement on Tariffs and Trade (GATT), under which it accords "most favored nation" (MFN) treatment to other contracting nations. New Zealand also has a number of trade agreements with Commonwealth and other countries under which it accords British preferential treatment. Tariffs for those nations are set at rates that are usually lower the MFN rates.

    To glance at some 1994 statistics from the NZ government web site, we can see that New Zealand trades heavily with Australia at 21.5% of imports (vdf) and 20.9% of exports (fob). The number of exports to Australia has increased significantly from 1984 as a result of their economy undergoing specialization in production and shifting more towards a stronger manufacturing sector. Other partners and their numbers include Japan at 14.6% of exports (fob) and 15.4% of imports (vdf). The US remains a strong trading partner as well with 11.3% of NZ's exports and imports of 18.1%.

    Theory in Practice

    Aside from the lower transportation costs, perhaps the main reason why Australia is one of NZ's biggest trading partners is because both have similar lifestyles, technologies, resources and the desire to bring free trade to the Tasman region.

    Clearly one can deduce that Adam Smith's theory of absolute advantage is taking place with some products that NZ and Australia exchange. Comparatively speaking, Australia is 29 times larger in area and has five times more people than New Zealand, and 6.5 less sheep per person than NZ. Recall NZ had approx.. 14 sheep per person in 1993.

    However, more intra-industry trade appears to be occurring . As Orr states in his OECD article of 1995 "analysis suggests that exports no longer simply represent the overflow from unsold domestic production....trade diversification in both product and destination has accelerated...". So even though factor endowments are similar, with Australia enjoying the larger land and labor factors, these factors determine the patterns of inter-industry trade, yet economies of scale in differing products allow the pattern of intra-industry trade to be determined and examined. In the 1860's when the Austral Asia area was being settled, their per capita GDP had surpassed the UK and remained the highest until the US became a super power during W.W.I years (Cashin, 1995). Cashin has noted that while both countries were being "formed", both NZ and Australia were likely to possess similar tastes and technologies. Both have integrated economic activities to the urban areas and relied on large foreign capital flows. While conducting my research, the Australian web site was down and I was not able to find any specific import or export numbers to make a model of measurement of intra industry trade between the two countries by measuring intra-industry trade index (T) in electrical machinery products. Unfortunately, I found few other published documents which have examined trade theories in application.

    Summary

    In the past few years, the world's focus has been on the emerging nations of the Pacific Rim. New Zealand has many things to offer investors, foreign and domestic. Their government is stable and they enjoy many of the same freedoms of the US but with much less of the economies of scale. NZ's future is looking bright in spite of the fact that it is a small country. I have outlined some facts on New Zealand that will give you a better understanding of their economic climate.

    Bibliography

    1. Boer, David Boles de. "The Economic Efficiency of Telecommunications in a Deregulated Market: The Case of New Zealand" Economic Record March 1996, n216, p24

    2. Cashin, Paul. "Economic Growth and Convergence Across the Seven Colonies of Australasia" Economic Record June 1995 v71, n213, p132

    3. CER Agreement. http://www.mft.govt.nz/Publications/cer/intro.htm

    4. Hanke, Steve H. "A revolution that paid off" Forbes May 20, 1996

    5. James, Colin. Far Eastern Economic Review February 9, 1995, v158, n6, p49

    6. OECD. New Zealand OECD Economic Outlook June 1996 n59 p120

    7. OECD. New Zealand OECD Economic Outlook June 1995 n57 p98

    8. Orr, Adrian. OECD Observer Feb-March 1995, n192, p51

    9. Prince & Partners. New Zealand Business and Investment Information

    http://www.clearfield.com/prince_partners/nzbiz2.htm

    10. Star and Tribune. "What's Your Dollar Worth" Star and Tribune Online http://www.startribune.com

    11. Statistics New Zealand. http://www.govt.nz/stats/nz/people.html

    12. The World Competitiveness Report September 1995 http://www.govt.nz/com/worldcomp94.html

    13. Xenon Labs. The Universal Currency Converter http://www.xe.net/currency/

    Copyright © Shannon Avery, 1996, all rights reserved.