While New Zealand has about 0.1% of the world’s population, its economy produces about 0.3% of the world’s material output. Compared to the rest of the world, it is one of the richer economies. However, the Organisation for Economic Co-operation and Development (OECD) places it at the middle to lower end of its middle rich countries – a classification that focuses on material output rather than standard of living. New Zealand’s distinctive (and in some ways relaxed) lifestyle with a moderate climate, open environment, reasonable public services, and relative security from war and terrorism probably means its quality of life – if that could be measured – would rank higher. According to surveys, New Zealanders think so.
New Zealanders are generally well educated, healthy, and have a comfortable standard of living. The United Nations Human Development Index, which combines longevity and education with material production, places New Zealand in the top cluster of countries so well off that there are no clear differences shown.
As in most rich OECD countries, New Zealand’s economy primarily uses the market, where private owners (of resources, factors of production, and goods and services) make economic choices voluntarily. The government provides a context, including a framework of commercial law, in which these transactions can take place, although it reserves some activities mainly to itself, including the issue of currency. In some sectors – most notably education and health – it is the most important funder and provider. Although the market mechanism has always been dominant since European settlement, the balance between government involvement and voluntary market transactions has varied. New Zealand’s post-war market liberalisation was relatively late, which in part explains the vigour of the reforms from the mid-1980s.
The service (i.e. tertiary) sector dominates production and employment, with the share of manufacturing (secondary) and resource (primary) industries diminishing. Most industries are technologically sophisticated, relying on – by world standards – a skilled workforce.
Every economy is unique, but New Zealand’s has some distinctive elements:
The biggest difference is in the external sector. New Zealand’s export effort remains based on its comparative advantage in certain resources which are traded for other goods and services which it cannot produce as efficiently – for example, trading sheep meat for cars. This trade of like with unlike is called ‘inter-industry trade’. Elsewhere in the post-war era there has developed a new phenomenon, called ‘intra-industry trade’ in which countries export and import much the same product – for example, aircraft parts. This now makes up about a quarter of all international trade, and a far higher proportion of trade between rich nations. Among the OECD rich countries, New Zealand performs poorly on measures of intra-industry trade. In this respect it appears more like a developing than a developed country. It is only with Australia that New Zealand has a mature intra-industry trade relationship.
Economists often characterise the domestic structure of an economy by sectors, in which they group farms, firms and institutions which are doing similar things. The usual means of measuring a sector’s contribution to the economy is the value of its net output (value added).
It used to be said that New Zealand had 20 times more sheep than people. By 2001 this was no longer the case: there were only 12 times as many sheep as people. However for each person there were also:
1 beef cow
1 dairy cow
3 cartons of apples and pears exported
13 litres of wine produced each year
16 chickens killed each year
40 trays of kiwifruit produced each year.
There have been major changes to the structure of New Zealand’s gross domestic product (GDP). Over the 80 years for which data are available there has been a substantial reduction in the share of agriculture in GDP (partly reflecting lower prices than in the past), a diminution of the manufacturing sector for about 20 years, and an uneven expansion of the service sector.
In all modern rich economies the service sector grows faster than the primary and secondary sectors. In recent decades this sector in New Zealand has grown so fast that the share of manufacturing has also diminished. However, import licensing and reductions in most tariffs during the 1980s and 1990s may have reinforced that trend by forcing the closure of manufacturing industries that could no longer compete with imports.
Despite the relative decline in both employment and output in agriculture, this sector remains hugely important to New Zealand, both in terms of image and of export trade. Much agriculture remains internationally competitive, partly because animals are largely grass fed, but also because New Zealand farmers are technologically innovative and sensitive to market opportunities and changes. Some of the most important forms of farming are:
Although almost a quarter of New Zealand’s 26.8 million hectares of land area is in native forests, milling of this has almost ceased. But 1.8 million hectares are planted in exotic trees, mainly radiata pine, and as a result of government sales of its estate in the late 1980s, over 90% of these forests are in private hands. Following a planting boom in the 1970s and early 1980s many trees are ready for processing. About an eleventh of all exports are wood products, including timber, pulp, board, paper and newsprint.
Since the establishment in 1977 of an exclusive economic zone around New Zealand (one of the largest such zones in the world), commercial fishing has developed into a major export industry. The fisheries are managed by a world-leading quota management system which sets limits on fish catches, and allows the trading of quota. There are over 1,500 vessels at work, and in addition to fish species such as hoki, orange roughy, tuna and snapper, there are significant exports of squid, lobster and farmed mussels. Fish and fish products amount to about 4% of total exports.
Energy contributes about 3% of gross domestic product (GDP) and New Zealand is self-sufficient in all forms of energy except oil. About 70% of New Zealand’s primary energy is domestically produced, the rest being imported oil. In December 2002 the most important energy sources were indigenous and imported oil (33% of energy content), gas (30%), hydroelectricity (11%), geothermal (11%), coal (8%) and other renewables (7%). Considering just sources of electricity, three fifths came from hydroelectric power stations, a quarter from gas, and small amounts from underground geothermal reserves (7%) and coal (4%).
The locally produced oil was dominated by the Māui field off the coast of Taranaki, which was also responsible for two-thirds of the gas production, with most of the remainder coming from onshore Taranaki, although there are prospects in other parts of New Zealand. Efforts have been made to improve energy efficiency and to develop renewable sources of energy such as wind and solar power.
Total in-ground coal resources are though to be about 15 billion tonnes, of which 8.6 billion are judged to be economically recoverable. Production in 2002 was about 4 million tonnes a year (about a half is exported), so New Zealand has very substantial reserves for the future.
There are two economically significant metals mined in New Zealand:
In 2001 the manufacturing sector contributed about 16% of gross domestic product (GDP), down from the 25% typical of much of the 20th century. In part this reflected the trend occurring in rich countries, but it was also a result of the elimination of all import licensing and of most tariffs from the mid-1980s. Even so, about a quarter of a million New Zealanders work in the sector.
The largest subsectors were food, beverages and tobacco, followed by machinery and equipment. Auckland was the largest centre for manufacturing in 2001, with 35% of the 235,000 manufacturing labour force.
There was a great variety in the range and type of industry. The food, beverages and tobacco subsector included large industrial plants processing livestock and milk for international sale, as well as small businesses providing food for local consumers to take home. Successful world-class manufacturers included producers of domestic and office furniture, electric fences, dairy products, wine, chemicals, retail point of sales systems, production systems for domestic appliance manufacturers, rock-crushing equipment and mobile radios, among other things.
In 2001 the largest industrial works in New Zealand included the aluminium smelter at Tīwai Point near Bluff, petrochemical factories in Taranaki, wood-processing factories at Kawerau in the Bay of Plenty and Kinleith in Waikato, the huge dairy factory at Te Rapa in Waikato, the steel mill at Glenbrook, just out of Auckland, a whiteware plant in Auckland, and the oil refinery at Marsden Point, Whāngārei, plus freezing works throughout New Zealand.
With the end of border protection, manufacturing based on assembling imported components to supply domestic markets almost entirely disappeared. As well as those which domestically process New Zealand’s primary production, often for export, there is now a flourishing manufacturing export industry based on New Zealand skills and innovation. Many manufacturers began exporting to Australia, facilitated by the Closer Economic Relations agreement (CER), and the earlier New Zealand–Australia Free Trade Agreement (NAFTA).
Despite home ownership declining from the mid-1990s to 67% in 2001, the freehold home remains an important aspiration for many New Zealanders. Building new homes is therefore a significant economic activity. Residential construction is normally about 60% of all building by value, and in 2000 the whole industry employed over 100,000 people and contributed over 4% of GDP.
Shipping has been important since the first Europeans arrived, with many of the country’s urban centres built around ports. In the early 2000s, a quarter by value of overseas exports by sea was shipped through Tauranga, and a fifth through Auckland. Auckland, however, receives more imports. Wellington and Picton provide important shipping links between the North and South islands. Oil products are distributed by sea where possible.
In 2003, 17% by value of exported goods went out by air. Auckland airport is the second largest port for imports. Virtually all of the more than three million overseas visitors to New Zealand in 2002 arrived by air. They were carried by 17 foreign airlines, as well as by Air New Zealand. Because of the country’s long narrow shape, air travel is a favoured form of domestic travel.
However, the most popular form of travel remains the car. In 2000 there were over three million motor vehicles for four million people. There were more cars per person in New Zealand than in the United States, the United Kingdom or Japan, but fewer than in Germany or Australia. In 2001, 73% of New Zealanders drove to work.
Railways do not play the central role in the transport system that they did in the past. Nevertheless, they remain major haulers of long-distance freight, and there are small commuter networks in Auckland and Wellington.
In the last decades of the 20th century, the transport sector increasingly relied on the market mechanism (supply and demand) rather than on public ownership. Even so, following the privatisation of Air New Zealand and New Zealand Railways in the 1980s and 1990s, the government subsequently purchased back a major shareholding in the airline and renationalised the rail track.
As in other parts of their lives, New Zealanders have been offered choice and technological sophistication in communications since the late 1980s. In radio there is a great range of private stations, including Māori tribal stations, many operating on the FM network, with the government only retaining National Radio, Concert FM, a network for broadcasting Parliament, and the Radio New Zealand international (external link) broadcasts to the nations of the South Pacific.
Television has seen the crown-owned TV1 and TV2 competing with a free-to-air network (TV3) and a whole range of smaller channels transmitted through subscriber television networks such as Sky Network Television’s digital transmission. In 2004 a government-funded Māori television channel began broadcasting.
New Zealanders have also quickly picked up on telecommunications developments, especially cellphones and the internet. Whether in schools, libraries, at work or at home most New Zealanders have regular access to the web. Increasingly bookings and purchases are transacted that way. As email has taken off, stamped mail has become far less a vehicle of personal communication.
The information and communications technology (ICT) sector is thriving, and New Zealand is exporting hardware, software and services.
Wholesale and retail trade utilises about 15% of gross domestic product (GDP). Like many other sectors in recent years it has been transformed with a relaxation of shopping hours (they can open for 24 hours a day except for Christmas Day, Good Friday and Anzac Day), the increased use of credit cards, and new presentational formats based on ICT and overseas bulk purchasing. The end of liquor licensing restrictions in 1989 and the growing number of women in employment has resulted in an upwelling of restaurants and bars in city centres, and the growth of fast-food outlets. In the early 2000s a far higher proportion of meals were prepared and consumed outside the home than they were by previous generations.
Other significant commercial services include the provision of banking and insurance, while the education and health sectors sell services to foreign customers, and there is a growing number of New Zealand companies providing services offshore via broadband access.
New Zealand is also developing a significant role in the world biotechnology industry.
Tourism is the world’s largest industry, and with air travel becoming cheaper and effective promotion, New Zealand has captured a share of that market. The country promoted its distinctive Pacific culture, opportunities for adventure and sophisticated recreations, from world-leading museums to groomed ski slopes. It cashed in on events such as the America’s Cup yachting competition and the release of the locally made movie The lord of the rings. The result was that during the 1990s overseas tourist numbers doubled and tourism became the country’s leading earner of foreign exchange. In 2004 there were close to 4,000 establishments offering accommodation, and the restaurant trade has boomed.
Since New Zealand engaged with the world economy in the 19th century it has had a high level of trade. In 2003 exports represented almost a quarter of the gross supply of goods and services in the economy.
The export sector has experienced major changes since the 1960s. At that time over 90% of exports were farm products, mainly in the form of crude commodities such as bales of wool, carcases of meat, and crates of butter and cheese. Few services were exported and two-thirds of all exports went to Britain.
By the 2000s New Zealand was still a specialist exporter of primary products. Depending on the precise measure, exports from farm, forests, fisheries and mines followed by secondary sector processing made up about two-thirds of all merchandise exports, but slightly less than half when service exports are included.
The nature of those exports has changed. Exports from the farm now include horticulture (whether cut flowers, kiwifruit, apples, vegetables or wines). These exports tend to be much more sophisticated, with more processing beyond the farm gate. The old standbys – wool, butter and cheese – which had together earned half of New Zealand’s exports by value in 1965, each contributed under 4% of exports in 2001. Dairy products are still 16% of the country’s exports by value, but most went in the form of milk powder, not butter or cheese. Meat, which had been almost 30% in the mid-1960s, was down to 10%.
Primary sector exports in 2004 included:
The manufacturing sector is a major exporter either by processing and value adding to the primary sector exports, or by general and specialist products in their own right. Among the extraordinary range of goods sold overseas are whiteware (fridges and dishwashers), electric fences, newsprint and furniture.
In some respects the biggest change came in the provision of services, which by 2001 were contributing about a quarter of the country’s export receipts. This was very largely a result of the rise of international tourism to New Zealand, although other service activities (most noticeably the film industry) also made a considerable contribution.
Export destinations have changed dramatically too. Australia is now the largest export market (with over a fifth of exports in 2004), followed by the United States (with over a seventh), then Japan and China. In only fifth place came the United Kingdom (with under a 20th of exports), which still imported meat and dairy products. Of course if we look at markets rather than countries, the European Union was New Zealand’s second largest single market. The Asian region takes about a third of all New Zealand exports.
As a general rule the revenue from exports did not pay for all the imports of goods and services plus the interest and profit payments to foreigners. That means most years New Zealand had a current account deficit. This deficit represents foreigners’ investment in New Zealand.
The total goods and services available for use in an economy are those which are produced, plus the exports. This is called ‘gross supply’. Imports were 23.8% of gross supply in the March 2003 year. But almost a quarter (24.9%) of the gross supply was exported.
Of the total gross supply, 44.6% went into the consumption of private households. Another 1.0% was spent by private non-profit organisations such as charities. Central and local government spent 13.8% on consumption, capital formation (investment) was 15.2%, and the remainder of the available supply built up inventories.
The proportion consumed by government is much lower than frequently referred to in the public rhetoric. This is partly because it is usually compared with gross domestic product (not gross supply), partly because the figure of 13.8% omits the government’s capital formation, but also because the rhetorical figure includes the transfer of monies – such as social security, welfare payments and superannuation – to the private sector, so when a New Zealand superannuitant purchases a loaf of bread, that is portrayed as public expenditure. Comparisons suggest that New Zealand’s public spending is at a level similar to that of most rich OECD countries.
In the early 2000s about two-thirds of adults were in the workforce. Three-quarters of this group were full-time workers. Since the mid-1980s the number of part-time workers has grown rapidly. Women were more likely to work part-time. In 2000–2003 the unemployment rate hovered between 5 and 6% – one of the lowest rates in the developed world. Service industries employed two-thirds of the workforce. Over time the labour force has become increasingly skilled and better educated.
About 18% of the workforce was in the public sector. This was relatively low by international standards. The figure has fallen from 25% in the mid-1980s, largely because of the sale of many government enterprises during the late 1980s.
From the 1890s New Zealand industrial law involved considerable state regulation of industrial relations and was supportive to trade unions. In 1989, 47% of the employed labour force belonged to a union. Over the next decade membership fell to 17%, largely as a consequence of the Employment Contracts Act 1991, which stripped away the privileges of unions and focused on individual employment contracts. This act was replaced in 2000 by the Employment Relations Act, which required employers, employees and unions to deal with each other openly and honestly.
This new legislation did not, however, reintroduce compulsory unionism, and there was only a slight rise in the proportion of unionised workers to 17.6% of the employed labour force at the end of 2002. They were in 174 unions, not all of which were members of the New Zealand Council of Trade Unions.
Overall, New Zealand has become slowly more prosperous, albeit with setbacks in the 1980s and 1990s. The gap between rich and poor widened from the 1980s. In the year ending March 1996 the top 10% of households had just over a quarter (25.8%) of all income. In 1982 they had possessed about a fifth (20.1%). The lowest 10% of households had just 3.6% of the income. This widening gap was due in part to income-tax changes of the late 1980s and social security benefit cuts of the early 1990s, along with higher unemployment. During the same period the real incomes of 8 out of 10 people fell, in part because of the weak performance of the economy.
Many people in the lowest deciles are in considerable hardship, especially those with children.
The Polynesians who settled New Zealand carried an economy with them. They introduced kurī (dogs), kiore (the Pacific rat) and crops such as kūmara (sweet potato). Local resources were initially plentiful and easily gathered. Some were overexploited. Killing seals and the large flightless moa was all too easy – they were not so much hunted as ‘quarried’.
As these resources ran out, Māori adopted a more sustainable economy, based on cultivating kūmara and fern root, and a careful harvest of the forests, the seashore and the sea. Tribes were self sufficient in most resources, but there was trade in valuable tough cutting stone such as pounamu (greenstone), obsidian and argillite.
With the arrival of the Europeans, Māori quickly began to trade food, especially pigs and potatoes and other resources – timber, flax – for European wares such as nails and muskets. At first some European settlers survived only because of the supply of Māori food.
Māori gladly ate the new foods that explorers introduced. While parareka (potatoes) and poaka (pigs) were soon staple foods, younger people also tried more unusual flavours. A favourite early relish contained an extraordinary mixture of new tastes and old: tāwhara (kiekie berries), peaches, onions, potatoes, kūmara, fuchsia berries, pig brains, lard and tutu juice. This particular sauce won’t be found in any contemporary Kiwi recipe book.
Following loss of land and a declining population from the mid-19th century, the Māori economy became increasing marginalised. Despite living almost entirely rurally, Māori found it difficult to take full advantage of the pastoral farming revolution.
After the Second World War Māori moved to urban centres to find jobs and prospects. Today they are an integral part of the New Zealand economy and workforce, although they tend to be on average younger and less skilled. They are also less well paid and more likely to be unemployed. Māori tend to be more concentrated in farming, forestry, fisheries, tourism and some service providers in education and health.
Like the first Polynesian settlers, 19th-century Europeans depleted various resources such as seals, whales, native timber, gold, and kauri gum. Major gold rushes in Otago, the West Coast and Thames in the 1860s stimulated development. Many of Dunedin’s fine buildings were paid for with Central Otago gold. Coal was also mined in Otago, the West Coast and Waikato, and kauri gum in Northland. It was an unsustainable economy, although some regions, notably the West Coast, remained important quarries of natural resources into the late 20th century.
The early European settlers mostly provided supplies and services. Pastoralism also developed in the 1850s and 1860s, with large sheep runs mainly on the east coasts of both islands. As the resources were depleted the settler lifestyle became more marginal, especially in the long economic depression in the 1870s and 1880s, when many went elsewhere. New Zealand’s economic destiny seemed to lie in large-scale sheep farming, and the export of wool, tallow and perhaps canned meat.
The advent of refrigeration, which began in the 1880s, opened up a new economy based on family farms. Forests were felled. In 1861 there were 158,000 acres (64,000 hectares) of good pasture in New Zealand; by 1881 there were 3.5 million acres (1,416,373 hectares) and by 1925, 16.5 million acres (6,677,188 hectares). There was innovation. New grasses were sown so that two blades of grass grew in place of one. Improved livestock were bred, and freezing works and dairy factories efficiently turned out meat and dairy products which were shipped to Britain. This ‘processed grass’ (including wool) made up some 90% of exports for the next 80 years – until the 1960s.
In the 1920s and 1930s the manufacturing sector expanded. The freezing-works chain replaced skilled butchers, and auto assembly plants appeared. Hydroelectric dams began to provide electrical power. Industrialisation was forced by government interventions (such as import controls from 1938) in order to generate jobs for a growing population. They were keen to reduce the dependence on exporting after the collapse in the terms of trade during the great depression of the early 1930s. ‘The slump’, as it was also known, brought widespread poverty, and the unemployed rioted in city streets. The Second World War brought recovery and a wool boom in the early 1950s. It was an economy sometimes described as ‘two-legged’, with the pastoral leg generating the foreign exchange the economy needed, and the manufacturing leg generating the jobs to maintain full employment.
In late 1966 the export price of wool crashed by 40% as a result of increasing competition from synthetic fibres. The price never recovered for any length of time. Meat exports came under pressure from white meats – chicken, pork, and fish – and butter from other oils. Affluent countries limited access to their markets, and dumped their surpluses on other markets, further depressing New Zealand’s export returns. The dominance of farm goods in the export sector and the political economy came to an end.
‘Think Big’ referred to a bundle of energy-related projects promoted by Robert Muldoon’s government in the late 1970s. They were intended to save on imports and remove dependence on agricultural products. Several projects involved the use of Māui gas, which was used for methanol, ammonia-urea and synthetic petrol. The oil refinery at Whāngārei, the Tīwai Point aluminium smelter and the steel works at Glenmore were extended, and there was electrification of much of the North Island main trunk rail line. With the fall in the world price of oil in the mid-1980s the programme proved less successful than promised.
With the staple export of ‘processed grass’ under threat, the New Zealand export sector diversified into horticultural, forestry, fishing, energy exports, tourist and other services, as well as general manufacturing (mainly to Australia). Meanwhile, more sophisticated farm exports added value – for example, wool carpets were being produced. The new products also meant new markets, an effect reinforced when Britain joined the European Union in 1973, blocking off the traditional markets. It has been calculated that between 1965 and 1980, New Zealand achieved the greatest external diversification of all rich OECD countries, both by commodity and destination concentration. Nevertheless the exports remained specialised, and not all efforts succeeded. The Think Big idea of using gas from the Māui field as the basis for a petrochemical industry largely failed when the price of oil fell in the mid-1980s.
Changing global conditions meant that the high degree of government intervention was becoming ineffective. New lifestyles and greater social heterogeneity challenged old ways. For example, as women joined the workforce, the restricted shopping hours became unrealistic.
There were cautious changes up to 1984, such as the Closer Economic Relations initiative with Australia. But a new government in 1984 and another in 1990 unleashed vigorous liberalisation, promoting a freer market economy. Government withdrew from many businesses, tariffs were lowered, the currency floated. Some reforms were extreme and were later reversed, but the general principle of the market mechanism remains at the core of New Zealand economic policy.
‘Rogernomics’ was a term used by New Zealanders to describe the dramatic liberalisation of the economy which followed the election of a Labour government in 1984. The name derived from Minister of Finance Roger Douglas, considered by many to be the major force behind the controversial initiatives.
An unfortunate by-product was that for a time the economy stagnated, with per capita gross domestic product falling in the late 1980s and early 1990s. Another consequence was that manufacturing based on the desire to avoid importing components, such as car assembly, almost completely closed down.
From the mid-1990s the New Zealand economy began to expand, and its gross domestic product (GDP) has grown a little faster than the OECD average. There are many possible reasons – the great diversification of the 1970s, the liberalisation of the late 1980s and 1990s (although some of the most extreme measures were reversed after 1999), prudent economic management, and export price gains from the reduction in world agricultural protection following the ‘Uruguay Round’ settlement of 1986–94. Whatever the reasons, New Zealanders know they will have to work hard, invest shrewdly, innovate creatively, and manage wisely to maintain a high standard of living and an improving quality of life.