Economy of New Zealand

Economy of New Zealand

Auckland's Central Business District at night, a major hub of economic activity.
Currency 1 New Zealand dollar (NZD$) = 100 cents
1 April – 31 March
Trade organisations
 APEC, WTO and OECD
Statistics
GDP US$173.2 billion (2016, PPP)[1]
GDP rank 53rd (nominal) / 69th (PPP)
GDP growth
 Increase3.5% (2014 FY)[2]
Increase1% (YTD September 2014)[3]
Population below poverty line
 No official statistics
0.32 (2010)[4]
Labour force
 2.402 million (2012 est.)
Labour force by occupation
 Agriculture (7%), industry (19%), services (74%) (2006 est.)
Unemployment 5.3% (December 2015 Qtr)[5]
Main industries
 Food processing, textiles, machinery and transportation equipment, finance, tourism, mining
2nd[6]
External
Exports NZ$61.722 billion (FY 2013)[7]
Export goods
 Dairy products, meat, wool and wood products, fish, machinery
Main export partners
  Australia 21.0%
 China 15.0%
 United States 9.2%
 Japan 7.0% (2012 est.)[8]
Imports NZ$59.076 billion (FY 2013)[7]
Import goods
 Machinery and equipment, vehicles and aircraft, petroleum, electronics, textiles, plastics
Main import partners
  China 16.4%
 Australia 15.2%
 United States 9.3%
 Japan 6.5%
 Singapore 4.8%
 Germany 4.4% (2012 est.)[9]
NZ$232.8 billion (100.7% of GDP) (FY 2014)[10]
Public finances
38.4% of GDP (2013 est.)[11]
Revenues NZ$74.9 billion(Budget 2015 forecast)
Expenses NZ$74.9 billion (Budget 2015 forecast)
Economic aid donor: $99.7 million (FY99/00)
Foreign reserves
 US$20.626 billion (March 2011)[14]
Main data source: CIA World Fact Book
All values, unless otherwise stated, are in US dollars.

The economy of New Zealand is a mixed economy that depends greatly on international trade, mainly with Australia, the European Union, the United States, China, South Korea and Japan. The Closer Economic Relations agreement with Australia means that New Zealand's economy is closely aligned with the Australian economy.

New Zealand's economy has a sizable service sector, accounting for 63% of all GDP activity in 2013.[15] Large scale manufacturing industries include aluminum production, food processing, metal fabrication, wood and paper products. Mining, manufacturing, electricity, gas, water, and waste services accounted for 16.5% of GDP in 2013.[15] The primary sector continues to dominate New Zealand's exports, despite accounting for 6.5% of GDP in 2013.[15]

The major capital market is the New Zealand Exchange, known as the NZX. As of November 2014, NZX had a total of 258 listed securities with a combined market capitalisation of $94.1 billion.[16] The currency is known as the New Zealand dollar, which is also the currency of five Pacific Island territories. The New Zealand dollar is the 10th most traded currency in the world.[17]

Overview

Gross domestic product trend of New Zealand at market prices estimated by the International Monetary Fund.
Year Gross domestic product
(NZ$ millions)		 1 US dollar exchange Inflation index
(2000=100) 		Per capita income
(as % of USD)
1980[18] 22,976 NZD 1.02 30 58.67
1985[18] 45,003 NZD 2.00 53 38.93
1990[18] 73,745 NZD 1.67 84 55.80
1995[18] 91,881 NZD 1.52 93 59.02
2000[18] 114,563 NZD 2.18 100 38.98
2005[18] 154,108 NZD 1.41 113 62.99
2010[19] 140,787 NZD 1.65 129
2015[19] 199,117 NZD 1.74 147

The New Zealand economy is usually seen to be successful: It has been ranked first in the world for Social Progression, which covers such areas as Basic Human Needs, Foundations of Wellbeing, and the level of Opportunity available to its citizens.[20] However, the generally positive outlook includes some challenges. New Zealand income levels, which used to be above those of many other countries in Western Europe prior to the crisis of the 1970s, have dropped in relative terms and never recovered. As a result, the number of New Zealanders living in poverty has grown and income inequality has increased dramatically.

New Zealand has also had persistent current account deficits since the early 70s, peaking at -7.8% of GDP in 2006 but falling to -2.6% of GDP in FY 2014.[21] Despite this, public debt (that owed by the Government) stands at 38.4% (2013 estimate) of GDP,[11] which is small compared to many developed nations. However, between 1984 and 2006, net foreign debt increased 11-fold, to NZ$182 billion.[22] By March 2014 net foreign debt had dropped back to NZ$141.6 billion, which represents 61.5% of GDP.[10]

New Zealand net overseas debt 1993–2012
New Zealand government overseas debt 1990–2012

Despite New Zealand's persistent current account deficits, the balance on external goods and services has generally been positive. In FY 2014, export receipts exceeded imports by NZ$3.9 billion.[21] There has been an investment income imbalance or net outflow for debt-servicing of external loans. In FY 2014, New Zealand's investment income from the rest of the world was NZ$7 billion, versus outgoings of NZ$16.3 billion, a deficit of NZ$9.3 billion.[21] The proportion of the current account deficit that is attributable to the investment income imbalance (a net outflow to the Australian-owned banking sector) grew from one third in 1997 to roughly 70% in 2008.[23]

Taxation

Taxation in New Zealand is collected at a national level by the Inland Revenue Department (IRD) on behalf of the Government of New Zealand. National taxes are levied on personal and business income, as well as on the supply of goods and services. There is no capital gains tax although certain "gains" such as profits on the sale of patent rights are deemed to be income, income tax does apply to property transactions in certain circumstances, particularly speculation. Local property taxes (rates) are managed and collected by local authorities. Some goods and services carry a specific tax, referred to as an excise or a duty such as alcohol excise or gaming duty. These are collected by a range of government agencies such as the New Zealand Customs Service. There is no social security (payroll) tax or land tax in New Zealand.

In the 2010 New Zealand budget, personal tax rates were cut with the top personal tax rate reduced from 38% to 33%[24] The cuts gave New Zealand the second-lowest personal tax burden in the OECD. Only Mexico's citizens had a higher percentage-wise "take home" proportion of their salaries.[25]

The cuts in income tax were estimated to have reduced revenue by $2.46 billion.[26] To compensate, GST was raised from 12.5% to 15%.[27] Treasury figures show that top income earners in New Zealand pay between 6% and 8% of their income on GST. Those at the bottom end, earning less than $356 a week, spend between 11% and 14% on GST. Based on these figures, the New Zealand Herald predicted that putting GST up to 15% would increase living costs for the poor more than twice as much as for the rich.[28]

Corruption

New Zealand is the 4th highest-ranked (i.e. 4th least corrupt) country on the Transparency International corruption perceptions index (CPI) of 2015.[29]

Regional economies

Regions of New Zealand.

In 2013 Statistics New Zealand published details of the break-down of Gross Domestic Product in the Regions of New Zealand for the year ended March 2013:[30]

Region (position on map) GDP (2013, NZ$ million) Share of national GDP GDP per capita (NZ$, 2013)[* 1]
Northland (1) 5,562 2.6% 35,068
Auckland (2) 74,746 35.3% 49,217
Waikato (3) 17,935 8.5% 42,868
Bay of Plenty (4) 11,174 5.3% 40,236
Gisborne (5) 1,613 0.8% 34,472
Hawke's Bay (6) 6,050 2.9% 39,035
Taranaki (7) 8,200 3.9% 74,341
Manawatu-Wanganui (8) 8,534 4.0% 36,688
Wellington (9) 28,472 13.5% 57,941
North Island 162,286 76.7% 47,612
Tasman / Nelson (10 / 11)[* 2] 3,795 1.8% 39,863
Marlborough (12) 2,032 1.0% 44,357
West Coast (13) 1,535 0.7% 46,793
Canterbury (14)[* 3] 27,843 13.2% 49,447
Otago (15) 9,147 4.3% 43,086
Southland (16) 5,001 2.4% 52,701
South Island 49,353 23.3% 47,269
New Zealand 211,639 100% 47,532
  1. ↑ Estimated population in 2013.
  2. ↑ Nelson and Tasman are combined by Statistics New Zealand, but are separate regions.
  3. ↑ Includes the Chatham Islands.

Unemployment

Prior to the economic shock created by Britain's decision to join the EEC in 1973, removing it as New Zealand's primary market for exports, unemployment in New Zealand was very low. The official number of people unemployed in 1959 was only 21. A year later it was 22.[31] A recession and collapse in wool prices in 1966 led to unemployment rising by 131%, but was still only a 0.7% increase in unemployment.[32]

After 1973, unemployment became a persistent economic and social issue in New Zealand. Recessions from 1976–78 and 1982-83 greatly increased unemployment again.[32] Between 1985 and 2012, the unemployment rate averaged 6.29%. After the stock market crash of 1987, unemployment rose 170%[32] reaching an all-time high of 11.20% in September 1991.[5] The Asian financial crisis of 1997 set unemployment upwards again, by 28%.[32] By 2007, it had dropped again and the rate stood at 3.5% (December 2007), its lowest level since the current method of surveying began in 1986. This gave the country the 5th-best ranking in the OECD (with an OECD average at the time of 5.5%). The low numbers correlated with a robust economy and a large backlog of job positions at all levels.[33] Unemployment numbers are not always directly comparable between OECD nations, as they do not all keep labour market statistics in the same way.

The percentage of the population employed also increased in recent years, to 68.8% of all inhabitants, with full-time jobs increasing slightly, and part-time occupations decreasing in turn. The increase in the working population percentage is attributed to increasing wages and higher costs of living moving more people into employment.[33] The low unemployment also had some disadvantages, with many companies unable to fill jobs.

From December 2007, mainly as a result of the global financial crisis, unemployment numbers began to rise, this time by 106%[32] with job losses especially high amongst women.[34] In the last quarter of 2012, the unemployment rate fell to 6.9% from a 13-year high. This now makes New Zealand the 14th lowest among developed nations, below Canada's 7.2% and above Israel's 6.7%.[35] In the September 2014 quarter, unemployment was 5.4%.[36]

Housing affordability

Shamubeel Eaqub, formerly a Principal Economist at the New Zealand Institute of Economic Research (NZIER), said that thirty years ago, an average house in New Zealand cost two or three times the average household income. House prices have risen dramatically in the last few years and by 2007, an average house cost more than six times household income.[37] International surveys show housing is now unaffordable in all eight of New Zealand's major markets – unaffordable being defined by house prices which are more than three times the median regional income.[38]

Demand for property has been strongest in Auckland pushing up prices in the city by 52% in the last five years. In 2014 the average sales price there went from $619,136 to $696,047, a rise of 12% in that 12-month period alone.[39] In 2015, prices rose another 14%.[40] This makes Auckland New Zealand's least affordable market and one of the most expensive cities in the world[41] with houses costing 8 times the average income.[38] Between 2012 and April 2016, the average Auckland home increased in price by just over two-thirds reaching $931,000 - higher than the cost of an average home in Sydney.[42]

As a result, more and more people are being pushed out of the property market. Those on low incomes are hardest hit, affecting many Maori and Pacific Islanders. New Zealand's relatively high mortgage rates are exacerbating the problem[43] even making it difficult for young people with steady jobs to buy their first home.[44] According to a submission made to the Housing Affordability Inquiry,[45] escalating house prices are also impacting on many middle income groups, especially those with large families.[46] Mortgage adviser Bruce Patten said the trend was 'disturbing' and added to the gap between the 'haves and have-nots'.[47]

Property analysis company CoreLogic says 45% of house purchases in New Zealand are now made by investors who already own a home, while another 28% are made by people moving from one property to another. Approximately 8% are being made by overseas cash buyers[37] primarily Australians, Chinese, and British – although most economists believe foreign investment is currently too small to have a significant affect on property prices.[48]

Whether purchases are made by New Zealanders or foreigners, it is generally those who are already well off that are buying the bulk of properties on the market. This has had a dramatic effect on home ownership rates by Kiwis, now at its lowest level since 1951. Even as recently as 1991, 76% of New Zealand homes were occupied by their owners. By 2013, this was down to 63%, indicating that more and more people are having to rent.[37] Raewyn Cox, chief executive of the Federation of Family Budgeting, says: "High prices and high interest rates (have) sentenced a rising number of New Zealanders to be lifetime tenants" where they are "stuck in expensive rental situations, heading towards retirement."[43]

Inequality

Between 1982 and 2011, New Zealand's gross domestic product grew by 35%. Almost half of that increase went to a small group who were already the richest in the country. During this period, the average income of the top 10% of earners in New Zealand (those earning more than $72,000)[49] almost doubled going from $56,300 to $100,200. The average income of the poorest tenth increased by only 13% from $9700 to $11,000.[50]

Growing inequality is confirmed by Statistics New Zealand which keeps track of income disparity using the P80/20 ratio. This ratio shows the difference between high household incomes (those in the 80th percentile) and low household incomes (those in the 20th percentile). The inequality ratio increased between 1988 and 2004, and decreased until the onset of the Global Financial Crisis in 2008, increasing again to 2011 and then declining again from then. By 2013, the disposable income of high-income households was more than two-and-a-half times larger than that of low-income households.[51] Highlighting the disparity, the top 1% of the population now owns 16% of the country's wealth – the richest 5% owns 38%[52] – while half the population, including beneficiaries and pensioners, earn less than $24,000.[49]

Growth in numbers on welfare

Factors contributing to the growth in inequality include substantial cuts in the top income tax rate in 1986-88 combined with a surge in unemployment caused by Rogernomics and the stock market crash of 1987 which pushed more people onto welfare.[53] Then in 1991, benefits were also cut back substantially as part of the 'reforms' and those on welfare have been struggling ever since.

Professor Jonathan Boston of Victoria University says nearly 20% of poorer households in New Zealand now depend on welfare benefits. He says the growing gap between rich and poor enables the rich to "exercise disproportionate political influence", and that "if disadvantaged citizens are not to be excluded from political life, they must have access to education, healthcare and social assistance".[50] British epidemiologists, Richard Pickett and Kate Wilkinson, argue that inequality is damaging for everyone in society, not just the poor.[54] They say that when the gap between the top and the bottom levels of society becomes too wide, this erodes trust and empathy between citizens leading to alienation and social fragmentation. This exacerbates a multitude of health and social problems such as high infant mortality, obesity, teenage pregnancy, crime and imprisonment.[53]

Impact on social indicators

In 2014, Pickett and Wilkinson were invited to Auckland and Dunedin to discuss the relevance of their research to New Zealand.[55] They argued that as inequality in New Zealand has grown, there has been a dramatic increase in the youth suicides;,[56][57] although in contrast, recent Department of Health data shows that the age-standardised suicide rate decreased by 19.5% from the peak rate of 15.1 deaths per 100,000 population in 1998 to 12.2 deaths per 100,000 population in 2012.[58] The proliferation of food banks increased dramatically;[59] and the number of families and children living in poverty has increased. However serious crimes causing injury and death decreased by 20% between 2012 and 2014, whilst assaults decreased by 3% over the same period.[60] At the same time, health care spending has increased. In 2011 Health spending accounted for 10% of GDP, higher than the OECD average of 9.3%. As in many OECD countries, health spending in New Zealand slowed down post the GFC but still reached 3% in real terms in 2010 and 2011 – higher than the OECD average.[61] in 2012 New Zealand has 2.7 doctors per 1,000 population, and increase from 2.2 in the year 2000.

In 2012, life expectancy at birth in New Zealand stood at 81.5 years, more than one year higher than the OECD average of 80.2 years.[62]

Impact on growth

In December 2014, the OECD released the Global Income Inequality Report which said "[r]ising inequality is estimated to have knocked more than 10 percentage points off growth in ...New Zealand" between 1990 and 2010.[63] The paper found no evidence that redistributive policies, such as taxes and social benefits, harm economic growth, provided these policies are well designed, targeted and implemented.[64] It concluded that "focusing exclusively on growth and assuming that its benefits will automatically trickle down to the different segments of the population may undermine growth in the long run."[65]

Poverty

In the 21st century concern has been growing that an increasing number of New Zealanders, especially children, have been pushed into poverty where poverty is defined in income terms as households living at below 60% of the national median income.[66] In 2005, an international report found that one in six children in New Zealand were being raised in poverty – making New Zealand children 23rd poorest out of 26 rich nations.[67] In 2009 according to NCCSS, over half a million New Zealanders, including 163,000 children were living in poverty.[68] The Expert Advisory Group established by the Children's Commissioner found that the number of children falling below the threshold has continued to grow. In 2013, around 265,000 children, a quarter of all children in New Zealand, were now "mired in poverty".[69]

Statistics New Zealand also publishes a range of data on the economic well-being of New Zealanders and, in 2012, released a discussion paper highlighting the need for government agreement on the development of more useful criteria and statistics related to poverty.[70] Currently the information that is collected is 'static data' – it shows the percentage of citizens below a certain level of income. But New Zealand is unique among western OECD countries in that it does not collect 'dynamic' data which captures the extent to which people move in and out of poverty.[71]

In 2013 over a dozen different reports were released which focused on the issue and the need to develop agreed ways of describing and measuring poverty.[72] However, the National Government resisted these attempts maintaining that "endless arguments about definition and measurement are a waste of time".[72] Because of the Government's reluctance to define and measure the problem, in 2012 Children's Commissioner Dr Russell Wills, established an expert advisory group which produced a comprehensive report, called Solutions to Child Poverty in New Zealand: Evidence for Action[73] which contains 78 recommendations to combat poverty. Dr Wills also set up the Child Poverty Monitor[74] to highlight the living conditions of children in New Zealand on an ongoing basis.[69]

Superannuation

New Zealand has a universal superannuation scheme. Everyone aged 65 years old or over, are a New Zealand citizen or permanent resident and normally live in New Zealand at the time they apply is eligible. They must also have lived in New Zealand for at least 10 years since they turned 20 with five of those years being since they turned 50. Time spent overseas in certain countries and for certain reasons may be counted for New Zealand Superannuation. New Zealand Superannuation is taxed, the rate of which depends on their other income. The amount of Superannuation paid depends on the person's household situation. For a married couple the net of tax amount is set by legislation to be no less than 66% of net average wage.

Because of the growing number of elderly becoming eligible, superannuation costs rose from $7.3 billion a year in 2008 to $10.2 billion in 2014.[75] In 2011 there were twice as many children in New Zealanders as elderly (65 and over), by 2051 there are projected to be 60% more elderly than children. In the ten years from 2014, the number of New Zealanders over the age of 65 is projected to grow by about 200,000.[76]

This poses a significant problem for superannuation. The age of eligibility was gradually increased from 61 to 65 between 1993 and 2001.[77] In that year the Labour Government of Helen Clark introduced the New Zealand Superannuation Fund (known as the "Cullen Fund" after Minister of Finance Michael Cullen) to part-fund the superannuation scheme into the future. As at October 2014, the fund managed NZ$27.11 billion, 15.9% of which was invested in New Zealand.[78]

In 2007 a new individual saving scheme was introduced by the same Government, known as KiwiSaver. The main purpose of KiwiSaver is for retirement savings, but younger participants can also use it to save a deposit for their first home. The scheme is voluntary, work-based and managed by private sector companies called KiwiSaver providers. As at 30 June 2014, KiwiSaver had 2.3 million active members or 60.9% of New Zealand's population under 65. NZ$4 billion was contributed annually, and a total of NZ$19.1 billion has been contributed since 2007.[79]

Infrastructure

According to the National Infrastructure Unit of the Treasury, New Zealand "...continues to face challenges to its infrastructure; all forms of infrastructure are long-term investments, and change does not come about easily or quickly."[80]

Transport

New Zealand's transport infrastructure is "generally well developed."[81]

Road network

The New Zealand state highway network consists of 11,000 km of road, with 5981.3 km in the North Island and 4924.4 km in the South Island, built and maintained by the New Zealand Transport Agency, and paid for from general taxation and fuel excise duty. Heavy road users must pay Road User Charges as well, there is limited use of tolling on state highways. There is also 83,000 km of local roads built and maintained by local authorities.[82]

Railway network

The railway network is owned by state-owned enterprise KiwiRail and consists of 3,898 km of railway line, built to the narrow gauge of 1,067 mm (3 ft 6 in).[81] Of this, 506 km is electrified.

Airways

There are seven international airports.[81] Air New Zealand, 53% government-owned, is the national carrier and state owned enterprise. Airways New Zealand, another state owned enterprise, provides air traffic control and communications.

Seaports

New Zealand has 14 international seaports.[81]

Telecommunications

Telecommunications in New Zealand are fairly typical for an industrialised nation. A competitive telecommunications market has seen mobile prices drop to some of the lowest in the OECD.[83] The phone and fibre networks are mostly owned by Chorus Limited, a publicly listed company. Chorus wholesales services to retail providers (such as Spark New Zealand, formerly Telecom New Zealand).

Internet

New Zealand has a high rate of internet use. As of October 2014, there are 1,916,000 broadband connections and 65,000 dial-up connections in New Zealand, of which 1,595,000 are residential and 386,000 are business or government.[84] The majority of connections are Digital Subscriber Line over phone lines.

The Government has two plans to bring Ultra-Fast Broadband to 97.8% of the population by 2019, and is spending NZ$1.35 billion on public-private partnerships to roll out fibre-to-the-home connection in all main towns and cities with population over 10,000. The program aims to deliver ultra-fast broadband capable of at least 100 Mbit/s download and 50Mbit/s upload to 75% of New Zealanders by 2019.[85] In total, 1,340,000 households in 26 towns and cities will be connected.

A $300 million Rural Broadband Initiative (RBI) has also been introduced by the Government, with the aim to bring broadband of at least 5Mbit/s to 86% of rural customers by 2016.[86]

Energy

Main article: Energy in New Zealand

From 1995 to 2013, the energy intensity of the economy per unit of GDP declined by 25 percent.[87] A contributing factor is the growth of relatively less energy-intensive service industries.[88]

Electricity

History

Agriculture (especially dairy farming—such as for the Fonterra plant shown) is a major export earner.
An aerial view of the Kinleith Mill. Forestry exports are an important component of New Zealand's economy.

For many years New Zealand's economy was built on a narrow range of agricultural products, such as wool, meat and dairy. These products became New Zealand's staple and most valuable exports, underpinning the success of the economy, from the 1850s until the 1970s.[89] For example, from 1920 to the late 1930s, the dairy export quota was usually around 35% of New Zealand's total exports, and in some years made up almost 45%.[90] Due to the high demand for these primary products, manifested by the New Zealand wool boom of 1951, New Zealand had one of the highest standards of living in the world for 70 years.[91]

In the 1960s, prices for these traditional exports declined, and in 1973 New Zealand lost its preferential trading position with the United Kingdom when the latter joined the European Economic Community. Partly as a result, from 1970 to 1990, the relative New Zealand GDP per capita adjusted for purchasing power declined from about 115% of the OECD average to 80%.[92]

Between 1984 and 1993, New Zealand changed from a somewhat closed and centrally controlled economy to one of the most open economies in the OECD.[93] In a process often referred to in New Zealand as Rogernomics, successive governments introduced policies which dramatically liberalised the economy.

In 2005 the World Bank praised New Zealand as the most business-friendly country in the world.[22][94] The economy diversified and by 2008, tourism had become the single biggest generator of foreign exchange.[95]

Early years

Prior to European settlement and colonisation of New Zealand, Māori had a subsistence economy, the basic economic unit of which was the sub-tribe or hapū.[96] From the 1790s, the waters around New Zealand were visited by British, French and American whaling, sealing and trading ships. Their crews traded European goods, including guns and metal tools, for Māori food, water, wood, flax and sex.[97] Their increasing lawlessness and plans for formal settlement by the New Zealand Company were two of the drivers behind the signing of the Treaty of Waitangi in 1840, which established New Zealand as a colony. Settlers continued to be dependent on Māori for food until the 1860s.[96][97] From then immigrants became self-sufficient in farming, and started quarrying a variety of minerals including gold, which was discovered at Gabriel's Gully in Central Otago, leading to the Otago Gold Rush in 1861. Settlements flourished in areas where these quarries were established. In the 1880s, Dunedin became the richest city in the country largely on the back of investments from the gold rush.[98]

Sheep farming began in the Wairarapa but soon spread up and down the east coast from Southland to the East Cape once rudimentary roads and transport became available. Much of the land used for farming was taken or leased from Māori. Sheep numbers grew quickly and by the mid-1850s, there were already a million sheep in New Zealand; by the early 1870s, there were 10 million.[89] Wool became the first staple export, initially exported from the Wellington settlement in the late 1850s, although unrefrigerated meat and dairy products were exported as far as Australia.[89]

In the 1870s, Julius Vogel was periodically both colonial treasurer and premier. He viewed New Zealand as a "Britain of the South Seas"[99] and began the development of infrastructure in New Zealand investing in heavily in roads, railways, telegraphs and bridges funded by public borrowing.[100] Progress slowed after the collapse of the City Bank of Glasgow in 1878 which led to a contraction in credit from London, the centre of the world’s financial system at the time. Economic activity was depressed for some years afterwards, until refrigeration was introduced in 1882.[91] This enabled New Zealand to start exporting meat and other frozen products to the United Kingdom. Refrigeration transformed and shaped the development of the economy but, in the process, established New Zealand's economic dependence on Britain.

The success of refrigeration was directly related to the growth and development of farming in the country. In the 19th century, the bulk of economic activity was in the South Island of New Zealand. From around 1900, dairy farming became increasingly viable in areas which were less suitable for sheep, particularly in Northland, the Waikato and Taranaki. As dairying developed, the North Island slowly became more important to the economy.[101] As more land was cultivated and farmed, Britain became the sole market for New Zealand meat and animal products.

20th century

The Reserve Bank of New Zealand was established as New Zealand's central bank on 1 August 1934. Up until that time New Zealand's monetary policy had been set in the United Kingdom, and the New Zealand Pound was issued by private banks. A separate central bank gave New Zealand's government control of monetary policy for the first time,[102] although New Zealand remained part of the Sterling area by pegging its pound to the British Pound until the introduction of the New Zealand Dollar in 1967, when the dollar was instead pegged to the Australian dollar.

By the mid-20th century, pastoral-farming products made up more than 90% of New Zealand's exports,[101] 65% of which was going to Britain in the 1950s. Having a secure market with guaranteed prices also enabled New Zealand to impose high tariffs on imported goods from other countries. Tough import controls gave local manufacturers the ability to produce similar products locally, broaden the base of jobs available in New Zealand and still compete against higher priced imports.

This prosperity continued up to 1955 at which point Britain stopped giving New Zealand guaranteed prices for its exports.[103] From then on, what New Zealand received was dictated by the free market. As a result, during the 1950s and 1960s the country's standard of living began to slip as the export sector was no longer able to pay for the level of imported goods required to meet the country's growing consumerism.

Tiwai Point Aluminum Smelter, opened in 1971.

Britain applied to join the European Economic Community (EEC) in 1961, but was vetoed by the French. The government of Keith Holyoake reacted by attempting to diversify New Zealand's export markets, signing the first free trade agreement (Australia New Zealand Free Trade Agreement) in 1965,[104] and opening new diplomatic posts in Hong Kong, Jakarta, Saigon, Los Angeles and San Francisco.[90] Britain applied again to join the EEC in 1967, and entered into negotiations for membership in 1970. Holyoake's deputy and successor, Jack Marshall, (briefly Prime Minister in 1972) negotiated continued access for New Zealand exports to the United Kingdom under the so-called "Luxembourg Agreement".[105]

Britain gained full membership of the EEC on 1 January 1973, and all trade agreements with New Zealand came to an end, except the Luxembourg Agreement.[105] By the end of that year, only 26.8% of New Zealand's exports were to Britain.[106] This had a significant effect on the standard of living. In 1953, New Zealand had the third highest standard in the world. By 1978, it had dropped to 22nd place.[103]

Having lost unrestricted access to its traditional market, New Zealand continued to search for alternative export markets and diversify its economy. The Government of Norman Kirk, who succeeded Marshall, put greater emphasis on expanding New Zealand's trade, especially with South East Asia. Following the Yom Kippur War in October 1973, an oil embargo was put in place by the Middle Eastern oil exporters, leading to the 1973 oil crisis. This compounded New Zealand's dire economic situation further. Inflation greatly increased as the cost of transport and imported goods soared, causing standards of living to decline.[107]

Think Big

Main article: Think Big

Following the 1979 energy crisis resulting from the Iranian Revolution of that year, Rob Muldoon, the Prime Minister between 1975 and 1984, instituted an economic strategy known as Think Big. Large scale industrial plants were established based on New Zealand's abundant natural gas. A new range of products for export such as ammonia, urea fertilizer, methanol and petrol were produced and with greater use of electricity (with the electrification of the North Island Main Trunk railway) with the goal that this would reduce New Zealand's dependence on oil imports.[95]

Other projects included the Clyde Dam on the Clutha River, which was built to meet a growing demand for electricity, and the expansion of the New Zealand Steel plant at Glenbrook.[108]

The Tiwai Point Aluminium Smelter, which opened in 1971, was also upgraded as part of the Think Big strategy and now brings in approximately NZ$1 billion in exports every year.[109]

Unfortunately for New Zealand, most of these projects only came on line at the same time as oil prices dropped during the 1980s oil glut. The price of crude went from more than US$90 a barrel in 1980, to about US$30 a few years later. Because these Think Big projects required massive borrowing to get started, public debt soared from $4.2 billion in 1975 when Muldoon became Prime Minister to $21.9 billion when he left office nine years later. Inflation remained rampant, averaging 11% in the 1980s.[107] Once Labour came to power in 1984, many of these projects were sold to private industry as part of a wider sale of state-assets.[108]

The Muldoon Government did make some moves towards deregulation however. For example, in 1982 it removed the transport licensing restrictions on road carriers carting goods more than 150 km, and turned the Railways Department into a statutory corporation.

Rogernomics

Main article: Rogernomics
“ Between 1984 and 1993, New Zealand underwent radical economic reform, moving from what had probably been the most protected, regulated and state-dominated system of any capitalist democracy to an extreme position at the open, competitive, free-market end of the spectrum.[110] ”

The Fourth Labour government, elected in July 1984, moved away from government intervention in the economy and allow free market mechanisms to dominate. These reforms became known as "Rogernomics", named after Minister of Finance from 1984-1988, Roger Douglas. The changes included making the Reserve Bank independent of political decisions; performance contracts for senior civil servants; public sector finance reform based on accrual accounting; tax neutrality; subsidy-free agriculture; and industry-neutral competition regulation. Government subsidies including agricultural subsides were eliminated; import regulations were loosened up; the exchange rate was floated; and controls on interest rates, wages, and prices were removed; and personal rates of taxation were reduced. Tight monetary policy and major efforts to reduce the government budget deficit brought the inflation rate down from an annual rate of more than 18% in 1987. The deregulation of government-owned enterprises in the 1980s and 1990s reduced government's role in the economy and permitted the retirement of some public debt.

The new Government was faced with an exchange rate crisis the day after it was elected. Speculators expected the change of government to result in a 20% devaluation of the New Zealand dollar, which led to the 1984 New Zealand constitutional crisis due to Muldoon's refusal to devalue, worsening the currency crisis further. As a result, the dollar was floated on 4 March 1985, allowing for the value of the dollar to change with the market.[111] Prior to the dollar being floated, the dollar was pegged against a basket of currencies.[111]

Financial markets were deregulated and tariffs on imported goods lowered and phased out. At the same time subsidies to many industries, notably agriculture, were removed or significantly reduced. Income and company taxes were reduced and the top marginal tax rate was reduced from 66% to 33%. These were replaced by a comprehensive tax on goods and services (GST) initially set at 10%, then increased to 12.5% and recently increased to 15% in 2011. A surtax on universal superannuation was also introduced.[97] Many government departments were corporatised, and from 1 April 1987 became State owned enterprises, required to make a profit. The new corporations shed thousands of jobs adding to unemployment; Electricity Corporation 3,000; Coal Corporation 4,000; Forestry Corporation 5,000; New Zealand Post 8,000.[112]

The wage and price freeze of the early eighties coupled with the removal of financial restrictions and a lack of investment opportunities, led to a speculative bubble on New Zealand's sharemarket, sharemarket crash of 1987, in which New Zealand's sharemarket shed 60% from its 1987 peak, and taking several years to recover.[113][114]

Inflation continued to be a major problem afflicting the New Zealand economy. Between 1985 and 1992, inflation averaged 9% per year and the economy was in recession.[115] The unemployment rate rose from 3.6% to 11%,[116] New Zealand's credit rating dropped twice, and foreign debt quadrupled.[115] In 1989 the Reserve Bank Act 1989 was passed, creating strict monetary policy under the sole control of the Reserve Bank Governor. From then on the Reserve Bank focused on keeping inflation low and stable, using the Official Cash Rate (OCR) – the price of borrowing money in New Zealand – as its primary means to do so. As a result, inflation rates fell to an average of 2.5% in the 1990s, compared to 12% in the 1970s.[107] However, the tightening of monetary policy contributed to rising unemployment in the early 1990s.[117]

The Labour Party was greatly divided over Rogernomics, especially following the 1987 sharemarket crash and its effect on the economy, which slumped along with the rest of the world into recession in the early 1990s. The National Party was returned to power at the 1990 general election and Ruth Richardson became Minister of Finance under Prime Minister Jim Bolger. The new Government was again thrown a major economic challenge, with the then state-owned Bank of New Zealand needing a bail-out to stay operational.

Richardson's first budget in 1991, nicknamed 'the mother of all budgets',[118] attempted to address constant fiscal deficits and borrowing by cutting state spending. Unemployment and social welfare benefits were cut and 'market rents' were introduced for state houses – in some cases tripling the rents of low-income people.[119] Richardson also introduced user-pays requirements in hospitals and schools.[118] These reforms became known derisively as Ruthanasia.

By this time, New Zealand's economy faced serious social problems; the number of New Zealanders estimated to be living in poverty grew by at least 35% between 1989 and 1992;[115] many of the promised economic benefits of the experiment never materialised.[120] Gross domestic product per capita stagnated between 1986–87 and 1993–94, and by March 1992 unemployment rose to 11.1%[121] Between 1985 and 1992, New Zealand's economy grew by 4.7% during the same period in which the average OECD nation grew by 28.2%.[122] From 1984 to 1993 inflation averaged 9% per year, New Zealand's credit rating dropped twice, and foreign debt quadrupled.[115] Between 1986 and 1993, the unemployment rate rose from 3.6% to 11%.[123]

Since the deregulation of the postal sector, different postal operators can install mail collection boxes in New Zealand's streets.

Deregulation also created a business-friendly regulatory framework which has benefited those able to take advantage of it. A 2008 survey in the Heritage Foundation and Wall Street Journal ranked New Zealand 99.9% in "Business freedom", and 80% overall in "Economic freedom", noting that it takes, on average, only 12 days to establish a business in New Zealand, compared with a worldwide average of 43 days.[124] In its 'Doing Business 2008' survey, the World Bank rated New Zealand as the second-most business-friendly country worldwide.[125]

Deregulation has also been blamed for other significant negative effects. One of these was the leaky homes crisis, whereby the loosening up of building standards (in the expectation that market forces would assure quality) led to many thousands of severely deficient buildings, mostly residential homes and apartments, being constructed over a period of a decade. The costs of fixing the damage has been estimated at over NZ$11 billion.[126]

21st century

Unemployment continued to fall from 1993–94 fiscal year, until the onset of the 1997 Asian financial crisis again pushed the rate higher.[127] By 2016 the unemployment rate decreased to 5.3 percent, the lowest level in 7 years.[128]

Between 2000 and 2007, the New Zealand economy expanded by an average of 3.5% a year driven primarily by private consumption and the buoyant housing market. During this period, inflation averaged only 2.6% a year, within the Reserve Bank's target range of 1% to 3%.[129] However, in early 2008 the economy entered recession, before the effects of the global financial crisis (GFC) set in later that year. A drought over the 2007/08 summer led to lower production of dairy products in the first half of 2008. Domestic activity slowed sharply over 2008 as high fuel and food prices dampened domestic consumption, while high interest rates and falling house prices drove a rapid decline in residential investment.[129]

Around the world instability was developing in the finance sector. This reached a peak in September 2008 when Lehman Brothers, a major American bank, collapsed propelling the world into the global financial crisis.[130]

Finance company collapses

Uncertainty began to dominate the global financial and economic environment. Business and consumer confidence in New Zealand plummeted as dozens of finance companies collapsed.[131] To try and stop a flight of funds from New Zealand institutions to those in Australia, the Government established the Crown Retail Deposit Guarantee Scheme to cover depositors funds in the event that a bank or finance company went broke.[132] This protected some investors but nevertheless, at least 67 finance companies collapsed within a short period of time.[133] The largest of these was South Canterbury Finance which cost taxpayers NZ$1.58 billion when the company collapsed in August 2010.[134] The directors of many of these finance companies were subsequently investigated for fraud and some high profile directors went to prison.

In an attempt to stimulate the economy, the Reserve Bank lowered the Official Cash Rate (OCR) from a high of 8.25% (July 2008) to an all-time low of 2.5% at the end of April 2009.[129]

"Rock star" economy

Fortunately for New Zealand, the recession was relatively shallow compared to many other nations in the OECD, it was sixth least affected out of the 34 member nations with negative real GDP growth totaling 3.5%.[129] In 2009 the economy picked up, led by strong demand from major trading partners Australia and China, and historically high prices for New Zealand's dairy and log exports. In 2010 the GDP grew by a modest 1.6%, but over the next couple of years economic activity continued to improve, driven by the rebuild in Canterbury after the Christchurch earthquakes and recovery in domestic demand.[129] Through 2011, global conditions deteriorated and the terms of trade eased off their 2011 peak, continuing to moderate until September 2012. Since then, commodity prices have rebounded strongly, with strong demand from China and the international situation improving. Commodity prices have been at record highs in recent quarters and remain elevated. High commodity prices are expected to provide a considerable boost to nominal GDP growth in the near term.[129]

In 2013 the economy grew 3.3%. HSBC chief economist for Australia and New Zealand, Paul Bloxham, was so impressed that he predicted New Zealand's growth would outpace most of its peers, and he described New Zealand as the "rock star economy of 2014".[135] Another financial commentator said the New Zealand dollar was the "hottest" currency of 2014.[136] Only three months later, The New Zealand Productivity Commission expressed concern about low living standards and problems affecting the long-term drivers of growth. Paul Conway, Director of Economics & Research at the Productivity Commission, wrote: "New Zealand's broad policy settings should generate GDP per capita 20 per cent above the OECD average, but the actual result is more than 20 per cent below average. We may be punching above our weight, but that’s only because we are in the wrong weight division!"[137] In August, Paul Bloxham, who coined the term "rock star economy", admitted that "the sharp decline in dairy prices over the last six months has clouded the outlook somewhat".[138] In December however Bloxham stated that he thought the New Zealand economy would continue to grow strongly.[139]

In 2014 increased attention was paid to the growing gap between rich and poor. In The Guardian, Max Rashbrook said policies implemented by both Labour and National governments have increased inequality. He claims that for 20 years outrage "has been muted", but "Alarm bells are finally beginning to sound. Recent polling shows three-quarters of New Zealanders think theirs is no longer an egalitarian country".[140]

Trade

New Zealand Export Treemap from MIT Harvard Atlas of Economic Complexity

New Zealand's small size and long distances from major world markets creates significant challenges in its ability to compete in global markets. Australia, New Zealand's closest neighbour, is New Zealand's biggest trading partner.[7] In 2013 New Zealand's main trading partners were Australia, China, the United States, Japan, Singapore and the United Kingdom.[7] In March 2014, the total value of goods exported from New Zealand topped $50 billion for the first time, up from $30 billion in 2001.[141] New Zealand Trade and Enterprise (NZTE) offers strategic advice and support to New Zealand businesses wanting to export goods and services to other countries.

Trade agreements

Free trade agreements (FTAs) New Zealand is a party to.
  New Zealand
  Current FTAs
  Proposed Bilateral FTAs
  Proposed Regional Bloc FTAs

Since 1960s New Zealand has pursued free trade agreements with many countries to diversify its export markets and increase the competitiveness of New Zealand's exports to the world.[142] As well as reducing barriers to trade, Trade Agreements New Zealand has entered into are designed to ensure existing access is maintained. Trade agreements establish rules by which trade can take place and ensure regulators and officials in countries New Zealand is trading with work closely together.[142]

Australia

Australia is New Zealand's largest bilateral trading partner.[7] In 2013, trade between New Zealand and Australia was worth NZ$25.6 billion.[7] Economic and trading links between Australia and New Zealand are underpinned by the "Closer Economic Relations" (CER) agreement, which allows for free trade in goods and most services. Since 1990, CER has created a single market of more than 25 million people. Australia is now the destination of 19% of New Zealand's exports, including light crude oil, gold, wine, cheese and timber, as well as a wide range of manufactured items.

The CER also creates a free labour market which allows New Zealand and Australian citizens to live and work freely in each other's country together with mutual recognition of professional qualifications. This means individuals who are registered to practise an occupation in one country can register to practise an equivalent occupation in the other country. Banking regulation and supervision are co-ordinated through the Trans-Tasman Council on Banking Supervision and there are also ongoing discussions about co-ordinating Australian and New Zealand business law.[143]

China

China is New Zealand's second largest trading partner buying primarily meat, dairy products and pine logs.[7] In 2013, trade between New Zealand and China was worth NZ$16.8 billion.[7] This has occurred primarily because of soaring demand for imported dairy products, following the Chinese milk scandal in 2008. Since then demand for milk products has been so strong that in the 12 months to March 2014, there was a 51% increase in total exports to China.[144] The increase was facilitated by the New Zealand–China Free Trade Agreement which came into force on 1 October 2008. Since that year exports to China have more than tripled.[145]

United States

The United States is New Zealand's third largest trading partner.[7] In 2013, bilateral trade between the two countries was valued at NZ$11.8 billion.[7] New Zealand's main exports to the United States are beef, dairy products and lamb. Imports from the US include specialised machinery, pharmaceutical products, oil and fuel. In addition to trade, there is a high level of corporate and individual investment between the two countries and the US is a major source of tourists coming to New Zealand. In March 2012, the United States had a total of $44 billion invested in New Zealand.[146] A number of US companies have subsidiary branches in New Zealand. Many operate through local agents, with some joint venture associations. The United States Chamber of Commerce is active in New Zealand, with a main office in Auckland and a branch committee in Wellington.

According to the Ministry of Foreign Affairs, New Zealand and the United States "share a deep and longstanding friendship based on a common heritage, shared values and interests, and a commitment to promoting a free, democratic, secure and prosperous world".[147] This common background has not translated into a free trade agreement between the two countries.[148]

European Union

A growing number of New Zealand companies use the United Kingdom as a base to supply their products to the European market.[149] However trade with the European Union is declining as demand from Asia continues to grow. The EU currently takes only 8% of New Zealand exports but provides around 12% of imports.[143]

In July 2014, negotiations on the Partnership Agreement on Relations and Cooperation (PARC) between New Zealand and the European Union were concluded.[150] The Agreement covers the trade and economic relationship between the EU and New Zealand with a view to further liberalisation of trade and investment and acknowledges the intention of the European Union to upgrade its diplomatic presence in New Zealand with a resident Ambassador.[151]

Other Asian economies

In the 21st century, Asian economies have been developing rapidly providing significant demand for New Zealand's exports. New Zealand trades with Taiwan, Hong Kong, Malaysia, Indonesia, Singapore, Thailand, India and the Philippines and this now accounts for around 16% of total exports.[143] New Zealand initiated a free trade agreement with Singapore in September 2000 which was extended in 2005 to include Chile and Brunei and is now known as the P4 agreement.

Relationship with Pacific Islands

The Pacific region with numerous islands is New Zealand's sixth largest trading market and is growing every year. In 2011 exports to Pacific Islands were worth over $1.5 billion up 12% on the previous year. Fiji is the biggest individual market followed very closely by Papua New Guinea, French Polynesia and New Caledonia. Goods exported to the islands include refined oil, construction materials, medicines, sheep meat, milk, butter, fruit and vegetables.[152] New Zealand also assists Pacific Islands with defence and regional security, and with management of the environment and fisheries.

Because of their small size, the Pacific Islands are some of the most vulnerable environments in the world and are on the receiving end of numerous cyclones every year. When disasters occur, they often have severe social and economic effects which last for years. Since 1992, New Zealand has co-operated with Australia and France to respond to disasters in the Pacific. New Zealand provides emergency supplies and transport, funding for roading and housing and the deployment of specialists to affected areas.[153]

Through the Ministry of Foreign Affairs and Trade, New Zealand also provides international aid and development funding to help stimulate sustainable economic development in underdeveloped economies. The New Zealand Aid Programme, allocated about $550m a year, is focused primarily on promoting development in the Pacific. The allocation of $550 million represents about 0.26% of New Zealand's gross national income (GNI).[154]

Foreign Investment

New Zealand welcomes and encourages foreign investment, which is overseen by the Overseas Investment Office. In 2014 foreign direct investment totaled NZ$107.69 billion.[10] From 1989 foreign investment increased from $9.7 billion to $101.4 billion in 2013 – an increase of over 1,000%.[155] Between 1989 and 2007, foreign ownership of the New Zealand sharemarket went from 19% to 41% but has since dropped back to 33%.

In 2007, around 7% of all New Zealand agriculturally productive land was foreign-owned.[22] In 2011, economist Bill Rosenberg said that the figure is closer to 9% if foreign ownership of forestry is included.[156] In March 2013 the financial sector, which includes the four big Australian owned banks, was worth $39.3 billion accounting for the largest portion of the $101.4 billion foreign ownership of New Zealand companies.[155]

Impact

Between 1997 and 2007, foreign investors made $50.3 billion profit, 68% of which went overseas. The Campaign Against Foreign Control of Aotearoa (CAFCA) says this has a negative impact on the economy arguing that when foreign investors buy up New Zealand companies, they tend to cut staff and push down wages.[22] Foreign ownership has also done nothing to improve New Zealand's foreign debt. In 1984, private and public foreign debt was $16 billion ($50 billion in March 2013 dollars) which was less than half New Zealand's Gross Domestic Product at the time. By March 2013, total foreign debt stood at $251 billion, well over 100% of New Zealand's Gross Domestic Product.[155]

Other indicators

Tourism, like here on the Milford Sound (special bus with viewing gallery), is a major export earner for New Zealand.

Industrial production growth rate: 5.9% (2004) / 1.5% (2007)

Household income or consumption by percentage share:

Agriculture – products: wheat, barley, potatoes, pulses, fruits, vegetables; wool, beef, dairy products; fish

Exports – commodities: dairy products, meat, wood and wood products, fish, machinery

Imports – commodities: machinery and equipment, vehicles and aircraft, petroleum, electronics, textiles, plastics

Electricity:

Electricity – production by source:[157]

Oil:

Exchange rates:
New Zealand dollars (NZ$) per US$1 – 1.2652 (2012), 1.3869 (2005), 1.5248 (2004), 1.9071 (2003), 2.1622 (2002), 2.3788 (2001), 2.2012 (2000), 1.8886 (1999), 1.8632 (1998), 1.5083 (1997), 1.4543 (1996), 1.5235 (1995)

See also

References

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