Choose a Scenario: How Are We Going to Respond to the Doha Round Gains?

Listener: 25 September, 2005. This economics column was designed to be set out in three parallel columns. That is not possible in this format. Instead final two columns are interleaved, to give a sense of the intended juxtaposition. The italics is used to indicate the different scenarios.

Keywords: Globalisation & Trade; Macroeconomics & Money;

It seems possible that the New Zealand economy could eventually have a three percent boost as a result of the Doha Round’s elimination of dumping agricultural products into key New Zealand export markets. About a third will come from higher export prices, and two-thirds from the additional production – on and off the farm.

However, with falling tariffs on manufacturing, we will lose general manufacturing export markets to Australia, as the preferences become less valuable and China undercuts us.

In the following scenarios, I assume world and technology trends are mainly benign over the decade, including no major war or disruptive terrorism. An exception is that the oil prices will continue to rise, which will induce alternative fuel sources (such as biofuels). Transport costs will rise, but not greatly. Oil prices could double, so air travel costs would be back to where they were in about 1990, given continuing technological change. Assume that the Kyoto Agreement is not too disruptive. (If it fails, the warming damage comes after the end of these scenarios.)

If the US economy continues to run an unsustainable budget deficit, I assume the world economy will switch steadily across to the euro as the currency of preference.

The key difference between the scenarios is how we spend the windfall, which is likely to phase in from 2007. Both have their attractions, but the message is that the different economic strategies affect our lifestyle. You may have the chance to choose between them in this year’s election.


In this scenario, we spend the proceeds. We’ve had a hard time, partly through poor economic management, but also bad luck, while the world agricultural protection that depresses our export prices is not our fault. So as the higher agricultural prices come on line, we use the proceeds to boost consumption, by tax cuts and/or additional public spending, on items such as culture and recreation, the environment and health. Public investment in roads is for reducing commuting and recreational travel costs. We stick to safe economic development – what we know we can do well.
Sure, we consume some of the proceeds from the higher agricultural prices, but we increase the investment, transforming the economy. Transport investment is for getting product to market; we pour money into upgrading the workforce skills (somewhat more efficiently than recent years); we increase spending to promote new industries based on new technologies. More firms succeed, but some innovators go bust.

Land-based exports surge, and our China and other East Asia markets grow while the share of Australia, Europe and the US diminishes. (Even so, we bind our economy and politics more closely with Australia.) The shift to a larger service sector continues. The manufacturing sector diminishes, even though farm-based processing increases and, given a little improved access to the barricaded rich markets, we will send them high-valued returns. Tourism may ease back because of the higher airfares and higher exchange rate. Design skills are not a priority.

Australia is not a big enough market for us, so as well as expanding land-based exports to China and the rest of East Asia, we send manufactures and services to the US and Europe. We remain good friends with Australia, but, like cousins, go our different ways.
Land-based exports expand. Manufacturing switches from the general to high-value technologically advanced products, many of which are airfreighted overseas. Even the growing service sector exports, often via broadband as well as tourism. Good ideas generate significant royalties. We are into intra-industry trade, exporting and importing similar things: pharmaceuticals to Europe and pharmaceuticals from Europe; IT to the US and IT from the US; films to Hollywood, films from Hollywood. We put effort into design, branding and servicing customer needs.

Immigration is restricted, because we don’t need the skills they bring, although later we may have to bring in low-skilled Asians to provide for our elderly.
The environment is under greater pressure and we have to make compromises. The immigration intake is high as we seek skills and aim to get a better age structure.

Output will continue to grow at about the rich world average, and we live in the green and pleasant land we have today, which much of the world envies. But some New Zealanders go overseas to lead more exciting lives.

Output grows a little faster than the rich world average. The world envies us for the vigour, innovation, creativity, and excitement of our society.

Not in the original column: The main determinant of the difference between the two scenarios, is whether we allow the real exchange rate to rise, thus facilitating consumption, or we take measures to keep it low, thus facilitating exporting and the required investment. Detailing this belongs to another column, but will be evident from other items on the website.