Culture of Dependency

We must remember the lesson of the 1960s and ensure the diversity of our exports and markets.

 

Listener: 22 August, 2013.

 

Keywords: Globalisation & Trade; Growth & Innovation; Political Economy & History;

 

We learnt from the Great Depression of the 1930s that New Zealand was over-dependent on a few exports – wool, meat, dairy – being sent to very few markets. Economist and historian Bill Sutch called us a monoculture exporting processed grass to a single market, the UK.

 

Applying the lesson and diversifying proved much harder. We tried wood (Tasman at Kawerau), aluminium (the Bluff smelter) and hydrocarbons (Think Big); we tried import substitution but that shifted our dependency to imported components; and 50 years ago, we formed a free-trade arrangement – now called CER – with Australia.

 

We were alerted to our single-market vulnerability in 1961 when the UK applied to join the EEC (now the EU) with its protectionist agricultural policies. Conveniently, 12 years elapsed before it was admitted. Even so, when the wool price collapsed in 1966, we were still sending two-thirds of our exports to the UK. There followed the most rapid export diversification in the OECD. Once we were among the most dependent on a few products and markets; by 1981 we were in the middle.

 

The UK had long ceased to be our major market; today it is sixth behind Australia, China, the US, Japan and Korea, although collectively the European Union is our second-largest. Wool, which once constituted 40% of our exports, is now ranked 19th on the list of exported goods, and there are some big service exports as well, particularly tourism.

 

We have moved out of simple commodity exports to a complex array of products. Dairy exports are no longer dominated by butter and cheese; milk powder heads the list. Fonterra is also into “chaining” – supplying components of milk to other producers as inputs for their products.

 

Similarly, a meat plant’s disassembly line sends different parts of the same lamb carcass to China, the US, parts of Continental Europe and the Middle East as well as the UK; some byproducts, such as the pancreas, are converted into pharmaceuticals.

 

Worries remain that we are still excessively concentrated. There has been much pleasure at the growth of the Chinese market as a result of the free trade agreement, but we don’t want to become as dependent on it as we were on the UK. So we are trying to do deals with India, Japan, Korea, the US and the EU. But we are small and tend to get left waiting in the queue (in any case, each of those countries is very protective of its farmers). Hence the importance of multilateral (such as WTO) and plurilateral (such as Asean) deals. We seek opportunities in Asia, and have just done a deal with Taiwan, but the regional interdependence from

chaining means when China goes into a downturn, those economies will stagnate too; this has been Australia’s recent experience.

 

A new problem – obvious with hindsight – has arisen. Selling complex products requires sophisticated international marketing and distribution, which involve branding and reputation.

One of the strongest brands in the international dairy world is Fonterra. Its reputation is being damaged by some of its products, sold to other producers, being contaminated. Phytosanitary regulation has returned to the agenda following the melamine scare in China and the dicyandiamide one here – not just for Fonterra but for all our biologically based products.

 

My guess, based on some sophisticated economic models, is that the future of the New Zealand economy is centred on the export of advanced products and services based on our natural resources. We are not going to replicate the growth of the larger rich economies in other areas – we do not have the size to reap their economies of agglomeration.

 

By their nature, biological processes – in the production of meat, fish, forestry, horticulture and wine as well as dairy – are more subject to contamination than physical ones.

 

Brand and reputation require a high standard of quality assurance. It is not a matter of pretending we are clean and green. We have to earn it. That involves every worker. Relying on inspectors and regulation is not enough; it hasn’t been in the current case.