The New Zealand Economy

This was an entry for a venture which did not proceed. (April 2010)

Keywords: Political Economy & History;


While New Zealand has about 0.1% of the world’s population, its economy produces about 0.3% of the world’s material output. Based on this material output (GDP per capita) the OECD places it in the middle to lower end of its middle rich countries. 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 it more highly .

New Zealand’s economy is primarily market based, However in some sectors – most notably education and health – the government is the most important funder and provider. A few businesses are also publicly owned. Although the market mechanism has always been dominant since European settlement from the early nineteenth century, the degree of government involvement 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.

Among the distinctive features of the New Zealand economy are

– it is distant from the world’s economic heartlands, although improvements in transport and communications have reduced that handicap;

– it is relatively small;

– it lacks some of the prestige industries, such as jet aircraft construction.

The biggest difference is in the external sector which reflects New Zealand’s specialisation in the world economy. It is dominated by resource based exports from farming, fishing, forestry (and to a lesser extent energy and mining) together with tourism based on its landscape. There is some general manufacturing exports, but the most important contribution to exporting from the secondary sector is the sophisticated processing of the resources. Contract services, education of international students and some advanced technology products and services also contribute to exports. The film industry has been especially successful in recent years.

There is no distinctive Maori economy, but Maori based enterprises are concentrated in farming, fishing, forestry, tourism and some suppliers of personal and community service.

Agriculture, Forestry, and Fishing

The early nineteenth century economy was based on the exploitation of seals, whales, gold, and timber. As these became exhausted, farming dominated the economy and exports with just under a third of employed directly in that sector from the mid-nineteenth century into the middle of the twentieth. Many more would have been employed servicing the farms or processing the farm output. For most of this period the dominant products were wool and, from the introduction of refrigeration in 1882, sheepmeats, beef and dairy products which were sold mainly in Britain. The high performance was made possible by a temperate climate, heavy capital investment and skilled and innovative farm management. Almost all the livestock is grass fed. New Zealand farming gets negligible public subsidies but its efficiency is such that it competes successfully against subsidised foreign producers. Following the collapse of the price of wool in 1966, there was increased diversification, including goats and deer, horticultural products (notably kiwifruit) and wine. Export sales are now also greatly diversified by destination, especially to emerging economies such as China. The largest single exporter is Fontera which grew out of the cooperative New Zealand Dairy Board, but does not have a statutory monopoly.

The primeval native forests (bush) were largely cut down or burned off in the nineteenth century; the remnants are jealously protected. Wood is supplied by huge forest plantations mainly of radiata pine (originally from California). The ‘wall of wood’ – including pulp, paper and board – also goes to many markets.

New Zealand also has one of the largest Exclusive Economic Zones in the world, with the fish stock conserved by a system of ‘individual transferable quota’ which limit harvesting to sustainable levels. Aquaculture is developing rapidly.


New Zealand’s most valuable minerals may well be its water, of which rainfall provides an abundance although irrigation for farming has been exhausting supplies in some regions. There are substantial supplies of coal and some hydrocarbon production, mainly from Taranaki and its seas, with significant prospects of other offshore reserves. But New Zealand remains a net importer of oil. Because of its diverse geology and dynamic tectonic history, there are other minerals but few are sources of significant activity except two major gold mining operations and iron from iron sands. (Gold was very important in the middle of the nineteenth century.) It seems likely that there are substantial mineral reserves in New Zealand’s continental shelf , but except for oil and gas this is hardly exploited.


New Zealand is self-sufficient in energy except for oil. About a third of the total (including transport fuels) are renewable, with hydro-electricity generation historically important. Wind power is becoming increasingly important, and there are experiments with tidal power. New Zealand is a world leader in the exploitation of geothermal energy.

Because of the high ratio of livestock (which emit methane) to the population, New Zealand has a particular problem with global emissions. It is phasing in what may be one of the world’s most comprehensive emissions trading schemes.

Manufacturing and Construction

The manufacturing sector began developing with the end of alluvial goldmining in the nineteenth century. Partly because of geographic isolation (in addition to temporary isolation in the two world wars) it covered a lot of activities. Much was sustained by high levels of protection following the introduction of import licensing in the 1938.

With the unwinding of border protection and cheaper transport (and more recently cheap Asian sourcing) the contribution of the manufacturing sector to GDP has fallen from the 20 to 25 percent of the first three quarters of the twentieth century, to below 15 percent at the beginning of the twenty-first. There is now little import competing production. The textile industry is increasingly designing in New Zealand, and producing offshore perhaps using New Zealand raw materials, and importing some product back to New Zealand, while exporting the rest to the world.

The largest subsector in manufacturing is food processing, which is dominated by (large) export oriented meat freezing works and dairy factories. All the biggest factories are export focussed with the exception of those processing hydrocarbons. They include wood processing, aluminium utilising New Zealand electricity, and steel. There are also specialist exporters which have prospered initially by supplying domestic needs – such as dairy machinery and electric fencing (for improving pasture management). Luxury yachts exports have grown out of New Zealanders’ recreation interests in the sea.

The housing and construction sector makes up about five percent of GDP, and there is some exports of construction services. Home ownership is high, but has been falling slightly in recent decades.


At the centre of the New Zealand financial system is the Reserve Bank of New Zealand which is a ‘full menu’ central bank. In 2010 it regulated 17 registered banks only two of which were not wholly owned overseas. It has independence from central government in the management its monetary operations, but the goal – currently a (low) inflation target – is set by a contract with the Minister of Finance.

The core banking system has shown considerable stability even during the Global Financial Crisis of 2008 and 2009. However some of the less closely regulated financial institutions outside the core, mainly investing in property, collapsed.

The New Zealand dollar floats, with negligible government intervention. There has heavy overseas borrowing, not all of which has been invested in business enterprises – much in housing. As a result New Zealand net foreign liabilities are high (around 100 per cent of annual GDP in 2010) although public debt is low by international standards because the government ran a fiscal surplus in most of the 1990s and 2000s.

Much New Zealand industry is overseas owned. This partly arises from the vertical integration of overseas companies purchasing local resources, but many businesses oriented towards domestic markets are also foreign owned, or have a substantial proportion of their equity owned by offshore shareholders.


As already explained New Zealand’s international export trade has become increasingly diversified since the mid 1960 by product and destination. Today the main markets are Australia, the European Union, China, the United States and Japan, with other Asian economies becoming increasingly important. Import sources follow a similar pattern.

New Zealand is involved in a number of (enhanced) free trade arrangements with an increasing number of Pacific and Asian economies, the most important of which is Closer Economic Relations (CER) with Australia. It is a very active member of the World Trading Organisation (WTO) and has vigorously advocated reductions in protectionism on farm products, which is particularly detrimental to New Zealand exports.

Restrictions on imports to New Zealand are not high, following the import licensing regime introduced in 1939 being replaced with low tariffs. It is relatively easy to invest in New Zealand, but sometimes approval from the Overseas Investment Commission is necessary.


Like other affluent economies the service sector forms the largest part of the economy – over 70 percent of net output on some definitions – and its share is growing. Tourism is the largest foreign exchange earner in the service sectors (and the first or second largest foreign echange earner) but significant contributions also come from educational services and consulting services. New Zealanders also travel widely purchasing tourist services from other countries.


As for most other high income economies, the New Zealand labour force is skilled, and it is more flexible than many others. The unemployment rate is at the lower end of the affluent economy range, although it fluctuates with the business cycle.

The deployment of the labour force approximately matches the pattern for production sectors. In comparison to the OECD New Zealand businesses tend to be small but in contrast total worker numbers tend to be in the larger firms.

Historically following the Industrial Conciliation and Arbitration Act (1894) the New Zealand labour force was highly unionised, although self employment was (and is) high. With the Employment Contracts Act (1991) unionisation was dramatically reduced, and now tends to be concentrated in larger private businesses and the public service. There as been only a marginal recovery in union numbers following the passing of the Employment Relations Act (2000).

Taxation and Public Spending

The main taxes are income tax (including a corporation tax) and Goods and Service Tax (GST – a value added tax) which is applied on almost all goods and services. Other significant taxes include customs duties, taxes on motorists, and on alcohol and tobacco. There are no wealth taxes, no inheritance taxes and (almost) no capital gains taxes. A major source of the second government tier local authorities is local body rates on real estate.

Public revenue from taxation is below average in comparison to other OECD economies, even including the GST on public expenditure and the income tax on social benefits and pensions.

Public sector spending is particularly strong on social security and welfare, health services and education which make up two thirds of core Crown expenses. Because there were fiscal surplus in the 1993 to 2007 period, financing costs are not high, but began growing when the public account went into deficit following the Global Financial Crisis.


Being an archipelago distant from other economies (the nearest Australia is over 1400kms away), New Zealand is very internationally dependent on shipping, airlinks, and telecommunications. There are eleven significant seaports. The largest export port is Tauranga (mainly dairy and wood) but, including inbound goods, Auckland is the largest port by value. The second largest on this measure is Auckland International Airport, and there are two other major international airports at Christchurch and Wellington although, increasingly, provincial centres have passenger connections to Australia. The main oil terminus is at Marsden Point (Whangarei) where there is an oil refinery.

Given a rugged topography and a scattered population, New Zealand is mainly connected by roads plus an inter-island ferry link between Picton and Wellington. The roading networks is generally funded by levies on users (most notably a petrol tax) and local body rates (for urban streets); there are very few toll roads.

There is a main trunk railways system from Invercargill to Whangarei, plus branches to the West Coast (of the South Island) to Gisborne and to New Plymouth, and through the Wairarapa. There are urban railway services in Auckland and Wellington.

Because of the terrain and Cook Strait, there is a network of domestic air links with all provincial towns having airports, although some are serviced by quite small planes. The predominant aircraft on the main trunk route – Auckland-Wellington-Christchurch – are of the size of Boeing 737s. The main domestic and international airline is the largely government owned Air New Zealand, although smaller airlines vigorously compete domestically and major international airlines also provide foreign connections. The Trans-Tasman market is particularly competitive.

There is a general view that there has been insufficient investment in transport infrastructure in the past, and most urban arterial routes are jammed during peak hours. A major investment program in roading (and a rail upgrading) began in the mid -2000s.


Historically the telecommunications industry was dominated by monopoly Post Office. In the 1980s, the telecommunications division separated out as Telecom New Zealand and then privatised after opening the industry to competition. Telecom is still the largest firm in the industry, but is under competitive pressure from Testra-Clear (its Australian equivalent) while Vodaphone is the largest mobile phone provider. Smaller (quirkier) companies are also aggressively active.

New Zealanders tend to be very quick to take up new technologies. By the mid 2000s, over 80 percent had internet access, and 85 percent a mobile phone. New Zealand is rapidly rolling out broadband access but the low density of the scattered population makes this difficult. 3G is widespread.

Regulation of the telecommunication system was ‘light handed’ in the early 1990s, but since 2000 there has been increasing active government involvement.

Thanks to Geoff Bertram for some corrections