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SEP 13

Exports at 40% of GDP a realistic target?

If New Zealand’s exports are to increase as a share of gross domestic product what should be the policy targets? Should we relax and point to the successful and hope for more of the same, or would seeking to address the matters confronting those struggling around the threshold of failure have a greater macro impact?

The New Zealand Centre for Small and Medium Enterprise Research has recently released a report “Understanding Internationalisation Behaviour”, which shows the importance of networks and returns to exporters, and looks at some of the challenges and reasons for exit from export markets.

The report shows just how much the exchange rate can influence export success over time once a business has found a way to sell in export markets. Of the top four reasons for exporters abandoning export markets, two mention exchange rate explicitly while the other two depend directly on the exchange rate.  

Most frequently reported reasons for disengagement from overseas markets

(Source: Statistics New Zealand BOS 2011 Tables, Table 54/ Understanding Internationalisation Behaviour)

For exporters, appreciation of our currency has a direct effect on margins. Many firms cannot simply raise their prices in response, indeed if they are not priced at the level of the market they are failing at a basic level. For most elaborate products price positions are determined by market competition and cross rates determine what comes back to New Zealand; these problems cannot be hedged or wished away. The hit on margins can be even more disastrous for an already struggling export firm, by way of example, one firm we have met must sell today twice the unit volume to return the same revenue in New Zealand as was the case a decade ago.

It should not be forgotten that the exchange rate also hurts our import competing manufacturers; cheaper imports creating competitive disadvantage in the domestic economy.

Our policy framework must understand these factors and aim to bolster firms that are close to the threshold of failure and support future growth in offshore markets rather than stand back and witness retrenchment. Policies which support marginal firms will do the same for all other firms to a greater or lesser degree.

Exporting is a key driver of economic growth, however they are a minority within our economy. This means our policy focus tends to favour the domestic sector and exporters miss out when it comes to hard priority decisions. Witness the screams over loan to value debt expansion controls when the other option might have been higher interest rates that would have a currency impact. Macroprudential intervention by the Reserve Bank can target debt expansion without currency implications, which would give exporters some long needed support. It is worth recalling we all depend, one way or another, on the performance of our relatively small export sector; the loss of a single market or export firm should be significant to us all.

In 2012, only 1133 firms made up 95% of New Zealand’s exports, and just 77 companies contributed 67% of exports. This means that 0.77% of firms which have one or more employees, make up 95% of New Zealand’s exports. Such a small number of firms, though vital to our economy, seem to have the policy attention warranted by their number not the importance.

We need export policy that deals with all these issues and challenges to support and bolster success on the world stage. When the marginal operators can succeed, so will the stars. The greater the success, the lower the risks that fall on exporters and the more export activity will eventuate, and maybe 40% of GDP is possible. One thing is sure, just pointing to the stars and claiming all is well will not make it happen. 

tags: exports, manufacturing, exchange rate, policy, rbnz, currency
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