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22
OCT 14

Economic Diversity




For any economy, diversity in the things you make and who you sell to is important to lower risks and ensure a shock resistant and resilient economy. However New Zealand has generally been going in the opposite direction, relying more on a narrow range of simple products, milk powder, meat and logs, and single large market, China.

In the below graph, you can see that both processed and unprocessed primary have been improving strongly since around 2007. These sectors are less diverse and have been led by strong growth in milk powder, meat and logs – all of which were boosted by the China FTA, taking effect in 2008. In contrast, the simple, elaborate and miscellaneous manufactures (which covers from low tech, through to high tech manufacturing) have been stagnant, even decreasing over this time.


This risk of relying so heavily on a few large sectors is currently being demonstrated, with the substantial falls in dairy prices. Global dairy prices were high last season, but have fallen 45% since February, and the Fonterra payout has decreased from $8.40/Kg last season to $5.30/Kg, with potential to fall further. This is a real concern for many farmers, those who supply the industry and even the New Zealand economy, as this could see a loss of $5b to our economy (2.2% of GDP). A substantial minority of dairy farmers have very high levels of debt – and as the payout falls, and borrowing costs continue to rise, as indicated by the RBNZ, many may be running at a loss, having to borrow to service existing debt – Federated Farmers indicated nearly a quarter could be running a loss this season at a $5.30/Kg payout.

This is exacerbated by the failure of the NZD to autostabalise, that is, fall as the commodity price falls, making the reduction in prices worse for farmers, as well as keeping the pressure on exporters and import competing manufacturers.

Shock resistance follows from product and market diversity - China has been an impressive market for milk and logs, lifting our exposure to problems in that market.

Policy makers need to consider how to improve our economic diversity. While the success of our agriculture industry is vital for our future, it does not have to be the only source of growth. The correction of tax incentives and policy targeted at broad growth of our manufacturing sector can build resilience and make our economy stronger and more prosperous.


tags: diversity, exchange rate, currency, exports, dairy, complexity, manufacturing, trade, china
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