NZ’s changing place In the world
Covid-19 has disrupted the movement of people, and in NZ that could have a lasting effect. John Anthony reports.
New Zealand’s longstanding connectedness to the rest of the world has been severely disrupted by the Covid-19 pandemic, and its planned immigration reset is a reflection of those changes.
That’s the view of Derek Gill, principal economist of the New Zealand Institute of Economic Research (NZIER), which has just published a discussion paper and created an interactive platform showing how New Zealand’s place in the world – including flows in trade, people, capital, and ideas – continues to shift.
Gill, who wrote the paper, says many of the perceptions of the New Zealand economy, including our openness to external trade and foreign investment, and the role of migration in driving population growth, has changed.
There has been a slow-down in globalisation, and the world is becoming ‘‘increasingly bipolar’’, dominated by the United States and China.
Globalisation is not just about trade flows, but also about people movement, capital flows, and ideas and culture, he says.
The movement of people has been particularly affected by Covid-19, and in New Zealand that impact is likely to be felt long after the pandemic ends.
The Government’s planned immigration policy reset means the high migration levels of the past decade are over, which will further affect New Zealand’s international connectedness, he says.
‘‘So whatever the international trends in global flows of trade, investment, people and ideas are in the future, New Zealand’s international connectedness will be different than in the past.’’
A lot of New Zealand’s international trading of goods and services is a result of connections developed by migrants, he says.
‘‘Obviously with fewer migrants here, there’ll be a bit less of those connections.’’
Over the past decade, there have been record immigration flows, and local population growth has been mostly driven by migration rather than natural increase, something not previously experienced since the 1870s.
Gill says questions about the management of the movement of people will become a key concern.
The share of New Zealand’s resident population born overseas has reached a third nationally, and 50 per cent in Auckland, and is among the highest in the developed world.
He forecasts that post-Covid capital flows will largely continue as normal, and trade flows and supply chains will become more resilient, but the movement of people into New Zealand is going to change.
‘‘I think the big impact’s going to be on people flows. We’re only at the end of the beginning of how we manage out of Covid. At some stage we’re going to have to open our borders. Who are we going to open to and under what conditions?’’
In November, NZIER released a report it did with the Helen Clark Foundation, which said Covid-19 provided an opportunity for New Zealand to reset to a high-wage, high-productivity economy.
‘‘That means shedding some of those low-paying jobs,’’ Gill says.
New Zealand has traditionally brought in a lot of highly skilled migrants, and benefited from that. ‘‘But we were also bringing in quite a lot of relatively unskilled people . . . doing relatively low-value jobs that Kiwis don’t want to do.’’
Moving to a high-wage economy would require either charging more for goods and services, or adopting machine automation.
The report also examined external trade data and identified that New Zealand’s openness to trade ranked poorly against other advanced, small, open economies.
For example, when looking at exports of goods and services as a percentage of GDP, New Zealand ranked last when compared with Austria, Belgium, Denmark, Finland, Hong Kong/China, Ireland, Israel, the Netherlands, Singapore and Sweden, Gill says.
Many New Zealanders view New Zealand as a small, open economy, but it is less connected than we think, largely due to our geographical isolation.
Despite that, the economy has fared ‘‘remarkably well’’ over the past year.
‘‘That’s a tribute to the flexibility of the modern New Zealand economy. As someone who grew up in the dark ages of the Muldoon era, that was a very rigid economy with few exports.’’
From the 1880s until the late 1950s, meat, wool, butter and cheese exported to the United Kingdom made up nearly 80 per cent of exports. Today, China, Australia and the United States are the largest markets, and the mix of exports has widened.
‘‘What we do have is quite diversified, both by product mix and by country mix, which means you can ride out the storm because you don’t have all your eggs in one basket.’’
New Zealand’s export-to-GDP ratio peaked in 2000 at 35.7 per cent, before levelling out at about 25 per cent, he says.
The primary sector has been ticking over despite the huge disruption of Covid-19 – now accounting for 90 per cent of
goods exports and 63 per cent of total exports – while global commodity prices have risen.
But New Zealand’s services exports have grown over the past 30 years to 30 per cent of GDP, dominated by tourism.
Gill says it is remarkable that activity is now higher than preCovid, considering that sector had been almost removed. ‘‘We did remarkably well.’’
Global prices have benefited New Zealand more than other advanced economies. ‘‘I remember putting a paper to the Muldoon government about the death of the dairy industry, the EU had a ‘butter lake’, the Americans had massive export subsidies on dairy – the good news story is how well we have done.’’
New Zealand’s terms of trade
– a measure of the country’s export prices relative to import prices – have increased by 50 per cent over the past 20 years while other small, developed economies’ terms of trade have been flat.
Gill says that shows how, contrary to the common narrative, New Zealand is not disadvantaged by being at the bottom of the value chain, with other countries adding value to our primary exports.
‘‘This is inconsistent with the conventional wisdom in the 1970s about primary producers facing adverse terms of trade movements, as well as modern arguments about the advantages of moving up value chains.’’
Land-based exports proved resilient to supply chain disruption during the pandemic, he says. ‘‘People have been going on for years about how we should be moving up the value chain.’’
But he points to the looming Kawerau mill closure.
‘‘It’s in the wrong industry, making newsprint. Are log exports really so bad? Wood prices have gone up, someone else is doing the processing – it’s a good story.’’
Shamubeel Eaqub, an economist at Sense Partners, says comparisons of terms of trade without a discussion of the size of the export sector are not helpful.
‘‘New Zealand has a very low export share of GDP for a small country.’’
The things New Zealand exports have increased in price generally, but that has not necessarily flowed through to direct benefits for the economy as a whole.
Independent economist Tony Alexander says exports of goods and services from New Zealand typically make up about 27 per cent of GDP, which is a lot smaller than in many other countries.
However, for most other economies, exports are made up of a high imported component.
‘‘Virtually everything which we export from New Zealand is actually produced here. Our exports come from our land and sea, rather than partly off the wharves,’’ Alexander says.
This gives New Zealand a slight export income advantage currently, because supply chain disruptions matter less to us than to other countries where, for instance, cars cannot be produced because the necessary computer chips are not available.
New Zealand’s big problem is labour shortages, but that mainly affects the harvesting of certain crops, and rest time for many existing operators on dairy farms, Alexander says.
There is good demand for what New Zealand produces, with export destinations experiencing strong growth off the back of a variety of factors such as fiscal stimulus and successful vaccination campaigns, strong factory production in China, and healthy household balance sheets.
He believes the prices for most of the main things New Zealand exports are trending upwards.
‘‘The strength of the primary sector has been a key source of support for our economy over the past year and it would be good if the Government could recognise the important role played by farming, in particular, by making extra effort to get badly needed staff through MIQ facilities.’’
Gill, meanwhile, says that what happens in the future will depend on how much the United States’ geopolitical rivalries spill over into economic developments, how hard the US tries to claw back the traditional leadership role in international economics, lost under former president Donald Trump, and whether there is a loss of momentum in multilateral trade institutions.