Money-go-round economy where export is king
Atravelling salesman, feeling lucky, walks into the local hotel and gives the hotelier $50 to hold a room for him for the night. The hotelier, also feeling that the salesman will be lucky, takes the cash to the corner shop and pays off his ‘‘on tick’’ account.
The shop owner, wanting to share the luck, takes the cash to the local mechanic’s shop and settles his last call-out bill. The mechanic takes the cash to the local hostess and pays for the last assistance. The hostess is always lucky and takes the money to the local hotel where she hands over $50 to reserve a room for the night.
Who, apart from the taxman, is out of pocket? This is the essence of the money-go-round. Each dollar circulates. Savings and tax reduce it at each stage, and leakages occur, but $1 is worth more in communities than $1.
Exactly how much more is the subject of considerable debate among economists. The descriptor should, perhaps, be ‘‘turnover’’ rather than the more commonly used ‘‘multiplier’’.
Each dollar coming into the country through export payments to dairy turns over about eight times in the community, and each sheep and beef dollar turn over six or seven times (according to banking estimates).
Exports bring new money into New Zealand. Money that is already here ‘‘leaks’’ out of circulation, into housing, for instance, or any purchase from overseas. Money paid for housing supports the employment of real estate agents who then support employment in other sectors.
Money paid for goods supports employment in shops and supermarkets and transport. Money paid for goods online from overseas suppliers supports only the transport employees in New Zealand. The other money has leaked offshore.
During Covid, the Government launched a huge investment in wage support and increased benefits to ensure that people could keep purchasing. It worked: New Zealand’s economy did not crash in the way that had been predicted.
A big part of that was because the export income from the primary sector continued. And the money turned over. Fonterra has forecast a milk price of between $7.25 and $8.75 per kilogram of milksolids, and pointed out that at $8, Fonterra alone will contribute more than $12 billion to the New Zealand economy next season.
Fonterra sets the benchmark for what most of the other companies pay out; Tatua is in the market of specialist products and generally pays rather more than the other companies.
Overall, this means that the Ministry for Primary Industries’ June Situation and Outlook for 2022 of more than $20b in dairy exports is likely to be realised. Meat and wool are expected to be more than $10b, horticulture and arable $8b and forestry more than $6b.
Another $3b is forecast from honey, live exports and various processed foods and seafood contributes $1.7b.
This income supports economic development, particularly in the regions.
The New Zealand Institute of Economic Research (NZIER) calculated in 2018 that the dairy industry plays a crucial role in supporting regional economic development. It provides jobs where there are few alternatives and is the top income generator in Waikato, West Coast and Southland. In half of New Zealand’s 15 regions, the farm side of dairy is the No 1 provider of gross domestic product, and in the top 10 employers.
It also contributes to employment growth on farm and in processing. And to innovation. NZIER calculates a 21 per cent increase in cow productivity since 2001 and gains to the processing side with UHT, infant formula and rapidprocessing mozzarella taking off in the last couple of decades. ‘‘Fonterra’s food services business is growing at three times the global rate, with over 50 per cent of the 300 million pizzas sold in China topped with Fonterra’s cheese each year.’’
Money, employment and innovation . . . the latter leading to productivity gains for the sector and country.
New Zealand no longer has a reliable international student market. It no longer has significant international tourism.
Most people agree that we haven’t yet seen the full effects of the Covid-19 disruption but that, so far, the national economy has managed to keep going. Export income is the reason – offsetting the money leaks. Government borrowing to support incomes has been part of the success, but that money will need to be recovered in the future – perhaps through inflation.
When this happens we will, again, need the primary sector to pull in the dollars from overseas to keep the money turning over.
The increase in the milk price and meat schedules show that New Zealand has what other countries want – protein. New Zealand is the lucky country, and everybody in the community can feel lucky as the money goes round.
Fonterra alone will contribute more than $12 billion to the New Zealand economy next season.