Exports weak link in growth

New Zealand will have to substantially lift its game as an exporter and foreign investor if it is to maintain the economic growth of the past few years.

That is the conclusion of a report by the New Zealand Institute, an Auckland-based think tank, which argues that the country will struggle to achieve the higher labour productivity needed to lift living standards as long as it continues to underperform other small developed countries in its level of economic engagement with the wider world.

"A market of 4 million people is just too small to drive the productivity growth we need," institute chief executive David Skilling said.

The combination of New Zealand's small domestic market and remoteness from large markets hampers the country's economic performance.

"The lack of scale ... reduces the incentive of firms to invest and means that some kinds of economic activity that have large up-front costs are not feasible," he said. It reduces the intensity of competition and limits the scope of firms to grow.

The report, by Skilling and Danielle Boven, says it is hard to find a case of a fast-growing small country that is not heavily oriented towards expanding its international engagement through trade and investment.

But New Zealand's exports, relative to the size of the economy, have gone sideways over the past 20 years.

Exports are equivalent to 29 per cent of gross domestic product, the same as in 1983. For Ireland, with a similar population, the proportion is closer to 80 per cent.

Exports grew at an average annual rate of 7.8 per cent between 1971 and 2000, lagging behind world trade which grew 9.5 per cent a year over the same period. Had New Zealand kept pace, exports would be two-thirds larger than they are now.

While 75 per cent of world trade is in manufactured goods or bits of them, two-thirds of New Zealand's exports are the products of farms and forests and only 25 per cent manufactures.

The composition has not changed much in the past 15 years.

Exports are relatively low-tech. While there has been rapid growth in some sectors such as information and communications technology and biotechnology, it has been from a low base and still does not make a significant slice of the exports pie.

And New Zealand has lost market share since 1990 in categories, including meat, which make up 57 per cent of its exports.

"Indeed, 42 per cent of New Zealand's exports are in slow-growing categories in which it is losing market share," the report says.

Firms have failed to achieve the necessary scale by investing overseas; by that measure the country has been going backwards. Foreign direct investment out of New Zealand surged in the 1980s, rising from 2.3 per cent of GDP in 1980 to 14.7 per cent by 1990.

But since then the outflow has dwindled and it is now only 11.9 per cent of GDP, while 27 per cent is average for a developed country.

Worth $18 billion, it is dwarfed by the $79 billion of inward FDI.

New Zealand's exports are heavily concentrated in a small number of companies. Only 50 firms exported more than $75 million over the past year and collectively they contributed more than 60 per cent of exports.

Just 10 firms accounted for about half of New Zealand's exports, while it takes the 700 largest exporters to make up half of Australia's.

The institute concludes that New Zealand is not well integrated into the global economy compared with other small developed countries. Why that is, and what businesses and the Government can do about it, will be the subject of reports next year.


World place
* NZ is not well integrated into the global economy compared with other small developed countries.
* The gap between exports and imports is the widest for 30 years.
* The high dollar and falling commodity prices are not the only factors to blame - it is also a structural issue.
* Exports are modest, slow growing, low tech and concentrated in far too few companies.
* Not enough firms are big enough and good enough to compete globally.
* At this rate, the country will struggle to achieve the economies of scale and best practice needed to lift productivity.
* That means living standards will lag too.


Poor export performance
* Exports are equivalent to 29 per cent of GDP, the same as in 1983. For Ireland, with a similar population, the proportion is closer to 80 per cent.
* Exports grew at an average annual rate of 7.8 per cent between 1971 and 2000, lagging behind world trade which grew 9.5 per cent a year. Had New Zealand kept pace, exports would be two-thirds larger than they are now.
* 75 per cent of world trade is in manufactured goods or bits of them, but two-thirds of New Zealand's exports are the products of farms and forests and only 25 per cent manufactures.
* The composition has not changed much in the past 15 years and most exports are relatively low tech.