NZ economic theory debunked

Treasury believes it may have debunked a theory that economies like New Zealand's which are reliant on commodity exports are doomed to decline.

A Treasury working paper has been released which looks at the terms of trade for New Zealand over the past 50 years.

The terms of trade in the study compare the volume and price of exports to imports and what effect they have had on economic growth.

It has been a long held economic hypothesis that the price of commodity based exports must decline against the price of manufactured imports, meaning a decline in the real income and overall economic of commodity exporting nations.

The Treasury study found that contrary to the theory, New Zealand's terms of trade have not declined and in fact, shown an increasing trend since 1974.

This in turn has had a positive impact on economic growth.

The study found that New Zealand exporters have managed to get better prices than other commodity exporting nations because they changed the type of goods exported.

An example of this was the significant dairy conversions of the 1990s.

Land used for dairy farming increased by over 35 percent between 1990 and 2000 while land used for sheep and beef farming fell by close to 13 percent.

This was mainly a reaction to dairy prices increasing by 31 percent during this period as opposed to a 1 percent increase in combined meat and wool prices.

New Zealand exporters have also been forced to find new markets, which the study says might have helped to hold up the terms of trade.

For instance when the United Kingdom joined the European Economic Community in 1973 it was taking 72 percent of lamb exports, 73 percent of butter exports, 66 percent of cheese exports and approximately 20 percent of wool exports.

Since then New Zealand's largest markets have been Australia and other countries.

The rise of China has also assisted New Zealand's terms of trade not only by creating a new market for commodities but by its cheap production of goods driving down import prices.

The paper concludes that the future for New Zealand's terms of trade is unclear.

There are factors that could result in higher prices for some exports, such as New Zealand's primary commodity exports becoming higher value in nature.

Further world trade reform and the growing demand from China would also boost exports.

However, the positive economic outlook could be offset by lower prices for some exports due to increased supply from some emerging markets such as South America, and the higher cost of some imports such as oil driven up by demand from China.

Treasury urges policy makers to work towards further diversification of the economy and world trade reform, as well as keeping a careful eye on China.

- NZPA