Economist warns against cargo cult mentality

BNZ chief economist Tony Alexander is warning against complacency and adopting a cargo-cult mentality in assuming the swelling of China's middle class in the next 15 years will take care of the New Zealand economy.

"It won't. One key reason is because by and large our primary sector is extremely hard to scale up. In contrast, Australia's mineral exports sector can be grown many times."

The outcome of growing commodity incomes in New Zealand would be soaring land prices - with or without any change in bank lending criteria or land sales offshore, he said.

"These years may represent the last ones for young people to have a reasonable expectation of farm ownership."

Mr Alexander, who is in Hong Kong, said New Zealand had a blind spot about Hong Kong and China.

Since the Free Trade Agreement between New Zealand and China started in October 2008, this country's trade with China - including the Hong Kong special administration region - had grown about 120%, or 151% for the mainland only.

Mainland China's total imports from all countries had grown 43%.

The increase in New Zealand's trade meant China accounted for 14% of the country's export receipts, up from 7% three years ago and about 2% in 1990.

At the current pace of change, China would surpass Australia as New Zealand's main export destination about 2017, Mr Alexander said.

"On the face of it, one might think that this huge surge in the money we are making from China's growth is great and as long as we keep doing what we have been doing, everything will be OK. But that way of thinking is the very problem."

More than 96% of the things New Zealand exported to China were primary products and growth in those receipts had been about 126%, but growth in receipts of non-primary exports had been only 9%.

New Zealand was exporting low-value-added products to a country whose consumers' incomes were rising rapidly and they were demanding increasingly sophisticated goods and services, similar to those Western households wanted.

All New Zealand had achieved so far was to shift some of its dependency on low-value-added primary sector exports from one set of countries to another, he said.

Some might think that riding a commodity boom could be a fine thing for growth, yet in the year to September, the New Zealand economy recorded growth of only 0.1%, if additions to inventories were removed.

The unemployment rate had been stuck near 6.5% for two years, wages growth was minimal and a record number of people were seeking their fortunes in Australia, Mr Alexander said.

"Don't underestimate what the outflows are telling us. Between 1975 and 1982, rising discontent with an increasingly regulated economy saw a net 156,000 people leave our shores. There is a message in the sound of feet walking away from our long white cloud. Something is not right here."

There were examples of companies doing well in China either through exports or establishing an on-the-ground presence, Mr Alexander said.

New Zealand Trade and Enterprise had a strong focus on developing business in areas such as supplying quality food and beverages to the hotel, restaurant and institution sector, biotechnology, niche manufacturing and agritechnology.

"But the popular debate surrounding the sale of the Crafar farms shows how astoundingly far away Kiwis are from understanding the economic and geopolitical implications of China's rise back to accounting for more than a quarter of the world's economy.

"Avoiding being tenants in our own land is an extremely valid goal which, if not satisfied, would take New Zealand completely away from the sort of place people were seeking when they started flocking here in the 19th century."

The debate about the sale of the Crafar farms sidestepped the fact that during the past five years, the Overseas Investment Office had approved proposals for the sale of 1.1 million hectares of land, of which 117 hectares was approved for China buyers and 939 hectares for buyers from Hong Kong.

Mr Alexander said the question which needed answering was how to best make money out of the land sales New Zealand was already making.

Should land sales lead to the greatest opportunities for extra sales of high value-added products, extra processing in New Zealand and extra capital for additional expansion?

Or should New Zealand instead be thinking in terms of not selling but leasing the land to foreigners, with again the same questions asked?

Taken from another angle, China accounted for 14% of New Zealand's export receipts but only about 2% of the near $94 billion foreign direct investment.

dene.mackenzie@odt.co.nz