No economic salvation in goods exports

Let’s be clear, goods exports make a valuable contributionto New Zealand’s economy.   They make up around 78 percent of total exports and24 percent of GDP.   On the whole, goods exporters are more productive thantheir domestic-focused counterparts.   They expand domestic production beyondthat possible from a sole focus on New Zealand’s tiny market.   They battlethrough large and volatile swings in the exchange rate, high transport costs,and stupid self-interested trade barriers in overseas markets.   Goods exportersare certainly worthy of admiration.

But let’s not get overly obsessed about the contribution goodsexports make to New Zealand’s economy.   It is one of the many cogs upon whichthe success of the economy depends.   Goods exports’ share of the economy hasswung around a bit over the past two decades.   But if you remove the peaks andtroughs, the medium-term trend is relatively modest as the chart indicates.   Arguably,this trend has been biased upward by the extraordinarily high commodity pricesin the early to mid parts of this decade, which substantially boosted the pricesand production of commodity based goods exports.   However, there are two big developmentsthat are likely to prevent goods exports being the powerhouse in the futurethat many wish.

The first development is that as New Zealand gets richerthere will be a natural tendency to move away from goods production toward theprovision of services, which are predominantly domestically focused.   Goodsproducers tend to be more productive than service providers in wealthiercountries allowing goods producers to pay higher wages without substantially raisingprices.   Service providers on the other hand are forced to push up their pricesby more to meet rising pay demands.   Over time this drives down goods pricesrelative to services prices resulting in a decrease in the share of goods inoutput.  

Related to this first development working against the exportof goods are the shift of manufacturing production offshore to take advantageof cheaper cost structures and be closer to overseas markets, and a greaterpreference for services (for example, discretionary healthcare, eating out andfinancial services) as populations become wealthier.   Static or declining trendsin the shares of goods exports in the economy are evident in rich countrieslike Australia, Canada, Norway, Sweden, Britain, and United States.

The second development that is against the export of goodsis New Zealand’s ageing population.   In the future there will be a dwindlingproportion of people of working age.   There won’t be the supply of labour tosustain large scale production of goods in New Zealand to the extent necessaryto boost goods exports as a share of the economy.   A larger share of those ofworking age will be sucked into industries servicing retirees such ashealthcare, retirement accommodation, retail, and financial services.   Greaterimmigration will help meet the needs of an ageing population at the margin, butthe tide of older people is so great that it will take an unfeasibly large andsustained inflow of people to counter the diminished share of workers.

For those that see the export of goods as the salvation of NewZealand’s economy this might all seem rather gloomy.   But the situation can bebrighter than this.   In a world where production is increasingly sourced from lowcost countries more important than what’s produced in New Zealand is how muchincome New Zealanders earn from all sources.   It is possible for New Zealand tobecome wealthier with a lower share of goods exports if productivity is raisedacross all its industries and if New Zealanders invest wisely in assets hereand overseas.   New Zealanders need to become owners not just of high yielding domesticassets, but also overseas assets either through ownership of shares or throughdirect stakes in overseas based operations.

There will always be parts of New Zealand’s export sectorthat will do well.   Some of our primary producers are striving and succeedingat raising the value of their exports through innovative products that leverageour country’s comparative advantages.   There are some high profile high-techmanufacturing export successes.   But for every export success story there will bea fading star.   Overall shrinkage of our goods exports as a share of the totaleconomy is likely to be inevitable in the longer term.  

The government can assist goods exporters to make the mostof the environment they face by continuing to work bilaterally and multilaterallyto reduce trade barriers, and reduce its influence on the exchange rate by keepingpublic spending in check.   But policies that primarily seek to counter thedominant forces working against the production of lower value goods exports inNew Zealand will be counter-productive.   Better to focus on boosting the mediocreproductivity of New Zealand’s domestic sectors and improving New Zealanders’ investmentperformance.

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