Jun 16, 2008

Monday Essay There Are Good Times Ahead: Let's Not Shoot Ourselves In The Foot

Executive Summary

The stars are pretty much aligned our way. The world is prepared to pay more for what we produce. Free trade means we can maximise returns. Last time things were like this we became the world's wealthiest country in per capita terms. Don't fuck things up with a poorly thought out and rushed emissions trading regime.

Essay begins

For pretty much all of the author's life we have been told that New Zealand is in the wrong space being so export dependant on agriculture, fisheries and forestry. Emphasis has been placed on building an industrial base and then a knowledge based economy. Even over the past 8 and a half years the focus has been on a growth and innovation framework, economic transformation and most recently sustainability. At their heart these processes have been designed to de-emphasise our focus on primary production. And there are now Government officials (we wish the new CEO at MfE well and are pleased that he has come from MAF), interest groups and political parties that are actively seeking to constrain growth in, or even reduce production from agriculture. [At a meeting a couple of months back a study which predicted the last meat and wool farm closing in 2026 was being discussed. Everyone around the table appeared deeply concerned. Then one voice piped up - "Hang on, is this necessarily a bad thing? Doesn't anyone else agree with me" It was the representative of a well known environmentalist group.]

But the world has been changing. Underpinning the desire to move away from primary production has been a paradigm which assumes continuing increases in the value of industrial and services products and a continuing decline in the value of commodities, particularly agricultural commodities. Today, we have seen a steady decline in the value of manufactures (thank you China and Vietnam) and no appreciable increase in the value of the most commonly traded services (until very recently the real cost of travel and tourism has been in decline for years, and the only reason why it is increasing right now in nominal terms is to pass on the costs of higher fuel costs). But food, and other commodities are being more valued by the global economy. They are being priced as an increasingly scarce and valuable commodity. The effects are obvious in dairy. They are beginning to be seen in meat also (drought in Australia and New Zealand has meant that killings have been higher than normal, thus flooding the market with more supply than would be normal. Longer term, of course, this means that there are less stock units available to satisfy future demand and higher prices are pretty much guaranteed. Add to that increased demand from China etc. and you have a very nice outlook for the meat sector also).

Some of the smartest people on this planet at present are those running China. They were possibly the first to sense that world was about to change and that they needed to start to think differently about how to ensure security of food supply and of other essential commodities. Chinese diplomacy toward Africa, Latin America and Australia/New Zealand has been driven by these concerns for the last five years or so. The FTA we have just signed with China is all about China's food security concerns and about its desire to reform its agriculture system further. It needs to move more people to the cities but how are they going to be fed? Increased imports and the adoption of a more efficient agriculture model at home. New Zealand can help in both areas.

The UAE, some ASEANs, the Koreans, Japanese and Indians have become fast followers of China's lead. All are seeking to secure continuing interest from New Zealand exporters in supplying them. How? By reducing barriers to trade and by offering the opportunity for better prices.

Thanks to the Uruguay Round and CER, New Zealand is already enjoying the best market access conditions since British entry into the EEC. In a few years, things will have improved further and New Zealand will be enjoying preferential access conditions into almost all its major export markets. And the products being exported will be enjoying higher prices than anyone dreamed possible a few years back. Rather than regarded as a weakness, being the only OECD economy with an economy so dominated by agriculture, forestry and fisheries, this is increasingly being seen as strength. Food it literally and figuratively being regarded as the new oil, and we have much more of it than we can possibly consume domestically. And, we can expand production.

On a visit to Europe recently we were struck by the number of fund managers saying what we have just said, and asking how they can take a position directly in New Zealand agriculture (dairy in particular).

Add into the equation our tourism and services export potential, our high tech export potential and our wider resource strengths - the special character of our iron sands, production of the purest aluminium in the world, our 1,000 year coal resource, our 70% renewable electricity profile, and our now economically exploitable oil and gas reserves etc. we are sitting pretty.

If we adopt the right export strategy, link our investment strategy into this strategy - Singapore style -we can lift our wealth to a new plane. Why aspire to the top half of the OECD when we can once again be #1?

Unfortunately there isn't much strategic thinking going on in this space. Government is more interested in keeping the lid on scandal and winning an apparently unwinnable election. This means that they are prepared to risk everything for the sake of possible short term electoral advantage achieved through the passage of an emissions trading scheme. A scheme that will do zip to help the global environment, but which allow it to portray National as uninterested in the environment, and which will allow the PM and her Climate Change Minister to look good at international meetings (something that also sometimes wins votes at home).

Unfortunately the scheme will have serious side effects. The aluminium and steel industries have already signalled short term that this will mean deferral of investment. Loner term it might mean exit. The scope for dairy to expand will be severely constrained, and it and wider pastoral agriculture might decline. Forest plantings are likely to expand but harvesting the trees will be penalised. Exploiting our sustainably managed fish stock might cease because of increased costs. And will we really be able to make the most of our coal resource under the proposed regime (a coal liquefaction industry doesn't exist so will get zero free allocation under the currently proposed rules). And the proposed policy will lead to a decreased competitiveness for our tourism, education, and manufacturing industries.

In summary, we are about to throw away our opportunity to move back up the growth ladder. We can't do this to ourselves - can we? Can't we just take a bit more time to design a scheme that delivers a good environmental outcome and allows us to take full advantage of the economic opportunity that is there for our grasping?

The next few weeks will tell.