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New Zealand characteristics

Economic geography

152nd
Rank of Auckland in the list of world's largest cities by population (including surrounding urban areas)
Source: City Mayors (2007)

New Zealand can be characterised as having a relatively small population (compared with other developed economies) located some distance from the world's economic weight of Europe and North America, though closer to the emerging economic weight in Asia.

Small size means a relatively lower level of domestic competition,[15] making foreign competition comparatively more important to creating a competitive domestic business environment. Small size also makes it harder to achieve economies of scale,[16] and allows fewer agglomeration benefits.[17] Auckland is New Zealand's largest city, but is still relatively small by world standards. New Zealand's population is thinly spread, creating challenges for infrastructure.

Distance from markets makes economic integration more difficult, given the transport and communication costs of distance, and that preferential trade liberalisation is often driven by geographical proximity.

10.1%
Reduction in New Zealand's GDP per person that can be ‘explained' by economic geography
Source: OECD (2008a)

The OECD (2008a) estimated that New Zealand's distance from markets lowers its GDP per person by around 10%, equivalent to around 75% of the gap in living standards between New Zealand and the average country in the sample. Two points of clarification should be borne in mind: First, comparing against the average country hides the fact that the same study suggests distance accounts for only around 20% of the gap to USA and almost none of the gap to Australia, so there is still a large role for other factors. Second, the impact of distance ultimately depends on real costs (transport, communications, and so on), and good policy can help reduce some of these.

The close proximity of Australia, with similar institutions and history, make competition intensive for labour and capital, particularly since New Zealand and Australia have among the most free cross-border movement of labour in the world.

Natural resources

17%
Contribution of the primary sector to New Zealand's GDP, including backward and forward links to the rest of the economy
Source: Harrington (2005)

Natural resources have influenced the strengths the economy has developed, such as the primary sector[18] and tourism. These sectors tend to have particular characteristics: Agriculture generally faces stronger trade barriers worldwide, ownership is dominated by cooperatives, and R&D is generally lower than other sectors. Service sectors related to tourism are relatively more important to New Zealand than other developed countries.

New Zealand's water resources have allowed generally lower electricity prices and low costs for water usage, especially in the primary sector.[19] Consequently, New Zealand is a net exporter of ‘virtual water', since water consumption is involved in the production of many exports.[20]

Historical and cultural context

As a former British colony, New Zealand has inherited British political and legal institutions, English is the dominant language, historically there have been strong trade and people flows with the UK, and the ethnic mix is predominantly Pākehā, though it is changing over time.

80%
Proportion of allocated water in New Zealand used for irrigation and stock watering
Source: Ministry for the Environment (2007)

The Treaty of Waitangi relationship between Māori and the Crown has implications for a number of policy areas. Perhaps the most important from an economic point of view is the importance of natural resources,[21] making collaborative approaches desirable for resource-related policy issues.

Two ‘Kiwi' attitudes that may have economic relevance are the importance of lifestyle and a ‘number 8 wire' mentality. Both appear to be supported by the available survey-based evidence.[22] Other attitudes that are sometimes raised are a lack of aspiration (a ‘boat/bach/BMW' attitude) and tall poppy syndrome. There is little available evidence to support these attitudes, and in any case it is possible that an apparent lack of aspiration could in reality be other drivers (such as lack of competition stifling entrepreneurial activity[23]).

Notes

  • [15]The OECD (2005) noted that “in small economies there will be a tension between the paucity of firms in many industries and the fact that these firms are often operating below optimal scale. These tensions could even be accentuated when markets are geographically fragmented, as in New Zealand. Indeed, this can lead to the presence of even smaller geographically distinct markets within the economy. The key way to circumvent the disadvantage of size is to increase exports (thereby improving the ability of firms to achieve economies of scale) and imports (thereby providing increased competition).”
  • [16]For example, Mills and Timmins (2004) found that “large firms that are smaller on average than large firms in at least some other countries”.
  • [17]‘Agglomeration’ refers to the tendency for economic activity to cluster together in close proximity, such as cities as agglomerations of people, or Silicon Valley as an agglomeration of IT companies. Agglomeration can provide benefits through, for example, information spillovers, or thicker labour markets for specialised skills. See, for example, McCann (2003).
  • [18]Harrington (2005) described the importance of the primary sector to the New Zealand economy: “The primary sector directly contributes … 6.8% to the country’s Gross Domestic Product (GDP). If the primary sector’s backward and forward links to the rest of the economy are included as well, the contribution grows to around 17% of GDP…and two-thirds of New Zealand’s merchandise exports.”
  • [19]The Ministry for the Environment (2007) found that 80% of allocated water in New Zealand is used for irrigation and stock watering, and that “there is no doubt that the intensification of pastoral land use has increased the pressure on our surface waterways and groundwater”.
  • [20]For example, see Chapagain et al (2006).
  • [21]Article the second of the Treaty of Waitangi provides for “the full exclusive and undisturbed possession of their Lands and Estates Forests Fisheries…”
  • [22]The Growth and Innovation Advisory Board (2004) conducted a survey into growth culture in New Zealand, and found, among other things, that “core values that focus around lifestyle and environment are paramount, closely followed by health and education”, and that “such attributes as resourcefulness, practicality, fairness, cooperation, and ‘give it a go’ attitudes, are defining and are an important foundation for growth and innovation.”
  • [23]For example, Knuckey et al (2002) investigated management practices in New Zealand and found: “Leaders in practices and outcomes tend to be those firms that are operating in a market where they face or perceive a significant number of key competitors. Conversely, a higher proportion of Laggers indicate that they either hold a captive market or are in a market where there is a range of non-dominant competitors.”
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