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Discussion

The idea that international connections could provide substantial benefits arguably started with David Ricardo's original theory of comparative advantage and gains from trade in 1817. Economist Paul Krugman has referred to this theory as ‘Ricardo's difficult idea'.[98]

In this section, we discuss four areas where current thinking and approaches could be acting as barriers to fully realising the potential benefits from international connections. The following ‘difficult ideas' are deliberately written somewhat provocatively, with the aim of encouraging greater debate among policy makers and the public more broadly.

Nationalistic tendencies?

In recent years, New Zealanders have expressed strongly held views that lean against international integration in a number of areas. Some examples include foreign investment, particularly in assets considered ‘sensitive'; foreign ownership of land; high flows of immigration, particularly from Asia; high flows of emigration, particularly to Australia; and offshoring of manufacturing production.

New Zealanders' views on international connections could be preventing policy changes that would improve economic performance.

New Zealand consistently argues for other countries to break down their barriers on New Zealand's exports, but in many areas New Zealand can itself be relatively protectionist.[99]

A shift in the New Zealand psyche that sees international connections as more of an opportunity than a threat would no doubt provide support for changes in some policy settings that would improve international connections and, perhaps more importantly, support a culture that sees international integration as a success.

The key to unlocking such a change may be a more sophisticated public debate. When concerns that New Zealanders have are raised, the underlying issues should be teased out, brought into the open, and tested. In many areas, there are likely to be ways to address valid concerns and target them directly, without falling back on blunter instruments that may deter international connections generally.

The future is agriculture?

Agriculture has been at the core of New Zealand's international connections since the 19th century and it is one of the overriding features of New Zealand's ‘brand' from an ‘outside in' perspective. But the question is often raised: Is agriculture part of New Zealand's future?

The potential for agriculture as an area of future competitive advantage looks promising (see page 30).[100] Current economic thinking emphasises the importance of path dependence and building on traditional strengths,[101] making economic development into higher value-added agricultural products a plausible future scenario. In addition, strong population growth in developing countries is likely to see strong demand for agricultural products over the next 10-20 years, and New Zealand's natural advantages in water will be sought after in a world of greater water scarcity.

Policy and other domestic settings could be preventing the agricultural sector from developing future competitive advantage.

On the other hand, competitive pressures are building, from South American countries in particular, and liberalisation of agricultural trade remains slow. Perhaps more importantly, there seem to be a number of domestic barriers to the sector realising its full potential. Environmental pressures are strong, from greenhouse gas emissions, water allocation, and water quality. These pressures matter both for the capacity to continue economic growth within environmental limits, and for market access, as sustainable modes of production are increasingly becoming the price of entry to developed markets, as well as some developing markets.

Industry structures potentially lean against dynamism and international expansion, notably capital and ownership structures and some competition settings. The farm-gate and short-term focused production model tends to limit longer term market signals from consumers through to producers. Innovation through biotechnology may be being hampered by a regime that in practice results in few developments of genetically modified and non-genetically modified new organisms.[102] Despite the strong returns to R&D, the level of investment in the sector looks light. Complex Treaty of Waitangi issues run through many of these issues, which require time and dialogue to resolve.

In short, agriculture is likely to be one of several areas of importance to New Zealand's economy in 20 years' time, but the sector faces formidable challenges to achieving greater productivity and higher value-added. Current domestic settings could be hampering meeting those challenges.

Notes

  • [98]Krugman (1996)
  • [99]A source of survey evidence is the IMD World Competitiveness Yearbook. For the question “Attitudes toward globalization are generally positive in your society”, New Zealand scored 6.40 out of 10 in the 2008 yearbook, compared with 7.03 for Australia and 8.29 for Denmark.
  • [100]To be sure, other sectors are likely to be important to New Zealand too, such as the service sector, which is generally less affected by international transport costs than goods exports, for example.
  • [101]Smith (2006) compares New Zealand with other natural-resource based economies such as Finland, Sweden, Norway, Denmark, Iceland, the Netherlands, Canada, and Australia, and discusses how their paths of economic development were based on innovation in their sectors of traditional strength.
  • [102]Since the changes to the Hazardous Substances and New Organisms Act in the early 2000s, the number of outdoor approvals for genetically modified organisms (field trials and outdoor developments) has been either one or none each year. For the decade before the changes, approvals averaged about five per year. In contrast, use of genetically modified crops has been increasing in both developing and developed countries (ISAAA, 2008).
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