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This paper has described how and why international connections are important for New Zealand's productivity and economic performance, and has set out some general lessons for policy making. The paper has considered each of the four resource flows in turn, and then discussed some cross-cutting themes that may require a more fundamental change in how to think about New Zealand as part of the world economy.

In conclusion, we look across the four types of flows and distil:

  • the main channels through which international connections can drive productivity and economic growth; and
  • broad areas for grouping policy priorities, and some more specific suggestions for policy attention.

Links to productivity and economic growth

International connections provide economic benefits to New Zealand through resources, specialisation, knowledge, and competition.

The main channels can be summarised as follows:

  • Resources. New Zealand can gain access to resources that facilitate higher productivity: skilled talent, foreign capital to overcome the domestic saving constraint, and international goods and services, both final products and intermediate inputs.
  • Specialisation. A central part of a country's economic development is specialising in areas of comparative advantage, by exporting in those areas and importing in others. Part of these gains comes from overcoming the domestic market to achieve economies of scale, a particularly important aspect for a small country.
  • Knowledge. Perhaps the most important part of international connections is the ability to access international knowledge. Technological change is at the heart of the dynamic process of economic growth. Most of global technological change happens overseas, and New Zealand needs to tap into that knowledge, and adapt it to domestic circumstances, through technology-embodied imports, the expertise and skill that accompanies foreign capital, and the ideas and connections that flow from interactions between residents, migrants, students, researchers, tourists, and the diaspora offshore.
  • Competition. Competition provides stimulus for change. It helps resources flow to areas of comparative advantage, and in itself it can stimulate innovation through the need to perform. Imports, foreign investment, and immigration all provide competition, which is low in New Zealand relative to larger countries, given the small domestic market.

Broad priority areas

Three main areas of focus to improving New Zealand's international connections are discussed below, in order of importance, and more specific suggestions for consideration are set out in Table 4.

Domestic policy settings

Domestic policy settings are critical to making the most of international opportunities.

Policy settings across the board can affect international connections, even those that on face value seem intrinsically domestic. With low obvious policy barriers to deepen integration at the border, these domestic policy choices are likely to be where most gains are possible.

Themes with a specific international dimension include facilitating the development of future comparative advantage, ensuring New Zealand is a competitive location for people and capital, and maximising opportunities to capture economic benefits from our existing resources.

Regional economic integration

New Zealand should aim to be an integral part of an Asia‐Pacific regional economic market.

New Zealand's longer-term objective should be to be an integral part of an Asia-Pacific regional economic market. Flows of trade, capital, ideas and people flows are already strong with Australia, Asia, and the US. But these relationships are likely to increase in importance as the weight of global economic activity increasingly shifts towards Asia. Our participation in regional economic integration will be critical for New Zealand's prospects.

Relationships with countries that have been historically important to New Zealand, such as the UK and other European countries will continue to be important in some areas, such as to access ideas and technology.

Barriers at the border

Further reducing barriers at the border would support greater economic integration.

New Zealand's formal restrictions on international flows are generally low, and other at-the-border policy settings compare reasonably well internationally. On the other hand, New Zealand's distance from markets sharply reduces our connections with the rest of the world.

Given the importance of international connections to New Zealand, the costs of both inward and outward flows should be as low as possible, within the constraints of achieving other government objectives.

Table 4 – Priority areas for policy attention

1. Domestic policy settings are critical to making the most of international opportunities.

Unilateral policies

Ensure tax and regulatory settings encourage entrepreneurial and innovative activity to be located in New Zealand, such as shifting the tax base over time away from internationally mobile bases (e.g. income, profits) towards immobile bases (e.g. land, consumption).

Dampen exchange rate cycles to facilitate development of the tradeable sector, by reducing the risk of pro-cyclical fiscal policy and maintaining a sustainable, predictable and smooth medium-term adjustment path.

Develop a more integrated approach to international flows of people that includes domestic policies as well as at-border controls, and covers emigration and immigration, international students and New Zealanders studying abroad, and links between international researchers and businesses.

Reduce barriers faced by New Zealand firms doing business abroad through a more effective offshore presence.

Maintain a well-functioning innovation system that facilitates international knowledge transfer, with continued support for private sector R&D and more use of public sector institutions to access international knowledge.

Allocate natural resources more efficiently to support development and investment in sectors that use water as an input in production, and produce carbon as a by product of production.

International engagement

Argue for a fair post-Kyoto framework, including wide inclusion of countries and gases, with more recognition of the relative inability to reduce emissions in agriculture in particular.

2. New Zealand should aim to be an integral part of an Asia‐Pacific regional economic market.

International engagement

Maintain a clear strategy for engagement in the Asia-Pacific region, working with Australia in areas of common interest, and taking opportunities when they arise to promote regional economic integration, both at- and behind-the-border.

Continue moves towards a single economic market with Australia as part of the wider aim, through ongoing incremental improvements over time.

3. Further reducing barriers at the border would support greater economic integration.

Unilateral policies

Phase out all remaining import tariffs.  Import tariffs are already low, meaning direct economic benefits from further reductions are relatively low, but the signalling benefits to investors and traders could be more important (i.e. “no tariffs to worry about”).

Remove investment screening, or improve the screening regime.  As a first best, New Zealand should not screen investment based solely on the fact that the investor is not a New Zealand citizen.  As a second best, any screening regime should be as low cost as possible and provide certainty and predictability to investors.

Reduce costs of ports and customs.  New Zealand needs to have low-cost border control, relative to trading partners and competing economies, while providing security.  New Zealand also needs to have low-cost customs for travellers and migrants, while protecting security interests.  International air and sea ports need to be as productive and low cost as possible, making ownership, competition, investment, scale, and regulatory structures highly important.

Ensure high-speed, low-cost broadband is available for business.  As trade in services increases over time, low-cost communication will be essential.  Government should focus primarily on reducing costs for businesses.

Reduce the cost of international capital.  Access to foreign capital comes at a premium, reflecting, among other things, additional risk caused by New Zealand's high level of international indebtedness.  Government should continue policies to encourage saving, and keeping Crown debt at prudent levels.

International engagement

Negotiate hard for market access in multilateral, plurilateral, and bilateral forums, since high tariffs and other barriers, particularly faced by our agricultural exporters and higher value-added goods and services, are likely stifling New Zealand's economic development.
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