January 14, 2003
Yes, we're small - so think big
by Winton Bates, published in the Business Herald
A favourite used to be that as commodity exporters, both countries suffered the curse of falling terms of trade. Agricultural product prices were said to be in long-term decline relative to the prices of industrial goods.
But there has been no such trend. Rather, industries producing high-technology goods such as computers have faced some of the sharpest declines in their terms of trade.
Another, only slightly more justified, argument was that the rest of the world was unfair - our farm exports faced barriers in overseas markets.
But countries such as Hong Kong and Singapore at earlier stages of their development also faced high protectionist barriers for products such as textiles.
They simply took the world as they found it, forced their economies to adjust through free trade policies, and rapidly overtook New Zealand's level of per capita GDP.
Lately, the idea that New Zealand is handicapped by its size and location has resurfaced.
Can this be credible? New Zealand once enjoyed one of the world's highest levels of per capita GDP, yet its location hasn't changed and its population and economy are much larger today.
As well, transport and communication costs are a fraction of what they were 100 years ago, meaning New Zealand is effectively closer to world markets.
Some other small economies - Hong Kong, Singapore, Mauritius, Luxembourg, Switzerland, Finland and Ireland - have fared very well.
Their success cannot be attributed to geographical location, although it can play a part. Ireland prospered only since its economic reforms in the late 1980s, yet it was part of the European common market from 1973.
Or take a more extreme case - Bermuda. Its population is only 60,000, it is a barren island in mid-Atlantic, and it has no valuable natural resources.
Yet its annual per capita income is US$36,850 - above that of the United States and nearly twice that of New Zealand.
Bermuda has prospered through low levels of Government spending and taxation (it has no income or corporate taxes), respect for the rule of law (ultimately adjudicated by the Privy Council), limited Government intervention in business, strict welfare policies and no welfare dependency. Bermuda is thought to have a higher level of economic freedom than Hong Kong.
Treasury economist David Skilling, in papers such as The Importance of Being Enormous, has argued that New Zealand businesses are handicapped by factors such as lack of scale and specialisation, absence of "thick" labour markets for specialist skills, and the need for firms to start exporting at an early stage in their growth.
Others cite the problem of Government overheads being spread across a relatively small population.
These arguments are not convincing. Most of the problems New Zealand firms face are overcome with an open economy.
For a start, New Zealand is now highly integrated with Australia.
Its domestic market for goods and most services covers both countries, and there is a common labour market.
As well, New Zealand firms have access to the technology and management skills of parent companies or business partners anywhere in the world.
It seems unlikely that New Zealanders are any more disadvantaged than, say, West Australians by the size of the domestic market, the distance from large centres of population, or foreign trade barriers.
New Zealand electricity and telecommunications prices are internationally competitive, and there is no obvious reason to expect the per capita costs of many Government services - such as police, courts, education or health - to be higher than in larger countries.
In the past, many of New Zealand's problems of market size and isolation were self-inflicted.
Participation in international trade was severely constrained by inward-looking policies. Bureaucratic structures for agricultural marketing covered a substantial proportion of exports and impeded international linkages.
Today, New Zealand firms are no longer stunted in their growth by the high costs of protectionist policies. Reforms such as those in the ports industry have reduced the "economic distance" to world markets. New Zealand firms can tap into world demand for their products, provided they are competitive.
Of the 10 countries with populations of more than 100 million, only the United States and Japan are prosperous.
Gary Becker, a Nobel laureate in economics, has noted that since 1950 real per capita GDP has risen faster in smaller nations than in bigger ones.
He says "dire warnings about the economic price suffered by small nations are not at all warranted".
Instead, he says, smallness can be an asset in the division of labour in the modern world, provided economies are open to international transactions.
In any case, New Zealand can do nothing about its location and little about its size. To the extent that these factors are handicaps - and they seem minor at most - they can be offset by better policies that would enable New Zealand to match the performance of leading countries.
Winton Bates is an economic consultant in Canberra.
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David Young
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Email: dyoung@nzbr.org.nz
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