It might not make sense for a story about New Zealand’s future to start in Dublin, Ireland. But often, the experiences that tie together different trains of thought into one cohesive idea work in mysterious ways.
I won’t pretend I had some sort of lightbulb moment where everything became clear to me. But walking around a city with a population of about 1.5 million people and dramatically transformed over the last 50 years got me thinking.
“Why was Dublin’s GDP per capita NZ$190,000 while Auckland’s hovered around NZ$72,000? “
Being married to a wonderful Irishwoman has given me plenty of reasons to visit Ireland regularly. Outside the weddings, family time and craic – these visits have given me a lot of insight into an outstanding economic transformation that I believe New Zealand can learn a lot from.
As nations, we have a lot in common. We’re both some of the best in the world at growing food, winning rugby games and being bloody good company. Unfortunately, all these things are not conducive to rapidly increasing GDP per capita.
You can view the Irish experience through a couple of lenses:
- They got bloody lucky.
- They made good decisions that enabled them to take advantage of a few fortunate breaks.
“Talking to people all over Ireland, it’s evident that a series of decisions set up individual Irish people to participate in the rapid growth of their economy – from one of the poorest nations in Europe to one of the richest in the world.”
“I suppose this is why the Irish were able to pull off one of the economic transformation stories of the 20th century, while us New Zealanders slid from third in the world in GDP per capita to thirty-third.”
The other thing about my wife is she absolutely loves it in New Zealand. Our lifestyle, climate and fantastic work-life balance are all things that she regularly points to as reasons we’d stay in New Zealand over moving back to Ireland.
The downside of staying in New Zealand is that on our current trajectory, the potential economic tradeoffs are significant. We’re trading an economy that is powering commerce between two of the world’s largest trading partners (the USA and the EU) for one that seems to have not adapted from the lessons it should have learned over the last 70 years.
Couple this with an election campaign raging when we got home that seemed to be about how to divide an ever-shrinking relative pie, rather than grow the pie for all of us to benefit, and I was feeling somewhat disheartened around the prospective future state of the country.
I found myself asking a question as I reflected on my experiences.
“I love New Zealand, but how do we make it good?”
When chatting about this with Kerry Topp over a coffee, we agreed on some key points:
- New Zealand desperately needs economic clarity like the Irish have had. How do we make it work more like them, but in our own unique way?
- What we’re lacking starts with a clear vision of our future place in the world. What do we want to be as a nation?
- The government won’t magically fix it for us. Their job is to back winners once they’re winning, not pick them.
- We can’t rely on publicly traded companies either – they are too focused on managing risk around profitability. We need the innovative world of SMEs to take this challenge by the horns and go fast and hard with it.
These key things led to the following four insights that developed our proposed solution, which I’ll share in the next post. For now, let’s look at these four insights and how I believe they shape our future vision as a country.
You can’t get rich growing stuff.
New Zealand is awesome at growing stuff. As Michael Parker puts it in The Pine Tree Paradox, “Radiata pine grows in New Zealand seven times faster than it grows in the US…it’s the kind of sustainable competitive advantage that should have made us the Saudi Arabia of timber. It isn’t, and we aren’t.”
This paradox got my brain spinning when I read it in 2023. We’ve been obsessed as a nation with how good we are at growing stuff since I can remember. Whether it’s wine, lamb, pine, oysters, stone fruit or the elephantin the room that is our dairy industry, we’re rightfully proud of how good our food production is on the global stage.
Unfortunately, there are two problems with that when it comes to building our national wealth.
Firstly, the only way we can outperform over time is to increase the value of the output of the average worker’s labour above that of the countries we’re competing with. Going back to Microeconomics 101, there are two sides to this – supply and demand. Building wealth growing stuff has problems on both sides of this equation.
Supply is where we tend to focus most of our productivity discussions. So, let’s start there. New Zealand invests massive amounts of money in the training and education of our agricultural workers to make them more efficient. We’re already blessed with some of the world’s most productive agricultural land, which makes us very effective at growing whatever we put in or on it. This has made us one of the most efficient food producers in the world, but it hasn’t made us rich.
“We’re hamstrung by the fact that no matter how hard we try, on the supply side of the equation, we are limited by two things: how much land we have and how fast the stuff we’re making grows.”
At 75th in the world in total area, we’re not blessed with the wide-open acres of Canada, the US or Argentina. We’ve also pretty much fully utilised the land we want to use for food production. The rest we(rightly) want to keep as conservation land, or it’s mountainous and inaccessible. Sure, we could make some incremental efficiency gains by reallocating resources towards the highest-margin things we produce. But this won’t suddenly vault NZ up the charts.
These two numbers show me that no matter how efficient our production skills are, we’re still limited by the speed of what we produce. I don’t think anyone is on board with genetically engineered halved gestation periods. And if you’ve tried wine from the tropics where they get two vintages a year, I think you’ll agree that sticking to one is much better.
“So, if you can’t dramatically increase production due to these constraints, what about looking at the other side of the equation?”
Demand for food is off the charts globally. Everyone wants what we’ve got. The problem is that we can’t meet what the market needs ourselves. Therefore, we’re beholden to global pricing when it comes to how much we can sell our food for.
I always take great pleasure while travelling to go and look at the New Zealand wines for sale in overseas supermarkets. Weird? Maybe. But it’s one of our well-known global exports, and it gives me a bit of pride to see our stuff so far from home.
However, on this trip, I noticed something unexpected. It might have been that I was very tuned into this conversation around getting rich growing stuff, but I started comparing the New Zealand Sauvignon Blanc (best in the world, right?) with the Chilean Sauvignon Blanc (surely a cheap knock-off?). I expected that the Chilean stuff would be €8 bottom-shelf plonk and the New Zealand stuff would be €20 and sitting proudly in the best spots.
Turns out that’s not true. I was stunned to see Chilean wines sitting on the shelf for more than their New Zealand counterparts, often wearing New Zealand brands but containing Chilean grapes. So, I had a dig around on Tesco.ie and discovered NZ wines were selling for an average of €12.12 per bottle. While Chilean wines were averaging €14.49 per bottle.
“For all our talk about being the best producer of wine in the world, at the volume end of the game, we aren’t even making the best margins.”
What’s more, New Zealanders cost 3x more than Chileans to employ. So, our production costs simply can’t compete with Chile’s.
This example shows how difficult it is to beat the world at getting wealthy with primary production, even if it’s a product that we’re “best in the world” at. The price at the end of the game that matters is volume. The price of wine is pretty much locked globally, and our production costs are just too high.
No number of gold stickers on a wine bottle can change that.
The Irish saw this in the 1980s. When saying a bad thing about Kerrygold Butter was almost worthy of deportation. But after joining the EU in 1973 and going through political and economic turmoil in the 20th century, they realised that betting on their outstanding farmers to radically transform their economy was a strategy that wasn’t going to pay off.
That’s why they executed a long-term strategy that made the most of situational “lucky breaks” and sensible, pragmatic policy that overhauled their economy. We need to do the same.
You can’t boil the ocean.
The single greatest lesson I have learned from running Proposition is that success comes from focus. The broader your focus, the less likely you are to succeed. Narrowing focus means getting good at one thing, dealing with one customer, and telling one story over and over.
“Winners are tightly focused. It’s that simple.”
The New Zealand story is one of random scattershot lack-of-focus. We export milk powder to China, backpacking trips to Germany, rockets to the United States and electricity to Australia. It’s a story of opportunism around the next big thing, rather than a consistent focus on future growth areas. In short, we’ve tried to boil the ocean.
“When you focus on everything, you focus on nothing.”
In Ireland, it’s clear that there’s a strong focus on their economic transformation. Many criticise the Irish approach, calling out low taxes and minimal government, but that’s not the whole story. Yes, this regulatory and taxation approach has played a part in Ireland, but it’s only worked because the Irish were clear on three things: their customer/market, their value proposition, and their competitive advantage. To quote from The Pine Tree Paradox again:
“…you have a coherent strategy: give an identified market (foreign corporations) access to what they want (proximity to Europe, [well educated] and English-speaking workers, and golf courses) at a price (…low taxes) that the competition to match. That is how to win in the global economy.”
In recent years, the Irish have refined this focus even more – instead of all foreign corporations, they have narrowed their target customer to pharmaceutical corporations and high-growth American tech companies. In turn, this has improved the skill of the Irish workforce in serving these target customers. And the upshot of this is Ireland is now 2nd in the world in GDP per capita (ahead of where New Zealand used to be), with dairy at 2.1%of Ireland’s exports.
“To win globally, we have to be focused and ready when the time comes to strike.”
Lucky breaks are meaningless without execution.
One of the regular laments in New Zealand is the effect of Britain joining the European Union (to be specific the precursor European Economic Community) in 1973. Up until this point we viewed it as our birthright to sell butter, lamb and whatever else we could get to London to the British, and many blame this moment for New Zealand’s economic downfall.
This was an unlucky break for New Zealand. But I’d argue that our lack of a clear strategy, and therefore our ability to execute, was what cemented this event into our economic history.
At the exact time New Zealand was losing access to the British market, the Irish were gaining access to the European market. Ireland and Britain have along and complicated history, but the position the sides had come to by 1973 meant that Britain joining the EEC made it necessary for Ireland to join, too.
The word ‘lucky’ feels a bit glib given the history at play here, but it was very fortunate for Ireland’s economic fortunes. However, it didn’t just automatically make Ireland the leading economy it is today. For instance, Greece joined the ECC in 1981 and they haven’t exactly crushed it.
As discussed above, the Irish had a clear strategy to execute around. While was supported by their fortunate break, it wasn’t strategy-defining. Apart from proximity to the European market, every other component of Ireland’s strategy was dictated by their choices, not by external forces.
“New Zealand’s breaks are coming, but they’re not coming from where we think they are.”
It’s not going to be China buying more milk that is our economic saviour. First, we need to identify our global markets, and figure out what our country’s value propositions are So, when opportunities appear in those places, we can take advantage.
Our market doesn’t need to be huge either. The Irish, who have a similar population to New Zealand, have chosen the European Union as their market. TheEU has a population of about 450 million people, less than half that of China or India. For comparison, the Southeast Asian countries that make up the ASEAN have a population of just over 660 million people.
“Our moment will come. When it does, we need to be ready.”
What we need to do about it.
In The Pine Tree Paradox, Michael Parker categorises economies into one of three core drivers: production, extraction and innovation. We’re already a production economy – which we’ve established we need to change. We don’t have anything to extract (or that is environmentally or socially palatable to extract).
“Ireland, a predominantly agrarian island of 5 or so million people has transformed itself into a world-leading innovation economy in 50 years.”
Therefore, we must follow the Irish example and transition our production economy to an innovation economy. However, they haven’t given us the blueprint. What they’ve done is not directly replicable here in Aotearoa. We’re going to have to work out our own way through this challenge, with our own constraints and opportunities.
The next steps are hard. Together with Kerry Topp, I’ve done some thinking about what this could look like, and I’ll be exploring this in my follow-up to this article.
To get there will require a coalition of the willing – starting from New Zealand’s mid-size private enterprises and startup ecosystems.
If the future of New Zealand’s economy matters to you, please join the conversation. It’s the least we can do to give ourselves the best chance at a future that sustains thriving generations.
