This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
The Climate Change Commission’s recommendations to government in March 2021 were partly based upon a Computable General Equilibrium Model called C-Plan (Climate PoLicy ANalysis). I was irritated at the time that the details of the model were not published so that I could not evaluate what seemed to me a strange claim, that the impact of the Commission’s recommendations did not affect total output (GDP) very much.
More of the model’s details have now been released and I find that the impact claim applied to only a narrow range of policies such as the electrification of transport and GHG caps. I am not surprised that their impact was low on total output; they may have major impacts on our life style which are not captured by GDP.
However, the issue which was concerning me – the overall sectoral change – was not so directly covered by the scenario variations. It is this which I want to focus upon. My particular interest here is the future export structure of the economy. (So here, I am not particularly interested in the climate change issues.)
The C-Plan model has a base projection which they call the ‘Current Policy Reference’ (CPR) case. It gives a GDP track to 2050. The CPR was calibrated to align Treasury’s Long-Term GDP projections – a perfectly sensible thing to do. It projects an average volume growth rate of 1.9 percent p.a. The population rises to about 6.2m in 2050 so the per capita income growth rate is around 1.2 percent p.a.
However, the Treasury does not provide a breakdown of how much each sector – such as farming, manufacturing, services and whole lot more – produces. I am not sure exactly how the C-Plan modellers did their sectoral projections. Apparently there was some consultation with industry, but it was not nearly as comprehensive as the National Development Conference modelling (led by Bryan Philpott) in the 1970s.
While Treasury does not project exports of goods and services, C-Plan projects them to 2050. (Warning: the export figures are in $US not $NZ). Here are the shares of exports as C-Plan reports for 2017 and 2050 for the Current Policy Projection scenario:
Share of Export Revenue by Year
Sector 2017 2050
Services 15.8% 27.7%
Transport 5.2% 5.8%
Fossil Fuels 2.4% 2.1%
Manufacturing 23.3% 27.2%
Food processing 43.9% 26.1%
Agriculture 4.7% 6.2%
Other primary production 4.6% 4.9%
The last three lines combine to the total export output of the farm sector (but also a little from fishing and forestry). According to the C-plan the share of the primary sector will fall from 53.2% in 2017 to 37.2%. Other tabulations attribute the fall to a slow rise in dairy exports and a fall in beef and sheep meat exports.
I take it that the farm projections assume that, for various reasons, farm productivity is near a peak and cannot increase much further. The lower meat production seems to reflect production land being taken over by forestry. The projection involves a reduction in beef and sheep farming land use; there is not an offsetting increase in forestry exports.
Suppose farm production is near peak or at least cannot increase fast enough to fund the imports we require for our living standards. (The C-Plan model assumes Import-to-GDP and Export-to-GDP ratios for 2050 very similar to the level for 2017.) C-Plan fills the gap from the low primary-sector export performance by some growth in manufacturing and major growth in services.
Once upon a time I was an optimist about the manufacturing sector, but I have become more cautious. Assuming that we are not competing with East Asian manufacturing – which would mean similar wage levels – we have to go for high-quality, technologically advanced, products. As my Globalisation and the Wealth of Nations points out, this requires economies of scale, of scope and of agglomeration. As a general rule, New Zealand’s manufacturing sector is far too small to reap these. Additionally, the costs of distance are against us. There will be some exceptional performers: Fisher and Paykel Healthcare is an example but the equally fine Fisher and Paykel Appliances moved overseas because of such factors.
A larger population would not improve the prospects of manufacturing much, given that we are so distant from everywhere else. I am not even sure that Australian manufacturing is viable except that the economy has a large mineral resource base. The New Zealand resource base is primarily farming.
Manufacturing exports increasing slightly faster than the economy may be feasible, although the probability is that the whole of the manufacturing sector will expand slower than the economy as a whole. So the burden of the export gap in the C-Plan projection is filled by the service sector.
Unfortunately the model treats the service sector as a single activity so there is no indication what, among the diversity of services, the model has in mind when it projects a trebling-plus of service exports over the third of the century. There are a number of potential activities, including those that can be delivered by cable. Even so, today’s single biggest component of export services is the tourist sector, which vies with dairy products to be our single largest export sector. The obvious conclusion is that the model is projecting tourist receipts to increase substantially – say by at least 2.5 times.
Is that feasible? To answer, let us ignore the gloomier scenarios that a world permanently riddled by Covid-SARS might suggest. Can we envisage a New Zealand dominated by tourism with two-and-a-half times more tourists than our last good year of 2019; two-and-a-half times more hotels, two-and-a-half times more traffic congestion from tourists? Would we want to live in that New Zealand? At the very least we need to ask whether this dependence upon the tourist sector for the future of New Zealand is wise or whether we can gear up the rest of the service export sector to meet the sector’s challenge.
This raises the question of whether the economy the C-Plan projects is viable. If it is not, the probable resolution will be a smaller population, with less immigration and more emigration than the Treasury thinks. Ultimately, then, the question is what population can the New Zealand resource base sustain? It is possible that under the economic assumptions of the C-Plan projection, the population of New Zealand will be smaller in 2050 than it is today.
We can, of course, leave answering such questions to mañana, allowing the potential crisis of an inability to earn our way in the world to creep up on us. Too often that has been the New Zealand way; as it has been with climate change.
Footnote. International tourism is an intensive generator of greenhouse gas emissions from the international transport involved. However these emissions are not included in the New Zealand emission totals, which follow the UNFCCC guidelines of accounting for and reporting emissions. Even so, there is a sense that the New Zealand economy may still be depending on emitting GHGs in the atmosphere in 2050.
Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
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Figures look entirely realistic to me. Roflmao.
Putting up the 2021 figures between the 2017 and 2050 would keep me in hysterics for a week .
So a dodgy looking set of numbers. I would love to see the itemised invoices from these fly in fly out consultants.
Actually I don’t think I would.
Good article Brian ,you have painted the likely scenario around the increase in the services sector, I would like to see the reason for the very large drop in the food processing sector explained . Given the agricultural sector has a projected 30% approximate gain would it not be expected that food processing would ride on that , particularly dairy processing? . Another area that I believe will have a future impact is the objective of sourcing carbon credits offshore. The price of these is expected to rise substantially, this will be a severe handbrake on our economy as these are purchased .
The optimist in me predicts our agricultural sector’s gradual move up the value chain with more focus on specialised food exports over bulk commodity trade. That aside, climate change itself could significantly increase the value of our commodity exports.
That is unless our agricultural productivity dips from higher temperatures and droughts.
By 2050 most of the farmland will be in pine trees.
So that offshore owners of the carbon within can keep chugging along.
We must bill all Bitcoin and Crypto holders emission tax!
New Zealand traded USD $9.92M worth of Bitcoins in 2020.
According to the scientific journal Joule, Bitcoin production was estimated to generate between 22 and 22.9 million metric tonnes of CO2 in 2019 alone.
Using the 2019 data of the total number of coins being mined (0.68M), we can further estimate the amount of CO2 each coin generates,
1 Bitcoin coin = 22.45MMT CO2 ÷ 0.68 BTC mined = ? 33 metric tonnes of CO2 per Bitcoin! ?
Owning Bitcoins are much worse than owning a herd of cows.
Sounds a lot until you discover that China on its own used a couple of thousand metric tones of coal per year. Even if New Zealand had zero emissions it would make no difference at all to the worlds pollution.
CWBW there is actually a lot of merit to that. Low income Kiwi’s are paying 12c a litre of petrol to plant some noxious weeds for the benefit of wealthy overseas investors, but Bitcoin get’s a free ride. NZ has become a socialist paradise, many offshore (investors and tourists) are looking at us as too hard to deal with and will not consider returning for a long time. (unless of course Russia & Europe/US start a nuclear war and then the NZ passport will become the worlds most valuable)
If war happens I’m sure Peter Thiel will suddenly become Kiwi all over again.
He’s no fool, I take my hat off to him. You just have to see what is happening there to understand why he did what he did.
Just tax carbon.
It gets them anyway.
I’ve got a mate in Aus mines bitcoins and other AI stuff. He says trading it is for mugs but mining is where the money is. He’s got his whole roof decked out in solar panels running processors 24/7. He gets a govt subsidy for the panels and says it’s not economic to mine without solar power as it’s too expensive. He’s a rich man my mate.
Fisher & Paykel healthcare is a great example of the manufacturing exports argument.
A small population in South Pacific cannot realistically support into an advanced manufacturing hub.
I don’t think we should even attempt to pursue that dream and instead focus towards an environment where more companies emulate the success of FPH in industrial design of advanced products and services that are produced elsewhere in the world.
Interesting that international tourism gets a free pass for net zero, who is coming up with these rules?
I don’t know about agriculture being at peak but certainly dairy has peaked. I would think though that there is still some current dairy land that could be converted to things like hops or vineyards, possibly a bit of the sheep and beef farm land as well. I think these conversions are more profitable than dairy farming.
Good article. Increasing international tourism by 3 fold is not sustainable in many ways. An advanced small economy to prosper, like Taiwan, Singapore and Swizerland, must focus on specialized services and manufacturing. Let it be semi-conductors or Rolex. As the article points out, it is not quite possible for manufacturing in New Zealand.
What do we have for services other than tourism? International education should be encouraged but that comes with its own set of problems (and share many with tourism), with growth potential probably limited. It is thus a no brainer we need to have other service exports. Among the top choices:
Software/gaming, an emerging industry in New Zealand. Problem with those are that they are swiftly being acquired by offshore interests, and we lack domestic talents to staff the firms;
Financial services similar to Singapore, which its problem could be how to mitigate and maintain reputation in the world of offshore finance; and
Emerging technologies, like it be rockets or blockchain, each comes with its environmental set of problems.
Whichever the path will be the “right” future I am not sure, what I know for sure is, we can’t just rely on tourism and international education–the existing service exports, which are decimated anyway. We have to find new service exports. I also know for sure, there is no “perfect” service exports without any downsides, we just have to make our choices.
There should be laws against such edifying reality checks.
.. be careful what you wish for.
All sounds like hard-work to me. Better to just trade houses back and forth.
There’s a time to double down, my view is that has now long passed.
Brian is to be congratulated for this article, which asks big questions that desperately need to be debated.
The 2017 figures that Brian quotes here do not seem to align well with current stats – for example that around 83% of merchandise exports come from the primary industries, as reported by MPI . ‘Agriculture’ at 4.9% most be based on a very specific definition, for example all meat and dairy is classed as ‘food processing’. Manufacturing at 23% for 2017 also looks remarkably high and it would be interesting to see what has been included there.
My own expectation is that international education will never recover unless it is linked to availability of future citizenship, with all that is implied by that.
Essentially, the CPLAN calculations start with an assumption that GDP will rise in real inflation-adjusted terms by 1.9% per annum. If that assumption is not correct, then none of the CPLAN outputs have validity.
KeithW
There is no way you can make those forecasts look remotely credible – it’s a joke. Service sector exports more than doubling in 27 years driven by tourism??? Hello… we are going to decimate our world class primary export industry’s (planting pine tree’s, wtaf?) to reduce GHG emission and the industry we are going to replace it with is utterly dependent on long-haul travel (and no, there will not be electric or hydrogen planes).
As an aside, I notice the UK is already walking back from net zero, slowly but surely, as they realise the cost both financially and geopolitically. They are now set to issue 6 new North Sea gas drilling licenses in 2022.
https://www.telegraph.co.uk/politics/2022/02/07/six-north-sea-oil-gas-f…
It’s sobering stuff, perhaps we could pile into anything that can be transmitted on a cable, software, entertainment, services in general.We have had some money spinner successes in animation for example and NZ is well positioned to ride out climate change and pandemics, it may become an attractive place to live.
Worth a try.
I’ll file this away under forecasts. If I’m still alive at 99, I’ll get back to you with how you did Brian. Given that you’ll be 107 I’ll understand if you don’t reply.
One must consider that if the economy crashes spectacularly we might not be able to afford to die so need to go on living.
Even if our primary production maintained todays levels I doubt we will be a first world nation in 2050 with a larger population. We need to have another string on our bow as it were other than just agriculture.
And I agree with the sentiment ” Who would want to live in a country full of tourists” Bali comes to mind. Didn’t a Prof Paul Callaghan once say ” If you want a low wage economy concentrate on tourism”
We won’t be a first world nation if we destroy our primary produce export sector – it’s the backbone of us being a first world nation today.
If we can transition to a high value add tech sector great, I just think that is low delta.
NZ is going to remain a highly desirable place to live and I see that increasing with geo-political tensions, population growth, bio-security, climate change (if it is as actually as bad as forecast) as key factors.
Can we envisage a New Zealand dominated by tourism with two-and-a-half times more tourists than our last good year of 2019
Assumes the only Avenue to increase revenue is to just increase volume.
It’s pretty clear NZ will struggle to make it’s way competing in bottom of the barrel large volume markets. And there’s more luxury end or niche consumers than ever so better to target them than try to be all things for all people.
Our wine sells for a lot more than the Australians in most markets. Whether its objectively better wine, I couldnt say, but NZ wine had been better marketed. There’s no reason many of our other industries don’t have room to upmarket themselves.
Excellent article.
I would love to know if any of these big questions get discussed in Government given the amount of attention consumed by three-year election cycles and policy short-termism.
One thing is for sure, as a small country at the edge of the world, we need our own long-term plan, or we will simply be thrown around in the wake of the plans of bigger countries. For example, if China do achieve their strategic goal of being self-reliant in timber by 2035, what does that mean for our timber export market?
My personal view is that our main assets are our potential to generate all of our own energy, our fertile soils, the remarkable quality of our landscapes, a reasonable level of resilience to climate change, and our reputation as a nice, safe place to live. These assets do push us towards a future as a desirable destination for tourists and university students, and as a centre for energy- and skills-intensive digital enterprises.
However, to capitalise on these assets will require investment in long-term societal and infrastructure change – and I just don’t see either of our main parties committing to the necessary ‘state craft’. Do they think that the invisible hand of the market will simply steer us toward the future we want?
One interesting thing lurking in the background is Kiwisaver. I think theres around 90 billion invested now and growing every day. At around an 5% average return its quietly bringing in around $4 – 5 billion a year to kiwis – much from overseas investments. As this grows, remember its compounding and being added to, the amount of income coming in will grow as well. It will be drawn more on in time but this will put the money in peoples hands whereas its locked away for now.
In effect this is export earnings from offshore capital investment – something not really seen in NZ before.
It will be interesting in time how much this will drive economic activity as it is unlocked as people age. As per the stats figures below in 20 to 40 years time a lot of this money will become available to be used in the economy or handed onto younger family as us oldies, especially boomers, have an aversion to spending capital as we think we will life forever!!
The dramatic change in demographics – mirrored through out the world – will also mean a massive change in what markets want or what people we have available in the working age population to do work – Europe is on course for a decrease of over 30 million working age people by 2050 compared to today.
The rise in Technology also means there is no guarrantee any of the things we produce now will be as dominant or as valuable in the future.
The 65+ dependency ratio (the number of people aged 65+ per 100 people aged 15–64 years) increased gradually from 14 per 100 in the mid-1960s to 24 per 100 in 2020. It is projected to increase significantly, with the ratio expected to be in the range of 33–41 per 100 in 2040, 38–52 per 100 in 2060, and 40–61 per 100 in 2073.
This means that for every person aged 65+, there will be about 2.8 people aged 15–64 in 2040, 2.3 in 2060, and 2.1 in 2073. This compares with 4.2 people in 2020 and 7.1 in the mid-1960s.
Better tell our kids to start breeding!!
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