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  • Writer's pictureIan Fletcher

China – a Warning


China matters to New Zealand but, as a market place for our products, it is faltering. We need a plan to respond, but politicians appear asleep at the wheel, warns Ian Fletcher in this month’s Views from Outside the Apiary.

China seems mired in an economic slowdown and, as New Zealand’s leading export market, that is a major concern for the New Zealand economy.

By Ian Fletcher

China matters. Not only globally, and regionally, but also specifically to New Zealand as it’s our largest export market. Australia is in second place (taking roughly half the value of our China trade). China is also Australia’s largest market, and Australia’s the place where New Zealand’s surplus workers go to find work. On the specifics, World bank figures tell a familiar story for our exports to China – dairy products, beef and unprocessed logs top the export tables, with horticultural products next. On the services side, tourism and foreign students from China add billions more.

Now, China seems to be mired in a growing economic slowdown. There’s a lot of evidence and lot of commentary. But for New Zealand the key indicator has probably been the recent slide in dairy prices.

Generalisation about China is always risky. Indeed, when I studied Chinese history in 1981 (it seems like yesterday...) I was told on the first day of the course that the teacher (Dr S A M Adshead, the cleverest man I ever met) had only one objective: to show “that anyone who says ‘China is…’ is wrong. China is too big, too complex, and too internally diverse for that sort of generalisation to ever be safe”.

A smaller population in China will mean less demand for New Zealand exports, with dairy prices falling back recently.

Adshead was right. But at a macro level there is such a thing as the Chinese economy, and there does seem to be such a thing as the Chinese population. We know the economy is spluttering; we see quite good evidence that the population is lower than we all thought and probably falling more quickly than expected. Birth numbers seem to have dropped sharply after 2017 – before covid – according to Peter Zeihan, a well-informed US commentator.

A falling population will need less of the stuff we export, even if the Chinese economy recovers quickly. China is also making efforts to produce more of its own food, generally. This is where New Zealand needs to wake up. The Chinese boom years may well be drawing to a close for our products. We’re probably going to find ourselves poorer than we thought. We need a plan.

The elements of any plan aren’t hard to identify: find other markets, find other products, and improve productivity so we get more economic output per unit of input. What is hard is getting New Zealanders to see that this is serious, urgent and unavoidable.

Productivity improvement is the big opportunity. But it’s also the hardest to do. Productivity improvements scare governments because it means investing more in skills, infrastructure, and effective competition. That means higher taxes, and reforming the public service so that actual delivery and management gets a lot better. The debacles of the recent health reforms and the polytechnic merger show just how adrift we are in our ability to actually get things done. In any case, the politics of productivity is always awkward: the benefits accrue in the future; the costs are now.

An agricultural-led recession and low productivity has New Zealand on a path to similar ‘sterile’ years such as in the 1980s when prime minsters David Lange (depicted on left) and Robert Muldoon (right) struggled to gain control over rising inflation and unemployment, Ian Fletcher warns.

New markets? There may be scope to do better in India and South-east Asia, and that may help. New products? Tricky, as we produce temperate proteins in bulk. Only so much we can do, quickly. Getting genuine research done into new, better uses for wool and sheep meat would be a good idea, for example. But, like dairying, these sectors are demoralised. The policy of converting land to forestry is a dead end too, especially if log prices fall, and as the appalling environmental costs of harvesting are added to the equally appalling social cost of forestry conversion as rural communities are gutted. New thinking needed, quickly.

Are we up to it? History suggests not. A former head of the Fire Service once said to me that while Australians prepared for disasters, New Zealanders only responded. Every event was an unfair surprise. We need to change that mindset.

Last month I set out some of the domestic issues I thought politicians ought to be thinking about. On the basis of this analysis, I’d like to add productivity to that list, and some effective innovation policies. Importantly, the consequences of China’s normalisation (so it grows like other economies) and underlying population fall leads to a domestic productivity and innovation issue for New Zealand, not a foreign policy issue.

What’s lacking is a sense of urgency, and a sense of inevitability. The Chinese boom years are ending for our products – it’s inevitable. And that shift has started. We don’t have time. What will happen? Nothing. There will be an agriculture-led recession, land prices will stay high (immigration) and productivity will stay too low. Public services will stagnate. A lot of skilled younger people will leave (Australia faces the same challenge, but will master it better and sooner). A reforming government may eventually come along, but only once things are grim. There’s likely to be a lot of social upheaval along the way.

In the 1970s, when this happened (the UK joined the EU, closing our biggest and best market, and the Yom Kippur War triggered the energy crisis, inflation and recession), the sterile Muldoon years eventually gave way a decade later to the Lange/Douglas reforms (some of which were an equally sterile, doctrinaire mistake). But that’s the path we’re on. As I said last week, today’s politicians don’t even understand there is a question, let alone grasp the answer. It’s going to be quite a ride.

Ian Fletcher is a former head of New Zealand’s security agency, the GCSB, chief executive of the UK Patents Office, free trade negotiator with the European Commission and biosecurity expert for the Queensland government. These days he is a commercial flower grower in the Wairarapa and consultant to the apiculture industry with NZ Beekeeping Inc.


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