9. Global Connectedness
- Global connectedness is about the international relationships that New Zealanders and New Zealand firms establish. Through these relationships, understanding and trust of New Zealand and New Zealanders are created. As importantly, New Zealanders are exposed to new ideas, new markets, different cultures and ways of doing things.
- These connections and their benefits are difficult to measure. However, the available evidence suggests that, while New Zealand is quite well connected internationally, there may be some way to go to match similar small, but high-growth, OECD countries, particularly in relation to exports.
- There are, however, some useful proxies that have been used in this report. These are:
- New Zealand's openness to international trade: New Zealand's exports as a percentage age of GDP are average in the OECD, but lower than comparable small countries, particularly those that have had sustained periods of above-average economic growth
- the export of high and medium-high technology goods and knowledge-based services: New Zealand has also not been particularly strong in the export of high and medium-high technology goods. This reflects New Zealand's economic structure, where agriculture tends to be more technology-driven than typical OECD countries
- the ranking of New Zealand's cities internationally: Cities in New Zealand rank very well internationally and that ranking has improved in the last 12 months. This makes New Zealand an attractive place to live, and to visit, even if there is a significant difference in income levels. It provides the potential to attract and retain skilled people and investment from offshore.
Openness to Trade: New Zealand Has Average Levels of Openness
Why is it Significant?
An open and globally connected economy is necessary for New Zealand to achieve and sustain high growth rates. Openness and global connectedness give New Zealand access to capital, markets, skilled labour, networks, technology, competitively priced goods and services, other cultures and fresh perspectives. Evidence from other small economies indicates that internationalisation is necessary (although possibly not sufficient) for economic success.
High levels of openness can also spur productivity improvements. Opening up New Zealand markets to competitive pressures from offshore:
- encourages better resource allocation
- promotes innovation
- gives New Zealand opportunities to benefit from specialisation and economies of scale through exporting in the areas in which New Zealand has a comparative advantage.
It also exposes New Zealand firms to new technology, ideas and management practices.
How Does New Zealand Perform?
An economy's openness can be measured in several ways, including:
- ratios of international trade (total imports plus total exports) to GDP
- levels of tariffs and non-tariff barriers
- ratios of foreign direct investment to GDP59
- levels of international connectedness between New Zealand and international businesses.
Irrespective of the measure used, New Zealand is generally considered to have an open economy. New Zealand has unilaterally reduced tariffs and removed barriers to inward flows of investment, and has been aggressive in pushing for multilateral trade liberalisation.
However, the combined total of New Zealand's imports and exports as a percentage age of GDP is approximately 70 percent, only slightly higher than the OECD average of 66.5 percent.
New Zealand Export and Imports (as % GDP March years, current prices)
Measurement issues complicate comparison with other countries. The data for the chart below are from the OECD's Main Economic Indicators. These exclude trade in services and some goods and the cost of insurance and freight60. As a result, New Zealand's performance appears weaker than suggested by the national accounts data in the chart above, which include this cost. New Zealand's ratio of exports to GDP in the OECD comparison is around 26 percent, below the OECD average of around 33 percent. It is also below that for other small countries, such as Finland (35 percent) and Ireland (80 percent).
Exports and Imports of Good and Services
However, these EU countries, as members of a large common market, face significantly lower barriers to trade than New Zealand. New Zealand faces not only geographic barriers, but also barriers of culture and other countries' trade policies.
High transport costs associated with geographic isolation can reduce levels of international trade by eroding a country's competitive advantage. The 2002 Firm Level Manufacturing Export Study, however, found that New Zealand's location was a relatively minor issue in terms of overall company growth and that many companies have developed strategies to overcome the barriers of distance61.
What Does This Mean for New Zealand?
During the 1980s, most OECD countries reduced or removed border protection measures, such as import tariffs and quotas. New Zealand reduced or removed almost all import barriers, although some remain for clothing, footwear and textiles.
While many import barriers were lowered across the OECD, barriers to trade in agriculture remain pervasive in most OECD countries. Given that this is an area in which New Zealand has an established comparative advantage, New Zealand has continued to pursue multilateral trade liberalisation that reduces tariffs and subsidies on agriculture.
Although the infrastructure of openness is now well in place, including high levels of access to and use of the internet,62 New Zealand's performance in forging global connections is mixed. Available evidence indicates that New Zealand's researchers are well connected internationally,63 but New Zealand's businesses also need to take advantage of ways to increase the flows of technology, ideas and tacit knowledge across New Zealand's borders.
Exports of High and Medium-High Technology Goods and Knowledge-Based Services: New Zealand Has Low Levels of Exports of High and Medium-High Tech Goods and Services
Why is it Significant?
The future competitiveness of firms will be dependent on quality and knowledge, rather than cost alone. Knowledge-based activities have become increasingly sought after, and have led to positive benefits for firm productivity. Producers of high and medium-high tech goods have the potential to build market niches, enabling the goods to 'leap over' tariff and price barriers. However, this may require a critical mass of firms and well-developed domestic and international markets.
This indicator uses the OECD definition of knowledge-based industries (i.e. knowledge-intensive services, high-tech manufacturing, and medium-high tech manufacturing64) as a proxy for the level of knowledge-intensive outputs across countries. Therefore, trade specialisation in knowledge-based industries can be measured by the share of exports of high and medium-high tech goods in total goods exported and the share of exports of knowledge-intensive services in total services exported. Analysis of trade specialisation in high and medium-high tech sectors and knowledge-based services allows New Zealand commercialisation of these goods and services internationally to be determined.
How Does New Zealand Perform?
In terms of the share of exports of knowledge-based services65, New Zealand has experienced an upward trend recently, with approximately 8.9 percent of the economy's exports accounted for by knowledge-based services in 2001, compared with about 6.4 percent in 1997. However, New Zealand's performance in this indicator remains well below that of the seven major OECD economies (UK, Canada, France, Japan, Germany, the United States and Italy). The UK is the leader here, with over 50 percent of its exports in the services sector classified as knowledge-intensive in 1998, followed by Japan, Canada and Germany at around 45 percent66.
New Zealand Knowledge Services Exports (as % of Total Services)
For the share of exports of high and medium-high tech goods in total goods exported, New Zealand's performance has been consistent across the period 1997-2002. In 2001 high and medium-high tech goods represented approximately 12 percent of total goods exports. New Zealand's performance can be compared to the United Kingdom, the United States and France, which have experienced an upward trend in the share of exports of high and medium-high tech goods in total goods exported, reaching between 15 - 20 percent in 199967.
The chart on the next page provides an international comparison of high and medium-high tech manufacturing exports as a percentage age of total manufacturing exports for 1999. The average across OECD countries is 53.5 percent. The OECD figures show New Zealand at 16.8 percent, one of the lowest of all countries.
High and Medium-High Tech Goods Exports
What Does This Mean for New Zealand?
There is some evidence that New Zealand firms may have difficulty internationalising given their small size and small domestic market, leading to firms having to export more quickly than is usual in other countries68. This may contribute to New Zealand's poor performance in exports of high and medium-high tech goods, exports of knowledge-based services and exports of manufactures.
However, a more immediate explanation for New Zealand's poor performance relates to New Zealand's current lack of comparative advantage in these areas (see the discussion of value added in high-tech manufactures as a share of gross value added). This indicates that the current OECD classification system also underestimates New Zealand's performance in this area.
How New Zealand's Cities Rate Against Other Cities of the World: Auckland And Wellington Rank Well and are Improving Their Ranking in International Surveys
Why is it Significant?
A high quality of life rating for New Zealand cities is an important factor in attracting the skills, talent and capital required for increasing innovation, the development of key industries (such as ICT, biotech and creative industries) and, subsequently, economic growth.
The availability and quality of labour are important determinants of the extent to which innovative practices are undertaken. The fact that labour is a vital component in the growth and innovation equation is very relevant for New Zealand. Compared to many other countries, for example those in the EU, New Zealand's access to labour markets is limited by geography. New Zealand has to make up for this with cities that offer attractive employment opportunities accompanied by other factors such as environmental cleanliness, health and safety and infrastructure. These all shape the prospective employees' and investors' perceptions of New Zealand and its cities.
How Does New Zealand Perform?
As the largest population and commercial centre, Auckland's international quality of life directly reflects on New Zealand's overall ranking. The latest Mercer Human Resource Consulting Quality of Life Survey (released in March 2003) ranks Auckland as fifth (equal with Sydney). This is an improvement from sixth place in last year's Mercer survey69. Wellington ranks 15th in the same survey (up from 22nd in the 2002 survey).
With this survey covering 215 cities, having the fifth and 15th ranked cities in the world in terms of quality of life is a major selling point for New Zealand.
New Zealand cities also rank favourably compared to other international cities on a number of international competitiveness measures.
Personal safety
Both Auckland and Wellington ranked 25th equal in terms of personal safety - the same ranking as Perth, but ahead of cities such as Sydney, Melbourne and Glasgow.
Environmental standards
In a Mercer 2002 survey on environmental standards and cleanliness of the world's cities, Wellington ranked seventh and Auckland ninth. The World Conservation Union Well-being Index 2000, which looks specifically at how well countries are adopting the goal of sustainability, ranks New Zealand 14th in the world, ahead of Australia (18th) and the United States (27th).
Infrastructure
Auckland ranks well in terms of lifestyle options, but does not rank well in terms of infrastructure and transport networks (traffic congestion and a smaller number of international airlines connecting with Auckland) compared to other cities.
Richard Florida's70 work on 'creative capital' also suggests that it is more than just being offered a well-paid job that attracts creative and innovative people to cities.
The 'creative class' is seen as the key part of any labour market. This is because their skills, attitudes and characteristics are essential for putting innovation into practice. These people are attracted to locate in a particular city for a number of reasons other than remuneration. These include:
- the presence of thick labour markets (where they have a number of employment options available)
- openness and tolerant attitudes
- visible diversity (variety of art/music venues, outdoor recreation, unique social meeting places and architecture).
Creative and innovative people may encourage economic growth through their international networks, as well as by driving innovation.
Wellington has taken steps to attract creative people through its 'Creative Capital' campaign. Auckland (and other New Zealand cities) may be able to do more in terms of promoting themselves to this creative core of the labour market, given that Auckland already ranks highly in terms of some of the 'quality of life' factors sought by the creative class.
What Does This Mean for New Zealand?
While New Zealand cities, particularly Auckland, rank well, higher ranked cities highlight several implications for New Zealand from the current rankings.
London was ranked the best city in the world to locate a business by the European Cities Monitor 2002. It has a number of factors contributing to its number one spot including:
- the availability of qualified staff
- transport links
- easy access to markets, customers and clients
- a favourable climate for doing business, created by the government
New Zealand cities will never be able to compete with London, particularly in terms of access to markets.
The London factors do suggest, however, that Auckland in particular may need to improve the quality of its transport and telecommunications infrastructure and make optimum use of information and communications technology (ICT) to make access to customers and clients as easy as possible.
The labour market in New Zealand cities is also distinctive, particularly in relation to participation rates and ethnic diversity. For example, Auckland has higher than average labour force participation and fairly low unemployment (5 percent at September 2002).
Auckland's labour force, in line with the entire New Zealand labour force, is getting older and more ethnically diverse. However, the Māoriand Pacific peoples component of Auckland's labour force will increase in size and become relatively younger by comparison with the Pakeha component. Auckland's Māori /Pacific labour force largely work in semi-skilled occupations and generally have lower levels of education than Auckland's Pakeha population. The predicted increased dependency on this segment of the labour market suggests that better skilled and educated Māoriand Pacific peoples will be needed if the city is to achieve its innovation and growth aims.
The government's recently released Sustainable Development Programme of Action has made sustainable cities a priority. The Programme of Action recognises that, as 85 percent of New Zealanders live in towns and cities, they are a strong base for economic growth. One of the desired outcomes from the Programme of Action is 'cities as centres of innovation and economic growth'. The programme of action to achieve that outcome includes a number of steps that could improve Auckland's ranking in comparison with other cities including:
- central government working with local authorities to improve legislative and statutory controls on planning, development and service delivery (giving priority to Auckland and focussing particularly on transport infrastructure and services)
- improved settlement outcomes for migrants
- cultural development in cities, including cultural industries and employment.
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