New Zealand Economy - Essay Example

Macro & Micro economics 27 November New Zealand Economy New Zealand is an island nation in the southern Hemisphere. It is an isolated island with many islands around; it has unique plants and animals (Britton 4). The Polynesians were the first people to settle in New Zealand. The New Zealand people are the descendants of European immigrants and native people of Maori. The intermingled culture was a blend of their traditions to create a rich cultural mix; with the blend it threated the survival of the Maori people. The New Zealand`s Government is working to promote the growth of its people, as it tries to preserve its culture. The New Zealand people are working together with the government to promote the country so as to make it a better place to live for its people (Britton 4). The country was discovered in December 1642, by Tasman (Britton 4). It has an ocean environment that keeps the climate mild with the prevailing westerly winds; this causes fluctuation of temperatures and rainfalls from East to West. New Zealand experiences the four seasons of winter, spring, summer, and autumn (Smelt 13). It is a rich and complex economy, with a unique society. The economy of New Zealand has been built for over a hundred and fifty years; some of the economic aspects were gotten from the Polynesian heritage, as well as the European culture (Hawke 1). The main economic activities of New Zealand were dependent on the success of wool, dairy, and meat export (Rewi 21). Like many other countries, New Zealand is in search of ways to boost its economic activity. New Zealand economic growth continued until the First World War, but there were economic interruptions. During the 1920s, the nation was marked with economic uncertainties, and in 1930s it experienced a great depression. New Zealand saw its exports restrained by limited growth of demand for meat, wool, and dairy products in 1920s, and was affected by the falling prices of these products in the 1930s. Hawke points out that “The depression of the 1930s was a major social political event in New Zealand’s history, even if the experience of poverty and unemployment was not great by international standards” (6). Export prices guided the recovery from the depression, while in the meantime, North American and European economies also recovered. The depression in New Zealand brought to power a Labor government, and when this government came across economic problems, it chose to use the unorthodox policies. The depression was combined with the efforts to protect the economy of New Zealand from international events. New Zealand’s economy changed during the 1930s with the regulation of imports and exchange controls, which linked to aspects of a reserved and secured economy (Hawke 6).New Zealand is a small open economy that relies on trade and financial markets trends to ensure output performance, and its vaporization linked to development in the rest of the world. The dependence on New Zealand’s growth leaves it vulnerable to economic performance in the market. Financial markets are an important passage way in which New Zealand’s business cycle is influenced by the United States economies (IMF 3). Robert Reich of Labor Party brought New Zealand to foresee the twenty-first century deficit of national products, corporations and industries. For many years, New Zealand`s economy was built on “free markets” and “free trade”, and investment seemed invincible (Kelsey 1).The enthusiasts wanted to advance the process more swiftly, but critics came up with ways to mitigate the unfavorable effects of globalization, particularly on the environment and labor. The “‘unrealistic critics’ denounced the growing inequalities and poverty and warned of erosion of democracy and the potential for unregulated capitalism to implode” (Kelsey 1). After many years of fundamental theory-driven transition, it was surprising that the people of New Zealand of 1990 began to acknowledge the importance of their political and social world in Government decisions. In 1984, the free market revolution began; it had a clear layout and a devoted team of officials, politicians, and individual players with common interests. New Zealand had never experienced the `great transformation`, as stated by Karl Polanyi (Kelsey 4). The government intervention had driven the economy of New Zealand from the days of colonization, and it was focused on the social structure, before the emergence of the Keynesian welfare state. In 1984, the agricultural produce was still dependent on the family farms system. The industries were supported by local influence and border preservation. Training was financed through free education and education in the departments of the government (Kelsey 8). New Zealand’s economy moved from being a hidebound economy outside the former communist coalition, to being the most progressive in the Organization for Economic Cooperation and Development. New Zealand has a relatively high level of government involvement, and a state ownership of infrastructure and trading activity (Goldfinch 13). New Zealand enjoyed economic growth, while the rate of unemployment was at its lowest. According to Goldfinch, the GDP (Gross Domestic Product) was 1.8% per capita growth (14). During the elections of 1984, New Zealand faced serious crisis, this was because the growth rate was less than OECD (Organization for Economic Corporation and Development) average since 1960, and there was variability in terms of trade in the 1970s.The oil crisis of 1973-74, had a great impact in New Zealand`s economy, as it seemed slower to adjust and recover. Many economists argue that the existing problems were caused by a number of factors. First, “rather than adjusting to new realities of shrinking demand and prices for agricultural goods, and seeking out new markets and developing new products, domestic agricultural prices were buoyed up by subsidies”( Goldfinch 21). Secondly, to protect domestic industries, resources were moved away from exports sectors that were more efficient. Thirdly, “considerable overseas borrowing led to an increase in public sector debt from 11percent of GDP in March 1974 to 95 percent in June 1984” (Goldfinch 21). In 1984, New Zealand’s government was trying to settle all prices and wages, as well as interest rates between the New Zealand dollar and other currencies. It had become the most centrally controlled economy in the world. It was at this time that huge and growing economic and political pressure rose. During the election of 1984, Muldoon called for a general election, in which the Labor Party lost. The new government faced a huge economic crisis. Consequently, the New Zealand Dollar depreciated, and the six years the Labor Government established a program of deregulation and financial reforms. By 1990 the World Bank and other International bodies stated that New Zealand was among the nations that had one of the most deregulated and the least centrally controlled economy worldwide (Smelt and Lin 28). New Zealand`s economic performance continued to improve. With the gradual expansion, it was able to last longer than previous ones as it also broke from past trends. The Gross Domestic Product growth did outdo the other countries in the OECD, averaging at 5.5percent between 1993 and 1994 and reaching 3.5 percent in 1995 (OECD 1). The outlook for 1996 and 1997 was predicted to be conducive, after a slow pace in 1995 in response to the high monetary conditions; the economic expansion appeared to have stabilized. During the mid-1996, the tax cuts enhanced the private consumption, and output growth was predicted to increase. Inflation in the country was expected to remain under control, decreasing in the following term before margining up again as activities strengthened in 1997. There were risks however, since it was possible that in anticipating tax reduction, a domestic demand would increase rapidly than excepted. Faster growth at a time when the economy was operating to its capacity could re-ignite inflation pressure and push up the external deficit. This challenge went to the policy makers, who had the responsibility of prevent an imbalance from an upcoming economy that could threaten growth prospects in the medium term (OECD 1). In 1996, New Zealand was in its fifth year of growth, and unlike the previous upswings, the current one was not sparked off by fiscal expansion or positive terms of trade shock. The initial impetus for recovery came from the volumes of exports, which followed the depreciation of the New Zealand Dollar. They did gain value since then, the export performance remained favorable, as trade liberalization showed improvement in the non-price competitiveness. Income was generated in the export sector, with the low interest rates throughout 1993 to 1994 allowing the firms and households to increase on their spending (OECD 3). High profits and record levels of business led to an increase in investment and employment, and this marked the fall of unemployment. Consumer confidence was consequently boosted, and reinforcement brought to the economic growth in New Zealand. This made New Zealand the strongest OECD country. This was even with the 1990s surge, when the GDP in New Zealand had declined by almost 10% as compared to the OECD average from 1984 to 1994 (OECD 3). Between 2000 and 2007 New Zealand`s economy grew by an average of 3.5 percent each year, as the private consumption and residential investment grew even strongly. The annual inflation average was 2.6 percent; the reserve bank was 1 percent to 3 percent target range, while the deficit during the time stood at 5.8 percent of GDP during that period (“The Economy of New Zealand: Overview.”). In 2008, New Zealand entered a recession, which affected the global financial crisis. A drought was experienced during the 2007 and 2008 summer that led to low manufacture of dairy products in the beginning of 2008. Domestic activities reduced sharply in 2008, as high fuel and food prices humidified domestic consumption, while high interest rates and falling housing prices drove a rapid decline in residential investment. New Zealand’s Economy declined strongly as a result of the growth of the global financial crisis. The following graph shows the Real GDP growth of New Zealand compared to that of Australia and the United States from 1990 to 2012: Source: The Reserve Bank of New Zealand, Key graphs - GDP growth, 25 October 2012, Web, 27 November 2012. There were like experiences across advanced economies, business and consumer confidence collapsed as skepticism gained control of the global financial and economic environment. Access to overseas markets funding by the local banks decreased as the economic crisis intensified. Economic activities declined by 0.9%in December 2008, while Gross Domestic Product production was affected by a reduction in most activities like construction, manufacturing, wholesale and retail (“The Economy of New Zealand: Overview.” treasury.govt.nz). The expenditure of New Zealand fell with a reduction in both services and goods exports. The overseas importers ran out of stock in fear of uncertainty, while the tourism sector continued to weaken as fears of job security, and declining incomes weighed on decisions to travel. The New Zealand government and the banks took measures to alleviate the crisis, the Reserve Bank reduced the Official Cash Rate from 8.25 percent, which was its level in July 2008 to a level of 2.5percent in April 2009 (“The Economy of New Zealand: Overview.” treasury.govt.nz). The reserve banks came up with arrays of methods to guarantee that enough cash flow is available for the banking sector. The government established wholesale and retail bank agreements geared towards renewal of confidence in the banking sector, and supplying banks with advanced avenues to wholesale capital. Others measures taken by the government in December 2008, included; a package of `ready-to-roll` infrastructure projects covering the transport, housing, energy, and education sectors, whose estimated cost was approximately five hundred million dollars and a short relief package projected to benefit small and medium-sized trades, with an aim of decreasing conformity costs and reconstructing the business environment in the event of a crisis. Global uncertainties increased in March 2009. As the global crisis extended, New Zealand’s economy fell further by 0.8% form previous, resulting to a decline of 1.4% in annual average(“The Economy of New Zealand: Overview.” treasury.govt.nz). The period of mid-March 2009 was the turning point of New Zealand’s economy. As the equity market around the world rallied from very low levels and risks, aversion began to decrease. Low fixed mortgage interest rates and rapid increasing net migration led to increase in house prices. Renewed optimism in the global situation resulted in a sharp increase in business confidence, making the economy to produce positive growth. The economy grew again in September 2009; with a GDP of 0.2 percent, and the small increase largely increased the primary production. In conclusion, New Zealand, an Island in the Southern Hemisphere has experienced a remarkable economic growth ever since the end of the First World War. Its growth has seen a reduction in unemployment and a relatively high government support. It was until 2007 that New Zealand’s economic growth declined, and its government did all it could do to bring back the economy. In 2009, the economy started improving. . Works Cited Britton Tamara. New Zealand. Minnesota: ABDO, 2004. Print. Goldfinch, Shaun. Remaking New Zealand and Australian Economic Policy: Ideas, Institution and Policy Communication. Wellington: Victoria University Press, 2000. Print. Hawke, Gary Richard. The making of New Zealand: An Economic History. Melbourne: Cambridge University Press, 1985. Print. IMF. New Zealand: Selected Issues. Washington D.C.: IMF, April 14, 2003. Print. Kelsey, Elizabeth Jane. Reclaiming the Future: New Zealand and the Global Economy. Wellington: Bridget Williams Books, 1999. Print. OECD. OECD Economic Survey: New Zealand 1996. Paris Cedex: OECD Head of Publications Service, 1996. Print. Rewi, Adrienne. Frommer's New Zealand. New Jersey: John Wiley & Sons, Inc., 2012. Print. Smelt, Rosslyn. New Zealand. New York: Marshall Cavendish Corporation, 1998. Print. Smelt, Rosslyn and Lin, Yong Jui. New Zealand. New York: Michelle Bisson, 1998. Print. The Reserve Bank of New Zealand. “Key graphs - GDP growth.” rbnz.govt.nz. 25 October 2012. Web. 27 November 2012. The Treasury. “The Economy of New Zealand: Overview.” treasury.govt.nz. 2010.Web. 27 November 2012. . Read More