New Zealand has a modern, developed economy. The country has a high standard of living, ranking 19th on the 2005 Human Development Index and 15th of The Economist’s 2005 world-wide quality-of-life index. Since 1984 successive governments have engaged in major macroeconomic restructuring, transforming New Zealand from a highly protectionist and regulated economy to a liberalised free-trade economy.

During the late 1980s, the New Zealand Government sold a number of major trading enterprises, including its telecommunications company, railway network, a number of radio stations and two financial institutions in a series of asset sales. Although the New Zealand Government continues to own a number of significant businesses, collectively known as State-Owned Enterprises (SOEs), they are operated through arms-length shareholding arrangements as stand-alone businesses that are required to operate profitably, just like any privately owned enterprise.

Unfortunately, due in part to the sudden transition to a market economy, an economic bubble developed in the New Zealand stock market starting in 1984. This burst in October 1987 and the total value of the market halved within a year (it has still to recover this lost value). The effect of this bubble was a period of poor economic growth which lasted until the mid 90s. It also led the government to begin a programme of massive immigration to boost GDP. However, since 1999 New Zealand has enjoyed a period of relatively strong and sustained growth, and contained inflationary pressures.

The current New Zealand government’s economic objectives are centred around moving from being ranked among the lower end of the OECD countries to regaining a higher placing again, pursuing free-trade agreements, “closing the gaps” between ethnic groups, and building a “knowledge economy.” In 2004 it began discussing free trade with China, one of the first countries to do so.

New Zealand is heavily dependent on trade-particularly in agricultural products-to drive growth, and it has been affected by global economic slowdowns and slumps in commodity prices. Since agricultural exports are highly sensitive to currency values and a large percentage of consumer goods are imported, any changes in the value of the New Zealand dollar has a strong impact on the economy. Its primary export industries are agriculture, horticulture, fishing, forestry and information technology. There are also substantial tourism and export education industries. The film and wine industries are considered to be up-and-coming.

Economic Profile

Since 1984 the government of New Zealand has accomplished major economic restructuring, moving an agrarian economy dependent on concessionary British market access toward a more industrialized, free market economy that can compete globally. This dynamic growth has boosted real incomes, broadened and deepened the technological capabilities of the industrial sector, and contained inflationary pressures. Inflation remains among the lowest in the industrial world. Per capita GDP has been moving up toward the levels of the big West European economies. New Zealand’s heavy dependence on trade leaves its growth prospects vulnerable to economic performance in Asia, Europe, and the United States.

New Zealand’s economy has traditionally been based on a foundation of exports from its very efficient agricultural system. Leading agricultural exports include meat, dairy products, forest products, fruit and vegetables, fish, and wool. New Zealand was a direct beneficiary of many of the reforms achieved under the Uruguay Round of trade negotiations, with agriculture in general and the dairy sector in particular enjoying many new trade opportunities. The country has substantial hydroelectric power and sizable reserves of natural gas. Leading manufacturing sectors are food processing, metal fabrication, and wood and paper products. Some manufacturing industries, essentially forms of import substitution, such as car assembly, have completely disappeared.

Microeconomic Reform
Since 1984, government subsidies including for agriculture have been eliminated; import regulations have been liberalised; exchange rates have been freely floated; controls on interest rates, wages, and prices have been removed; and marginal rates of taxation reduced. Tight monetary policy and major efforts to reduce the government budget deficit brought the inflation rate down from an annual rate of more than 18% in 1987. The restructuring and sale of government-owned enterprises in the 1990s reduced government’s role in the economy and permitted the retirement of some public debt.

Economic growth, which had slowed in 1997 and 1998 due to the negative effects of the Asian financial crisis and two successive years of drought, rebounded in 1999. A low New Zealand dollar, favourable weather, and high commodity prices have boosted exports, and the economy is estimated to have grown by 2.5% in 2000. Growth resumed at a higher level from 2001 onwards due primarily to the lower value of the New Zealand dollar which made exports more competitive. The return of substantial economic growth led the unemployment rate to drop from 7.8% in 1999 to 3.4% in late 2005, the lowest rate in nearly 20 years. The large current account deficit, which stood at more than 8% of GDP in 2000, has been a constant source of concern for New Zealand policymakers. The rebound in the export sector is expected to help narrow the deficit to lower levels.

Economic Relations with Trading Partners

New Zealand’s economy has been helped by strong economic relations with Australia. Australia and New Zealand are partners in “Closer Economic Relations” (CER) [4], which allows for free trade in goods and most services. Since 1990, CER has created a single market of more than 22 million people, and this has provided new opportunities for New Zealand exporters. Australia is now the destination of 19% of New Zealand’s exports, compared to 14% in 1983. Both sides also have agreed to consider extending CER to product standardization and taxation policy. New Zealand initiated a free trade agreement with Singapore in September 2000 and is seeking other bilateral/regional trade agreements in the Pacific area.

U.S. goods and services have been competitive in New Zealand, though the strong U.S. dollar has created challenges for U.S. exporters in 2001. The market-led economy offers many opportunities for U.S. exporters and investors. Investment opportunities exist in chemicals, food preparation, finance, tourism, and forest products, as well as in franchising. The best sales prospects are for medical equipment, information technology, and consumer goods. On the agricultural side, the best prospects are for fresh fruit, snack foods, specialized grocery items (eg. organic foods), and soybean meal. A number of U.S. companies have subsidiary branches in New Zealand. Many operate through local agents, with some joint venture associations. The American Chamber of Commerce is active in New Zealand, with its main office in Auckland and a branch committee in Wellington.

New Zealand welcomes and encourages foreign investment without discrimination. The Overseas Investment Commission (OIC) must give consent to foreign investments that would control 25% of more of businesses or property worth more than NZUSD 50 million. Restrictions and approval requirements also apply to certain investments in land and in the commercial fishing industry. In practice, OIC approval requirements have not hindered U.S. investment. OIC consent is based on a national interest determination, but no performance requirements are attached to foreign direct investment after consent is given. Full remittance of profits and capital is permitted through normal banking channels.