The Economy of New Zealand is a market economy which is greatly dependent on international trade, mainly with Australia, the European Union, the United States, China and Japan. It is also strongly focused on tourism and primary industries like agriculture (though both sectors are highly profitable), while having only small manufacturing and high-tech components. Economic free-market reforms of the last decades have removed many barriers to foreign investment, and the World Bank in 2005 praised New Zealand as being the most business-friendly country in the world, before Singapore.
Traditionally, New Zealand's economy was built upon on a narrow range of primary products, such as wool, meat and dairy products. As an example, from approximately 1920 to approximately 1940, the dairy export quota was usually around 35% of the total exports, and in some years made up almost 45% of all New Zealand's exports. Due to the high demand for these primary products - such as the New Zealand wool boom of 1951 - New Zealand enjoyed high standards of living. However, commodity prices for these exports declined, and New Zealand lost its preferential trading position with the United Kingdom in 1973, due to the latter joining the European Economic Community. Partly as a result, from 1970 to 1990, the relative New Zealand purchasing power adjusted GDP per capita declined from about 115% of the OECD average to 80%.
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 industrialised, free market economy that can compete globally. This 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 towards the levels of the big West European economies since the trough in 1990, but the gap remains significant. 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 in the long term. The country has substantial hydroelectric power and sizable reserves of natural gas, much of which is exploited due primarily to major Keynesian import substitution-oriented industrial projects (See Think Big). Leading manufacturing sectors are food processing, metal fabrication, and wood and paper products. Some manufacturing industries, many of which had only been established in a climate of import substitution with high tariffs and subsidies, such as car assembly, have completely disappeared, and manufacturing's importance in the economy is in a general decline.
The New Zealand economy has recently been perceived as successful. However, the generally positive outlook includes some challenges. New Zealand income levels, which used to be above much of Western Europe prior to the deep crisis of the 1970s, have never recovered in relative terms. The New Zealand GDP per capita is for instance less than that of Spain and about 60 % that of the United States. Income inequality has increased greatly, implying that significant portions of the population have quite modest incomes. Further, New Zealand has a very large current account deficit of 8-9% of GDP. However, despite this, its public debt stands at only 21.2% (2006 est.) of the total GDP, which is comparatively small compared to many developed nations. However, It has also been noted that net foreign debt has increased 11-fold between 1984 and 2006, now reaching NZ $182 billion, NZ $45,000 for each person. The combination of a modest public debt and a large net foreign debt reflects that most of the net foreign debt is held by the private sector. One reason why New Zealand runs persistent current account deficits, that drives the net foreign debt upwards, is that earnings from agricultural exports and tourism fail to cover the imports of advanced manufactured goods required to sustain the New Zealand economy. However, this trade imbalance is much smaller than the investment income imbalance which makes up the vast majority of New Zealand's current account deficit.
Foreign business relations
New Zealand's economy has been helped by strong economic relations with Australia. Australia and New Zealand are partners in "Closer Economic Relations" (CER), which allows for free trade in goods and most services. Since 1990, CER has created a single market of more than 25 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 which was extended in 2005 to include Chile and Brunei and is now known as the P4 agreement. New Zealand 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 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, specialised 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% or more of businesses or property worth more than NZ$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 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.
This free investment by foreign capital has also been criticised. Groups like Campaign Against Foreign Control of Aotearoa (CAFCA) consider that New Zealand's economy is substantially overseas-owned, noting that direct ownership of New Zealand companies by foreign parties increased from $9.7 billion in 1989 to $83 billion in 2007 (an over 700% increase), while 41% of the New Zealand sharemarket valuation is now overseas-owned, compared to 19% in 1989. Around 7% of all New Zealand agriculturally productive land is also foreign-owned. CAFCA considers that the effect of such takeovers has generally been negative in terms of jobs and wages.