OPINION: It's the best of times and the worst of times for New Zealand, to borrow a phrase from Dickens. Many positive developments in the economy also carry some significant negatives.
That observation in last week's column about the economy and the budget's role in it triggered a bigger, and far more polarised, response from readers than usual. Some welcomed the analysis; others criticised it as negative and politicised.
So this column will explore the issues some more, in the hope of contributing to a wider debate.
Let's start with an historic moment. On April 26, Statistics NZ delivered a remarkable piece of news: China had overtaken Australia as our largest trading partner.
We exported $2.3 billion of goods and services to China in the first three months of this year, equal to 20 per cent of all our exports. They had risen by 32 per cent from a year earlier, when China's share of our exports was only 15 per cent. Meanwhile, our exports to Australia fell 7 per cent to $2.17b.
The surge was extraordinary, even though we've become used to fast trade growth with China since we signed a free trade agreement with it in 2008. It suggests we're getting the hang of selling to the Chinese.
But our total exports to the world rose by only 0.8 per cent in the first three months of the year. This tells us we're struggling to increase the volume or value of our exports. We're merely selling to the Chinese what we had been selling to others in the world. Is this a push from better marketing by us or pull from a voracious Chinese economy?
Tourism is a very good example of this switch. The growth of arrivals from China has significantly offset falls from other countries, notably in Europe and North America. But the Chinese stay for fewer days and spend less than people from well-established markets. So we're worse off.
High volume, low value tourists are typical of the first phase of new markets, as we found, for example, with South Koreans in the mid-to-late 1990s. Huge efforts are needed to turn them into valuable customers. Our tourism industry is working hard to convert the Chinese but it will be a long, slow road.
The problem of low volume growth is apparent across the economy. It is particularly crucial in the dairy sector since it has been by far the biggest driver of export growth over the past 20 years.
While this was driven in part by greater productivity, greater market access and higher prices, it was fundamentally a story of more cows. In 1992 the national herd was 2.6 million cows. Last year it was 4.5m.
Three years ago the Government set a goal of trebling food and beverage exports by 2025. Late last year it cut the target to a doubling.
Yet there is widespread acknowledgment in the primary sector that even the lower target cannot be achieved because of physical constraints of land and water.
Crucially in dairy, most water catchments are fully loaded in terms of farming nutrients in the waterways and in allocation of water supplies.
Similarly, there are limits to how much more land suitable to dairying can come into production.
The sector will, however, enjoy good incremental growth thanks to a number of positive developments.
On-farm, productivity and environmental performance will improve under a much-enhanced farming strategy focused on sustainability of environmental, economic and people outcomes to be launched in July by Dairy NZ, the industry's public good science body.
More irrigation, as long as it is in projects with strong economic and environmental performances, will help to. But as a 2010 New Zealand Institute of Economic Research report for the Government showed, the gains in production will be modest: $11.5 billion of investment in 14 projects would lift agricultural exports by 17 per cent by 2025. Outside Canterbury, the return on investment might struggle to exceed the cost of capital.
Downstream, there are several promising projects in the Primary Growth Partnership, a funding joint venture between the sector and the Government.
These include work on the science of some innovative dairy products; on red meat farming systems; and on improved techniques to improve the selectivity of fish harvested and the quality and size of the fish landed.
But here's the big issue the primary sector is still struggling to come to terms with: in 2011, the export value of our food and beverage exports was $25.3b. But overseas consumers paid between $140b-$200b for products of primarily New Zealand origin, according to analysis by food sector consultant Coriolis.
Yes, our primary sector is trying to chip away at creating higher value and capturing a bit more of it further downstream. But it has a long way to go and there are big negatives along the way.
For example, recent foreign investment in farming and processing here is at best economically neutral, but is more likely over time to be negative, with much of the value created flowing overseas. There are ways to attract positive investment but we have yet to do so.
This duality of positives and negatives is evident across the economy. For example, it's exciting to see a new breed of very capable, internationally successful local IT companies such as Xero and soon SLI thrive on the stock market. But there is a real risk of a stock market bubble as local investors chase new listings.
Likewise, a large proportion of our exporting manufacturers are profitable at US85c to the dollar even though a decade ago they were struggling badly at 60c. They are thriving because they have become a lot more capable and sophisticated companies.
But they are growing much slower than their world markets and their overseas competitors, and they are yet to be big enough as a sector to help fast forward our economic growth.
In the same vein, the Government's strong fiscal discipline has helped us cope with our longest, deepest recession in 40 years, and it is backing a number of initiatives such as Callaghan Innovation that will help business advance.
Taking into account these positive and negatives across the economy, Treasury's budget forecasts show GDP growth will slow once the Christchurch rebuild winds down after 2015. By 2017 we'll be barely above our long run growth rate of around 2 per cent, even though our trading partners will be growing twice as fast.
So, it's right to give Government and business credit for their work to date. But it's wrong to believe that's enough. Bigger, faster still eludes us.
Rod Oram is on sabbatical. His column will return August 4.
- Sunday Star Times