New Zealand’s economy has me scratching my head.
Typically, economies follow a very well-defined path as they mature.
And while each one follows the same path, they might take longer or shorter to reach each milestone.
Imagine a grove of bamboo shoots.
Each shoot represents an economy. Each shoot in the grove is growing quickly, but not all at the same speed. Some are taller than others.
On each stem, there’s a series of sections, bookended by knobby little nodes.
You can compare each section to an economic developmental stage.
Put really generally, every economy progresses through these stages:
Source: Taylor Kee
100,000 years ago, every society on earth was 100% hunting and gathering.
T-Rex steaks with a side of berries and mushrooms, please.
Soon enough, they realised they could plant seeds near their living spaces to make harvesting a lot easier. That was the transition to horticulture. It meant that people were starting to control their environment.
With the development of societal structure…and the growing density of populations…our ancestors began building upon their horticultural insights. They went from little backyard gardens to sprawling fields and mass-produced crops.
It wasn’t much longer until they began specialising and trading with one another. You’d have your rice guy, your beef guy, your egg guy. This was the dawn of the commercial stage. It opened up a wealth of opportunity because it meant that you now had access to more than just what you could produce — you could potentially trade for anything that anyone else had too.
At this stage, we see the great trade routes forming. We see a complete change in dynamic for military conquest. And we see the exponential development of innovation begin.
It eventually leads to industrialisation…where manufacturing using technology multiplies how much each person can produce. What took 10 days now took 10 minutes. What took 10 men now took one. It drastically decreased the time and effort needed to provide for yourself and your family.
And, finally, the latest chapter in this story, the post-industrial or service society. When the labour costs of making stuff plummeted, it allowed the labour force to pursue new opportunities. These opportunities often came in the form of knowledge.
For example, a mechanic. You don’t need to learn how to change your car’s spark plugs yourself. You can pay a mechanic to use his specialised knowledge to service your car instead. In the end, you save time, sweat and oil stains…and the mechanic gets a cheque. Win-win.
Thus the service economy was born…and along with it, information and research. Harnessing and applying one’s mind in a specialised space became the new way to provide.
That’s where we are today.
Now, a small caveat. When I say that an economy is an industrial economy, that doesn’t mean that there aren’t service or agricultural or commercial industries at play too.
For example, even during the earliest economic stage, the hunter/gatherer stage, you would still find the world’s oldest service profession, prostitution, at work.
So each society has a mix of each industry…and you label an economy based on the relative importance of the greatest industry. If manufacturing represents the biggest slice of the pie, you’ve got an industrial economy.
It’s hard, but not impossible, to skip stages. India is a good example of an economy that’s pulling that off. They’re jumping straight past industrialisation — from agriculture/commercial to service.
That brings us back to New Zealand’s weird economy.
Like many colonised states, New Zealand has enjoyed the long-term prosperity of the British Empire’s Midas touch…
Think Hong Kong, Singapore, Malaysia…Australia…parts of India…the United States.
Britain has generally fast-tracked those economies by centuries beyond neighbouring un-colonised nations.
Look around New Zealand. Even though some of our island neighbours have larger populations and greater land masses, their economies pale in comparison to ours.
As perhaps the most isolated member of the developed league of economies, we depend on several niche markets to hold our seat. High-quality wool. Top-grade milk products. Certain meats. Some fruits and veggies.
But, as our peers have developed straight through the commercial, industrial and post-industrial stages, New Zealand has managed to hold on to an agricultural society.
Why is that?
Well, as perhaps the world’s top expert in New Zealand’s agricultural economy, Dr Keith Woodford had an intriguing perspective in his recent article on Interest.co.nz:
‘If New Zealand wants to compete with the rest of the world which has advantages of location and scale, then we have to make the best of our competitive advantage. Our competitive advantage lies in our agricultural resources, our bountiful water resources, and our wonderful scenery.’
While I share his admiration for New Zealand’s natural splendour, I’m not sure I agree with his reasoning. Here’s why…
By focusing on agriculture, we’re competing with dozens of poorer but highly motivated countries around the world with similarly productive agricultural economies. And with shipping costs, our isolation means that we likely won’t be able to beat anyone on price…
For now, we hold a slight advantage that New Zealand quality and branding have given us a minor edge, but eventually the competition will catch up. When they do, people won’t care if a kiwi fruit came from New Zealand or the Congo. They’ll buy what’s cheapest…and that won’t be us.
That’s why I think agriculture is unfortunately a losing game in the long-term.
Instead I’d suggest the service industry holds far more potential for New Zealand. We’re digitally well connected, highly educated and obviously fluent in English. Those three factors alone give us a huge head start in the global service sector.
Plus, it minimises the effects of our geographical isolation. It’s taking advantage of what Thomas Friedman calls today’s ‘flat world’.
It’s capitalising on our advanced economic status and the connectivity of the Internet to tussle with the best and brightest around the world.
And I’d suggest that it’s not only more advantageous and sustainable — transitioning from agriculture to service actually puts us in a better place to adopt whatever phase comes next.
Editor, Money Morning New Zealand
PS: Here at our Money Morning New Zealand office, we discussed the topic at length — what comes after the service stage. We think that the world might experience the birth of the creative era, when automation makes both physical resources and digital processes infinitesimally cheap, and a person’s ability to create becomes the most valuable product available. But we’d love to hear what you think — what’s comes after the modern service society? Reach us at [email protected]