• EconAfterHours

Paradise of the Pacific

By Niranjana Raj

2020 was a tough year for most people, countries, and economies. Life as we knew it came to a standstill and we were restricted from indulging in our quintessential definition of a ‘good time’. However, while the rest of the world was under the shackles of a global pandemic, there was one nation enjoying itself as if everything were normal, at least for the time being. That nation is none other than Australia’s younger sibling- New Zealand. While New Zealand is mostly known for being Australia’s neighboring country, its average cricket team, kiwis and tourism potential, some also know it as almost being a country with a “perfect” economy.

While its GDP or its GDP per capita might not be reflective of this bold claim, one has to remember that despite this economic variable being an effective measure of a country’s wealth and prosperity, it is not the only parameter to do so. High standards of living are often indicated by the happiness index, ease of doing business, and a comfortable existence. New Zealand is primarily an agrarian country and the fact that it is still a developed nation is highly commendable. This is because most developed nations are either the world’s manufacturers or innovators, and not always the world’s farmers. This prosperity from agriculture wasn’t always present.

New Zealand had a heavily subsidised farming system, that was quite similar to the USA and the European Union. This meant that the farmers would get a predefined price for the predefined stalk that they produced. So, although this meant food security for the nation and a safety net for the farmers who were mostly at nature’s mercy, there was no scope of innovation. People respond to incentives and the people of New Zealand, at that time, had no incentives to come up with better means of working in agriculture. Due to this major drawback, the government of New Zealand decided to do away with this system, almost overnight. In the short run, losses must have been faced by farmers from having had the rug pulled from underneath them. However, in the long run, it resulted in agriculture being one of the major contributors to the country’s economy. After the safety net was removed, farmers were now forced to develop more efficient techniques of farming and to grow profitable crops to reduce their cost of farming. There was a massive reduction in the use of fertilisers as it was earlier heavily subsidised by the government.

Another breakthrough due to this was in the dairy industry. Milk was seen as a very common everyday product. But currently, the dairy industry in New Zealand is one of the biggest in the world. This is because of the climatic conditions which are very suitable for dairy farming. New Zealand took advantage of this gift and they currently sell their dairy products at high prices in the foreign market which earns them equally high profits due to demand for these indigenous products. Although it was considered primarily as an agricultural country, due to technological innovations and developments the country can now be considered as an industrialized free-market economy.

New Zealand happens to be one of the very few countries that understand how a free market works and have put that to good use. They have divided sectors between the free market and the government equitably which has resulted in this economic success. The invisible hand guides market forces in a free market, which is why value-adding industries need to be under its roof. This is exactly what New Zealand has done. Nonetheless, leaving the market entirely to the invisible hand, even in a reportedly non-corrupt country like New Zealand, is not exactly the best decision. This is why the government intervenes in this process and handles public services. The tax rate is quite high in the country and residents are taxed more than they spend, this is why they have a consistent budget surplus.

One of the main reasons for the development in New Zealand is foreign investment. New Zealand is extremely easy to do business in. So much so that it had dethroned Singapore and ranked first in the World Bank's Ease of Doing Business Index in the year 2017. The country has an apt legal framework to support this. It protects businesses well and lays heavy emphasis on property ownership, dispute resolution and, managing or dealing with international entities. It is also a country with almost nil corruption and this results in businesses taking fewer risks onto themselves. There are multiple small businesses that result in a more competitive and active market. This enables the country to enjoy the benefits of a competitive market. New Zealand has always made the most out of its factors of production-that is land, labour and capital.

There is a lot of immigration to this country due to its ease of doing business. The country only has a two-tier immigration system which makes it easy for wealthy, English-speaking workers to enter New Zealand while it becomes a lot more difficult for the poorer, non-English speakers to do so. The influx of immigrants has considerably raised the living costs in New Zealand. Property rates have skyrocketed and currently, the country is going through a housing crisis with the younger generations being forced out of their flats and apartments to live in their cars. Foreign investors have acquired dual citizenship to buy land and build large estates for investment purposes. This is also another reason for the extremely high property rates in New Zealand. For most people, the grass is always greener on the other side- the other side being Australia. A tragic scene occurring in the island nation is the fact that its citizens are moving to Australia for higher incomes. About 27,000 people per year move to Australia in an attempt to earn higher wages and to escape the high costs of living in their own country.

The “perfect” economy of New Zealand is also going through a rough patch due to the pandemic. Although it did a phenomenal job in restricting or constraining the number of cases (at one point in time, there were zero active COVID-19 cases in New Zealand and almost everything had gone back to normal), the economy did suffer quite a bit. They did have certain measures to cope with this. The government introduced a COVID-19 economic dashboard on 17 April 2020 which aims to provide a range of real-time data which will help with independent analysis and might provide businesses an idea about the economic activity in different parts of the economy. This is a genius move on their part as it promotes transparency in terms of economic data. Businesses can protect themselves from potential losses by analysing the trends in the required sector. The government had also released multiple subsidies for businesses facing losses due to the pandemic. They have tried their best to help their citizens during these difficult times.

So, while the economy of New Zealand might seem perfect on the outside, it has its fair share of problems to deal with. While no economy is ever perfect, New Zealand might be just one step closer than other countries in achieving that.













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