Essay

Tectonic Z

OF ALL DEVELOPED countries, New Zealand is one of the most dependent on its natural environment for earning its living; and we have lived well, thanks to the bounty our ancestors discovered here some seven hundred years ago.

Ours was the last large land mass humans settled. We remain a small population spread thinly across two spacious islands, and many small ones. Ranked by people, we are the world’s 124th-largest country. Ranked by land we’re seventy-fifth.

Where we stand in the world matters hugely to us. Our location creates our cornucopia, defines us, challenges us and gives us unrivalled opportunities. But our current economic model is hitting its limits. It is generating escalating environmental, social and cultural strains. It will not provide well for us over the next seven years, let alone seventy or seven hundred.

This is our paradox of poverty amid plenty. Bar oil producers, we have per capita the highest stock of natural capital in the world; and ours is a world of ever-scarcer resources. Yet we’re struggling.

To see the New Zealand problem, it is best to stand back about ten thousand kilometres – not east or west, north or south but straight up in space. Don’t worry. A couple of clicks on Google Earth will get you there. Just keep an eye on the altitude in the bottom right hand corner. Don’t over-shoot or you’ll miss the radical, exciting future the view also affords New Zealand and its Pacific neighbours.

We live on tiny specks of land where the Indo-Australian and Pacific tectonic plates meet. The fault line gives us earthquakes and volcanoes, and one of our names – The Shaky Isles. But the tectonic pressure also creates our mountains. These intercept oceanic air currents to give us rain; the rain erodes the mountains to gives us soil. Our mid-hemisphere latitude gives us long growing seasons. The oceans give us fish and moderate our climate.

Set against these great advantages, however, we have three big disadvantages: ours is a tiny economy; we produce commodities; and we are a very long way from major markets.

Take the dairy industry. Growing fast over recent decades, it now accounts for over a quarter of New Zealand exports. It also has an impressive 40 per cent share of global trade in dairy products. Almost all dairy products are, however, consumed in the country where they are made, only 7 per cent of total world dairy output crosses borders. So, while the percentage is impressive, New Zealand has only a tiny share of the global dairy industry.

Yes, the growing middle classes in China and elsewhere are consuming more dairy products. But world output grows by more each year than the entire output of the New Zealand dairy industry. The national herd of 4.8 million cows is already degrading waterways and land suitable for dairy expansion is severely limited. There is no way industry can keep up with international demand. Producers in countries with ample land, such as the US and Brazil, meet most of the growth.

The second problem is the inherently low value of commodities. Some can be turned into valuable products such as infant formula. But it is the brand owners, not the product makers, who capture most of the value.

We were confronted by this reality early in 2012. Nestlé, the world’s largest food company, paid US$12 billion for the infant formula business of Pfizer, the US pharmaceuticals company. Pfizer only owned the formulations, brands, distribution and powerful market positions such as an 8 per cent share of Chinese purchases. But New Zealand captures only a small part of the value it helped Pfizer, and now Nestlé, create.

Almost all of the product was, and still is, made by Fonterra, the co-op that processes almost all New Zealand milk. It pays its farmer-shareholders the commodity price for the milk used in the formula, while the modest toll-processing and packaging fee it gets for making the formula contributes a miniscule sum to the small share dividend it pays its farmers.

This poverty trap, evident across the economy, is captured by the World Economic Forum’s annual Global Competitiveness Rankings. One of its key measures is the nature of a country’s competitive advantage. This is expressed as a scale of one (low-cost natural resources) to seven (unique products and services). On this, New Zealand scored 3.8, meaning we rely on lightly processed commodities, and ranked thirty-sixth in the world.

A second measure is more important. It expresses the sophistication of a country’s value chain, again on a scale of one (extraction of resources) to seven (direct relationships with final consumers). The higher a country is up the chain, the more value it captures. Again, New Zealand scored 3.8, ranking fifty-eighth.

The more farms we sell to overseas investors, for example, the worse this problem gets. Last year, Shanghai Pengxin, a Chinese conglomerate, bought a portfolio of farms from the receivers, after the New Zealand owners had gone bust, buckling under heavy debts.

Shanghai Pengxin plans to use its farms and third-party processing plants in New Zealand to supply its supermarkets in China. Being an integrated producer, it will create and capture value all the way from farm to cash register. Very little of this wealth will stick to the ribs of the New Zealand economy. It is an exact replica of the century-old British meat baron model that enriched the Vestey family and British investors but left only crumbs for the colonial locals.

The fact New Zealand ranks twenty-fourth in the OECD in terms of GDP per capita is a testament to efficiency and long work weeks, not to value creation and capture.

IT COULD BE worse, as it is for Australia. Its competitive advantage ranks it thirty-fourth, again reflecting heavy dependence on commodities. But it languishes at 105th on the value chain ranking because its iron ore, coal, gas and wheat are irredeemably undifferentiated and unprocessed commodities.

Australia is wealthier than New Zealand thanks to a larger domestic market. Yet it is a seriously suboptimal one by global standards, and the economy is suffering from Dutch Disease. This nasty affliction strikes when booming commodity sectors suck capital and labour from the rest of the economy, drive up the exchange rate and make the rest of the economy uncompetitive, as the Dutch learned when they fleetingly profited from North Sea gas in the 1960s.

Like New Zealand, Australia urgently needs to learn how to create and export sophisticated, high-value products, not commodities. Currently it generates only 18 per cent of its GDP from exports, which is remarkably little for a small country of 23 million people. New Zealand earns about a third of its GDP from exports. This matches the current global average for trade’s contribution to economic activity. But New Zealand has stagnated at this level for three decades while the global average has climbed from 17 per cent. In other words, New Zealand has been losing market share, and the dominance of commodities continues to impoverish us.

New Zealand’s third big disadvantage is its distance from major markets. We can easily and cheaply ship low-value commodities long distances. But it is proving incredibly difficult to turn ideas into sophisticated, high-value products and services in New Zealand and get them out to the world. It is even harder to run overseas operations from New Zealand.

Of course, ubiquitous, nearly-free internet and social media allow us to communicate instantly with others around the world. But physical proximity and high population density are critical to generating science and ideas, then commercialising them. We can connect from afar but it is not the same as being there. As Richard Florida and colleagues wrote in a 2007 paper ‘The Rise of the Mega-Region’, the top forty mega-regions make up about just under a fifth of the world’s population, produce two-thirds of economic activity, 85.6 per cent of patented innovations, and four-fifths of the most-cited scientists. They reap ideas, not resources.

These three big disadvantages mean New Zealand is struggling to earn a big enough, resilient enough living in the global economy. Consequently, we are running a large and growing current account deficit, funded by selling off assets to overseas owners and ramping up private sector overseas borrowing. Thanks to this growing stock of debt and the flow of interest and dividend payments offshore, New Zealand’s net international financial liabilities are the sixth highest of the thirty-four members of the OECD, according to International Monetary Fund data.

At some point, our creditors will start worrying about our ability to meet our obligations. Meanwhile, a third of our children live in households experiencing some level of deprivation, and on average Māori and Pasifika New Zealanders live shorter, unhealthier and poorer lives than Pākehā.

THE SOLUTION, OUR current government believes, is incremental growth of the existing economic model. Just look at all those middle class Chinese and Indians, it says. If only we could sell them more UHT milk, milk powder, infant formula, wine, lamb chops, holidays and university degrees we’ll be rich. It has set some big goals, such as doubling exports by 2025, to move from a third of GDP to 40 per cent. The government’s Business Growth Agenda is attempting to deliver this and the strategies of most companies in the major exporting sectors are equally limited in their thinking about producing more of the same.

Two problems arise. First, the simple arithmetic of doubling exports, even in strong sectors such as dairy, won’t work. They are growing too slowly to achieve that goal, many in the primary sector would run out of land and other resources before they got there. For example, the government is pushing fourteen big irrigation projects around the country at a cost of some $12 billion, on and off farm. But government-commissioned analysis by the New Zealand Institute of Economic Research shows that the investment would only lift agricultural exports by 17 per cent towards the government’s goal of doubling by 2025. Worse, many of the projects outside Canterbury would struggle to meet their cost of capital without substantial government subsidy.

Second, the government eagerly negotiates free trade agreements. But there is more to export success than access. There are few government policies or corporate strategies designed to shift New Zealand up the World Economic Forum rankings of value creation and capture.

Don’t be fooled by the trade headlines. Yes, exports to China rose 26 per cent in the year ended June 2012. But total exports fell 2 per cent. New Zealand is selling fewer goods to fewer countries, and becoming very dependent on one.

New Zealanders know this trade pattern well. For almost 150 years, New Zealand was hugely dependent on British buyers of food exports and on British suppliers for imports. New Zealand was, as historian James Belich noted at the ‘Catching the Knowledge Wave’ conference in 2001, two small, fecund islands dangling below the equator ‘like the Empire’s testicles’.

That cosy, but confining, relationship ended abruptly in 1973 when Britain joined the European Economic Community. New Zealand spent the next thirty years learning how to export and import more widely. But since signing the free trade agreement with China in 2008, China quickly became our number-one customer and number-one supplier. In just five years, it has displaced Australia as our largest trading partner.

This is not a tirade against foreign trade, investment or the Chinese. Rather, it is an argument for mutual benefit. For example, Shanghai Penxin’s application to buy New Zealand farms failed three of the critical tests of the Overseas Investment Act: it failed to bring new technology or skills to the country – indeed, it hired Landcorp, an NZ State Owned Enterprise, to run the farms for it; it failed to create jobs – other than two trainers of farm hands; and it failed to offer skills in the Chinese market that the local dairy industry lacked.

The government approved Shanghai Pengxin’s purchase though, on the grounds that the free trade agreement with China guarantees investment reciprocity. Of course that is desirable, but the current situation is grossly imbalanced. While Shanghai Pengxin’s investment was an economic negative for New Zealand, Fonterra’s investment in farms in China is a massive benefit, bringing skills, capital and ultimately a billion litres of milk a year to Chinese consumers.

NEW ZEALAND NEEDS very different strategies to thrive. How can we achieve global scale in a few fields? Create sophisticated, high-value products and services through science and other intellectual and cultural pursuits? Connect and collaborate intimately with communities of like-minded people around the world? Above all, how can we be true to who we are, what we are and where we are as a nation?

We can see the answers from ten thousand kilometres up in space. The tectonic plates carve a giant Z across the Western Pacific from the Equator to near Antarctica. In the middle is 5.8 million square kilometres of ocean, an area equivalent to three-quarters of the land mass of Australia. Entrusted to New Zealand under the United Nations’ Law of the Sea, it is the fifth largest national oceanic resource in the world. It is twenty-two times the land area of New Zealand. It is so big, we almost catch up with Australia, with twenty-eight times the New Zealand land mass. But Australia’s oceanic resource is only 1.4 times that of New Zealand.

This is a monumental responsibility. All oceans are precious for the life they hold and their influence on the planet’s ecosystem. New Zealand’s oceanic resource is home to 14 per cent of the world’s marine species; of those more than 60 per cent are unique, the second highest level of endemism in the world after Antarctic waters.

These life forms are essential to the healthy functioning of the oceans but also for the help they might be to humankind. As Professor Chris Battershill, who leads the coastal and marine ecosystem work at the University of Waikato’s Environmental Research Institute points out, of thirty-one marine leads for anti-cancer drugs, New Zealand has contributed three. One is a breast cancer drug in pre-clinical development from a local sea sponge.

We know astonishingly little about the oceans for which we are responsible. We’ve studied less than 6 per cent of our seabed so far, Dr Michael McGinnis of Victoria University estimates.

So far people around the world have turned to the oceans only for fish and some offshore oil and gas. But as a rising human population puts ever more demands on dwindling terrestrial sources of food and minerals, people will seek to massively exploit the oceans.

Worse, climate change is already creating an even bigger threat to oceans. Use of fossil fuels is pushing up carbon concentrations in the atmosphere, thereby raising temperatures. Oceans are absorbing a disproportionately large share of the heat and atmospheric carbon, causing warmer and more acidic water in surface layers. These changes are already causing damage to many coral reefs, which are by far the most intensive and biodiverse ecosystems in the oceans.

Most frightening of all, no scientist knows how to reverse these profound impacts, notes Sir Jonathon Porritt, a world leader on sustainability. In his latest book, The World We Made: Alex McKay’s story from 2050 (Phaidon, 2013), Porritt extrapolates from existing new and better technologies, and economic and social trends already apparent to describe how humankind solved many, but not all, of the increasingly intense climate and other sustainability challenges impacting us now and deepening fast. But ocean acidification and heating are by far the two most sinister for which Sir Jonathon sees no solution.

On a more encouraging note, he believes humankind will make some progress on improving the health of ecosystems, though still falling short of substantial recovery and restoration. Areas of high biodiversity will be crucial to these processes. He identifies the Pacific Islands as one of the largest biodiverse regions in the world.

So let’s make this vast area and its peoples a zone of hope across the Pacific’s tectonic Z from the Solomon Islands east to Samoa and south to Antarctica. This embraces some of the most precious but threatened places on the planet, such as islands which will be made uninhabitable by rising sea levels; and Antarctica where nations might try to carve out sovereign territory and exploit the land and sea once the continent’s international treaty becomes open to renegotiation and modification in 2041.

We and our neighbours, though, will have to learn radically new and better ways to work together, to agree on enduring values, to progress science and conservation, and to use resources wisely so we can create sustainable wealth in every sense of the phrase – environmental, social, economic and cultural.

Yet, this will be a very natural thing for us to do. We are oceanic people. We can reconnect with our past and together create a better future.

THE WORLD BUSINESS Council for Sustainable Development provides one of the clearest, most comprehensive guides in its Vision 2050 document. This lays out the main shifts we need to achieve across people’s values, human development, economics, agriculture, forests, energy and power, buildings, transport and materials. Quite simply, they represent a scale, speed and complexity of change far exceeding anything humankind has achieved in its history to date.

Young New Zealand leaders in business and other fields have produced a local version of Vision 2050 with the help of the World Business Council. Released early in 2013 it offers a blueprint for a New Zealand of six million people living very well within a restored ecosystem. Member companies of the Wellington-based Sustainable Business Council are working on turning ideas into actions.

To make this work, there is a need for a new type of company, fast growing and resilient with new business models that enable them to thrive in world markets. Such vanguard companies have begun to emerge over the past decade. They are distinguished by five hallmarks: inspired products and services offering unique value; originality of business and culture, born out of their New Zealand roots; smart and varying strategies for diverse international markets; astute management skills to acquire and develop human and technology skills, and capital; and the confidence and skills to collaborate with whoever they need, wherever in the world. Companies like LanzaTech and Xero, to name but two.

LanzaTech was founded in 2005 by biologists Sean Simpson and Richard Forster to develop new forms of biofuels. They targeted industrial waste gases as their raw material, not food crops, or crops from land that could have been used for food. Their first success was capturing carbon monoxide from the stacks of the New Zealand Steel plant, south of Auckland, and bubbling it through water so bacteria could produce ethanol.

The company was backed first by Sir Stephen Tindall, who channels some of his profits from his The Warehouse retail chain into his ambitious portfolio of start-up companies. LanzaTech has gone on to secure more than US$120 million of venture capital from investors including Vinod Khosla, Silicon Valley’s leading clean tech venture capitalist, and Sir Richard Branson, who sees the aviation potential of the fuel. The first commercial-scale plant was scheduled to start production at a Chinese steel plant in 2013.

LanzaTech demonstrates two fundamentally important themes about technology in a sustainable world: first, it is closing a loop. Rather than spewing carbon monoxide into the air as a greenhouse gas, it is recycling it into a synthetic fuel, thereby displacing new carbon that would have been released from oil, gas or coal; second it is using biological sciences, which are more in tune with the ecosystem and New Zealand’s greatest scientific expertise.

Xero was founded in 2006 by Rod Drury and colleagues to devise online accounting services to replace conventional accounting software that was fiddly, frustrating to use and hard to update, particularly for small companies. Its ambition is bold: ‘Our mission is to materially improve GDP globally by making small businesses more productive.’

At an early stage in its development, the company floated on the New Zealand stock exchange, giving it more funds for growth. In the first half of its 2013–14 financial year, it reported that its paying customers rose 89 per cent to 211,300, which increased operating revenues 87 per cent to NZ$30 million. When it announced in October 2013 it had raised a further NZ$180 million, its market capitalisation was NZ$2.3 billion.

It is very rare to see a New Zealand company grow so fast at home and abroad. The benefits to the wider economy are numerous, staff increased from 278 to 584 over the past twelve months, across its offices in New Zealand, Australia, US and Britain.

More significant than the growth is the fact that some of Xero’s competitors, the big multinational companies selling traditional accounting software, are informing their shareholders that Xero is a risk to their businesses.

Xero shows it is possible to devise in New Zealand a ground-breaking service for a huge yet very conventional market, and take it rapidly out to the world.

These two companies are commendable and encouraging trailblazers, which hopefully will serve as role models for others. But we have a very, very long road ahead before we begin to reap the rewards of deep sustainability in our terrestrial and marine environments.

SUCCESS WILL FEATURE the likes of global centres of research excellence, surrounded by clusters of enterprising global companies, in the likes of dairy nutrigenomics, marine-based pharmaceuticals and marine ecosystem monitoring and management.

Such scientific and commercial success will only happen, however, if we pioneer radically new and effective international institutions. One example is the Global Research Alliance on Agricultural Greenhouse Gases, which the New Zealand government proposed at the UN’s 2007 Copenhagen climate negotiations. The aim is to reduce emissions by turning them into nutrients that will help increase food production.

The Alliance now has thirty-six country members and three observers including the EU. Together, the countries account for 70 per cent of global agricultural greenhouse gases (GHGs), which in turn account for 15 per cent of total GHGs. The three workgroups of the alliance are Livestock, led by NZ and the Netherlands; Croplands, led by the US; and Paddy Rice, led by Japan, with New Zealand serving as the Secretariat for the Alliance.

New Zealand has a history of such initiatives. As one of the architects of the United Nations after World War II, the country continues to play roles there and in other international bodies such as the World Trade Organization. New Zealand was also credible and useful in climate change negotiations until the current government emasculated the Emissions Trading Scheme through a wide range of exclusions and other breaks for emitters and made a feeble commitment to emissions reduction.

The biggest challenge, however, would be to help pioneer a new international body that would bring together the nations of the western Pacific, from the Solomon Islands down to Antarctica, to ensure we are all responsible stewards and wise users of these critically important marine and terrestrial ecosystems.

Around forty thousand migrants a year arrive in New Zealand, with most settling in Auckland. The top countries of origin are the UK, China, the Philippines, Fiji and South Africa. Those classified as skilled migrants account for just under half, bringing their valuable talents to the country. India is the largest source of such migrants, followed by the UK.

This power of lives and cultures coming together suffuses Auckland. I see it daily as a business journalist. Take Rakon. Its headquarters in Mount Wellington is a mini United Nations of very highly qualified electronics engineers. Newcomers quickly acculturate into the distinctive, innovation-driven company style at Rakon; and they quickly acculturate into life in New Zealand, making their own take on Kiwi culture.

We could build the great attributes of our people, land and sea into a new New Zealand. It would look much like our nation today but bolder, stronger, more certain of its contribution to the world and more successful.

We could remain, of course, very much ourselves. Who would ever want to be a pale imitation of some other nation? We are shaped by who we are as diverse peoples, what we are physically as a country and where we are half a world away from major centres of population.

Our difference is our gift to the world. We are inventive and creative; enterprising because of remoteness; enlivened by distinctive cultures; in touch with land and sea; small but able to efficiently run a full-service nation. In a fast-homogenising global culture in which one product, one country looks ever more like another, New Zealand is an attractive alternative, offering a different way to lead our lives, to nurture the world.

Griffith Review