Story: Economy

Page 10 – The European economy: a history

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Like the first Polynesian settlers, 19th-century Europeans depleted various resources such as seals, whales, native timber, gold, and kauri gum. Major gold rushes in Otago, the West Coast and Thames in the 1860s stimulated development. Many of Dunedin’s fine buildings were paid for with Central Otago gold. Coal was also mined in Otago, the West Coast and Waikato, and kauri gum in Northland. It was an unsustainable economy, although some regions, notably the West Coast, remained important quarries of natural resources into the late 20th century.

Early settlements

The early European settlers mostly provided supplies and services. Pastoralism also developed in the 1850s and 1860s, with large sheep runs mainly on the east coasts of both islands. As the resources were depleted the settler lifestyle became more marginal, especially in the long economic depression in the 1870s and 1880s, when many went elsewhere. New Zealand’s economic destiny seemed to lie in large-scale sheep farming, and the export of wool, tallow and perhaps canned meat.

Refrigeration and the pastoral economy

The advent of refrigeration, which began in the 1880s, opened up a new economy based on family farms. Forests were felled. In 1861 there were 158,000 acres (64,000 hectares) of good pasture in New Zealand; by 1881 there were 3.5 million acres (1,416,373 hectares) and by 1925, 16.5 million acres (6,677,188 hectares). There was innovation. New grasses were sown so that two blades of grass grew in place of one. Improved livestock were bred, and freezing works and dairy factories efficiently turned out meat and dairy products which were shipped to Britain. This ‘processed grass’ (including wool) made up some 90% of exports for the next 80 years – until the 1960s.

Industrialisation

In the 1920s and 1930s the manufacturing sector expanded. The freezing-works chain replaced skilled butchers, and auto assembly plants appeared. Hydroelectric dams began to provide electrical power. Industrialisation was forced by government interventions (such as import controls from 1938) in order to generate jobs for a growing population. They were keen to reduce the dependence on exporting after the collapse in the terms of trade during the great depression of the early 1930s. ‘The slump’, as it was also known, brought widespread poverty, and the unemployed rioted in city streets. The Second World War brought recovery and a wool boom in the early 1950s. It was an economy sometimes described as ‘two-legged’, with the pastoral leg generating the foreign exchange the economy needed, and the manufacturing leg generating the jobs to maintain full employment.

The end of pastoral dominance

In late 1966 the export price of wool crashed by 40% as a result of increasing competition from synthetic fibres. The price never recovered for any length of time. Meat exports came under pressure from white meats – chicken, pork, and fish – and butter from other oils. Affluent countries limited access to their markets, and dumped their surpluses on other markets, further depressing New Zealand’s export returns. The dominance of farm goods in the export sector and the political economy came to an end.

Power projects

‘Think Big’ referred to a bundle of energy-related projects promoted by Robert Muldoon’s government in the late 1970s. They were intended to save on imports and remove dependence on agricultural products. Several projects involved the use of Māui gas, which was used for methanol, ammonia-urea and synthetic petrol. The oil refinery at Whāngārei, the Tīwai Point aluminium smelter and the steel works at Glenmore were extended, and there was electrification of much of the North Island main trunk rail line. With the fall in the world price of oil in the mid-1980s the programme proved less successful than promised.

Diversification: the 1970s

With the staple export of ‘processed grass’ under threat, the New Zealand export sector diversified into horticultural, forestry, fishing, energy exports, tourist and other services, as well as general manufacturing (mainly to Australia). Meanwhile, more sophisticated farm exports added value – for example, wool carpets were being produced. The new products also meant new markets, an effect reinforced when Britain joined the European Union in 1973, blocking off the traditional markets. It has been calculated that between 1965 and 1980, New Zealand achieved the greatest external diversification of all rich OECD countries, both by commodity and destination concentration. Nevertheless the exports remained specialised, and not all efforts succeeded. The Think Big idea of using gas from the Māui field as the basis for a petrochemical industry largely failed when the price of oil fell in the mid-1980s.

Liberalisation: the 1980s and 1990s

Changing global conditions meant that the high degree of government intervention was becoming ineffective. New lifestyles and greater social heterogeneity challenged old ways. For example, as women joined the workforce, the restricted shopping hours became unrealistic.

There were cautious changes up to 1984, such as the Closer Economic Relations initiative with Australia. But a new government in 1984 and another in 1990 unleashed vigorous liberalisation, promoting a freer market economy. Government withdrew from many businesses, tariffs were lowered, the currency floated. Some reforms were extreme and were later reversed, but the general principle of the market mechanism remains at the core of New Zealand economic policy.

An architect of change

‘Rogernomics’ was a term used by New Zealanders to describe the dramatic liberalisation of the economy which followed the election of a Labour government in 1984. The name derived from Minister of Finance Roger Douglas, considered by many to be the major force behind the controversial initiatives.

An unfortunate by-product was that for a time the economy stagnated, with per capita gross domestic product falling in the late 1980s and early 1990s. Another consequence was that manufacturing based on the desire to avoid importing components, such as car assembly, almost completely closed down.

The economy in the early 21st century

From the mid-1990s the New Zealand economy began to expand, and its gross domestic product (GDP) has grown a little faster than the OECD average. There are many possible reasons – the great diversification of the 1970s, the liberalisation of the late 1980s and 1990s (although some of the most extreme measures were reversed after 1999), prudent economic management, and export price gains from the reduction in world agricultural protection following the ‘Uruguay Round’ settlement of 1986–94. Whatever the reasons, New Zealanders know they will have to work hard, invest shrewdly, innovate creatively, and manage wisely to maintain a high standard of living and an improving quality of life.

How to cite this page:

Brian Easton. 'Economy - The European economy: a history', Te Ara - the Encyclopedia of New Zealand, updated 24-Sep-13
URL: http://www.TeAra.govt.nz/en/economy/page-10