Wednesday, December 30, 2009

What do wealthy nations make?

In thinking about whether New Zealand can be richer, and what it might have to do to do that, it is worth looking at the fundamentals. What makes a nation rich and what makes it poor?

Looking at industrial production helps understand this a bit better. This comparison and analysis isn't easy. Once again the data is fragmented and difficult to compare. Even using the CIA World Factbook isn't particularly easy in this case. I haven't finished looking at poorer nations yet but some interesting suggestions come out of looking at the rich nations. Once again my rich assessment is based on GDP per capita. The wealth of individuals is more important, ultimately, than the absolute wealth of a large group of people.

So, what are the apparent conclusions from looking at industrial production? Most are intuitively obvious:
  • rich nations have high value add (they make products not raw materials)
  • tourism, textiles and chemicals are ubiquitous products among the rich nations
  • electronics and food processing also feature often
  • the availability of raw materials doesn't necessarily constrain value added production but it does make it more likely
  • above a certain level extra population doesn't equate to higher individual wealth
  • wealth has never been weightless
  • the highly valuable products change over time
  • New Zealand features well up the GDP per capita rankings but doesn't have enough high value activity to get to the top

The best indicators for wealth seem to be around the production of chemicals, electronics and processed food. Tourism and textiles feature large in high value economies but, at first blush, also seem to in relatively poor countries (except for the very poorest). Tourism occurs where there is some attraction and is highly valuable where it occurs. Textile technology seems to be very widespread and available. Processed food is obviously unlikely in places where they struggle just for staples and, like electronics and chemicals, is high technology.

Some economies, Japan is a good example, import large amounts of raw materials and add a great deal of value to the products they manufacture. However, there seem to be advantages to having the raw materials in the first place. For example, the greatest incidence of petrochemical industry occurs where nations have oil resources. This makes sense. There must be a cost advantage to manufacturing products from local resources. And, it makes sense that expertise will grow when there is a long history with a resource. For example, New Zealand's high technology dairy processing makes sense due to its long history in dairying. Some countries, such as Kuwait, seem to have used their natural resources to ensure that value adding industries were established (petroleum and petrochemicals) rather than just export raw resource.

In a first attempt to think about the role of resources I had a quick look at population densities compared to wealth per capita. The result showed that at low population densities countries were uniformly poor but at higher population densities there was no discernible pattern. Having a minimum amount of available labour is absolutely necessary to gain wealth but that amount doesn't seem to be very high. From that point on the role of population seems to have little to do with the wealth of a nation. High technology development obviously helps support larger populations but the high tech seems to be the prerequisite and not the population.

The most highly advanced economies are not the richest (in per capita terms). The US, Germany and Japan feature highly but each seem to be supporting higher populations than would seem optimal (from a purely wealth per capita perspective). Economies based on little production, and indeed mainly on services, can be quite rich if they are small. For example, Bermuda has among the richest of individuals with only tourism, international business and light manufacturing; and Guernsey ranks quite high on only tourism and banking. Generally, though, services do not support larger numbers. The very richest countries (the top three examples of which are Liechtenstein, Qatar and Luxembourg) are both high tech and small.

Wealth has never been weightless. Weightless in this context means using a relatively low environmental footprint (including, or perhaps, especially energy). Some countries (ie very small ones) can make a respectable living out of services. However, even these countries tend to embrace tourism, which isn't as energy or resource intensive as some but is still far from weightless. Most rich countries are energy intensive. Surprisingly this doesn't necessarily mean heavy industry, big steel things are a source of value but don't seem to be the highest. Highly energy intensive industries like food processing, chemicals and electronics are at the forefront of wealth. The concept of a high value weightless economy based on services seems attractive but history doesn't yet smile favourably on this. Software giants who have established dominant positions seem attractive but ultimately there is more money invested in the 'weightless' internet in PCs, servers, modems and routers.

Notwithstanding the above the high value products change. Textiles once made the fortunes of the Low Countries, English and French but now seems to be spread across the world. Steel and machinery are still highly valuable products but don't seem to be a key indicator of the highest wealth. Electronics and chemicals seem to be the golden products today but will they be tomorrow? Services don't seem to feature that highly yet but is their time still to come, or is the 'killer app' of tomorrow still a fledgling technology today? Many people are promoting the 'green' economy, mainly around energy; but energy has been a major industry for some time yet rarely features as a valuable product. Energy seems to be mainly an enabler. There isn't an inherent demand for energy, only for what it can do.

New Zealand features relatively high on the individual wealth stakes because we have some of the top value earners. Tourism and textiles are nothing special (in the context of being common throughout the world) but they seem to be perennially valuable. New Zealand even does some machinery manufacturing, which although relatively small is also valuable. Food will always be valuable, though, and New Zealand is at the forefront in food technology. Mainly in dairy but also in other high value add products, such as wine. In general New Zealand has a small mixture of relatively high technology industry but mainly 'old school' stuff. We're not at the forefront of high technology and we probably don't have the energy intensity to do it anyway. Nevertheless, we're going backwards in relative terms and it seems to be a population problem. Growing GDP through increased consumption and property values (through arbitrarily high demand) is a poor way to grow GDP.

In terms of increased value add options seem somewhat limited. Food processing is worth sticking with and probably always will be. As will tourism and some limited textile production and manufacturing. Maybe we will find ourselves at the forefront of a 'weightless' economy but history suggests otherwise (and in any event there isn't a relative advantage in a weightless economy almost by definition). As for a 'green' economy well this is ultimately an energy play and energy is an enabler not an objective in its own right. Either we have to dial back the clock a little bit (on both population and expectation) or get busy with real high tech, energy intensive manufacturing (with no guarantee of a payback).

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