A Buy Kiwi Made program is currently under development – supplementing the long-standing Buy NZ campaign. What, if any, is the economic rationale behind such programs or policy initiatives? A quick diversion, if you’ll permit me, before I return to this question.

Competition in sporting arenas shares a similar ideal to competition in the business market place in the desirability for a level playing field. Underlying most sports matches and competitions is the principle of fairness. All competitors begin from the same position – whether that is a starting score-line of 0-0 or a starting line itself. The teams play to the same rules that are known to all competitors beforehand. The rules are enforced, arguably even-handedly, by neutral arbiters (whether they be referees, umpires, judges or linespersons). And there are ubiquitous TV officials assessing even the tiniest transgressions to ensure the rules are evenly applied. 

Then there is the playing field itself. Evenly prepared, any consideration that some portion of the field may be advantageous to one side is negated by the notion of half time. Coaches and ancillary staff come onto the field and turn their teams around (metaphorically, if not physically) to ensure any perceived advantages of sections of the playing field are enjoyed evenly by both sides over the course of the competition.

But is the playing field really level, I ask? My question arises from the notion of “home advantage”. Sports teams always strive for “home advantage”. There are the usual claims by coaches and captains that all opposition teams will always provide a stern test. But, without exception, all competitors and teams prefer to play at home. Without too much thought, reasons why are easy to list – crowd support being one, familiarity with ground and climatic conditions being another and, perhaps, a fatigue factor impacting on travelling teams. Then, of course, there are food poisoning outbreaks which, co-incidentally, appear to hit visiting teams far more often than home teams.

The principle of a level playing field has been translated across to the business and economic sphere. In particular, it forms the backbone of much policy advice. Claims that the market place, or playing field, is not level come from many quarters, as do other claims of competitors getting an unfair advantage. Such claims to unfair advantages are sometimes advanced as justification for policy changes, intervention or, even, a re-write of the rules of the game. No doubt, some of these claims are justified, some probably not. Sounds similar to post-match debates surrounding the neutrality of referees, doesn’t it?

Having taken the principles of fairness and level playing fields from the sporting arena, perhaps economic policy advisors should also look at the concept of home advantage. In particular, export promotion continues to be accepted as a necessary focus for New Zealand policy and business enterprise alike. But, perhaps, we should also look at exploiting home advantage. The parallel is with selling one’s wares abroad as opposed to trading in one’s home or domestic market. The context is the current account imbalance, which continues to be New Zealand’s Achilles heel.

A deficit of close to 10% of GDP suggests to me that we shouldn’t ignore any options to improve our trading performance. It seems common sense that a foreign exchange dollar saved is equivalent to a foreign exchange dollar earned. Earning foreign exchange dollars is the result of successful exporting activities. In economists’ jargon, saving foreign exchange results from efficient import substitution activities – that is, successfully competing against imports (and exploiting home advantage if necessary). My common sense, not to mention my economics training, suggests the impacts of the two types of activities on the current account trade deficit and, so, on New Zealand’s well-being should be similar.

Using an economic model I set out to test this idea by undertaking some experiments. The model I used breaks down the New Zealand economy into 49 different industries and captures the relationships between them, exports, imports, employment and prices. This model has been used for various other economic and policy investigations over the past decade, and is viewed as being in line sound conventional economic theory.

In short, the results from the model experiments back up the common sense. For example, a 1% across-the-board improvement in the domestic market share of New Zealand firms (and a consequent reduction in the market share of imported items) results in about a 1.2% addition to real GDP and a $360m improvement in the current account balance.

A similar result arises when there is a 2.1% across-the-board increase in NZ exporting activities. A range of related experiments confirm that export encouragement and import substitution have similar outcomes at the macro level. But there are differences depending on the economic climate. Thus, when the economic climate is one where there is difficulty in finding labour (as at present), both options provide relatively little increase in overall employment, but continue to show benefits in terms of higher consumption, income and a current account improvement.

Therefore, I would argue that there appears no reason for one policy option to be favoured over the other. That is, if assisting and promoting New Zealand products and services in overseas markets is widely accepted, we should be doing the same for New Zealand products and services in the New Zealand market? So, where’s the catch?

The catch, if you call it that, lies in the need for both sets of activities to be efficient and competitive. This is implicit in the computer simulations of the two policy options. This ‘assumption’, underpins the profit-maximising, cost-minimising, price competitive foundations of the economic model.

In other words, neither policy option should be used to encourage or support economic or business activities that are inefficient or uncompetitive. Rather, they should be used to encourage and support export and/or import substitution activities that are efficient and able to foot-it with competitors in the global market place. In other words, where NZ firms are able to successfully compete in the global market place, then policy should be used to either reinforce the home advantage (for those playing at home) or to counter the advantages of home competitors (for those playing away).

I would argue, therefore, that policy interventions like the proposed Buy Kiwi Made should be mirror images of our export promotion efforts. Promoting our products in overseas markets helps focus the minds of purchasers and consumers on the merits of NZ goods and services. This is done with recourse to appropriate imagery and metaphors for NZ – e.g. clean, green, Lord of the Rings, competitive, All Blacks, quality, excellence and value. Similarly, we should have few qualms in selling New Zealand products to domestic purchasers using the same vehicles i.e. bringing the forefront of the New Zealand consumer’s mind that quality, excellence and value go hand-in-hand with goods and services that carry the New Zealand label.

Of course, the on-going challenge is to ensure that goods and services that carry the New Zealand label do, indeed, live up to the standards of quality, excellence and value. But, that discussion will have to await another article (or two!).