This is New Zealand.
a picturesque nation whose economy looks to exclusively rely on throwing their tourists off cliffs in increasingly imaginative ways and being left off of world maps.
But Australia’s little brother is so much more than that and it might truly be the best-managed economy in the world.
Everything from The World Bank's Ease of Doing Business Index, from multiple quality of life assessments, put New Zealand in the top spot. Move aside, Norway.
What’s more, is that it has achieved this remarkable prosperity – despite not having a huge supply of natural resources, or acting as some tax haven for global businesses like so many other apparent economic miracles we have explored before.
or acting as some tax haven for global businesses like so many other apparent economic miracles we have explored before.
No. New Zealand has got to where it is today by carefully managing a market economy and providing
a safe, stable, and confidence-inspiring place to start a family, a business, and a career.
Of course, there are still some problems and we will certainly get to them.
But, after exploring The Economy of Argentina last week, ...
it’s now time to get out your pen and paper and take notes on how to actually run an economy.
And, to do this – as always – we are going to break the economy into some important categories.
What are the primary drivers of New Zealand's economic prosperity?
How has the nation been able to accommodate these [primary drivers] while other nations fail to do so?
And, what are the challenges the nation might face to keep this success going?
Once that's all done, we can put New Zealand on the Economics Explained National Leaderboard.
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The first piece of context that's really important to understand when looking at the economic success story that is New Zealand
is that its GDP – and subsequent GDP Per Capita – is relatively modest.
It's certainly is much higher than any developing country, of course. But amongst its advanced peers, it's nothing remarkable ...
with nominal figures falling somewhere ahead of Italy, and behind Japan.
And certainly well behind their neighbors in Australia.
Now, you might just write this off to mean that maybe New Zealand is not so remarkable after all.
But in many ways, this is the first big lesson from the nation.
GDP figures are useful tools. And GDP Per Capita figures – even more so.
But they can't tell us everything.
It's purely anecdotal, but think of two different people.
One who has a high-flying corporate executive job bringing-in six figures. And the other who is a modest blue-collar worker bringing in half of that.
The "corporate type" blows all of their money and then some going into debt to spend-up big on flashy dinners, and clothes, and car payments.
Whereas the "regular worker" lives comfortably – but not excessively –and makes sure to regularly invest in their future.
Which of these two would you consider more an economic success?
Of course, national economies do work very differently from personal finances in a lot of ways.
But, New Zealand really is the equivalent of "The Millionaire Next Door".
They have fantastic discipline to ensure a comfortable existence well into the future ...
despite not necessarily having the biggest paycheck on the block.
Nowhere is this more apparent than in Agriculture.
You see, farming as a primary industry is normally we associate with underdeveloped or developing countries.
"Real advanced economies" move into manufacturing and services, right?
Now, we think this because it's mostly true.
100 years ago, more than a quarter of Americans and almost half of the workforce were farmers.
These days, farmers make less than 1.3% of the population, as people have naturally moved into more specialized roles ...
that've been made available in a more advanced economy.
However, in New Zealand, Agriculture is actually growing as a share of national output.
And that's because of a big decision that was made over 40 years ago.
In the 1980s, farming in New Zealand was very similar to farming in the U.S.A., or the European Union.
Farmers could be sure that for as long as they grew or raised pre-defined stalk in pre-defined ways ...
they were guaranteed a pre-defined price from the government.
Now, these systems have their merit. They offer food security to a nation, for starters.
While also being a fail-safe for farmers who in many ways are at nature's mercy for their livelihood.
But, of course, these systems have major drawbacks.
Most prominently of which is that [subsidies] all but eliminates any incentive to innovate.
Why try growing different crops in a new and innovative way, when it means giving up the security of a guaranteed government paycheck?
This is part of the reason why almost half of the agricultural output in the U.S.A is made up of corn and soybeans ...
which are not particularly high-value crops, especially in a high-income nation like the U.S.
Now, New Zealand's solution to this problem was to basically rip this safety-net out – almost overnight.
This made a lot of farmers very angry, but ultimately forced them to move into new [and] potentially more profitable crops, ...
or, develop techniques that were more efficient.
Some of the big changes that were a result of this, were things like the massive reduction in the use of fertilizer ...
which up until that point, had been subsidized by the government and widely overused ...
because, well, ...
... it was subsidized by the government.
It also forced farmers into creating their own branding.
The dairy industry is huge in New Zealand, on account of its very accommodating climate and farmland.
But, before these changes, farmers were selling milk as a generic commodity.
Whereas today, milk from New Zealand demands a much higher price as a premium artisanal product – or, even turned into high value-added items, like baby formula sold all around the world.
A dollar's worth of milk turned into such a formula can easily sell for over thirty dollars internationally.
Similar types of innovations and market developments have happened throughout the entire industry ...
to create one of the most diverse and profitable agricultural sectors in the world.
Now, of course, agriculture is just one part – albeit, a very important part – of what makes New Zealand's economy tick.
But, it typifies their secret to success.
They properly understand where to draw the lines between what the free market does best, and what the government does best.
Value-adding industries? That's all for the free market.
But, public services? Well, that's where the government steps in.
Things like workers' protections and welfare are very strong in New Zealand.
They have mandated paid-time-off for all workers, maternity leave, as well as ...
heavy enforcement of employee regulations which offer a level of security to employees who can't just be fired for [any] reason without significant payouts.
The government also spends a lot to support green energy initiatives, as well as regular infrastructures like ports, highways, public parks, rail networks, and airports.
It also does this all while taxing its residents more than it spends.
Meaning, [the government] runs a consistent budget surplus and are constantly their national debt.
Unlike, most other developed nations.
Of course, a quick side note is that the government budget for 2020 and 2021 will not be in surplus because of the fallout from the [redacted],
and the required stimulus that came along with it – but that's fair enough.
In the long-run though, this consistent government spending while maintaining a surplus means that taxation rates need to be pretty high.
And indeed, they are.
The corporate tax rate in New Zealand is a flat 28%
which, is, pretty high.
Putting it above the U.S.'s rate of 21%, and definitely above Singapore's rate of 17%.
But despite this, according to The World Bank, this little isolated island full of sheep is apparently a better place to run a business than all of these other more traditional go-to destinations.
But why?
What is it that makes New Zealand the easiest place in the world to do business?
Businesses are ultimately profit-driven entities.
The bottom line of their income statements that list Net Profit After Tax (NPAT) is what they live for.
A higher tax rate means that this number will be lower.
Which makes investors, very sad.
So, naturally, you would expect a handful of countries that have 0% corporate tax rates to be far more compelling options.
But, of course, doing business is so much more than jumping through tax loopholes ...
despite what Amazon might have you believe.
To show you what we mean by this, we will compare New Zealand to the previous top destination to do business which is Singapore.
Now, Singapore is still a great place to do business.
The second-best in the world. But ...
it does present some difficulties that are just not present in New Zealand.
The Ease of Doing Business Index, is, well, an index. And it's measured on the following criteria.
Where the country is ranked from 0 to 100 for each category – and then an average score is taken of all of these factors to determine the rankings.
Might sound familiar to a few of you.
Now, you will see here that taxes are a component of this final outcome, and in this particular category, New Zealand doesn't score that well ...
compared to its more traditional rivals.
But everywhere else, it excels.
Particularly when it comes to protecting the parties involved in the business.
It's all well and good to not pay corporate taxes. But if you can't get a business loan, or enforce contracts, or even access electricity ...
you're not going to be generating much profit to not pay tax on.
All of these systems are incredibly easy in New Zealand, as they have adopted a legal system from their British ancestors ...
that puts a heavy emphasis on property ownership, dispute resolution, and dealing with international entities.
Almost in stark contrast to a nation like Argentina, which we explored last week, and found has consistently failed in these areas to the detriment of their economy.
What's more, is that New Zealand has taken these systems with a consistent track record, and has stripped-out a lot of the needless bureaucracy out of them ...
to not only give companies confidence in conducting their business, but swift, efficient, and above all – cost-effective – outlets for resolution, when it does not.
These protections also work on the flip-side.
In the U.S.A, for example, there are hundreds of examples of large companies taking smaller corporations to court ...
not in order to solve a conflict, but to simply bury them in legal-fees until they either give up or go bankrupt.
Of course, this phenomenon is by no means specific to the U.S.
New Zealand on the other hand, has developed a system of accountability in its legal systems that even the playing field between fledgling businesses in their infancy ...
and large institutions, that may or may not have a fair case against them.
The ease of doing business in New Zealand, also goes beyond just legal frameworks.
In a place like Singapore, often space is unbelievably expensive.
Transportation is good, but similarly unaffordable.
And things like building permits are almost impossible to obtain.
If your business involves anything that requires beyond generic office space with desks, chairs, and computers, then good luck getting started in Singapore.
What's more, is that New Zealand is incredibly safe. And by most measures: the least corrupt country in the world.
Thanks partly due to their robust legal system.
This means that business risks like losing fair contracts or having working capital destroyed are just less of a concern when doing business in New Zealand.
So, that really is their secret. And the results speak for themselves.
In the U.S., about 7% of workers are self-employed for their primary income.
In New Zealand, that figure is 18%.
18% of all workers in business for themselves also tends to mean that there are more small businesses ...
competing in a more active market, filled with more entrepreneurs ...
that are not doing the bare minimum maintain their wage, but rather, doing the most they can ...
to make their business successful.
On a macro-economic level, this results in a country that is making the absolute most of the land, labor, and capital ...
[that] it has to work with.
But, of course, it would be unfair to write all of this down as a flawless economy ...
Because, indeed, they are in many ways ... suffering from their own success.
The world-class stability and institutional reliability of the nation has attracted a lot of immigration.
This immigration has, for the most part, been supported by the government ...
which is desperately trying to maintain a skilled population.
Because of this, the government has, pretty unashamedly, rolled-out a two-tier immigration system ...
[which] makes it incredibly easy for wealthy, skilled, English-speaking workers – or financially self-sufficient people...
to enter the nation, while making it very hard for poorer, non-English speakers to do so.
This may sound may very "un-politically correct" ...
but, in reality, it's what almost every other advanced economy does.
This has, of course, resulted in a lot of new skilled workers moving over to set up life in the new nation.
But, this influx of human capital, has made its relatively small cities extremely expensive.
In recent years, property prices in Auckland have been growing faster than prices in cities like San Francisco, Sydney, London, and New York.
While property prices in New Zealand are, of course, still lower in absolute terms, so too are their salaries.
Meaning, a lot of New Zealanders have been priced out of their own homes.
To further add to this, the nation has attracted a lot of investment from international business leaders ...
who have been able to obtain dual-citizenship in the nation,
and build massive estates as a form of wealth preservation in a country that is famous for how seriously they take property ownership.
Even more curious, is that those same global businessmen have increasingly been setting up massive self-sufficient properties ...
in the nation, complete with world-class bunkers to ride-out all matters of global turmoil in this isolated corner of the world.
To the point where doomsday preparation has become a multi-million dollar industry in cities like
Auckland and Wellington.
So, you know, make of that what you will.
Now, this has, of course, caused a lof social issues. But the government has continued to allow it ...
because, at the same rate, New Zealand is bringing in new skilled individuals, it is losing them; primarily to Australia.
Australia and New Zealand really are like brothers. We share the same monarch, the same language, the same ...
love of sports, and overall ... a nearly identical culture.
Because of this, there are laws in place that allow both Australians and New Zealanders to live and work freely between the two countries as if it was their home nation.
But New Zealanders are increasingly moving to Australia given the opportunity for higher incomes.
This back-and-forth free travel zone sees New Zealand losing a net 27,000 people a year to Australia.
Primarily: young professionals.
As good as doing business for yourself is, it's not for everyone.
And for all of their success, they still can't compete on salaries with their much larger brother (Australia) which has been fueled by the largest natural resource boom in history.
Now, from here on, the rankings on the Economics Explained National leaderboard
will be done over on our second channel ...
(link in the description! :D)
Spoiler alert: New Zealand will do well.
And that's because they have played the long-game of building a solid foundation upon which genuine value-adding businesses...
can be conducted. And this investment into their future will no doubt continue to pay off for generations to come.
Now, applying this same timeless lesson to your own personal finances is made easy ... with Acorns.
Acorns.com/EE
Thx for watching guys, bye!