Description and Comparison of the Economies of Ireland and New Zealand - Example

Description and Comparison of the Economies of Ireland and New Zealand Name: College: Course: College: Date: Introduction The New Zealand’s economy can be described as a market economy that greatly relies on international commerce, mainly with the European Union, China, Japan, Australia and the United States. It is strongly focused on primary industries such as agriculture and tourism with few high-tech and manufacturing sectors. The country is viewed as the most business friendly nation due to the free market reforms undertaken in the previous decades to eradicate barriers to investment. The Ireland’s economy on the other hand has changed in recent times, focusing on high-tech and services industries and reliant on industry, trade and investment. Ireland has a stronger, vibrant economy in relation to GDP per capita, trade balance and household savings compared to New Zealand. However, the present financial crisis is impacting the Irish monetary system relentlessly, compounding domestic monetary problems. Fundamental Differences Unlike New Zealand whose economy has few manufacturing and high-tech industries and focuses on primary products, Ireland is basically a modern, commerce dependent economy. Its Gross Domestic Product averaged six percent between 1995 and 2007, but the level of activities declined considerably in the year 2008 and Ireland’s economy entered into a slump or recession for the very first time in a period of ten years following the start of the global economic crisis and successive severe recession in the construction, building and property markets (Economics Department, 2007). Some of the once important sectors including farming, fisheries and agriculture have been dwarfed by services and industry sectors. Although the export segment, flooded by foreign multinationals is a major element of the economy, building and construction recently accelerated development of the economy together with increasing business investment and consumer spending. Pricing or property prices increased more quickly in Ireland than in New Zealand within the last ten years compared to any other industrialized economy. GDP also improved during growth years and overtook that of America in 2007. Trade Balance Trade balance is the net exports of products and services for a specific country. IN incorporates all exchanges between a country and other countries in the world involving a transfer of ownership of goods and general merchandise as well as services. If exports of a particular country surpass its imports, it is said to have a positive trade balance or a trade surplus. If imports surpass exports on the other hand, the country has a negative trade balance or a trade deficit. The volume of Irish exports increased drastically between 1995 and 2000 and surpassed European Union’s growth. The decline of the positive trade balance in the 2000s implied that the Irish imports were expanding due to improved demand for luxury services and items rather than from a fall in exports like in New Zealand economy. However, the current economic crisis and sluggish than anticipated development in the European Union area was predicted to negatively affect Irish exports. The trade balance was projected to become positive in the year 2004 as a result of improved world and EU economy. In 2001, Ireland’s imports were $48.3 billion while exports totaled $85.3 billion resulting in a positive trade balance of $37 billion. Positive Trade Balance Since the economy of New Zealand is dependent on livestock and agricultural goods whose prices are unstable, New Zealand trade balance differs from that of Ireland and swings from one year to another. In general, deficits overwhelmed trade surpluses in the 1960s. Consistent positive trade balance was recorded in 1960s when global reserves increased rapidly. Nevertheless, a poor performance in trade in 1974 which was largely attributed to increased crude oil imports resulted to negative trade balance. Since then, the economy has continuously recorded payment deficits. Reduction of Trade Deficit However, trade deficit for New Zealand economy narrowed in 2009 with a decrease in imports that was impacted by the declining domestic demand. The volume of exports also declined as global demand is still feeble and prices of raw materials, energy and commodities are still falling. Trade balance for New Zealand economy recorded a shortfall of one hundred and sixty three New Zealand dollars. The global demand which is becoming constant at the present stage was not sufficient to revitalize the country’s export segment as it is still enduring from the effects of the financial crisis. New Zealand’s major international client including Europe and the U.S are still showing feeble demand, while other countries such as china started to reveal expanding demand after its economy recovered slightly. This could be a positive sign for New Zealand’s exports. New Zealand’s imports declined to 6.4% in 2009. This was due to the falling demand for foreign goods and high rates of unemployment that reached six percent forcing families to reduce purchases and spending. Rate of Unemployment New Zealand economy enjoys low levels of unemployment than Ireland. In 2008, the rate of unemployment in New Zealand was at 3.8%, the lowest level ever reached since the present means of surveying started in the year 1986 and has remained low for numerous years. The low level of unemployment is attributed to the strong economy together with its enormous backlog of employment positions at every level. Presently, New Zealand economy has an unemployment rate of 4.20%.While Ireland’s economy has a slightly higher rates of unemployment which is thought to be 6.10% Reduced Levels of Unemployment Prior to the economic crisis of 1970s, actual level of unemployment in New Zealand was also low, probably even lower compared to the present levels. The proportion of the employed populace also expanded in recent times to sixty eight percent of all citizens, with full-time employment expanding slightly and part-time jobs declining in turn. The expansion in the number of working people is attributed to rising wages and improved cost of living which has forced many people to look for employment. However, the low level of unemployment also has disadvantages with most firms incapable of filling jobs. Overall the level of unemployment in New Zealand has been declining gradually and rose slightly only in 2009 (Smyth, 2009).. On the other hand, rates of unemployment in Ireland have continually risen, with the highest rate being recorded in 2009. The table below shows the unemployment rate in New Zealand’s economy since 2003. It is evident that the rates have stabilized in the last seven with slight declines and increases being recorded. New Zealand Unemployment Rate Year Unemployment rate Rank Percentage Change Date of Information 2003 5.30% 146 2002 est. 2004 4.70% 154 -11.32% 2003 est. 2005 4.20% 34 -10.64% 2004 est. 2006 3.70% 34 -11.90% 2005 est. 2007 3.80% 41 2.70% 2006 est. 2008 3.60% 40 -5.26% 2007 est. 2009 4.20% 53 16.67% 2008 est. Source: CIA World Factbook Unstable Unemployment Rates Unlike New Zealand’s economy, Ireland’s economy has failed to enjoy stable unemployment rates since 2003. Indeed, the rising unemployment rate has become a serious challenge to the government. A historic loss of nearly 120, 987 jobs in 2008 and unemployment numbers increasing at a faster rate in thirty years reveals that, unemployment and jobs are the major economic problems in 2009(Smyth, 2009). Every segment in the Irish economy has been recording a clear proof of the turmoil. The Ireland seasonally adjusted rates of unemployment was approximated at 6.7% between May and July in 2009 which was higher compared to 4.0% recorded over the same period in New Zealand (Smyth, 2009). This signified an improvement from the rate of approximately Four percent recorded in a similar period last year. Statistics reveals that 709,040 jobs were filled in the year 2009 representing a decrease of 25,450 recorded in the previous year (Smyth, 2009). The Table below shows the unemployment rates recorded in Ireland between 2003 and 2009. Year Unemployment rate Rank Percent Change Date of Information 2003 4.30 % 157   2002 est. 2004 4.70 % 152 9.30 % 2003 est. 2005 4.30 % 35 -8.51 % 2004 est. 2006 4.30 % 41 0.00 % 2005 est. 2007 4.30 % 52 0.00 % 2006 est. 2008 4.60 % 61 6.98 % 2007 est. 2009 6.10 % 74 32.61 % 2008 est. Source: CIA World Factbook Increasing rate of unemployment resulted due to declined business segment as firms are still attempting to reduce cots via increasing lay-offs. The levels of income also fell together with reducing wages that is impacting consumption badly. The condition in the Ireland economy is still depressing as the economy began to contract since the 2008, while it is expected that the national economy will not be capable of growing till the last quarter bearing in mind that the economy shrank by one percent at the beginning of 2009. Household Savings While household savings in Ireland’s economy have risen to remarkable levels, household savings to disposable income in New Zealand’s economy has remained negative since 1990s and has reduced rapidly since the year 2000. The nation’s persistent deficit in the current account is proof to the discrepancy between borrowings and savings. This has elicited allegations of the nation living not within its means. The New Zealand economy slowed in 2005 after several years of robust economic growth of approximately 4% annually and remained slow in the year 2006 (Braddock, 2006). But there exists little likelihood of spare capacity and the employment market has been resilient. However, a sequence of inter-connected imbalances has amassed in the country’s economy and has begun to uncoil very slowly. Increased household income expansion and continuing immigration flows have activated estate sales and exerted upward pressure on the prices of houses. Financial institutions have satisfied the resulting demand expansion for mortgages by borrowing abroad, a procedure that has been assisted by low risk aversion and sufficient global liquidity. While the national government has high rate of savings, the household saving is considerably negative and household credit has risen rapidly to approximately 160% of disposable income, a proportion that is bigger compared to Ireland (Braddock, 2006). The net outcome is a deficit in the current account that stood at nine percent of GDP by the end of 2006(McCarthy, 2009). Extraordinary Levels In sharp contrast, the Irish household savings have risen to extraordinary levels with savings estimated to be ten percent of disposable wealth, a rise of three percent from the figures recorded in 2007(McCarthy, 2009). In Ireland, the sales had been increasing to mid-2007, stabilizing for several moths before falling beginning October 2007. The value of retail sales declined in the last quarter of 2007 to 10.7% (McCarthy, 2009). Regardless of the trade diversion, consumer spending should be declining faster compared to household disposable income. The outcome is that the rates of household savings increased rapidly in the last quarter of 2008. Consequently the marginal inclination to spend in the Ireland economy should be higher compared to that of New Zealand. Wealth Control Unlike New Zealand consumers who are living beyond their means, Irish consumers are controlling their wealth through unparalleled periods and are responding by expanding their proportion of savings. Watchfulness is the major word though, as households should be focusing beyond the short-term and strategies their investment in the milieu of environment dominated by low rates of interest. Rates of interest have hit the lowest in a period of three hundred years and are probable to stay comparatively low for a prolonged period. For numerous households, improved savings reflect uncertainty and these consumers should sustain savings in a secure and liquid manner. Reduced Spending Ireland’s households are also reducing spending on more modest expenses. In other words, Irish consumers are buying less and saving more. They are purchasing cheaper goods and switching shopping places. While the declines in consumer spending of over eight percent shows that household have improved their defensive savings, some goods are continually demanded even during the current economic recession. According to McCarthy (2009), products which have not been affected by economic recession include basic necessities such as butter, bread, cream, tea and milk. Other products particularly toiletry products including toothbrushes, deodorants, air fresheners, and shower gels have proven to be overly sensitive to the economic recession with retail sales falling significantly. Private Goods Consumers are turning in large numbers to private products which are typically 33% cheaper compared to branded goods. This year, the proportion of private branded products reached an all time in comparison to the proportion that consumer spends during the month of September. The expansion in sales of private goods is concentrated in frozen products and general vegetables, with eighty percent of most supermarket buyers indicating that they purchase private goods. The corresponding amount of consumer debt has continually risen, nonetheless, and increased to $133,000 from $128,000 in 2007(Aaron, 2008). This amalgamation of rising liabilities and falling liabilities has reduced the net value of Irish consumers, which has declined by nearly thirty percent since 2006. Households have reacted by increasing their rates of saving in the last six months, which is estimated to be ten percent of disposable income in the beginning of 2009. Hours Worked Countries restricting long labor hours are also countries where levels of productivity are higher compared to the European Union average (Hallerberg, 2004). Protecting employees from extreme long working hours may propel productivity. It circumvents unproductive firms from being sustained at the expense of employee’s time, instead coercing them to outlay in a more useful workplace organization. Ireland economy has usual working hours to some extent over forty which is below the New Zealand practice. The sum of labor force hours worked every week in Ireland in 2006 was approximated at twenty six million working hours signifying no considerable change throughout the year. The total number of workforce hours per week has risen by 11.8% between 2001 and 2006 (Aaron, 2008). New Zealand has social policies that restrict the number of hours worked. Employees are required to work between thirty five and forty five hours on a daily basis. A closer evaluation of the available statistics reveals that New Zealand labor-force works for fewer hours compared to the Irish. The graph below indicates the number of hours per week from 1989 to 1999. Source: http://keithrankin.com/chart/NZgraphs.html The number of hours in New Zealand economy varied periodically in the previous with the highest number of ordinary hours being recorded in 1996 and falling thereafter. Similarly, the total worked has also continued to decline considerably even in 2001 when the total number of workforce hours per week recorded in Ireland has risen by 11.8% between 2001 and 2006 Gross Domestic Product While New Zealand economy ranks poorly in the global front, Ireland possesses a globalized, vibrant economy, with Gross Domestic Product per capita second to Luxembourg's in the European Union. The mid 1990s saw more than a few years of double-digit growth in GDP propelled by a progressive work policy that strengthened and intensified foreign direct exports and investment. GDP growth declined due to the September 11 attacks and the current global economic recession but has averaged more or less 5% yearly since the year 2004. The current recession greatly affected New Zealand’s economy due to the reduced demand for primary products resulting into a decline in the GDP per capita. This has not been the case for Irish economy which has continued to record significant GDP growth since 2003. The table below shows GDP per capita for Irish economy from 2003 to 2007 Year GDP-per capita Percentage Change 2003 $34,377 2004 36,221 5.36% 2005 $38,337 5.84% 2006 $40,664 6.07% 2007 43,334 6.57% Source: http://www.indexmundi.com/ireland/gdp_per_capita_%28ppp%29.html New Zealand Traditionally, New Zealand’s economy relied on primary products such as meat and dairy products. These primary products were in high demand and the economy enjoyed a rapid real GDP growth. However, the export prices for these exports fell and the country lost its privileged trading with the larger European Union Community. Consequently, GDP per capita continued to decline. New Zealand economy declined for the first time in 2006. Surveys on the New Zealand economy revealed existence of negative trade balances, worsening terms of commerce and a probable recession. This has impacted the real GDP per capita which has continued to decline since 2006. New Zealand now ranks poorly in terms of GDP-per capita than Ireland. Year GDP –per capita Rank Percentage Change 2003 $20,200 36 2004 $21,600 34 6.93% 2005 $23,200 39 7.41% 2006 $25,300 36 9.05% 2007 $26,000 39 2.77% Source: http://www.indexmundi.com/new-zealand/gdp_per_capita_%28ppp%29.html The New Zealand government has implemented key economic restructuring shifting from an agrarian dependent economy towards a free market industrialized economy that is capable of competing globally. This restructuring has enhanced real income, deepened and broadened the technological capacities of different sectors and helped stem inflationary pressures. New Zealand’s inflation is amongst the lowest in the world. Irish economy compares poorly with New Zealand economy in terms of inflation. Due to continued high growth, Irish economy has suffered from severe inflationary pressures especially in the capital cities where almost thirty percent of Ireland’s populace resides. Although the price of commodities has fallen due to the economic crisis, inflation remains a major obstacle to the economy. Conclusion While Ireland boasts a globalized, vibrant economy due to its ability to sustain a positive trade balance, low levels of unemployment, and a high GDP per capita, New Zealand economy remains a matter of concern due to high unemployment rates, enormous trade deficits and consumers who are living beyond their means. Although the Irish economy has been impacted, it remains healthy due to prudent economic policies and wealth control through unparalleled periods. In the year 2008 the Irish government moved to recapitalize the financial system, financial institutions and banks, guarantee bank deposits and create venture capital investment in reaction to the economic crisis. However, various factors continue to affect both economies. These include the capacity to attract foreign direct investment, rising energy and labor costs when compared to other countries and shortages of skilled labor. Indeed it is important more than ever before for the governments to enforce numerous economic initiatives targeted to stem wage and price inflations. In addition, there is need to invest in facilities and infrastructure, improve workforce expertise and encourage foreign direct investment. References Aaron, B. (2008) New Zealand’s productivity performance and prospects, Reserve Bank of New Zealand.70 (1): 13-18 Braddock, J. (2006). Job cuts begin in New Zealand begin as economy shrinks. Retrieved October 12, 2009 from http://www.worldproutassembly.org/archives/2006/04/job_cuts_begin.html Hallerberg, M. (2004). Domestic Budgets in a United Europe: Fiscal Governance from the End of Bretton Woods to Emu. Ithaca: Cornell University Press. Economics Department. (2007). Economic survey of New Zealand 2007: Raising New Zealand's living standards. Retrieved October 12, 2009 from http://www.oecd.org/infobycountry/0,3380,en_2649_337.html McCarthy, C. (2009). Household savings rate rising sharply? Retrieved October 12, 2009 from http://www.irisheconomy.ie/index.php/2009/01/25/household-savings-rate-rising-sharply/ Rankin, K. (2003). Some charts of the New Zealand economy. Retrieved October 12, 2009 from http://keithrankin.com/chart/NZgraphs.html Smyth, R. (2009). Unemployment could reach 450,000 across island by end 2009. Retrieved October 12, 2009 from http://www.anphoblacht.com/news/detail/37017 Read More