Thank you for the invitation to speak to you today.

It is now nineteen months since the Labour-Alliance Government came into office. Much has happened in that time. We came to office concerned about the path New Zealand was on and determined to change it.

To that end Labour made a number of key election commitments covering economic and social policy. We intended to deliver on those commitments and we have. We sensed that the public was very cynical about unaccountable government. Confidence in the political process could only begin to be restored if governments began keeping their word.

The first ten months of our term of office were very much focused on up front delivery of our core commitments. We raised the level of New Zealand Superannuation; restored income-related state house rentals; stopped interest accruing on student loans during the period of study; provided funding for some 27,000 extra operations a year in the public system; targeted property crime and succeeded in reducing the burglary rate to its lowest in eighteen years; and began to develop industry and business growth policies. And, as foreshadowed, change was made to industrial relations law, accident compensation, and the top tax rate.

With those key changes made, our attention focused on the longer term changes needed for New Zealand to succeed as a first world nation in the 21st century. There is widespread apprehension that New Zealand is on a long term downward drift relative to other countries. Arresting that drift requires decisive action, not only from government, but from across the whole community.

A stocktake of New Zealand today, set out in the recently published Social Report 2001, reveals a somewhat mixed picture. In terms of real GDP per capita, we clearly have slipped down the rankings. In 1970 we ranked ninth in the OECD, in 1986 eighteenth, and in 1999 twentieth. Between 1986 and 1999, real GDP per capita grew by 9.5 per cent, compared with an OECD average of 29 per cent. It is worth noting that in that period New Zealand underwent profound economic and social change. What that change did not produce was an improvement in living standards.

On many other OECD rankings, New Zealand holds up moderately well. For example,

- despite concerns about illiteracy, our literacy levels appear to measure relatively well by international standards

- we have the sixth highest level of participation in early childhood education in the OECD

- we are ranked eleventh out of 28 in the proportion of the population aged 25-64 years having at least an upper secondary educational qualification, and fourteenth in the proportion who have completed tertiary qualifications to Bachelor’s degree level or higher

- in 1999 and 2000 we were well in the top half for employment rates, and

- in 2000 we ranked ninth in the OECD in the proportion of our population with access to the Internet.

All these factors suggest that we have the conditions for an economic takeoff if we concentrate our energy on it. We are better educated, more highly employed, and better connected to new technology than many of our peers.

Where we are not keeping up is in social conditions affecting our young people.

- our youth suicide rate is the highest in the OECD

- our teenage birth rates are the third highest, and

- our childhood abuse mortality rate is relatively high by international standards.

It is a truism that the future of our country lies with our children and young people. As a nation, we need to give some very serious thought to how we can give them better support. I am hopeful that the youth development strategy being worked on by the Ministry of Youth Affairs may provide some answers, and that through our broader social policies aimed at supporting families we will create a society which is safer and healthier for children. In this context I note and applaud the initiative of the Auckland Rotary Club to work with Plunket and the Auckland District Health Board to provide books in homes for under-privileged families and to encourage parents to read to their children.

Our government is ambitious for New Zealand. We want our country back in the top half of the OECD across the economic and social indicators. To achieve that, New Zealand needs a more consistent economic performance at higher rates of growth than it has experienced for a long time.

It would be easy to be complacent about our current economic performance.

- New Zealand is managing modest economic growth despite the sluggish economies of our major trading partners.

- Our unemployment rate at 5.4 per cent is at its lowest level in thirteen years, and job advertisements are running at a very high level.

- Our current account deficit is falling rapidly, driven down by strong export and tourism receipts. Indeed the country has just recorded its first quarterly current account surplus in seven years.

- Despite the pessimism generated by reports of a slowing world economy, business and consumer confidence remains positive.

Yet thinking people are well aware that our economy is rather too dependent on factors well beyond our national control. Over the past eighteen months or so we have had a most fortuitous combination of good weather boosting farm production, high commodity prices for that production, and an excessively competitive dollar. All that can change quickly.

That is why the government is stressing the need for economic transformation. We know that the nations which are prospering today are those which have the capacity to create new knowledge and to apply it to new and existing industries. We know New Zealand has the capacity to be one of those nations.

That means more emphasis than ever before being placed on education and skills training; on science and research and development, and on smart strategies to support business and industry growth and to attract greenfields foreign direct investment.

In the 1980s and 1990s it was widely assumed in government and business circles that the state should play a hands off role in economic development. That was perhaps an understandable reaction to the decades of excessive hands on attention the economy had received from the state in the past. In the new order, governments implemented far reaching decisions to deregulate, privatise, and cut taxes, but then sat on their laurels expecting the new level playing field created to be sufficient in itself to stimulate economic growth.

The results were disappointing. The hands off stance became indifference, even as the effects of globalisation saw our companies relocate their head offices overseas, our share of foreign direct investment fall, and our skilled workers following the opportunities off shore.

We came to office, determined to avoid the past excesses of hands off and hands on, and believing that there was a new role for the state to be developed in partnership with others.

We believe that in the 21st century the state must be a leader, a facilitator, a co-ordinator, a broker, and a partner, and that it has a substantial role as a funder and a provider for infrastructure and the social investments which must go hand in hand with economic development.

In our journey towards the knowledge economy and society, we have taken the following steps:

- We have invested more in education, with a particular emphasis on creating more opportunity for children in less advantaged neighbourhoods to boost their achievement.

- For the first time this year, equity funding is being introduced to early childhood education to make up for educational disadvantage in homes.

- There are new digital opportunity initiatives in low decile schools to ensure that their children and young people keep up with technological change.

- Many homework centres, known as study support centres, are being funded in low decile schools

- The particularly high suspension rate and the low achievement rate of Maori students have been targeted for improvement.

- In tertiary education, the more generous conditions for student loans and the fees freeze are aimed at making tertiary education more affordable.

- We are also working through significant changes to the funding and structure of tertiary education. The aim is to improve the quality, encourage collaboration and specialisation, reduce fragmentation in the sector, and discourage destructive competition between institutions.

- In this year’s budget, provision has been made for new Centres of Research Excellence in tertiary institutions. Over the next three years, $26 million will go into operating expenditure and $20 million into capital funding for these centres.

- Last year’s Budget saw a substantial lift in government funding for science and research, a good portion of which is available directly to the private sector. Business is also benefiting from improved tax treatment of research and development expenditure.

- Like other western countries, we are keen to see more of our research commercialised in New Zealand so that it generates wealth for this country.

- support the development of business incubators, many attached to our tertiary institutions. The incubators provide a base for new entrepreneurs to develop leading edge products and services.

- While the market for venture capital has developed quickly, there has been a gap in the provision of seed and start up capital. The government has moved to close that gap by providing $100 million capital to be deployed in partnership with the private sector. The capital will be invested in a series of drop-down funds in which the government anticipates being a minority investor. Our expectation is that more new knowledge- and technology-based companies will get access to capital.

- The government has also developed ambitious e-commerce and e-government strategies which will see New Zealand gain advantage from being a world leader in electronic technologies.

All these initiatives are aimed at putting in place the building blocks for the new economy, driven by the skills and talents of New Zealanders, and by research, technology, innovation, and entrepreneurship. But there is still more to do.

New Zealand’s challenge is to build globally competitive clusters in target sectors of the economy. There can be no doubt that globalisation has increased the importance of industry scale, and that forces us to specialise.

In this new world high value production gravitates to high innovation centres. As a small developed nation, we can aspire to develop critical mass in innovation clusters, and through specialisation create a high wage and high skill economy.

Work is currently going on to identify target sectors where we can develop world class skills and capabilities. Some of those sectors will need foreign investment for development, and for each of those sectors there must be sophisticated skills strategies, both to stimulate local supply and to import skills where local supply cannot quickly fill the demand.

Identification of the target sectors for growth will therefore inform New Zealand’s foreign direct investment strategy and our education and skills strategies.

Independent of government, Competitive Auckland has developed a similar strategy for growth of the Auckland economy, based around targeting key sectors and building a strong regional skills base and infrastructure to sustain them. Other regions are also actively planning their economic development strategies. Many have been spurred on by the government’s Regional Partnerships Programme which has provided funding for regional economic strategy development.

Competitive Auckland has identified six focus industries as having high growth potential: tourism, food and beverage manufacturing, marine, information and communications technology, biotechnology, and education. All of these industries would be likely to appear on a national target list, along with our existing strengths in the primary industries. The main challenge in the primary sector is adding value to its production and diminishing our reliance on commodity trade.

Film and television production, environmental technologies, professional services, and pharmaceuticals may also be areas of high value potential.

While for New Zealand as a whole, smart strategies and actions are needed to push economic transformation along, I suggest that in Auckland the need is particularly urgent. Auckland’s largely domestically-oriented service economy has missed out on the exporting boom which has lately fuelled growth in the regions. Auckland needs to build a high value export base to fill the gap left by the demise of protected manufacturing which created wealth here in the past.

Already the government has been active on a number of skills and industry initiatives.

- A new Modern Apprenticeship Programme has begun and is very successful in boosting the profile of work based training. Funding for industry training overall has increased substantially

- An Adult Literacy Strategy has been launched with funding to ensure that workers have the basic literacy skills essential for industry and for life in modern society

- The Ministry for Economic Development and Industry New Zealand are already working on industry strategies for key industries. The wood processing industry has been an early priority with its huge needs for capital investment and an appropriately skilled workforce

- The government brought together the public and private sectors and local government to develop a comprehensive strategy for the development of the tourism industry. The draft strategy has been released for consultation with the sector

- We have worked closely with the dairy industry on its plans to develop a globally competitive single company to take the industry forward, and were pleased to see dairy farmers give the plan their backing.

How to advance the knowledge economy and society is the central theme of the knowledge wave conference being hosted by the University of Auckland and the government in the first week of August. It brings together overseas speakers and New Zealand innovators and analysts with conference participants to stimulate debate and produce proposals for action so that New Zealand too can ride the knowledge wave. It seeks to create a shared vision about what New Zealand can be.

Social inclusion and social cohesion are also themes for the conference, and they are imperatives for the government. New Zealand cannot hoist itself back into the top half of the league of developed nations if a significant minority of our people are left behind - poorly educated and housed, unhealthy, poor, and only in transient employment. Our aim must be for the rising tide to lift all boats. That is why economic and social policy must be integrated and why the social investments we make in public health, education, housing, and superannuation are so important.

The government is ambitious for New Zealand and it is also optimistic about our country’s future. We believe that New Zealanders do want to turn the tide on our national economic prospects and that they will take advantage of opportunities created for them to contribute

Catching the knowledge wave requires all of us to get on board: central and local government, business, educators, scientists and researchers, communities, and individuals. Our shared vision for a more prosperous and inclusive future must see us committing to being innovative, creative, enterprising, wealth generating, collaborative, caring, and achieving globally as well. A nation committed to those values and objectives will succeed - and I know New Zealand can succeed in the 21st century.

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