Michael Cullen's Address to Argentine Business Association

Buenos Aires, Argentina

Argentina and New Zealand share important common interests. We have a long track record of excellent cooperation in key areas such as the Cairns Group, the United Nations, and Antarctica. However, for much of our history the fact is that we have both been oriented elsewhere: New Zealand towards Australia, Europe and Asia; and Argentina towards its neighbours in Latin America, Europe and North America. These orientations have been supported by a definite economic logic, as well as many years of history and the links of culture and language

Some of that logic is breaking down. We are both trading nations, with sophisticated economies based on our expertise in primary production. In a globalised marketplace, with freer flows of trade and investment, we face similar challenges in maintaining and developing our economic performance and securing our presence in the world’s larger export markets. We are both seeking new partnerships to supplement our traditional trade and investment links.

The time is now ripe for looking at building a stronger economic relationship between Argentina and New Zealand. Certainly there are areas in which we are competitors. But I believe there are much greater opportunities for collaboration through two-way investment, partnerships in research and education, and joint action in developing markets in third countries – not least in Asia, where I know Argentina is now looking with intensified interest.

The New Zealand Government is committed to promoting the further development of the relationship. This is one of the priority objectives of our Latin American Strategy, a whole-of-government policy aimed at bringing New Zealand and key countries of Latin America closer together. It seeks to forge closer political, economic and people to people links.

We feel we have a lot to bring to a new partnership, much more than could have been the case 20 or 10 years ago. New Zealand has become a much more competitive, dynamic and innovative economy and far more interesting as a potential partner for Argentina and other key countries of this region.

I want to explain why that is the case.

For a variety of reasons New Zealand has been able to ride out the economic turbulence of the last few years, and for the last five years we have enjoyed economic growth at rates ahead of the OECD average.

In fact, in the March 2004 quarter our economy grew at over twice the rate of the OECD average. And in the five years from the March quarter 1999 to this year New Zealand has achieved growth totalling 217 per cent.

This growth has been driven by a mix of strong domestic demand (which expanded by 5.9 percent in the 2003 calendar year) and sound export performance, with increasing volumes and sustained prices. It has been achieved in an environment of low inflation, modest population growth and careful fiscal management with Budget surpluses of between two and four percent of GDP and a steady reduction in gross debt to around 25 percent of GDP and falling.

In the last year the weakness of the US dollar and some other major currencies has meant that the New Zealand dollar has appreciated markedly against the currencies of some of our major trading partners. Our major export industries have enjoyed some protection from hedging contracts, but these have largely come to an end and this has led to a drop in the value of our exports since mid-2003.

For this reason, most forecasters have been predicting a significant slowdown in the New Zealand economy in the second half 2004 and much of 2005. Slowing net migration, slower employment growth, and the lagged effect of the high exchange rate are the main drivers of the forecast easing in growth as reduced export receipts impact on the domestic economy.

I am happy to say that recent economic data suggests that these effects may not be quite as severe as was forecast, due in large part to world commodity prices which are at historically very high levels.

So for the time being our domestic economy remains strong, and unemployment, at 4 percent, is now the second lowest in the developed world. The tight labour market, especially in the areas of construction and manufacturing, is contributing to inflationary pressure. That, along with the concern we all share about the sustained increase in the price of oil, has prompted our Reserve Bank to steadily tighten monetary policy over the last year.

We seem headed for growth in this calendar year of between 3 and 3.5 percent, with some forecasters suggesting that 4 percent is not out of the question. Over the four years to March 2008 average per annum growth is forecast to be around 3 percent.

So our economy has demonstrated resilience in the face of considerable global economic uncertainty.

New Zealand and Argentina share similar ambitions for developing our economies. We are both attempting to shift the balance away from reliance on commodity exports towards more value-added products and services.

In New Zealand this is taking two main forms:

First, we have been steadily broadening our economic base by expanding into newer industries. These include high-value tourism, international education, software, film production, and niche manufacturing in areas such as navigational equipment and baggage-handling systems. Some of these industries are starting to rival our traditional agricultural exports in terms of foreign exchange earnings.

And second, we have focused on transforming our traditional primary industries, with a particular emphasis on bio-technology and agricultural advisory and technical services.

In this latter regard, we have had to work hard against the perception that agriculture, forestry and fisheries are ‘sunset industries’. This perception discourages investment of capital and research activity, and also discourages our young people from pursuing careers in those industries. While it is true that production for the world’s commodity markets will always expose an economy to fluctuations in commodity prices, there are many opportunities to transform primary industries through the application of new technologies such as bio-technology and through imaginative marketing and product development.

Considerable world-class biological knowledge and expertise underpins our strengths in agriculture, horticulture, food, forestry, fishing, pest and environmental management. New Zealand has held its edge in these areas because of natural advantages and particularly because of the sound application of research based knowledge and expertise.

We are seeing this in the dairy industry with the development of so-called ‘nutriceutical’ products such as those based on colostrum. We are also seeing it in the livestock industry with better breeding technologies; in the forestry industry with new composite wood products which have many of the characteristics of plastics; and in the horticulture industry with alliances that enable us to supply product out-of-season to the large niche markets of Europe and North America.

One of the most important developments we as a government have made in the last five years is our Growth and Innovation Framework. This arose from the realisation that the sectors that create new economic opportunities and reinvigorate old ones (that is, our higher education, research, and business support programmes) were operating largely independent of each other, with the result that they were poorly coordinated.

Our universities and technical training institutes were producing skilled people, but those skills did not necessarily match what our major industries needed, either in the volume or the mix of skills.

Our researchers were engaged in world-class research, but there was insufficient attention paid to systematically commercialising that research, either by enhancing existing production or by developing new businesses.

Meanwhile, our business support programmes had fallen into disuse, after a decade in which New Zealand governments withdrew for ideological reasons from any positive involvement in industry strategy.

The Growth and Innovation Framework began with intensive research into identifying the major underlying drivers of economic growth and opportunity for New Zealand. We accepted that we could not be world-class in every field, and that it was better to focus our resources. We went looking for areas of economic activity in which there was a growing global market, opportunity for products and services that commanded a premium (principally from intellectual property rights), and in which New Zealand had an existing base of technology and productive capacity which could be leveraged.

What that research confirmed was that three areas should be the focus of co-ordinated attention. They were:

information and communications technology,

bio-technology, and

the creative and design industries.

The point that came though very strongly was that these were competencies that had applications across a wide variety of sectors. New Zealand's future standard of living will be shaped by how effectively we create and innovatively apply opportunities created in these areas.

We are now in the process of bringing our education, research and industry support programmes into alignment with these three areas of competency:

We have increased public expenditure on higher education and industry training, and have taken steps to involve our major industries in leadership roles relating to our skills strategy;

We have increased public investment in research by some 45 percent, with a very strong emphasis on partnerships with industry that direct research effort towards areas with good prospects of commercial application;

We have developed a new model of government support for business, through partnerships aimed at strengthening the global linkages of New Zealand businesses, in particular through encouraging foreign investment and supporting alliances between New Zealand companies and overseas partners.

One of the features of the New Zealand economy in the past has been a preponderance of small to medium sized enterprises. We are a nation of backyard innovators. (This is perhaps related to the isolated life of our farmers, who have always used their spare time to tinker with machinery, or more recently with computers.) However, due to our small domestic capital market – and particularly the shortage of venture capital – we have traditionally had difficulty scaling up successful small companies to achieve their full potential as world-class exporters.

This is part of the reason why New Zealand has one of the most liberal inward investment regimes in the world. We recognise the importance of foreign investment, both because it gives our companies access to a larger pool of investment funds, and also because it is often accompanied by access to new technology and links to global marketing and distribution systems.

Turning to the specific issues in the relationship between New Zealand and Argentina, our trade relationship remains relatively small. It fell away during the most intense period of Argentina’s recent economic difficulties but is now showing signs of recovery. Exports from New Zealand were NZ$15.2 million in the year to June 2004 – up 69% over the same period a year before. Exports from Argentina totalled NZ $ 23.8 million, an increase of 33% percent.

The small volume of trade reflects the structural similarity of our economies - although Argentina of course is 10 times larger than New Zealand both in population and in land area. As the latest export figures show, New Zealand companies are starting to look again with interest at several sectors of the Argentine market in, in particular opportunities for sales of technology and equipment for the development of Argentina’s primary production and exports, including seeds and genetic material. The direct air service has continued to facilitate trade in tourism and education as well as sporting and other people to people exchanges.

New Zealand investment in Argentina has grown. While we are a small country, we do some things on a very large scale and are active overseas investors in these sectors. One such area is dairy products.

New Zealand is a major international dairy player, accounting for about one third of world flows of internationally traded dairy products. All the EU countries together account for another similar percentage – made possible, of course, by the EU’s dairy subsidy policies whereas New Zealand’s production and exports are entirely free from subsidies.

The New Zealand dairy industry recently has established an investment presence for the first time in Argentina through the “Dairy Partners Americas” (DPA) alliance between Nestle and the New Zealand dairy company Fonterra, a large private cooperative representing approximately 90% of New Zealand’s dairy farmers. In a very recent further step, DPA has entered into a joint venture with the large Argentine dairy cooperative SanCor to produce and distribute a range of chilled dairy products. I visited the impressive SanCor refrigerated distribution centre serving Great Buenos Aires this morning.

New Zealand has further relatively large and sophisticated export-oriented production capabilities in sheep meat, seafood, forest products, beef, venison, kiwifruit, and apples and pears.

Three leading New Zealand fishing companies recently have set up joint venture Argentine operations with Argentine partners, directed at developing a new export-oriented “hoki” fishery.

The “hoki” (merluza cola) is caught and exported in significant quantities from New Zealand but traditionally has not been a sought after catch or product in Argentina. Opportunities for mutual benefit in developing an Argentine “hoki” industry were identified and I understand that “hoki” is gaining an increasing profile among Argentina’s fish exports.

As proponents of liberalisation of global trade we are both working to maintain the momentum in the Doha Round of the WTO. This has recently taken a giant leap forward with the agreement from the EU and the US to eliminate all agricultural export subsidies. This has taken enormous resources of patience and persistence by countries such as ours, especially after the seeming failure of last year’s Cancún Ministerial Conference.

This is a great outcome for Argentina and for New Zealand, as fellow members of the Cairns Group of agricultural exporting nations. In time large producers will no longer be able to dump their surpluses onto global markets and collapse prices for our farmers.

We want to promote development of the future economic relationship between our two countries. We share many similar outlooks and have opportunities to increase the bilateral trade in goods and services, and to explore investment opportunities that will enable our export industries to develop new markets in third countries.

Asia offers particular opportunities for cooperation between us. In recent years Asia has become New Zealand’s most important trade and economic partner region in the world. Around one-third of our trade, one-fifth of total inward investment, one-third of tourism revenues and 80% of the income from international education come from Asia.

Large numbers of New Zealand businesses today depend significantly for their sales on Asian customers and so they have developed considerable expertise in Asian requirements. Asian culture, history and languages are widely studied at New Zealand schools and universities.

I believe that any Argentine visitors arriving in Auckland will see and feel for themselves the links that modern New Zealand has with Asia.

At a time when Argentina is focussing with strong interest on further developing new Asian opportunities, there are many Asia-connected New Zealand companies and other organisations that could maker useful partners. This may be an area where the two governments, and the universities, as well as the private sectors, can look at working more closely together.

We have potential to develop a broader relationship encompassing education, science and diplomacy, that will build the trust and understanding upon which all enduring economic partnerships must rest.

Thank you.

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