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Cullen Speech to the Wairarapa Provincial AGM

Hon Michael Cullen
Monday 7 May 2001
Speech Notes

Speech to the Wairarapa Provincial AGM of Federated Farmers

Solway Park, Masterton

Good evening. I would like to thank your president Roger Barton for inviting me to spend time with you tonight.

Over the past year and a half, my acquaintance with your organisation has grown considerably. As Minister of Accident Insurance (an honour I no longer hold, by the way, ACC is now in the capable hands of Lianne Dalziel) I was in constant contact with Federated Farmers and I would like to ackowledge the persistance of your organisation in helping to bring about a resolution to the problem of the first and later scheme employers.

The Federation has also been effective in representing farmers¡¦ interests to the government over the UK foot and mouth disease outbreak. Last month my colleague, Jim Sutton, increased the already high level of border protection.

The Government takes the prevention of this disease very seriously. Whilst the outbreak in the UK is most grave and our every sympathy goes out to British farmers, it is important to realise that the main threat of the disease comes, not from the UK, but from Asia. And, more importantly, the Asian threat is not a one-off crisis, it is long term, chronic and ongoing.

Last year there were 490 outbreaks of Foot and Mouth in South-East Asia alone. In many Asian countries the disease is a permanent fixture.

The impact of a foot and mouth disease outbreak would represent an unprecedented shock to the New Zealand economy beyond the realms of any previous experience. Treasury and MAF forecasts put the cost of a potential outbreak, admittedly on a worst case scenario, at around $2.1 billion of our gross domestic product.

So even as the grisly images fade from our television screens, our borders must still be controlled with vigilance. No country can protect its borders 100% but the package of measures we introduced offers as close as to 100% as possible in an open, democratic country.

But tonight I will stick to my role as Finance Minister and I would like to share my thoughts on what has been dubbed the 'economic transformation' .

I think some people have tried to make this more complicated than it is. We want to move from a low performing economy to a high performing economy.

We want an economy that is not so vulnerable to the vagaries and long term decline of commodity-based production and trade. We want to compete in the markets we occupy with the best in the world. We want to reward our citizens with well-paid and interesting employment.

We want the sort of economy which is in the top half of the developed nations of the world.

We will have to play ourselves back into the first division at a time when the pace of change has never been faster. We have to adapt by innovating. We have the brains, the talent, and the institutional structures. We must now turn the great ideas New Zealanders generate into great ventures.

In this, education is pivotal. Education brings together and fuses technological and financial systems around a more sustainable, adaptable and higher yielding economic system.

If education is the fundamental 'what' of economic transformation, the 'how' and the 'when' are not so easy to pin down. As a country, we need to decide:
(a) what specific goals are we shooting for?
(b) what are the key drivers of the transformation; and
(c) what time scale are we talking about?

We have a double problem in that New Zealand's economy is not just under-performing, it is also unbalanced. It relies too much on the savings of others,
and until recently has relied too heavily on private consumption rather than the creation of wealth as a nation.

The result has been that we have spent before we have earned, sold off the family silver and then borrowed abroad to bridge the gap.

This imbalance is crystallised in the balance of payments deficit, which peaked at around 7 percent of GDP ¡V or 8 percent using the previous classification system and measure of GDP.

One of the key challenges of the economic transformation is bring this deficit back into a sustainable range remains, even if it is now declining very rapidly on the back of the current export led recovery.

Unfortunately, the deficit is an area where there is no clear consensus on what needs to be done. On the one hand there are those who see the deficit as inherently ¡§good¡¨, in that it reflects the confidence of foreign investors in New Zealand and means that we can use the available foreign savings to maximise our growth potential.
On the other hand, there is a school of thought which sees the deficit as a direct measure of the rate at which we are losing economic sovereignty and independence.

My own view is that foreign investment is neither inherently good nor bad. But I have very firm views on the quality of that investment.

We don't have to look to the very distant past to find examples of poor quality investment. It is hard to see the long-term net national benefit that accrued from foreign investment which essentially merely allowed locals to bid up the value of residential properties. Equally, selling state assets freed up domestic capital for use elsewhere, but did nothing to stimulate greenfields expansions to create more jobs and wealth for New Zealanders.

There is no firm evidence on this, but my intuition is that access to foreign capital has allowed soft investment into low quality assets. But given that we have no intention to impede inward investment, our challenge then is to create an environment in which there are better quality destinations for that investment.

Having said that, we need to realise that while foreign investment is welcome, foreign investors do take a share of the output it helps to produce, and that share is no longer available to lift the living standards of New Zealanders.

The last work done by Bryan Philpott stressed this point. He calculates that between 1984 and 1999, GDP ¡V the total value of output from within our national boundaries ¡V increased by 1.8 percent a year in real terms. However, because of our very poor savings record and our reliance on the savings of others, the net income paid overseas ¡V to the overseas owners of capital used in production here ¡V rose from $1.6 billion a year in 1984 to $7.4 billion in comparable dollars in 1999.

The result is that national income ¡V the total value of output accruing to New Zealand nationals ¡V only grew by 1.4 percent a year. When population growth is taken into account, national income per head grew by 0.2 percent a year. And this, ultimately, is what drives living standards ¡V the amount of output per person that New Zealanders can lay claim to.

So we have had a lot of change and a lot of pain, big new technological advances and over some decades even a lot of growth in total ¡V and we are virtually in the same place as we started out from.

That is why lifting the savings rate and the quality of investment ¡V not very sexy, headline grabbing targets ¡V have to be seen as central to the economic transformation project.

The external deficit also reflects an imbalance between what we earn from foreigners and what we buy from them. That is why a key part of the transformation also involves rebuilding the earnings base, especially earnings of foreign currency though our exporting industries.

As farmers you need hardly be reminded of New Zealand's agricultural history. For many decades we enjoyed unfettered access to Britain which allowed us to thrive on a few basic agricultural commodity exports: wool, butter, meat. Unprocessed, unadorned and highly subsidised.
We were forced into a painful transition by Britain's decision in 1973 to join the EC. Since then we have had to slowly develop new markets and new products. We talk about value added now. Timber and manufactured joinery, highly processed dairy products and chilled gourmet lamb and beef cuts.
In 1997 New Zealand imported some $12 billion worth of manufactured goods but only exported $4.9 billion, mostly at the low technology end of the spectrum.
That is changing. Last year overall exports rose by 25 percent and manufactured exports, not counting meat or dairy products, pushed past $12 billion in value, up an amazing 29 percent. Importantly $8 billion of these were value added products.
But still, the fact remains that 18 percent of our export income is earned from dairy products, 13 percent from meat and 11 percent for forest products. Clearly primary sector industries will continue to provide the core of foreign exchange earnings and any economic transformation must protect and enhance that core.
As you are very much aware, last month, Cabinet cleared the way for the dairy industry merger to go ahead by exempting the merger from the competition provisions of the Commerce Act and now it is up to farmers to decide whether it should proceed.
The stakes are high. The Global Dairy Company would be about 95 per cent of the New Zealand dairy industry. It would account for about 7 per cent of GDP, around 20 per cent of total exports, around 96 per cent of dairy exports, around 96 per cent of the New Zealand raw milk market, and around 50 per cent of the domestic dairy market.

These figures are perfect example of the tremendous power and wealth created by adding technology to a basic commodity. Last year the industry invested $94 million in research and development with total export earnings of $5,102.6 million.
Yet, despite the success of our dairy, meat, and burgeoning wine industries, there still persists the myth that farming and forestry are old economy using crude technologies. Most of New Zealand's technological advances have concentrated in farming, silviculture, mining and fisheries. All are highly knowledge intensive.
Farmers and orchardists have long paid for research and development in their sectors. And they are quick to take up new advances in technology ¡V such as that developed by Richmond meat company which means that meat products can be traced back to individual farms and animals, using computers and dna testing.
Technology and the capital to back it are critical to the transformation of the economy. It means enhancing and renewing those areas where we have a comparative advantage over the rest of the world - our primary products. We can produce milk, meat, wool, timber products and some fruit and vegetables cheaper and better than anyone else in the world.
We must trade in expertise, intellectual property and technology.
We also need to apply our skills and innovations to the emerging industries: jet boats, luxury yachts, film making, adventure tourism. It is worth noting, though, that these new, sexier industries have tended to arise from an adaptation to our natural environment.
New Zealanders are by nature inventive. Our number eight fencing wire reputation is well deserved. We have not been so talented though, at taking our good ideas and making good businesses out of them.
We need to do everything we can to make sure that New Zealand has the systems in place that allow good ideas and inventions - be they from crown research institutes, universities, garden sheds or the back paddock - to be turned into successful businesses or new industries.
That means having an education and training system that encourages and rewards at every level, enthusiastic public and private sector research and development, the technological infrastructure, venture capital and development finances, intellectual property protection, and most importantly having the people with the good ideas and the ability to commercialise them.
Another critical target of transformation is the employment base. You will not be surprised to be told that about half of the workforce is employed in the retail trade, in education, in the health sector and in other services. More than half of those who will be in the labour market in twenty years time have already left the formal education system.

Workplace training, second chance education and lifelong learning can help, but despite that the skill set and industrial distribution of the current labour force is largely set and will change very slowly.

We therefore cannot embark on an economic project that ignores the employment base of the traditional economy.

It is not unreasonable to anticipate that in a decade or so, while New Zealand will be able to draw from a large global pool of people with high IT skills, we will face a real skill shortage in agricultural production and processing. There is already a shortage of skilled agricultural workers, and I know that here in the Wairarapa you are feeling it bite.

The existing structures in tertiary education are largely demand-driven bulk funding systems, with little opportunity, and few powers, for the exercise of discretion in the allocation of funding. To be blunt, the government gets the elephant¡¦s share of the pay, for a mouse¡¦s share of the say.

We need to steer funding of tertiary education to reflect both national and local priorities, and to promote focus and specialisation among tertiary providers.

As a Labour Finance Minister, I must confess to sometimes experiencing a very small drop in my spirits at the mention of some businesses lobby groups, but this was definitely not my experience on hearing of the newest kid on the lobby block. On the contrary, I most sincerely welcome Business New Zealand and its 76,000 members who, like the government, see education as the single most important key to bringing New Zealand back in the OECD top ten.

I would like to take this opportunity to congratulate Simon Carlaw and I look forward to the very valuable contribution I am sure Simon and Business New Zealand will be making to both our economy and society.

The government is working to improve the overall performance of our economy. There is no single measure that will achieve that. We have to tune up the whole by paying constant attention to each part. What we do first is to work out if it is something government can help with. Then we look for the best way to get a result.
Often, the best results arise, not from grandiose schemes, but from sensible, practical policies based on the needs of people rather than monoliths. The tax simplification project falls into this category ¡V simple, effective and focussed on the needs of ordinary people.
The project is about simplifying the tax system and helping reduce stress on small business.
New Zealand is a country of family run business, the self employed and small businesses. Over 84% businesses have fewer than five employees. We are taking practical steps to reduce the high compliance costs that beset small business in order to help increase productivity and effectiveness.
We look forward to the Federation's submissions on the proposals which range from spreading the payments of provisional tax to simplifying tax calculations and returns.

Let me finish this evening with a few words on the process of innovation. There are number of linking steps to make good ideas into good businesses.

„h researching product and market opportunities;

„h developing product or production processes;

„h ¡§seeding¡¨ the new venture with the appropriate mix of technological, managerial and promotional input;

„h ¡§incubating¡¨ the project until it reaches a critical commercial stage of development so that it is self-sufficient;

„h growing the business so that it makes a substantial contribution to economic wellbeing;

„h adapting it to constant changes in its operating environment.

The strength of the innovation process will be determined by the strength of the weakest link in this chain.

Comment from the business community indicates that historically there have been a number of weak links in this innovation chain, not just one. Hence traditional industries have languished and have not been renewed around more sophisticated technological or commercial processes.

Some of the weaknesses that have been identified are:

„h Levels of direct government assistance for R&D.

„h Lack of tax incentives for undertaking R&D.

„h Uncertainties and inconsistencies in the tax treatment of R&D.

„h Lack of profits or cash flows, especially among small business, for spending on R&D.

„h Poor commercialisation of science undertaken within the state scientific infrastructure (CRIs), and weak incentives to commercialise the intellectual property of CRIs.

„h Lack of venture capital, especially at the seed end of the venture capital spectrum.

„h Weak business supports at the incubation phase of the innovation process.

„h Thin capital markets, and a tendency to ¡§migrate¡¨ an established venture offshore to facilitate its fuller growth.

The government is moving on all of these fronts. It is important to avoid concentrating too heavily on only one aspect of any problem, and to avoid ¡§fads¡¨ whereby the latest trend or policy fashion distorts the innovation policy package and merely creates uncertainty.

It is also important to get away from very short-term and cash driven incentive regimes.

And all of this takes time. While I see economic transformation as urgent it does not mean that we can afford impatience.
We need to be cynical about magic bullets and quick fixes. They do not exist. It is a broadly based, co-ordinated, careful and long-term project that is being implemented.

Inside this project, there is a limited amount that a government of a small, open economy can do. We are pushed and pulled by global investment flows, by international economic cycles, by new technological developments and by changing trade alliances.

What we can do is important, though. It is doubly important in a small economy precisely because there is a level of intimacy that is absent in large, faceless economic machines. Government and business can talk and there is an openness ¡V both ways ¡V that has to be a major source, not just of competitive advantage, but also of speed of response to changing circumstances.

My broad conclusion is that in the past we have done opposite things wrong. We either relied too much on governments ¡V especially to protect and subsidise ¡V or too little.

I see a new consensus emerging around the virtues of constructive engagement. But if I could go back to a theme that I developed at the start of this presentation ¡V it will be the quality, not just the quantity of that engagement that will determine success or failure.

In closing, I would like to thank you and indeed, all farmers, for leading the way in the export led recovery.

Thank you.


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