Michael Cullen Speech - Investing in New Zealand
Wednesday 18 July 2001
Embargoed to 12.30 pm Wednesday 18 July
Address to Canterbury Manufacturers Association
Hotel Grand Chancellor, 161 Cashel Street, Christchurch
Investing in New Zealand
Good afternoon. It is a pleasure to be back with you here today. You have asked me to talk about investing in New Zealand and I must say the timing could not have been better.
I have just returned from a very successful two week investment and briefing tour of Tokyo, London, Dublin, Edinburgh and Singapore.
The purpose of the trip was to encourage interest and investment in the New Zealand economy; to enhance existing contacts and develop new contacts of potential economic significance to New Zealand.
I was also keen to gather information relevant to world economic developments and our own superannuation, taxation and economic transformation policies.
My first stop was Japan - still very much a nation of contrasts. Here we have the second largest economy in the world, with a standard of living (in GDP per capita terms) at the top of the league and with a substantial ongoing current account surplus, yet Japan remains stuck with near zero growth.
It has become largely unresponsive to traditional fiscal and monetary instruments, has a growing mountain of public debt and faces substantial demographic challenges.
My visit was well timed. I was able to build on the results of the Prime Minister’s April visit to encourage a broadening and deepening of the relationship beyond that which already exists, promoting links in education, forestry, tourism and the knowledge economy. I was also able to strengthen and build on links I had established in my visit last year.
Japan is arguably at a major turning point. Its conservative people seem ready for change and delight in the new and telegenic Prime Minister, Koizumi, who enjoys an 85% approval rating.
During my last visit, people were doing their best to argue that renewed growth was just around the corner. In contrast, this year, there was a frank acknowledgement of the economic and political problems Japan faces and evidence of hope that Koizumi-led reforms could at last do something about them.
New Zealand’s reform experience seems widely admired in Japan. In my discussions I was able to place these in context, arguing that while change had clearly been necessary, the pain was greater, the time taken longer, and the gains less than had been hoped.
What had been missing in New Zealand was a positive agenda to take New Zealand forward as restructuring took effect, and this was the focus of the current government.
In addition, some changes yielded fewer benefits and more costs than anticipated, with for example most of the gains in the state enterprise area coming from corporatisation rather than privatisation.
There was a degree of easy optimism about the prospects and efficacy of reform in Japan that I found a little disturbing.
One aspect that particularly concerned me was the risk of deflation. The price level has been dropping gently in Japan. But the structural and fiscal consolidation policies proposed could (if not carefully handled) be accompanied by much more rapid deflation.
There is little if any experience in handling such a situation in a modern economy and I felt the Japanese authorities were overly sanguine about the risks. In essence, Japan needs structural reform to make macro policies work effectively, and effective macro policies would ease the process of structural reform. The solution is likely to be much more painful given the decade of delay that has occurred.
Assuming the more severe risks are avoided, a period of negative growth seems likely. This is not necessarily bad news for New Zealand. As Japanese real wages are squeezed people are looking for cheaper alternatives and import penetration is increasing. Opportunities are still there for New Zealand export growth.
My prime objectives in London were to encourage potential investment in the NZ economy; meet and build up contacts with the NZ expatriate community; and establish or renew relationships with British political and public sector leadership. The visit also provided an opportunity to compare notes on world economic developments, and to promote New Zealand through various media contacts.
The big standout feature in London was a marked change in the atmosphere compared to my last visit in September.
Last year, the City's financial community was decidedly cool toward the new government.
Given the depreciation of the NZ dollar, policy changes such as the increase in the top personal tax rate, and the general attitude of the NZ business community, the atmosphere was sceptical if not negative about our approach and economic prospects.
This year, there was a widespread acceptance of the economic picture I painted and a willingness to engage in informed and intelligent discussion of the policy direction, including the superannuation fund, takeovers legislation, education, taxation and investment in the knowledge economy.
This engagement was evident in a willingness to debate New Zealand’s long-term economic future, and how we might best position ourselves to maximise our opportunities.
While it was generally accepted that New Zealand’s location and size - our twin tyrannies - were disadvantages in an economic sense, they were by no means despondent about our prospects.
As an example, several top level financial and business leaders thought that the quality of our environment was a key branding opportunity and an important part of our attraction.
While I was in London I was fortunate to be able to meet with several hundred expatriate New Zealanders. Even among those who have made a more permanent home in the UK, there is obviously an ongoing commitment to New Zealand that we can draw on in line with the ideas emerging from the government/business talent initiative. A substantial number of others remain committed to returning to New Zealand for lifestyle or family reasons, despite the opportunity to earn more overseas.
I also met with the Governor of the Bank of England and we were able to discuss monetary developments in both countries. He had clearly followed the developments around the Svensson Report and we discussed the similarities and differences of the British and New Zealand monetary policy framework. Interestingly, he highlighted the difficulty of maintaining sufficient quality in appointments to the monetary policy committee, a factor that tends to confirm the decisions we took on proposed changes to the NZ framework.
Both the Governor and the Chancellor of the Exchequer shared views similar to our own on world economic prospects and the balance of risks, with the key issue being the direction taken by the US economy. Gordon Brown also showed considerable awareness of NZ economic developments and we were able to compare notes on budgetary pressures (especially in the health area) and a range of other economic and fiscal trends. This was my first meeting with the Chancellor and we established a good rapport.
Last year Ireland went through an economic boom with growth, exports, and consumption all reaching record highs.
So during my brief visit I was looking for further information on the transformation of the Irish economy and its possible lessons for New Zealand.
The turnaround in the Irish economy has been remarkable and is well documented.
Briefly, over recent years the Irish economy has been growing (in GDP terms) at around 10% pa, although this is expected to moderate to around 6% in the coming year. This growth has not been evenly spread. The unemployment rate in the late 1980s was running in excess of 17% and remained stubbornly over 15% in the early years of the growth acceleration before dropping rapidly to around 3% currently with significant labour shortages in a number of areas. The government accounts are in surplus and public debt, which peaked at around 116% of GDP, is currently around 33% of GDP and falling rapidly.
A number of commentators have claimed that the low corporate tax rate on the manufacturing and (offshore) financial centre sectors lies at the core of Irish success, and this has certainly played a part in attracting substantial investment from the United States.
However, my discussions confirmed for me that the real explanation lies in a number of factors coming together and that tax policy, while helpful, is only a small part of a much bigger story.
Three core factors emerged as being crucial to Irish success:
The first was a very focused strategic approach to skills development. This began with the introduction of free secondary education in the mid-1960s, but over the last twenty years successive Irish governments have built on the good level of general education by investing primarily in the skill areas deemed essential to economic success.
The second was an equally focused approach to investment attraction which has involved activities and companies with potential being targeted, rather than relying on an across the board or scattergun approach.
Both of these factors were enhanced in Ireland’s case by an ability to draw on a vast, talented, loyal and often wealthy diaspora.
The third essential factor in Ireland's success was the building of strong partnership agreements between the government, the business (and farming) sectors, the trade unions and (more latterly) the voluntary sector.
The importance of this for building broad support for development directions was especially emphasised by the government representatives that I saw.
Of course there are other contributing factors:
- Irish membership of the EU (and associated aid);
- the earlier opening up of the economy with the Anglo-Irish Free Trade Agreement;
- a competitive exchange rate;
- fiscal consolidation;
- regulatory reform;
- strong linkages between the domestic and foreign sectors so that productivity enhancements could be adopted; and
- favourable demographics.
In Ireland, too, I was able to talk to expatriates. ICANZ members in Dublin had recently conducted a survey on attitudes to New Zealand. The results were interesting and not necessarily in line with some local commentators.
While most people considered themselves better off financially in Ireland than New Zealand and most had stayed longer than initially intended, factors such as lifestyle, career and friends and family were much more likely to induce them to return than were financial incentives, tax rates or other general economic conditions.
In Scotland, my key focus was on potential investors and the financial community, and on establishing contacts with the new Scottish government.
The Scottish economy has struggled to maintain growth in excess of 2%, and like New Zealand has been looking to Ireland for possible lessons in improving performance.
New Zealand shares two important features with Scotland. We both compete with a larger neighbour and we both have some significant areas of economic and social disadvantage.
At the same Scotland has built on a long-standing strength in the financial sector to the point that Edinburgh successfully holds its own against the might of London. It is now the second largest financial market in the UK and fifth largest in Europe.
I was conscious of the potential parallels between New Zealand and Sydney in terms of the financial sector, although the scale is different. A key to Scottish success in holding its own has been perceptions (not always matched in reality) of an educated workforce, and an ability to work with the private sector to produce an ongoing supply of the skills it needs.
In essence, Edinburgh has been able to feed off London’s success, by providing a further pool of human capital available at less astronomical rates, and offering an attractive lifestyle simply not available in London.
Many consider the powers of the Scottish parliament quite limited, but in fact this is not the case.
The Scottish government has responsibility for health, education, transport, environment, rural affairs, justice and police among other things, and operates within an overall budget funded through London more than one and a half times the size of that of the New Zealand government.
I am convinced that we should work to build up stronger connections with the Scottish government and private sector. We have longstanding links and relationships that can be developed further to our mutual advantage. As a small country with a heavyweight financial sector, Scotland may well prove a more fruitful source of the investment cooperation New Zealand will need for its economic transformation than some of its bigger competitors.
What I saw also suggested to me that like Scotland there may be scope in exploiting a potential advantage for New Zealand in providing back office facilities in the financial sector.
In Edinburgh, as in Dublin and London, I was questioned about events surrounding the Montana takeover saga. It is clear that there is considerable misunderstanding about the facts of the case.
Given that the level of interest in such matters reflects a potential underlying advantage for New Zealand, this reinforced for me the importance of attending to our international as well as our domestic audiences in communicating New Zealand’s policies and approach to business and the economy.
My last stop was Singapore. Predictably, my visit to the 'Asian Tiger' was dominated by interest in the Singapore International Airline’s (SIA) bid for Air New Zealand. There was a risk, heightened by the newness of the New Zealand/Singapore Closer Economic Partnership, that our response to the SIA bid could be seen as rather unwelcoming.
To try and draw a parallel with New Zealand's position, I referred to the very cautious approach Singapore is taking to the opening up of its banking sector where it is emphasising the need for significant ongoing Singaporean ownership.
I stressed that New Zealand has three main concerns: international landing rights, the tourism value of the Air New Zealand brand and competition issues.
At the request of Singapore International Airlines, I met with Chairman Dr Cheong and the Senior Executive Vice President. Given the nature of the request it would have been discourteous to refuse, but the meeting was purely in the nature of a courtesy call and no new proposals were put on the table.
While in Singapore I also met with Standard and Poors. The credit agency was generally supportive of our economic performance and directions and while it is much too soon to expect an upgrade to our AA+ rating - which we only secured in March - there is no likelihood at this stage of a move in the other direction either.
As well as speaking to government officials and Ministers, I was able to take a look at some of their high tech companies and at IT Capital and I was shown some Kiwi innovation in the field of deep video imaging. Initial capital for this had come from New Zealand - Deep Video Imaging began life in Hamilton - and it struck home for me the critical need to look to the effective application and commercialisation of Kiwi ideas if we are to obtain the gains from our own entrepreneurial activity.
We are not always successful at turning our many good ideas into good businesses. However, the Government is putting in place a raft of policies to make sure we have the right infrastructure that allows a back shed idea, a scientific discovery or a technological breakthrough to be developed into a successful business, right here in New Zealand.
In conclusion, this was a most successful trip. I have renewed and strengthened overseas contacts. We are putting special effort into potential investor relationships that may be important as we advance our agenda of transforming the New Zealand economy.
Nothing I saw or heard suggested to me that we are on the wrong track in this. Indeed, the importance of engaging business and other interests in a positive partnership in forging an improved economic and social performance was reinforced.
It will be important to continue to engage the wider international support base on which New Zealand can draw, as we take this approach forward.
Finally, I was able to gain a closer insight into economic developments and prospects in a number of countries. While I consider that growth of the order of 2.5% to 3% is the most likely prospect for New Zealand in the period ahead, it is clear that there are some risks from the international economy that we will have to watch.
Nevertheless, I believe New Zealand is in a reasonably robust position to withstand the most likely shocks and by working in active partnerships, government policies will help deliver the economic and social transformation that will ensure a more prosperous and inclusive future.