Off the Map in a Global Economy - Cullen Speech
Opening Address to Victoria University International Symposium
“Off the Map in a Global Economy”
Lecture theatre 323, Hunter Building, Victoria University, Wellington
The symposium follows the end of history with the rebirth of geography. As an historian that makes me sad. As the Minister of Finance in a small and isolated country I welcome the focus on location as a key determinant of economic options.
Location must be seen as a determinant of options, not as a determinant of fortunes. It is vitally important, particularly at this stage of our own economic development and of the global re-evaluation of direction, that we approach location in a positive frame of mind. That doesn’t mean that we should be naively optimistic. Hard and realistic analysis has to underpin any evaluation of our prospects.
Targets, and the path towards achieving targets, have to be plausible and achievable. A positive frame of mind does mean that we must seek to respond to both the limitations and opportunities of scale and locality.
In this day and age, all economies need to innovate to retain their competitiveness and their relative income levels. This is doubly true for small and distant economies. And investment is the medium through which innovation impacts.
In order to be fully effective, or to get the most bang for the bucks, investment should ideally have four qualities:
- It should be in greenfields activities.
- It should add value.
- It should employ high-skilled, high wage labour.
- It should complement activity taking place in other enterprises to strengthen industry clusters.
In recent decades, inward investment has too often failed on all four counts. It has often simply acquired existing productive capacity. The intention has repeatedly been to extract value from the resource acquired, rather than to add value to it. The labour needed has been frequently basic rather than high skilled as is associated with commodity trade. And finally, we have tended to become over-diverse, with too few specialities.
The result is that a thinly spread, commodity trade based, small and distant economy has struggled, both to maintain competitiveness in the face of global technological change, and to maintain living standards compared with the rest of the developed world.
Changing that is neither easy nor quick. There is also a limit on how much governments can do, given that investment decisions are often made offshore. I often hear that part of the problem with New Zealand is that it is too small, relatively, to justify the amount of analytical time that a global conglomerate would need to dedicate to it to make a difference. We also have a very thin capital market, so it isn’t realistic to try and go it alone with home-grown expansion. To add to the list of problems, there is a degree of international competition going on to lure the marginal investment dollar that has a choice of location.
It is not all negative though. Smallness can be an advantage. There is not the large and faceless bureaucracy to deal with. Decision makers are readily accessible, able to respond quickly and easy to coordinate. We have a generally uncluttered infrastructure, with some notable exceptions.
Our workforce is skilled and adaptable. Our institutions are transparent and free of corruption. Our regulatory environment is relatively straightforward. Lifestyle and security considerations may also come to have greater value in the future than they have in the past.
You will be aware that this government has made economic transformation a core goal. A cynic might say that all governments do that, but I think that there is a difference between this government and previous ones. Before 1984, the key instruments influencing economic structure were regulation and subsidy. In some ways these can be regarded as attempts to negate disadvantages of scale and location by imposing compensatory costs on consumers and taxpayers.
Between 1984 and 1999 the emphasis was on creating a stable macro-economic framework and a liberal but neutral microeconomic environment. Structural change was presumed to flow exogenously, and almost ethereally. The transformation that did take place can be described as too little, too thinly.
The approach of this government is to attempt - and at this stage I put it no more strongly than that - a smart, active approach. Active distinguishes the government from the more passive stance of its predecessors. Smart implies that programmes and interventions are acute rather than blunt; customised rather than broad brush.
We see this transformation emerging out the fusion of three systems: the scientific system, the skills system, and the financial or investment system. This is not the time or place to go into details, but I would note that we have, as a part of this approach, made economic transformation a priority for analytical work in the Treasury.
One of the tensions in responding to the problems of size and distance is that between absolute and relative performance. The standard measure of the performance of the New Zealand economy compares relative per capita national income in the early 1950s with that today.
It is important not to let this sort of comparison put ourselves down or talk ourselves down. There have been massive, not marginal, gains in output and material consumption - and in personal choice - during the last fifty years.
In broad terms, real output per head is around three quarters higher now than it was in 1950. There is a rather strange view that sees the fifties as a type of golden age, despite the fact that output was radically lower than it is now.
Those output gains have been harvested alongside an enviable nurturing of the natural environment and retention of lifestyle quality. It is probably also true that they have been harvested in an environment of increasing inequality, and a widening gap between GDP and GNP.
Widening inequality has heightened social tensions, and that both detracts from economic performance and general feelings of wellbeing.
GDP measures what we produce, GNP what we have available to consume. I suspect that a part of any perceptions of discontent arises out of the fact that we do not appear to be increasing livings standards at the rate at which we are increasing production.
So we have more, but not enough more. When, though is enough? And enough of what? The relative disadvantage is not just of economic performance. We might well accept that the mix of consumption, lifestyle and environment is satisfactory and satisfying, and we do not want to destroy that through copycat materialism.
The problem is that this is not a collective choice to make. It is mobility that limits choice out here on the periphery. (We are not off the map!) Science, skill and finance is increasingly mobile, and unless we can combat the tyranny of distance and disadvantage of smallness, net outflows of science skill and finance - at the margin - will gradually erode our collective capacity to live the way we want to.
There is also the frustration that the global mobility of labour and finance has limited our capacity to pursue independent standards of income distribution. It may be that if we want higher sustained rates of growth we have to tolerate the income inequalities that global demand and supply of skill impose on us, and pay the price that global capital requires in order to locate here. But not any price.
There are still social, environmental, and labour standards that must be met. They will limit growth, unless a pathway can be found that generates equivalent growth within the value system that we are not prepared to compromise.
This, though, is edging up to the content of your symposium and I am here to open it, not to second guess your deliberations. I wish you well for a stimulating and constructive two days, and to the product of your dialogue informing policy design in the future as we convert the opportunities of who and where we are into the envy of enlightened civilised nations.