Michael Cullen Address to TradeNZ Hamilton
Hon Dr Michael Cullen
Address to TradeNZ Hamilton
Ferrybank Lounge, Granthan Street, Hamilton
Thank you for inviting me to be with you this afternoon.
Today I want to talk about the state of the economy and the crucial role exporters will continue to play to increase New Zealand’s prosperity.
But to start, I would like to take a few moments to thank the Waikato New Zealand Trade Development Board. The fact that the office is experiencing a continued demand for its services shows that your hard work and excellent support for exporters is paying off.
The Waikato’s success in the dairy industry has opened the doors for expansion for a number of related industries. Businesses supplying the industry have emerged in relation to milking systems, dairy hygiene products and electric fencing. And, as to be expected, the traditional dairy industry support businesses are also thriving.
I note that Trade New Zealand’s marketing manager, Rod Mackenzie recently predicted another good year for exporters. I tend to agree, as did the ANZ last week with its forecast of another solid season for agriculture and with the competitive New Zealand dollar providing a buffer for this year at least.
In fact, New Zealand continues to have a range of indicators pointing to an underlying resilience of the economy. And that resilience is also reflected in the rebound in confidence since the terrible events of September 11.
Gross domestic product rose 0.2 percent over the September quarter and growth is tipped to average 2.8 percent over the next five years.
Although unemployment rose marginally in the December quarter to 5.4 percent it is still low by international standards, and employment has been surging ahead strongly for six consecutive quarters.
The consumer price index for December has the annual rate of inflation back under 2 percent and residential property sales for that month were at their highest level since 1998.
The balance of payments deficit has dropped back to between 3 and 4 percent of GDP and is expected to stabilise at around those levels. Finally we have fiscal surpluses and low – by both relative and historical standards - government debt.
The government does not claim to take all the glory for this array of good news but we can take credit for keeping within a steady fiscal framework.
We front-end loaded much of our planned new spending into the first budget because we were keen to make quick work on our key election commitments - the restoration of income related state house rentals, the reversal of the previous government's pension cuts and moves to make the student loans scheme fairer.
Because of this, the subsequent two budgets are pretty tight on spending. Net new spending in Budget 2001 totalled only $692 million. But the new spending was well targeted. Big themes were: Child Youth and Family Services, equity funding in early childhood education, elective surgery, community housing, direct resourcing of Maori initiatives and measures to encourage more innovation in the economy. I will be talking more about this a bit later.
Much of the new spending provision for next year’s budget has already been allocated through the revolutionary $400 million a year over three years health package announced in December.
Forecasters have downgraded New Zealand’s growth prospects for this year to reflect the international situation but we are still well into positive territory - which is a good deal better than many other small economies.
But there is an accompanying message that we need to keep before us. And that is what we consider to be positive territory is not actually good enough for New Zealand.
We are still chugging along with a sustainable growth rate of 2 ½ - 3 percent per annum. At that level we are not going to catch up over the medium to longer term. We will catch up this year only because other economies are actually doing worse that that.
But in general terms we are not catching up – crucially, we are not catching up with Australia, which is on a 3 ½ to 4 percent sustainable growth rate. And that 1 percent difference compounded year by year, on average, translates into a big difference over ten, fifteen and twenty years.
So what can we do about it?
What I think governments have been doing for some time is trying to get the big framework right.
So they have said, if we get the big framework right: deregulated economy, extract costs out of the economy and so on, then everything will happen by itself and we will have a successful economy.
We have done most of that. By the latest international measures we have the fourth freest economy in the developed world – one notch above the United States. Another survey said we had the second most entrepreneurial economy in the developed world.
But still, something crucial is missing.
The reality is, the big picture is not good enough. The medium and small picture is still important. That means doing some things at a targeted and specific level is just as crucial to improving economic performance.
As a Government we often assert our intention to transform the New Zealand economy. We mean it. It is shorthand for a vision that takes in much of what we're doing - in economic and industry development, in education and training, in research, science and technology policy.
We are concentrating on being smarter and more active while recognising that the government cannot get back into the position of telling everyone what to do and managing every aspect of the economy.
In its latest report, Moody’s reconfirmed New Zealand’s rating and credits the government with supporting private sector growth and says New Zealand now “enjoys an opportunity to consolidate previous reforms and make new strides in economic growth”.
And we are not about to turn our backs on that opportunity. We are encouraging business and industry development through Industry New Zealand and we are deliberately setting out to attract quality foreign investment. We want to attract specific businesses to set up in New Zealand – creating employment and exports.
The government has been adopting a much more focused attempt at investment attraction into New Zealand. A recent analysis showed that big economies usually had a big picture investment approach and small economies targeted specific sectors and specific businesses.
New Zealand was the only small economy, which took a big picture approach. And that is perhaps why we were not succeeding too well.
We need to go out there and identify target companies that we are trying to get to invest in New Zealand. We need to tailor packages unique to them by way of cutting through red tape, fast tracking resource consents and so on.
We have also seen some very good spin-offs in terms of a lift in regional confidence where Industry New Zealand has been collaborating on strategic plans and bringing together groups and key players.
For instance, here Industry New Zealand invested $2 million for the first major regional partnership project – the Waikato Innovation park which, when completed, is expected to boost growth to your region to 4 percent and to provide up to 2500 new jobs.
When the new export credit guarantee scheme was being developed, the government was advised that New Zealand has been missing out on perhaps four or five major new long-running, multimillion dollar infrastructure export projects a year because of the lack of government-backed guarantees.
However, since the scheme was introduced in July last year the Export Credit Office has received few applications. So we will be looking at whether we need to improve the accessibility scheme, including informing exporters of exactly what cover is available.
You will be aware that the Prime Minister has released the government’s innovation strategy. Not all innovation takes place in the export sector. We need to innovate to improve both the quality and efficiency of the domestic economy as well, whether that is in areas like tertiary education or the performance of our sporting teams. Equally, not all exporting depends on innovation. We will continue to earn vital dollars of export income off our natural competitive advantages.
Having said that, exporting is crucial to our future success and innovation is crucial to the future success of exporting.
Again, though, we need to keep a sense of perspective. It is probably true that small countries with strong export sectors tend to have better growth rates than those without them. A conventional measure of the strength of the export sector is exports as a percentage of GDP: the size of the export sector compared with value added by all producers.
On the face of it, we lag behind. Ireland’s export to GDP ratio is 89 percent, the Netherlands 61 percent and Norway 47. By comparison, ours is 32. But there are exceptions. In Australia, by way of example, exports are only 20 percent of GDP, but it has a higher per capita income and a better growth performance than us over the last ten years at least.
It is also important to keep the focus on the key relevance of exporting. It is directly relevant in that it pays the wages and generates the other incomes of those engaged in export industries. It is indirectly relevant in earning the foreign currency that pays for the goods and services we import. Without exports, or more particularly without sufficient exports, we cover the cost of imports either by borrowing from abroad, or by selling assets to foreigners. There is nothing inherently wrong with either.
The problem is that we cannot cover too large a gap between earning and spending foreign currency for too long. If we do, more and more of what is produced in New Zealand accrues to foreigners who own the resources. Ultimately, of course, it is only production that accrues to New Zealand nationals that influences the living standards of New Zealanders.
If we look at exports in this light, it is clear that it is the value added component of exports that matters, not the total value of exports. We need to get more work done on this, but intuitively I feel that a significant component of the exports of, say Ireland, consists of re-exported import components.
Almost any export will have an imported component: machinery, fuel, and the like. In New Zealand, our export base consists largely of home grown and home processed content. Of every five dollars of export income, four represent value added domestically and one import content that is re-exported.
It is therefore more correct to say that exports contribute around 25 percent of our annual gross domestic production rather than to express exports as a percentage of GDP. This is not just statistical nit-picking.
We do not simply want to grow exports. Importing large quantities of components, applying a few finishing touches, and re-exporting with minimal value added generates little by way of income or net foreign exchange earnings.
The emphasis has to go on adding value. We add value by applying science and skill to our natural endowment. That is why the innovation strategy puts an emphasis on research, on technology, and on skills development. It recognises that exporters do face extra difficulties in converting a good ideas into foreign sales, and so there is a recognition of the role of venture capital, of the importance of export market information, and of the need to put foreign investors in touch with local innovators seeking strategic partners.
The innovation strategy does not try and start again from scratch. New Zealand does a lot of things well. We need to strengthen our economic foundations, not disparage or overlook them. There is no quick fix.
But we can improve performance across the board and look to where the next set of opportunities are likely to be found. Adding value means tapping the creative ideas of a creative people. It means extending the product range and the market penetration that can be developed from our biological endowment. It means applying new information technologies to improve efficiency and leverage advantages across a number of industries.
This is why in addition to what I would call the vertical strategies of science, technology and skill – initiatives that add value up the value chain – the innovation strategy identifies horizontal strategies that target new sectors: creative industries, information technology and biological sciences. These sectors create opportunities in a number of industries: they are the opposite of the all eggs in one basket Think Big project.
This is a far more effective and sustainable solution than the simplistic alternative that Opposition parties seem to trot out – cut the company tax rate. There is no point in having a low tax rate if you haven’t got any profits to pay tax on. It is far better to craft a constructive input from the government in order to grow the cake and generate the profits.
The future lies in adding value. We have been down the cost cutting road and it leads nowhere. The world today is about quality, relevance and reliability – the spoils no longer go to the cheapest.