PM's Address To London School Of Economics
London School of Economics
Implementing a progressive agenda after fifteen years of neoliberalism: The New Zealand Experience
2.30 pm Thursday 21 February 2002
Thank you for the invitation to give this lecture today
The government I lead in New Zealand is a minority centre left coalition. We govern with support in our Parliament normally offered by the Green Party. We took office in 1999 after fifteen years of neoliberalism as my topic asserts. There is no doubt in my mind that we were voted into office to bring a change in direction and a better balance in economic and social policy.
It should not be assumed that New Zealand prior to 1984 was a nation in which all was well. Our living standards ranked around third in the world when I was born in 1950. By the turn of this new century we ranked well below most European nations in terms of GDP per capita.
Older British citizens will remember New Zealand as something like an offshore farm for Britain. And so it was, until British entry to the European Union. A large proportion of our exports were, and still are, sourced from the primary sector, and a large proportion of those made their way in commodity form to Britain.
Manufacturing had developed in New Zealand under heavy import protection from the 1930s. Its focus was on import substitution and it was not internationally competitive. The service sector was distinctly underdeveloped prior to 1984.
As the world economy changed, New Zealand failed to change with it. Stuck with the old commodity exports and carrying the high costs of local, uncompetitive manufacturing, we were sinking relative to others. After the oil shock in 1974, unemployment began rising sharply, along with government budget deficits and current account deficits. When the outgoing conservative government called an early election for July 1984, it was having difficulty producing a budget. Its last budget deficit had been equivalent to eight per cent of GDP.
When Labour came to power in 1984, change was certainly called for. At that time, however, third way options were not developed in the social democratic menu, and the prescriptions for old Labour didn’t fill the bill either. Following the advice given to it by a Treasury heavily influenced by neoliberalism, the new government immediately floated the dollar and then embarked on a programme of far reaching economic deregulation and restructuring. Farm subsidies were removed, financial markets were opened up, and import protection was quickly phased out. Income taxes were cut substantially over the next four years, from a top marginal rate of 66 cents to 33 cents in the dollar. A broadly based consumption tax was introduced, initially at 10 per cent, and then rising to 12.5 per cent in 1989.
While no doubt may of these changes had to happen, the pace was rapid and no thought was given to adjustment mechanisms. As the old industries declined, there was no smart active government to facilitate the new. The market was king and the level playing field was lauded, even more so from the 1990s when a re-energised party of the right was re-elected and began radical change in social policy and provision as well.
The new government in 1991 slashed welfare spending and subsidies on public housing, leaving the poorest New Zealanders an estimated twenty to twenty five per cent worse off. That year the unemployment rate rose into double figures in percentage terms, and for the first time since the depressions of the 1920s and 1930s a significant level of poverty reappeared. Attempts were made to put the public health system on a commercial footing. One of the most controversial changes was to the labour law. The Employment Contracts Act brought substantial deregulation to the labour market and made collective bargaining much more difficult.
In the 1990s the economy marked time, riding the highs and lows of the commodity cycle. A newly independent central bank was required to manage inflation down to a range of 0-2 per cent, and then maintain it there. Fast transition to that target was accompanied by relatively high interest rates, and by a soaring New Zealand dollar which by the mid-1990s was adversely affecting export returns. Unemployment under the new economic settings seemed destined to bottom out at no lower than six per cent.
Then in 1998 New Zealand was caught up in the aftermath of the Asian crisis. The New Zealand dollar fell sharply and the government responded by further cutting spending. The economy went into recession again for two quarters.
It was against this tumultuous background of New Zealand’s modern history that our new government was elected in November 1999. Many New Zealanders agreed that the country was on the wrong track and that fifteen years of radical change had failed to deliver either prosperity, or a fair society. Nor was there an appetite for any more radical change.
Trust in government, and indeed in the whole political system, was at a low ebb. The 1980s and 1990s were looked back on as the years of broken promises when governments seemed to pursue agendas which had no public mandate. The level of concern about governments’ seeming lack of accountability had led to far reaching change in the electoral system.
In 1993 a referendum revealed that more than eighty per cent of New Zealanders wanted to change the electoral system, and that the greatest number wanted a German style proportional representation system. That system, known as MMP, was introduced, and the 1996 elections were the first held under it. The election result forced the ruling conservatives into a coalition with a small, populist party. That coalition, which fell apart in the course of the next three years, was a shambles and led to disillusionment with the new voting system as well!
So the challenges faced by our new government were not only to build a stronger economy and deliver more social justice, but also to keep our word to the electorate and make a minority coalition government elected under the MMP rules work. Fainter hearts may well have walked away from the task !
Fortunately, and unlike 1984, there were new social democratic models at hand. As Anthony Giddens has pointed out in his writing, a social democratic revival had been in progress since Bill Clinton took his “New Democrat” approach to the White House in 1992. The new social democracy began to evolve, with national characteristics, across a range of countries, including New Labour in Britain, the path taken by Dutch Labour in coalition, and also to a certain degree in Sweden and France.
In Professor Gidden’s recent Fabian monograph, “Where now for New Labour”, he sets out succinctly the characteristics of the new centre left. In summary, those of us who follow this path have acknowledged the need for fresh thinking to cope with the changes in the world around us, not least of them being the fast pace of globalisation and the emergence of the knowledge economy. We have also determined to appeal to the broad mainstream of the population which abhors extremes and wants commonsense, practical solutions to everyday problems.
Today’s social democrats operate in an environment where it is critical to maintain the confidence of business for the nation’s economic health, and critical to carve out the nation’s competitive niche in the international economy. That calls for sound macroeconomic policy, and for the state to take a leadership role in strategies for economic development, using the full ability it has to facilitate, co-ordinate, and broker, and using its funding powers to maximise investment and participation in education and skills training.
The state can also define the values which are important in the nation’s development. In the New Zealand Government we believe in promoting innovation and enterprise to build economic prosperity, and also in being collaborative, compassionate, and inclusive. Taken together, we believe these are the values which can enhance economic and social health in the 21st century. We also promote sustainability in everything we do to preserve options for future generations. We are influenced by the triple bottom line concept of integrating economic, social and environmental factors in our decision making.
Like New Labour in Britain, New Zealand Labour went into office armed with a pledge card of commitments we were determined to keep. We spent much of our first year in office meeting those commitments : lifting the level of public pension provision; introducing fair rentals for public housing; making tertiary education more affordable; funding more treatments in the health system; targeting and reducing the incidence of property crime, and growing the number of jobs in the economy. We had campaigned openly on a rise in the tax rate on the top five per cent of earners, and that was implemented. We brought in a fairer labour law and brought workers’ accident compensation back into the national social insurance scheme - measures important to our long time Labour constituency.
We were also determined to be good managers of the economy. In the first half of the year 2000, we watched with some concern the international currency repositioning which occurred, to the benefit of the United States dollar and the yen, and to the detriment of the Euro and the Australian and New Zealand dollars. That repositioning has left us with an extremely export-friendly currency, which in turn has resulted in export-led growth.
Prior to 11 September, we were well pleased with New Zealand’s economic position
- Economic growth in the year to June 2001 was 3.5 per cent
- Unemployment at 5.2 per cent was at a thirteen year low
- The current account deficit at four per cent of GDP was at an eight-year low, and falling. It now stands at around 3.4 per cent
- The trade balance turned positive from last July for the first time in six years, and
- Business and consumer confidence was reasonably steady.
11 September brought with it a period of uncertainty, but New Zealand was in a better position than most to cope with it. Our low inflation, low government debt, and strong fiscal position all help. We look set to continue to outperform our trading partners this year.
But out performing our trading partners is something we need to do year in and year out if we are to hoist our per capita income back into the top half of the OECD rankings. In terms of real per capita GDP we ranked ninth in the OECD in 1970; eighteenth in 1986; and twentieth in 1999. Between 1986 and 1999, New Zealand’s real GDP per capita grew by 9.5 per cent, compared to an OECD average of 29 per cent.
What our government is stressing is the need to speed up New Zealand’s economic transformation so that we lessen our dependence on commodity exports with their exposure to considerable price and climatic fluctuations, and move up the value chain in everything we do.
We know that the nations which proper in the 21st century will be those which have the capacity to create new knowledge and apply it to new and existing industries. We know New Zealand has the capacity to be one of those nations. Indeed our position on other key OECD indicators would suggest we have the preconditions for economic take off if we concentrate our energy on it.
- We have the sixth highest level of participation in early childhood education in the OECD
- We are ranked eleventh out of 28 in the proportion of the population aged 25 - 64 years having at least an upper secondary educational qualification, and fourteenth in the proportion which has completed tertiary qualification to Bachelor’s degree level or higher.
- Our literacy levels measure well by OECD standards
- In 1999 and 2000 we were well in the top half of the OECD for employment rates and
- In 2000 we ranked ninth in the OECD in the proportion of the population with access to the internet.
The legacy of the 1980s and 1990s was a state which played a hands off role in economic development. A level playing field was created, with low tax rates and a deregulated economy. But as other nations tilted their playing fields, as the pace of globalisation quickened, and as talented New Zealanders were recruited to fill other nations’ skills shortages, New Zealand lost out. Our share of the world’s foreign direct investment fell, and significant companies, often in new foreign ownership, relocated off shore.
Our government has had to start from scratch in developing smart active strategies for economic development. The path we are taking sees New Zealand place more emphasis than ever on education and skills training, on supporting science, research and development, on initiatives to back business, industry and regional growth, and on attracting greenfields foreign direct investment. In developing our strategies we have looked at models elsewhere, from those of Ireland, Finland, and Israel to Singapore, Korea, and Silicon Valley. From them we borrow what we believe will work for New Zealand.
Last week we issued the government’s policy framework for growing an innovative New Zealand. It sets out the vision we have for an innovative, inclusive and sustainable nation, the initiatives we have already taken to achieve that vision, and areas which are to be further developed.
Our vision sees New Zealand as
- A land where diversity will be valued and reflected in our national identity
- A great place to live, learn, work and do business
- A birthplace of world changing people and ideas
- A place where people invest in the future
Our aim is to speed up development of high growth, high value, internationally competitive sectors which not only create opportunities for well paid and satisfying work, but which also create the wealth to fund first world public services and infrastructure.
For New Zealand it is critical that new economy concepts also drive our primary sectors from which some sixty per cent of our exports are still sourced. At the production level these sectors have long been highly innovative, and increasingly more of their exports are moving to branded and higher value product. Our tourism industry which ranks up alongside the dairy industry as an export dollar earner, also offers a range of high value, sophisticated, and specialised products.
Other internationally competitive, export oriented industries have also developed in recent years on the razed earth left by the rapid economic restructuring. Significant export earnings are coming from information and communications technology, niche manufacturing, film and television, leisure marine industries, fashion and design, aquaculture, wine, and other new sectors. Education has gone from being a low earner of foreign exchange a decade ago to almost a one billion dollar earner today, and will grow further.
Increasing depth and improved performance in a wider range of export-oriented industries goes some way to explaining the turn up in New Zealand’s fortunes. A sign of how much our economy is changing can be found in the prediction that our information and communications technology cluster will, within three to five years, equal the export earnings of the wool industry, once the nation’s leading export industry.
So what specifically is the government doing to drive innovation in the economy further and faster? We are promoting initiatives in four key areas to get a step change in our rate of growth
1. Developing Skills and Talent
Here we undertake to invest as much as we can in education and industry training; to keep adapting our immigration policies so that they assist, rather than hinder our search for specialist talent and skills; and to enlist the talents of New Zealanders living off shore
- In education we have lifted the numbers in early childhood education; stressed the basics in literacy and numeracy: and made a quantum leap in getting information and communications technology into schools - with the help of leading ICT companies
- Big change is underway in tertiary education, to promote world class research and more collaboration across institutions. Decisions are being made now on which programmes get new funding to produce centres of research excellence. A national tertiary education strategy is being developed for the first time to get better alignment between tertiary education and New Zealand’s development goals. A new Tertiary Education Commission will implement the strategy and make funding allocations in line with it.
- Extra funding for industry training produced an eleven per cent growth in numbers participating in our first year. A new modern apprenticeship programme was set up to make work-based trade and technical training more attractive and has been very successful.
- We live in a global labour market where skills and talent are at a premium. As fast as other nations recruit our talented people, we have to recruit back. In the past New Zealand’s immigration policy focused more on how to keep people out than how to let them in! Now we are launching a new Talent Visa and skills shortage work permits so that employers can access skilled people in areas of shortage more quickly than ever before. There has in recent months been a surge of migration to New Zealand which includes many returning New Zealanders.
- We are also seeing the expatriate New Zealand community as a large resource to draw on. Government agencies and private sector initiatives are aiming to build networks of talented expatriates and to use those networks to establish exchanges and mentoring for young talented people and entrepreneurs.
2 Enhancing New Zealand’s innovation system
The government has lifted its own science and research spending by twelve per cent since the election and improved the tax treatment of private sector R&D to encourage more of it.
Like all western nations we want to see more of our peoples’ discoveries and innovation earning wealth for our own country. To that end we have set up an incubator support programme and a venture investment fund to provide seed and start up capital for new businesses- an area where there was a gap in market provision.
From having no business incubators two years ago, New Zealand now has twelve to eighteen, depending on how you count them. They have developed mainly around the universities and major polytechnics, and provide a supportive environment for graduates with ideas for new businesses. In the incubators they are linked to the staff and services of the institutions and to mentoring.
More work is now being done on how to drive forward clusters of innovative industries, how to incentivise tertiary education and government research institutions to commercialise more of their research, how to improve our intellectual property framework so that we get the full value from our innovation, and how to improve our innovative entrepreneur support strategies.
3 Increasing New Zealand’s global connectedness
Here the government is focusing on the attraction of quality foreign investment, aggressive export promotion, and improved national branding of New Zealand. Presently the investment attraction and recruitment activities of government straddle two agencies: Trade New Zealand, our long established export promotion agency, and Industry New Zealand, a new economic development agency. Many believe that a strong single purpose investment promotion authority will be needed, and we are now considering what the ideal shape of our structures for investment attraction would be.
Meantime we have increased the funding going into the area, and our agencies now work with major investors to put together packages which will encourage them to come to New Zealand. We are new at this game which many other nations and regions of nations have played for years, but the early signs are encouraging. We will undoubtedly have to provide more funding to get the quantum lead in FDI which we need to drive our growth and development.
Our government has been especially active on the trade and export promotion front. This has involved new funding and the establishment of an export credit office to enable exporters to access credit guarantees to back their bids for contracts in difficult markets. Most other western nations provide this kind of backing for their exporters. We have had to reinvent it.
A new Business Grow programme is providing support for companies with the capacity to grow their exports quickly. Now we are looking at a beachhead programme whereby our trade board will make premises available abroad for new exporters as forward marketing bases and as incubators for small and medium sized businesses establishing themselves off shore. Trade New Zealand has already come to such an arrangement with a Singapore technology park.
As a government we have put a lot of energy into improving market access for our exports, through trade policy work via the WTO and APEC, through pursuing bilateral trade agreements, and through ministerial and Prime Ministerial- led business missions.
We also have much work to do in rebranding New Zealand’s image to align it with the contemporary reality. New Zealand’s popular image is of a clean and green, beautiful country with a lot of sheep. It is all of that. But it is also a dynamic twenty-first century economy with sophisticated cities and a vibrant arts and cultural life.
We will be working with the private sector to develop a consistent brand image of New Zealand across all our industry sectors, so that we add smart and innovative to the clean and green image! Currently we are investing millions of dollars in leveraging benefit for New Zealand off the release of the Lord of the Rings - filmed in New Zealand and made by New Zealanders, and the second defence - by New Zealanders - of yachting’s premier trophy, the America’s Cup. Both events can help promote New Zealand as technologically advanced, creative, and successful.
4. Focusing Government resources
In the drive to speed up growth and innovation, the government has decided to focus on three areas, each of which not only has considerable growth potential, but which also has high potential spillover effects for growth in other sectors.
The consensus of advice we have received on sector targeting is that government should focus on areas which are capable of having a material impact on growth rates across the board, which are capable of developing world class scale and specialisation, and which contribute to the vision of a globally-oriented, innovative economy.
These criteria led the government and its advisors to conclude that promotion of biotechnology, information and communications technology and creative industries was most likely to help move New Zealand on to a higher growth plane. Biotechnology, for example, has spillover effects for the primary sectors and the processing of their goods, and for the pharmaceutical and other industries.
Information and communications technology helps drive the modernisation of the entire economic and social infrastructure, and is an essential part of making e-commerce a reality.
Creative industries not only underpin the effective branding and marketing of all New Zealand goods and services, but also can, through areas such as design, have a major impact on industrial output.
The government will be moving to establish joint public-private sector taskforces to identify the strategic opportunities in these areas and will be ensuring that government departments and agencies prioritise the development of these areas in their policies and programmes. So, for example, the government and private sector will need to give priority to developing the skills needed in these areas, research will be encouraged, innovation initiatives will be focused there, and appropriate foreign direct investment will be targeted there.
This focus will not be at the expense of other strategies well underway to boost other key areas of the economy, such as wood processing and tourism. The government has been an active facilitator of business, industry, and regional growth, with many new programmes being driven through the new Ministry of Economic Development and the new Industry New Zealand. The growth and innovation framework sets out the direction in which the government is moving to advance New Zealand’s growth prospects. The priorities it sets will impact on the 2002 and future budgets.
The development of the framework to date has been the result of a working public-private sector partnership. The government will continue to work closely with the private sector on the implementation of initiatives within the framework. An advisory board largely drawn from the private sector, including employee representation, will be established to advise the government on the progress being made and on new initiatives which should be taken, or on new areas for focus.
I believe that the government and private sector focus on growth and innovation has led to the development of a new economic agenda and a substantial shared vision of the future over the past year. While some in the business community still hanker after lower tax rates and further deregulation as the key economic prescription - and who can be surprised at that after fifteen years of neoliberalism - I believe many more are seeing the strategic focus the government has adopted and the policy interventions which accompany it as more likely to contribute to sustained growth. New Zealand already offers a substantial degree of economic freedom and a low cost of doing business relative to other western economies. It is important to our centre left government and, I believe, to most New Zealanders that decent environmental and labour standards are maintained in the drive for a high value and sustainable economy.
Indeed for our government the development of a stronger economy is a means to an end. That end is higher living standards and the ability to provide a better quality of life for all our people. An inclusive and cohesive society is an essential building block for a growing and innovative economy. In the past year as unemployment came down to a thirteen-year low, many more New Zealanders had the opportunity to raise their living standards.
Our government has been able to run a strong fiscal policy while also investing more heavily in the social areas and core services, in the environment and conservation, and in arts, culture, and sport.
My lecture today has focused very much on what we are doing to get growth and development in New Zealand on to a higher plane so that we have the means to support a better quantity and quality of life for our people.
It is also worth commenting, however, on the style of government we have adopted which differs a great deal from the general indifference neoliberals tend to display to civil society.
We have set out to develop an inclusive style which sees us engaging in conversations and partnerships with different sectors.
We have established a joint central government-local government forum which meets six-monthly to discuss policy in all the areas where we must interact, like transport planning, environmental management, regional development, and new legislation.
Borrowing from a British New Labour initiative, and building on our longstanding contacts with NGOs, we began work on developing a protocol for relationships between central government and NGOs. As in most western societies a great deal of social programme delivery is done by NGOs.
We have longstanding relationships with labour unions, with whom we share constituencies and many policies. After an initial standoff with business, much of which was resistant to the change of direction we brought, we have been able to develop a good dialogue which has resulted in greater mutual respect, if not always in agreement. I have already referred to the specific support from the private sector which we have had in developing digital initiatives in education and the growth and innovation framework.
Then there is a relationship which is unique to New Zealand which we are building between our government and Maoridom. Maoridom has undergone a renaissance in New Zealand and its drive for self-determination sees it wishing to develop its own approaches to economic and social development, generally at an iwi (tribal) or hapu (sub-tribal) level.
Mainstream economic and social programmes have not worked well for Maori, and the government is more than willing to be a partner in new approaches. We focus on building the capacity of Maori organisations to strategise and to implement programmes, and we fund programmes delivered by Maori for Maori.
Our experience with Maoridom has also helped us develop partnerships and programmes with and for the significant Pacific peoples population in New Zealand and for the other growing ethnic minority communities.
Thus it can be seen that our engagement with civil society in New Zealand is rather diverse.
From my lecture today I believe it will be apparent that the Coalition government in New Zealand is following a path parallel to those of other modernising centre-left governments. We do seek in Professor Gidden’s words “to reconcile social justice with an energetic and competitive economy”.
Our nation’s modern history has been one of relative decline. From the contentment and prosperity of the early 1950s, New Zealand failed to innovate and renew its economy and institutions. Change when it came from 1984 lacked balance, produced growing inequity, failed to deliver a turnaround, and lacked popular support.
Now we have made a fresh start, with the advantage of learning from others who have taken third way approaches. I go from here to Stockholm tonight to a meeting of the Progressive Governance group of leaders to swap ideas on how to meet the economic, social, and international challenges which face us all.
Our government came to office just over two years ago, determined to restore a sense of fairness; to build opportunity for New Zealand and New Zealanders; and to guarantee security for older New Zealanders, for families, and for those in adversity. While I have had little time to comment on our social agenda today, it has been substantial.
Later this year we will go to the election standing on our record of providing strong leadership, a clear direction, a growing economy, and major investment in the basic needs of New Zealanders for education, health, housing, and superannuation. We also have major environmental initiatives to our credit.
We are committed to a New Zealand in which people of all backgrounds, beliefs, abilities, gender and orientations have a fair go. And we have a programme of action to grow an innovative and sustainable economy which can support a higher quality of life for all our people.
Thank you again for the opportunity to address you on the steps we are taking to implement a progressive agenda for New Zealand.