Cullen Speech To Otago Chamber of Commerce
Speech To Otago Chamber of Commerce Breakfast
Hon Dr Michael Cullen, Minister of Finance
0730, 3 April 2002
As always it is a pleasure to be back in Dunedin. But it is especially pleasing, as Minister of Finance, to be here as the Otago region is reaping the the rewards of many years of hard work, and to be speaking to many of the people who put Otago at the top of the business confidence survey in December.
The economy as a whole is in very good heart - as illustrated by the 41 percent positive response to the “own activity survey” in the National Bank Business Outlook released last Thursday. But the Otago regional economy is one of the stars, with a growth rate of 4.5% in the year to last December, which completes 14 consecutive quarters of economic growth. While this is not the highest regional growth rate last year, the Otago regional economy is one that reminds us of the compounding benefits of steady, sustained growth, year in and year out.
Some part of these positive results can be attributed to good luck. We have had good growing weather at a time when commodity prices, especially for the sorts of commodities New Zealand produces have been at cyclically high levels. What is more, good weather and good prices have coincided with a rather large drop in the value of our currency, meaning that we had a competitive exchange rate that allowed other exporters, and the tourism industry in particular, to join in the good times.
Both weather and commodity prices are cyclical. And both can confound forecasters from time to time. In New Zealand we cannot escape the fact that our economy has as its base a primary produce sector whose returns will fluctuate due to factors largely beyond our control.
When the government published its economic and fiscal updates a week before Christmas there was some comment that the central forecasts were overly optimistic, and that the balance of risk was downside. Commentators pointed to a number of short term risks:
- commodity prices were at record highs, and so it was a long way down to any trough that might be driven by a global downturn;
- investor and consumer confidence surveys showed significant pessimism;
- there was a risk of an emerging drought, which would not only impact on agriculture but risk a repeat of, or even a worsening of, last year’s power crisis;
- the September 11 attacks meant that tourism was particularly exposed, and this was a key component of good recent economic performance.
- In the event, these downside risks have largely dissipated, and if anything the very short-term outlook is marginally more positive than the central scenario in the December update. Export price falls have been matched, and at times outdone by import price declines, so the net effect on the tradeables sector has not been as negative as was feared. Immigration numbers have turned around dramatically, and this has lifted the construction sector.
Consumer confidence is holding up and retail spending is ahead of market expectations. Tourist numbers have bounced back, largely because the composition of tourists has changed. Tax returns are even slightly ahead of forecast. And there has been no real implosion or contagion in the global marketplace.
The National Bank survey confirmed a rebound in investment intentions and strong optimism around exports, both of which bode well for the future and suggest the New Zealand economy has now shaken off the worst effects of the global slowdown.
Good luck is not the only factor, however. Good economic management plays an important part.
Early in the new term, the government re-negotiated the Policy Targets Agreement with the Governor of the Reserve Bank. It confirmed that the primary objective of the Bank was to control inflation, and that was good for confidence. But it also required the Bank to be more sensitive to the impacts of its monetary management on output in the real economy in the immediate term.
We also commissioned a review of monetary policy and practice, and that has fine-tuned structures and informed practices. We are tending to adopt a medium term focus for the inflation target rather than the point to point target that might have contributed to some of the overshooting and undershooting of the mid 1990s.
Our fiscal settings have supported monetary policy. This government has raised the extra money required to cover its extra spending on social and economic development programmes. And it has introduced a scheme to partially pre-fund tax-funded pensions, so that when our demographic structure acquires the inevitable older age profile, there is a cushion to assist in the transition.
It was gratifying to receive last week a vote of confidence in the government’s economic and fiscal management in the form of the healthy credit ratings given by British-owned rating agency, Fitch Ratings.
Fitch - which is on a par with international ratings agencies, Standard and Poors and Moodys - has rated New Zealand AA for long term foreign currency and AAA for long term local currency ratings and has put us on a stable outlook.
Their report notes that we have among the strongest public finances of any country Fitch rates and that public debt levels have more than halved since 1993. It also compliments us on our “undisputed reputation for liberalised markets and policy transparency” stating that it is “largely unmatched among rated sovereigns.” This represents a very solid endorsement by anyone’s definition.
So, from where we stand, there are no significant black clouds on the horizon, other than the kind that our farmers and hydro-electric power companies pray for. This means that we have some breathing space in which to get on with the important task of continuing to diversify our economy, both nationally and regionally, to make us even better positioned for cyclical changes and external shocks in the future.
I say “we” advisedly; since I believe the task of building a strong, diversified economy is one that must be shared by business and government. Neither can do the job alone.
In the 1960s, the Yale economist James Tobin won the Nobel Prize for his work on portfolio theory. For the layperson, this means he had proved mathematically that we should not put all our eggs in one basket. Economists around the world are still hard at work on finding mathematical proofs for “every cloud has a silver lining” and “it never rains, but it pours”.
Although diversification is something of a truism, that does not mean it is easy to achieve. It requires a commitment of resources and energy to innovation and a willingness to invest in risky ventures which may need to be abandoned later. This government has taken the view that to achieve the level of diversification we need within a reasonable timeframe, what is needed is a partnership between government and the business sector. Within this partnership, there are areas where each party will operate largely on its own - bearing in mind what the other is doing - but also significant areas of close collaboration.
This morning I want to expand upon the roles of business and government in diversifying our economy, with a particular eye to the Otago region.
The first point to make is that we clearly already have in New Zealand an economy that is becoming more diversified and hence less vulnerable to the kind of shocks that formerly sent us into a tail-spin. We are some way down the track.
This diversity is part of the reason why the events of September 11 and its aftermath were not as devastating to our economy as we might have expected. Countries which have good fundamentals - underlying strengths in the form of a skilled workforce, entrepreneurialism, innovation, transparent government processes, and good transport and communications infrastructures - tend to fare the best when there are major one-off events such as this.
The Otago regional economy is a good example of this. Land-based exports - in the form of a strong rural sector, a maturing stock of forests, and some significant mining operations - have been the key driver of Otago’s economic upturn. This has been aided by Otago’s solid manufacturing industry, much is which is oriented to the primary sector. Otago manufacturers learned long ago the need to find high-value market niches to make up for the challenge of distance to markets.
But other sectors are growing in importance:
ƒæ The region’s tourism industry, which has had a traditional focus on international, rather than domestic visitors, has weathered the post September 11 better than expected, and is catering increasingly to the needs of more sophisticated, and higher-spending types of visitor.
ƒæ Dunedin is home to some of the country’s most exciting high-tech companies, including several bio-technology companies, which have recently listed on the stock exchange with a combined value of around $100 million;
Otago is now firmly positioned in the second-tier of wine regions in New Zealand, with a 25% increase in the areas planted in grapes over 2001, compared to a 10% increase nationally. Judging by the quality of central Otago Pinot Noir, membership of the first-tier of New Zealand wine regions - with all the associated opportunities in expanding wine-related tourism, technology and manufacturing - is simply a matter of time.
The government’s role in promoting a diversified economy - beyond the good economic management I mentioned earlier - is focused on two areas:
A pragmatic but disciplined approach to intervention in the economy; and
Leadership and persistence in improving trade access.
Government intervention in the economy acquired a bad name in the 1970s and early 80s, and as a result governments over the last decade and a half have aimed to preserve the status of a neutral referee, presiding over an economy consisting of a series of overlapping and scrupulously levelled playing fields. But one of the lessons of the 1990s - lessons learned by other countries mainly, while we celebrated our purity and watched our economy falter - was that neutrality can become a comfortable face for passivity. In the end, markets provide equilibrium - that is their function - but equilibrium does not automatically result in growth and jobs.
This government has moved away from a passive role in the economy, and is developing a new stance based, not on a return to the crude activism of the past, but a smarter kind of activism. I could cite from a growing list of examples:
our recent initiative on Growing an Innovative New Zealand, as set out in the GAINZ report;
initiatives in dealing with skill shortages;
upgrading the regulatory environment that applies to the electricity and telecommunications sectors;
supporting the development of e-commerce;
improving the funding of research and development; and
simplifying the tax treatment of private sector R&D.
Our method is pragmatic and case-by-case, as evidenced by the consolidation of the dairy industry on the one hand, and the deregulation of the apple industry on the other. Each was a considered response based on a careful analysis of the global marketplace.
I would like to focus for a moment on the government’s strategy for the tertiary education system and its vital links with our innovation strategy and the so-called “knowledge economy”. We have 38 tertiary institutions - universities, polytechnics, colleges and education and wananga. The 1990s saw sustained growth in participation, and some important advances in terms of the number of Maori and Pacific students and the frequency with which those who have spent some time in the workforce are returning to tertiary study in order to improve their skills and launch second or third careers.
What was lacking, however, was quality - not in the sense of the competence of the teaching and research in tertiary institutions, but quality in the sense of the interaction between the tertiary education system and the world of business, innovation and community development.
We don’t have the luxury of building ivory towers; or towers built of anything else, for that matter. This government’s vision of the tertiary education system is one which involves strong two-way links between our institutions and the business sector in their region.
Taken to its logical conclusion, this vision could have a dramatic impact on our tertiary institutions and their role in our society and economy. We can see this if we consider how we usually think about the impact of an institution - a university, for example - on a local economy. We have tended to think of the institution, its students and staff as benefiting the local economy by being reliable consumers of local products and services. Attracting students, funding for research, tuition subsidies, capital proejcts, and so on stimulates the local economy.
The government’s vision pushes beyond that, and sees tertiary institutions entering into partnerships with businesses to provide specialised skills, undertake applied research and foster innovation. You have several examples right here, in the form of Blis Technologies, for example, which was a product of collaboration between university researchers and venture capitalists.
At present, this kind of partnership occurs at the margins. Our goal is for it to become commonplace, and for our tertiary institutions to be much more closely integrated into the economy in which they function. This is not only beneficial for regional economies; it also provides an excellent learning environment for students, and opportunities for them to tailor their studies to tangible work prospects.
Our innovation strategy highlighted three areas of particular focus: information and communications technology, biotechnology and the creative industries. We are not regarding these as industry silos in themselves; but rather as competencies that can have applications across a wide range of products and services, and in particular have the capacity to give new life to what have been tired, familiar commodities.
We are looking to invest in partnerships where business, research institutions and government can work together to foster innovation in these areas. Shortly, my colleague, the Hon Pete Hodgson will be releasing information on the nuts and bolts mechanisms for forming and funding partnerships between business and government. I trust many people in the Otago region will get involved.
Finally, maintaining and improving trade access is an important ongoing focus for the government. It was a prominent feature of the Prime Minister’s agenda in Washington last week. This government has negotiated a Closer Economic Partnership Agreement with Singapore and is pursuing a similar arrangement with Hong Kong. We have also taken trade missions to Chile, Argentina, Brazil and Peru as part of the Prime Minister’s Latin American strategy.
However, as the recent examples of the US action on lamb and latterly steel imports have illustrated, the free trade message is easily swamped by domestic politics. We have to be prepared to work hard to retake territory that has been gained in the past, as well as pursuing new objectives.
On the theme of free trade, we are approaching the 20th anniversary of CER, and I believe it is the right time to breathe new life into the agreement. I admit that CER is not glamourous. It had a promising childhood, but in its teenage years became a somewhat shy and retiring wall-flower. However, it makes a enormous contribution to our economy, and can make a greater contribution in the years ahead.
In its next decade I believe we will see it mature and come into its own as our two economies become increasingly interdependent. This came through quite strongly in my recent discussions with political and business leaders in Australia. There is untapped value in our combined economy, and this is something that both New Zealand and Australian businesses are realising.
The increased awareness of this in Australia is partly a response to September 11; but also to the acquisition of some major Australian companies by foreign interests. The prospect of becoming a branch economy of the United States, with “hollowed out” companies exercising a major influence on the country’s economic well-being, is something both Australia and New Zealand now share. Part of the answer is to build a web of Trans-Tasman companies with a firm base in our common market.
Government playing its part with ongoing coordination of business law and alignment of tax regimes. In many areas New Zealand is taking unilateral action to make sure its own business law is compatible with Australia’s. Our recent Takeovers Code has many features in common with the Australian code, and Australian law is informing our approach to the control of insider trading. And while the proposal to merge stock exchanges has fallen by the wayside, the Australian government has recently invited our government to develop proposals for the mutual recognition of securities offerings. I am hopeful that the work now starting will result in reduced compliance costs for cross border securities offerings and give investors in both countries increased investment options.
To sum up, I see many reasons for optimism in the Otago regional economy. It is already acquiring the type of profile that we know can provide a robust basis for delivering a good quality of life to the people of Otago. But, like the rest of the country, Otago has a lot of work to do, in building new technology based business, and in using technology to transform the traditional industries that form the backbone of its economy.
The government is committed to engaging enthusiastically and intelligently in partnerships to complete this important transformational work.