Cullen's Speech to New York Investment Luncheon
Finance Minister, Michael Cullen's Speech to New York Investment Luncheon
Hello. It is a pleasure to be with you today. New Zealand and the United States are, in the words of Secretary of State Colin Powell, “very, very, very good friends”. And the US is vitally important to us economically.
It is New Zealand's second largest source of foreign direct investment and our second largest export market. As you may know, we are keen to get US agreement to negotiate a free trade partnership and have this month pushed extra resources into our embassy in Washington to support this effort.
Our analysis shows that a US-New Zealand bilateral agreement would be mutually beneficial, with only minor adjustment costs. And we are confident that an agreement between the US and New Zealand could set high standards that would help the cause of trade liberalisation in our region and multilaterally.
We accept that the Bush Administration is giving Australia priority but are building a constituency for our bid within the US business community and within Congress. We are working hard and with some success to persuade the US Administration that New Zealand should be next in line after Australia given the inter-connectedness of our two economies.
I hope we might count on your support for this initiative.
In July – in the middle of the antipodean winter – the Labour-led coalition went back to the country to refresh our mandate. It was evident throughout the election campaign and in opinion polls since that the New Zealand electorate was generally happy with the policy direction the government had been pursuing and that there was little appetite for change.
So you can expect a large measure of policy continuity and stability.
There is obviously a potential risk for New Zealand, as there is for all developed economies, in the turbulence on the US and other major share markets and the ensuing decline in investor confidence. The extent to which this will affect us, and the way in which the effects will be manifest, is still not clear.
However I will make two observations. New Zealand managed to sail through the world downturn of 2001 with remarkably little damage. And our relatively high interest rates and strong government accounts give us a degree of macroeconomic headroom which should allow us to adjust reasonably smoothly in the event of an excessive slowdown being transmitted to us from offshore.
Also New Zealand did not have the asset bubble that many other countries had in the 1990s, and therefore didn’t have the degree of share price correction that they had. Our share market has fallen by only around 10 percent from its 1999-2000 peak, compared with declines of between 30 and 50 percent elsewhere.
These factors, I would argue, make us a safe haven for investment in these uncertain times.
Despite all the global economic uncertainty and volatility over recent years, the New Zealand economy has held up well. We have recorded growth of around 3 percent a year in recent years. Labour force participation is at a record high, unemployment and the current account deficit are both at 14 year lows, and inflation is below 3 percent and heading downward.
The fiscal position is robust. In the last financial year, the government ran a budget surplus of 2 percent of GDP. Gross public debt is a modest 30 percent of GDP, and is offset by financial assets of around 13 percent of GDP.
New Zealand has one of the strongest sets of government accounts in the OECD and in recent years has been returning growth rates above the OECD average. These are both significant achievements but we are aware that we have much more to do if we are to achieve our long-term objective of restoring New Zealand to the top half of the OECD in terms of income per capita.
New Zealand’s small population and therefore small domestic market mean that to lift our growth, we need to increase our exports. And to increase our exports, we need to dismantle the mesh of agricultural subsidies ranged against our products in overseas markets.
That is why we are committing every effort into making the current WTO Doha Round a success. We share US objectives for trade reform in the round, with agriculture being particularly important to us. We will work with the US to this end.
The Uruguay Round delivered gains of $525 million a year to New Zealand. The potential gains from the Doha Round are even more substantial and have been estimated as in the order of around $1 billion to $1.5 billion per annum.
The multi-lateral forum provided by the WTO remains our primary focus. However we are also active at the bilateral level. I have already referred to our ambitions with relation to the US in this regard. We have a mature open trade agreement with Australia, signed a close economic partnership with Singapore in 2000 and are currently in negotiations for a similar arrangement with Hong Kong.
New Zealand has one of the most welcoming inward investment regulatory regimes in the world. We have the basic institutional infrastructure that investors like: a well functioning, transparent and corruption free bureaucracy and judiciary, relatively low compliance costs, a sound fiscal base and stable prices.
We have a well-educated workforce, labour costs are low by developed world standards, the infrastructure is generally efficient, utilities are comparatively cheap, and we exhibit a high degree of innovation and ingenuity. New Zealanders have a ‘can do’ attitude and a very strong problem-solving orientation.
We are also capable of world-beating technical innovation. High profile examples of this flair are our success in the Americas Cup and the clutch of Oscars and Oscar nominations we picked up for the first film in the Lord of the Rings trilogy which was filmed and produced entirely in New Zealand using a largely New Zealand crew.
New Zealand has always relied upon direct foreign investment and has always put a high value on it. But whereas in the past we have tended to take a generic approach, we are now introducing a new focus to our promotion of New Zealand as an attractive investment destination.
We are doing this in two ways: by connecting potential investors with specific investment opportunities and by identifying areas where we believe New Zealand is especially well placed in terms of international competitive advantage.
The three competencies we have identified are biotechnology, information and communications technologies and the creative industries. We have taskforces working in each of these sectors to develop strategies for growth and will put resources behind those strategies.
We have also appointed a Growth and Innovation Advisory Board comprising representatives from the private sector to provide ongoing advice on initiatives needed to add knowledge and value to our productive base.
New Zealanders are highly creative. What we have been less good at is converting a good idea into a commercial success. The government is seeking to strengthen the links in the innovation chain and to encourage more research and development.
We have introduced a more supportive tax regime for R&D, established centres of research excellence within our tertiary education system, pushed more resources into pure research and introduced a raft of policies to help new businesses become established and established businesses to grow.
Building the skills and the capacity of the workforce is essential to our growth ambitions. Immigration is integral to this and we have introduced a range of measures to increase the numbers of skilled and business migrants to our country.
But our primary effort has to be and has been on building the skills of our own people. We have significantly increased funding to education at all levels – from pre-school to tertiary, and outside the school system through support for industry training and through a highly successful new Modern Apprenticeships Programme.
The government is using its influence as the principal funder of tertiary education to push through reforms which will reward relevance and bring into closer alignment the courses our tertiary institutions offer and the needs of the economy.
New Zealand moved to a floating exchange rate in 1985 and transferred responsibility for the operation of monetary policy to an independent Reserve Bank in 1989. As you may be aware, the former Reserve Bank Governor – Dr Don Brash – left the Bank for a career in politics.
The new Governor is Dr Alan Bollard. His appointment has been very well received because he is highly respected as an economist with a deep knowledge of how the New Zealand economy works.
He was Secretary to the Treasury from 1998, and was extremely successful in that role, and before that, as Chairman of the New Zealand Commerce Commission, was responsible for enforcing New Zealand’s competition law.
Before a new Governor is appointed, a new Policy Targets Agreement must be negotiated between the Governor-Designate and the Finance Minister. The new PTA concluded between Dr Bollard and myself explicitly moves the operation of monetary policy closer to the practice of the Reserve Bank of Australia.
The new PTA adopts a price stability target of 1 to 3 percent and requires the Bank to adopt a forward looking, medium term approach to achieving this objective. This should allow the Bank more time, where needed, to assess the economic impact of developments before making a policy response.
To get back into the top half of the OECD, New Zealand needs to lift its sustainable growth rate to at least 4 percent. I am confident we have the right policies and personnel in place to achieve that over time, and – just as important – that we have buy-in from the New Zealand public.
There is a new sense of a distinctive national identity among New Zealanders and a new feeling of confidence about the direction in which the country is headed. That confidence will, I am sure, be self-reinforcing.
I hope that when the Louis Vuitton series leading to the Americas Cup challenge series gets under way this week, you will take the opportunity to experience New Zealand’s hospitality and that you will extend your visit to enjoy the natural beauty of our landscape.
I can assure you that you will take home pleasant memories. But the cup is staying.