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Michael Cullen Address to Thrive Auckland 2003

Michael Cullen Address to Thrive Auckland 2003 Conference

Thank you for the opportunity to open today’s Conference.

In the words of the old Chinese curse, we find ourselves living through ‘interesting’ times. As we meet, the US and British forces in Iraq are putting the final touches to the overthrow of the Iraqi regime. While this brings to an end one cause of uncertainty that has dogged the global economy, it remains to be seen how protracted and disruptive the next phase will be. We all hope for reduced tensions in the Middle East, for less volatility in global oil prices (with all their flow on effects), and for a lessening of the threat of international terrorism. Whether these hopes will be realised soon is another matter.

Domestically, our economy is coming off a period of prolonged strong growth. Last year we grew faster than any other OECD country with growth running at 4.4 per cent. We have maintained low interest rates and low inflation, alongside a strong labour market. Unemployed and employed beneficiary numbers are at their lowest levels for 15 years, in effect since the first effects of the 1987 sharemarket crash. This has meant strong growth in household incomes despite, on the whole, modest non-inflationary wage growth.

We have known for some time that 2003 will bring some turbulence. Agricultural commodity prices have already dropped, and this will flow through into lower farm incomes this year. Added to this will be the effects of the appreciation of the New Zealand dollar (which rose nearly 15% during 2002 on a trade-weighted basis), and the general softness in the economies of some of our major trading partners, notably the United States, Europe and Japan. We can now add to this the impact of the SARS virus on our export industries, chiefly tourism.

As worrying as these external factors are, we are in fact very well placed to negotiate the next 6 to 9 months, certainly better placed than during the Asian economic crisis of the late 1990s or the 1987 stockmarket crash. Most New Zealand companies have strong balance sheets at the moment, and so too does the government. We have maintained tight fiscal discipline over the last 3 and a half years, and we have exceeded our fiscal forecasts. As a result, net government debt is below 15 per cent of GDP, and we are able to weather an economic downturn better than nearly all other developed countries, with sufficient fiscal and monetary headroom to be able to respond appropriately and effectively.

Partly as a result of this strength, most forecasters are tipping a modest slow down in the New Zealand economy in the first two quarters of the year, followed by a swift pickup as and when global demand climbs out of its current trough, probably in the second half of the year.

Locally, the times are ‘interesting’ too. The city of Auckland faces a unique combination of challenges and with them a unique set of opportunities. In keeping with the changing ethnic mix of the city, we should remember that the Chinese term for ‘crisis’ (wei-ji) combines together two characters: one meaning ‘danger’ and the other ‘opportunity’.

Auckland is now entering the post-America’s Cup era; and there is no reason why history should not judge it to be one of the city’s best. No one will deny the value of the Cup as a catalyst for the development of Auckland’s tourism potential and for placing our yacht building and maritime technology companies prominently on the world map. Most of you will be aware of the conservative estimates of the economic impact of the regatta which put it at well over half a billion dollars of value-added and more than 8,000 jobs.

However, while the loss of the Cup is a psychological blow, the hosting of the event has left an enduring and positive legacy. If we look just at the marine sector, the new skills and investment in infrastructure which have turned it into a $700 million a year industry will not go away. Order books remain healthy, and export income is expected to double within two or three years, Cup or no Cup.

I do not believe there is anyone in Auckland who believes that the mere loss of a piece of silverware (albeit one that came to symbolise the drive and momentum of Auckland City in the last few years) will halt the progress in the Auckland economy. It may be galling when someone makes off with the little silver jaguar from the bonnet of the car, but at the end of the day it is the performance of the engine that matters.

So this morning I want to talk about the state of the engine of the Auckland economy, and how we can further increase its capacity and make it run more efficiently, to the benefit of the people of Auckland and the whole of New Zealand.

I have no hesitation in saying, as a long-time South Islander and current resident of the Hawkes Bay, that the Auckland region plays a key role as a driver of New Zealand's economic growth. Because of its size, Auckland's performance will have a major impact on the performance of the New Zealand economy; so Auckland’s fortunes and New Zealand’s go hand in hand.

But much of the region’s potential remains to be tapped. For much of the last decade, studies on international competitiveness have ranked New Zealand as a whole relatively highly; yet until the last few years our actual performance was below that of nations which on paper were less competitive. What this suggests is that there is latent value in the New Zealand economy waiting to be unlocked.

How then can we unlock the potential of the Auckland region? Clearly it will not happen overnight, and not through any narrow set of initiatives.

There are three important ways forward that I want to explore this morning:

Turning population growth into value growth;

Linking value growth to export-oriented investment; and

Improving the quality and efficiency of Auckland’s business infrastructure.

Turning population growth into value growth

A report commissioned by the Government from LEK Consulting in 2001 concluded that while New Zealand is well known for its excellent small cities, for example Wellington and Christchurch, Auckland is New Zealand's only potential global city. It provides an attractive proposition to returning New Zealanders and to skilled immigrants, and can compete with Sydney and Melbourne to attract skilled and entrepreneurial people.

Mercer Human Resource Consulting recently ranked Auckland fifth-equal – alongside Copenhagen, Frankfurt, Bern and Sydney – in their annual quality-of-life survey of 215 cities.

Not surprisingly, Auckland is the destination of choice for a large proportion of our inward migration and for New Zealanders returning from overseas. This is a positive development, but more is needed. A growing population spawns increased economic activity, at least activity related to consumption. The heat in the Auckland real estate market in recent years illustrates this.

But we cannot drive economic growth off of population growth alone. The challenge is for Auckland to grow on a per capita basis, rather than just on a population basis. This means that productivity has to be increasing through time. We have to find ways of making each new Aucklander more productive than the last. Of course, this productivity challenge is also the challenge for the New Zealand economy as a whole.

There is a substantial body of empirical evidence that productivity, innovation, and economic growth are higher in more densely populated areas. This is because cities provide the key ingredients for an innovative and productive economy. Cities provide large, thick markets for specialist labour and other services, lots of suppliers of inputs, and a large immediate market to sell products into.

Cities also provide the conditions for knowledge spillovers in which knowledge – new ideas, ways of doing things, technologies – can ‘leak’ between people and firms, and be rapidly utilised. As Richard Florida, who spoke at the recent Knowledge Wave Conference, demonstrates, cities can also be intensely creative and entrepreneurial places where ideas and knowledge are continuously exchanged among people in close proximity to each other. These factors are behind the worldwide tendency to cluster and agglomerate. Large cities and regions prosper because they take advantage of complementarities between new and existing knowledge, between different types of skilled labour, and between input and output markets in the same space. This is the reason why places like Silicon Valley still attract people and capital despite substantial reductions in transport and communications costs. Location continues to matter, and not just for real estate agents.

Auckland can provide these environmental conditions in a way that smaller New Zealand cities will struggle to. The ability of Auckland to generate these types of benefits will play a significant role in determining New Zealand's future economic performance.

Equally important for business is the issue of skills development. Human capital is the most important input in a modern economy and thus our traditional desire to see all our young people develop to their full potential sits well with the nation’s economic imperatives.

If I can use an analogy appropriate to the fiftieth anniversary year of the first ascent of Mt Everest, our biggest challenge lies not in getting all of our young people to the summit, but ensuring they can all reach base camp. Far too many of our young people still fail at that level and it is the one area where we fall below the average of other developed nations.

We cannot afford to produce another generation with too many underachievers. That is why this year’s budget will see major new funding in the area of early childhood education.

It is also why it has been especially heartening to see an increase in the participation rate of Maori in tertiary education. The fact is that during the next twenty years our population, and particularly our working age population, will become progressively less pakeha and progressively more Maori, Pacific Island and Asian. Demographers tell us that, on current projections, our fifth million will be entirely in these ethnic groups, while the European population remains more or less static in numbers and older in age profile. Hence improving Maori education outcomes is a crucial factor in building the workforce of tomorrow.

Some progress has already been made. Indeed, more than 13 percent of Mäori aged 15 and over are enrolled in tertiary education, compared to only 9 percent for non-Mäori. Much of this growth has been amongst Maori in their 30s who for a variety of reasons did not proceed to tertiary education after school, but are now seeking a higher level of skills. However, the figures also show that Maori are not well represented in some of the areas of study most closely aligned with the future growth industries in the economy, notably science and engineering.

Achieving better outcomes for Maori is part of the brief of the new Tertiary Education Commission, which has the task of lifting our skills levels and focusing on a more integrated, cooperative tertiary education sector geared to our future economic and social needs. The reforms also send a clear message about building links and partnerships between academics and researchers in tertiary institutions and their local business community. We are already seeing the development of technology incubators and joint ventures between tertiary institutions and industry. These initiatives not only build the knowledge base of local firms, but also provide a unique kind of educational experience for senior students: the ability to get involved in turning technological skills into business advantage.

Linking value growth to export-oriented investment

Increasing the productivity of Auckland’s growing population is just one part of the equation. Another crucial part is linking that value growth to an export orientation.

Research indicates that the Auckland region is less export oriented than other regions. In itself this is not remarkable. Some of our most remote farming communities are entirely oriented towards export markets. And one would expect a city such as Auckland to have a large focus on servicing the domestic economy.

However, there is a ceiling on the returns to be made long term from the domestic economy, where no such ceiling operates for export growth. What we need more of is companies who want to play the long game, and that means getting into exporting. This can be a big step up for any company, and we need to get better at helping New Zealanders with good ideas and a good track record make that transition.

That is why the government decided to merge Trade New Zealand and Industry New Zealand, to create a powerful integrated vehicle for delivering business assistance. Additional resources will be provided to the new agency in this year’s budget.

We are also now examining the reports of the sector-specific taskforces on bio-technology, information and communications technology, and the creative industries, and making decisions on their recommendations. Further money has been set aside in this year’s budget to enable these to be put into effect.

One of the most significant barriers to the development of export industries has been the lack of a significant venture capital market in New Zealand. Traditionally, New Zealanders have produced innovative products and ideas in the equivalent of a suburban garage or back shed, and have then turned them into modestly successful but still, by world standards, small businesses. Scaling those kind of businesses up so that they can service global markets is a risky business, but one which is aided by a deep capital market which makes finances available at all points along a risk/yield curve.

In New Zealand we have found it difficult to get such a market going, and to a significant degree the problem has not been a lack of investors (after all we have one of the world’s most open regimes for foreign direct investment) but a lack of strength and sophistication in the institutions which comprise the market.

Achieving deeper capital markets is very much on the government’s agenda. For example:

We have set up the New Zealand Venture Investment Fund of $100 million to address the gap in the seed capital end of the venture capital spectrum. We expect the private sector capital partners to mobilise a further $200 million through participation in this fund. We also recognise the need for VIF-seeded ventures to be able to access deep capital markets so that they can diversify their equity capital at an appropriate stage in their development cycle.

There are a range of sectoral and regional industry development strategies being implemented by Industry New Zealand and Trade New Zealand that will help to clear some roadblocks to industry performance and stimulate new business growth. We expect these to have positive downstream implications for traded securities and the depth of the New Zealand markets. The merger and upgrade of these institutions currently in progress will further assist these objectives.

Similarly, Investment New Zealand’s mandate to attract new capital to the New Zealand market – for example, by an active and coordinated approach towards assisting major FDI proposals to work through planning processes – should make a significant contribution;

We have reformed securities legislation in the Securities Markets Act. This will strengthen both domestic and international confidence in our securities market law and institutions, and should have the effect of lowering the cost of capital to New Zealand businesses.

The revitalisation of the CER agreement is making it easier for businesses to work in a trans-Tasman environment. As just one example, Australian Federal Treasurer, Peter Costello, and I recently announced a tri-angular tax agreement, under which investors in either country will have access to imputation/franking credits. This makes New Zealand companies that do some business in Australia more attractive to Australian investors.

Improving the quality and efficiency of Auckland’s business infrastructure

The third theme I want of focus on this morning is Auckland’s infrastructure. This has for many years been a kind of Medusa figure in Auckland’s economy: a formidable many-headed monster with snakes instead of hair, who turns to stone any brave knight in shining armour who has the temerity to approach it.

But face it we must; and to combat its many heads we need a many pronged strategy which gets all of the many players in the Auckland region working together.

As one example of the range of possible responses to the infrastructure issue, we need businesses in the region to make more use of the new ‘soft’ infrastructure of broad-band telecommunications. Maximising the use of the information super-highway – through applications which enable teleworking and more complex data transfer – will take the pressure off the other kinds of highway.

This is not to downplay the importance of improving the quality (and quantity) of the region’s road network. Of course, we must also seek to reduce or, more realistically, limit the growth of traffic by the encouragement of public transport and the use of other modes than roading. Already we have had great success in Auckland, in particular in encouraging the use of public transport through the passenger funding mechanism we put in place. At the same time, central and local governments have successfully participated in and facilitated a new approach to passenger rail transport in Auckland.

The role of rail in an integrated and effective land transport system continues to be of concern to the government. Addressing this problem successfully is a very difficult issue, particularly as it is not an appropriate role for the government to end up effectively propping up any particular private sector companies, especially one that was the beneficiary of a very soft privatisation deal.

Another area of infrastructure development which is of substantial concern to the government is that of energy. In the recent past Auckland has looked into the abyss in this respect, and any question marks over future energy supply will immediately make it difficult to attract investment into energy intensive industries. Ensuring reasonable security of supply and an absence of excessive price volatility are therefore important policy objectives for the government.

In the short term we face a malign combination of circumstances, and we need to distinguish our current situation from the broader framework issues even though they interact to some extent. The current circumstances include the very real prospect of a dry winter and the lowered estimates of the Maui gas reserves. If the former occurs it will place real stress on our ability to manage our way through the coming winter period with minimal social and economic disruption. Pete Hodgson is already working hard at this and will, I am sure, succeed, as he did in 2001, in minimising any adverse impacts.

The question still remains as to whether the current very complex market, and the proposed changes to it, will deliver sufficient security of supply in such a small market as this with its peculiar mix of generating capacity. It is important to maximise where possible the elements of competition within the system to reduce inefficiency and avoid unnecessary costs. The question is whether the existing framework concentrates competition in the right areas – at the generating and retail ends – especially in the light of the emergence of the so-called “gentailers.” It is also questionable whether occasional very high price spikes send the appropriate long term pricing signals to encourage adequate generating capacity investment, including a sufficient dry year margin.

These are not easy issues but are ones which we will approach with a proper mix of principles and pragmatism. An important priority is achieving better working relationships amongst the various partners.

I believe that local authorities, the business community and central government are working together in a way that ten years ago would have seemed unlikely. This reflects the energy and commitment of the region’s Mayors and business leaders, and also the efforts of Judith Tizard as Minister for Auckland and Chris Carter as Minister for Local Government.

We can see the fruit of these efforts in the Auckland Regional Economic Development Strategy (AREDS), which for the first time integrates important aspects of economic planning for the whole of the region. Over time I believe Auckland businesses will reap the benefit of this through a more cohesive approach to the administration of planning law and other regulatory systems.

We all have a part to play in making Auckland thrive. Government has a role in providing stable economic management, good quality public infrastructure, efficient regulation and social policies which foster a cohesive and strong community. But I do not want to overplay the role of government. It is the initiative of Auckland business people that will carry Auckland into the future that we all hope for. And on that note I would like to step back and leave you with my best wishes for an inspiring and insightful conference.

Thank you.

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