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Cullen Address to Santiago Chamber of Commerce

Michael Cullen Address to Santiago Chamber of Commerce

Santiago, Chile

Earlier this year I had the pleasure of meeting President Lagos and Finance Minister Nicolas Eyzaguirre, along with a number of other ministers and prominent business leaders, in Wellington. Chile is one of New Zealand’s longest standing and closest friends in Latin America, and it has been helpful for me to supplement that strong diplomatic relationship with some personal acquaintance with Chile and its political and business leaders.

Chile and New Zealand have had diplomatic relations for 32 years. Over that time our countries have worked closely on many international issues, such as the environment, Antarctica, disarmament, UN issues and trade policy.

We are now fortunate to have wide-ranging contacts between the two countries, including strong and growing links in trade, investment, education and research. For many New Zealanders, Chile is the door to engagement with Latin America.

This morning I would like to explain the vision that my government has for a strong strategic partnership between Chile and New Zealand. Although we face each other across the Pacific Ocean, for much of our history we have both been oriented elsewhere: New Zealand towards Australia, Europe and Asia; and Chile towards its neighbours in Latin America, Europe and North America. This orientation has been supported by a definite economic logic, as well as many years of history and the links of culture and language.

However, some of that logic is breaking down. We are both relatively small trading nations, with advanced economies based on our expertise in primary production. In a globalised marketplace, with freer flows of trade and investment, we face similar challenges in maintaining our economic performance and securing our presence in the world’s larger export markets. We are both seeking new partnerships to supplement our traditional trade and investment links.

The time is now ripe for building a stronger economic relationship between Chile and New Zealand. Certainly there are areas in which we are competitors. But I believe there are much greater opportunities for collaboration through two-way investment, partnerships in research and education, and joint action in developing markets in third countries.

It is helpful to remember that there are some important parallels in our recent economic history, and in the structure of our economies. We both emerged in the 1980s from heavily regulated economic management regimes, and have embraced the challenges and opportunities of a more integrated global economy. We have both set ourselves the task of building a stronger base for prosperity on the development of free markets, a diversified export sector, and an open foreign investment regime.

In Chile’s case, this has made you one of the strongest economies in Latin America, with very strong, sustained growth rates during the 1990s. You have also weathered the effects of the Asian economic crisis and the slump in world business confidence after the 2001 terrorist attacks on the United States.

New Zealand’s growth track was somewhat different after deregulation. We were hit very hard by the 1987 stock market crash, and achieved only modest growth through the 1990s. However, for a variety of reasons we have been able to ride out the economic turbulence of the last few years, and for the last five years we have enjoyed economic growth at rates ahead of the OECD average.

While growth has come off its 4.4 per cent peak of early 2003, 3.6 per cent for the year to March is an excellent result, especially given the turbulent international environment. In fact, in the March 2004 quarter our economy grew at over twice the rate of the OECD average. And in the five years from the March quarter 1999 to this year New Zealand has achieved growth totalling 21 per cent.

This is a sustained strong run for the economy. Since our government came to office, growth has averaged around three and a half per cent per annum. The labour market is very strong. Unemployment has fallen from 7.6 percent in 1998, to 4.0 percent, its lowest level in 17 years, and the second lowest in the OECD.

This growth has been driven by a mix of strong domestic demand (which expanded by 5.9 percent in the 2003 calendar year) and sound export performance, with increasing volumes and sustained prices. There are no hidden fish-hooks. Growth has been achieved alongside low inflation, which has stayed comfortably within the Reserve Bank’s target band.

Population growth has been steady, but modest. And the government has maintained prudent fiscal management, with Budget surpluses of between two and four percent of GDP and a steady reduction in gross debt to around 25 percent of GDP and falling. Indeed, on current forecasts, net government debt is expected to drop to zero by 2007/08. New Zealand now has a set of books which most western economies would be proud to have.

In the last year the weakness of the US dollar and some other major currencies has meant that the New Zealand dollar has appreciated markedly against the currencies of some of our major trading partners. Our major export industries have enjoyed some protection from hedging contracts, but these have largely come to an end and this has led to a drop in the value of our exports since mid-2003.

For this reason, most forecasters have been predicting a significant slowdown in the New Zealand economy in the second half 2004 and much of 2005. Slowing net migration, slower employment growth, and the lagged effect of the high exchange rate are the main drivers of the forecast easing in growth as reduced export receipts impact on the domestic economy.

I am happy to say that recent economic data suggests that these effects may not be quite as severe as was forecast, due in large part to world commodity prices which are at historically very high levels.

There are concerns, of course. The tight labour market, especially in the areas of construction and manufacturing, is creating some quite severe skill shortages and is contributing to inflationary pressure. That, along with the concern we all share about the sustained increase in the price of oil, has prompted our Reserve Bank to steadily tighten monetary policy over the last year.

We seem headed for growth in this calendar year of between 3 and 3.5 percent, with some forecasters suggesting that 4 percent is not out of the question. Over the four years to March 2008 average per annum growth is forecast to be around 3 percent.

So both our economies have demonstrated resilience in the face of considerable global economic uncertainty. This is perhaps one of the few advantages of being a relatively small, but nevertheless advanced economy. Small, well-constructed boats are often better able to cope with storms than the largest super-tanker.

New Zealand and Chile also share similar ambitions for developing our economies. We are both attempting to shift the balance away from reliance on commodity exports with their dependence upon price cycles, currency fluctuations and weather patterns, towards more value-added products and services.

In New Zealand this is taking two main forms:

First, we have been steadily broadening our economic base by expanding into newer industries. We have significant new export-oriented sectors which barely existed two decades ago. These include high-value tourism, international education, software, film production, and niche manufacturing in areas such as navigational equipment and baggage-handling systems. In the last of these examples, the New Zealand company Glidepath provided baggage handling and security systems for the recent upgrade at Santiago airport.

Some of these industries are starting to rival our traditional agricultural exports in terms of foreign exchange earnings. Tourism in particular has seen a 40 percent increase in in-bound visitor numbers in the last five years, and an even faster rate of growth in the economic return per visitor. Meanwhile, international education has grown in a little over a decade into a $2 billion service industry.

In addition to new industries, we have focused on transforming our traditional primary industries. We have had to work hard against the perception that agriculture, forestry and fisheries are ‘sunset industries’. This perception discourages investment of capital and research activity, and also discourages our young people from pursuing careers in those industries. While it is true that production for the world’s commodity markets will always expose an economy to fluctuations in commodity prices, there are many opportunities to transform primary industries through the application of new technologies such as bio-technology and through imaginative marketing and product development.

Our merino wool growers, for example, have established their product as the fabric of choice for some of Europe’s leading fashion houses, and are producing new types of wool to meet their specific requirements.

We are also working to capitalise on the leading edge biological technology that underpins our strengths in agriculture, horticulture, food, forestry, fishing, pest and environmental management. New Zealand has held its edge in these areas because of natural advantages and particularly because of the sound application of research based knowledge and expertise.

We are seeing this in the dairy industry with the development of so-called ‘nutriceutical’ products such as those based on colostrum. We are also seeing it in the livestock industry with better breeding technologies; in the forestry industry with new composite wood products which have many of the characteristics of plastics; and in the horticulture industry with alliances that enable us to supply product out-of-season to the large niche markets of Europe and North America.

One of the most important developments we as a government have made in the last five years is our Growth and Innovation Framework. This arose from the realisation that our growth potential would remain limited if we simply focused on doing better what we were already doing. Instead, our prosperity would depend upon generating new knowledge, applying that knowledge in innovative design and technology, and supporting entrepreneurship throughout the economy.

We asked ourselves where new knowledge and innovative ideas would come from, and found that the sectors that create new economic opportunities and reinvigorate old ones (that is, our higher education, research, and entrepreneurial support programmes) were operating largely independent of each other, with the result that they were poorly coordinated.

Our universities and technical training institutes were producing skilled people, but those skills did not necessarily match what our major industries needed, either in the volume or the mix of skills.

Our researchers were engaged in world-class research, but there was insufficient attention paid to systematically commercialising that research, either by enhancing existing production or by developing new businesses.

Meanwhile, our business support programmes had fallen into disuse, after a decade in which New Zealand governments withdrew for ideological reasons from any positive involvement in industry strategy.

The Growth and Innovation Framework began with intensive research into identifying the major underlying drivers of economic growth and opportunity for New Zealand. We accepted that we could not be world-class in every field, and that it was better to focus our resources. We went looking for areas of economic activity in which there was a growing global market, opportunity for products and services that commanded a premium (principally from intellectual property rights), and in which New Zealand had an existing base of technology and productive capacity which could be leveraged.

What that research confirmed was that three areas should be the focus of co-ordinated attention. They were:

information and communications technology,

bio-technology, and

the creative and design industries.

The point that came though very strongly was that these were competencies that had applications across a wide variety of sectors. They involve disciplines that can add to the unique growth capacity of the New Zealand economy.

We are now in the process of bringing our education, research and industry support programmes into alignment with these three areas of competency:

We have increased public expenditure on higher education and industry training, and have almost doubled the number of industry trainees in the workforce. We have also taken steps to involve our major industries in leadership roles relating to our higher education and skills strategy;

We have increased public investment in research by some 45 percent, with a very strong emphasis on public-private partnerships with industry that direct research effort towards areas with good prospects of commercial application. Alongside this increase public investment, private sector research and development expenditure has risen by over thirty percent since 2000;

We have developed a new model of government support for business, through partnerships aimed at strengthening the global linkages of New Zealand businesses. We have endeavoured to identify where government can add value in a small economy; and that is often in developing business support infrastructures.

We have also been encouraging foreign investment and supporting alliances between New Zealand companies and overseas partners.

One of the features of the New Zealand economy has been a preponderance of small to medium sized enterprises. We are a nation of backyard innovators. (This is perhaps related to the isolated life of our farmers, who have always used their spare time to tinker with machinery, or more recently with computers.) However, due to our small domestic capital market – and particularly the shortage of venture capital – we have traditionally had difficulty scaling up successful small companies to achieve their full potential as world-class exporters.

This is part of the reason why New Zealand has one of the most liberal inward investment regimes in the world. We recognise the importance of foreign investment, both because it gives our companies access to a larger pool of investment funds, and also because it is often accompanied by access to new technology and links to global marketing and distribution systems.

Turning to the specific issues in the relationship between New Zealand and Chile, our trade relationship has grown steadily throughout the last decade, but remains relatively small. The trade balance is slightly in favour of Chile at the moment. Exports from New Zealand were $30.7 million in the December 2003 year with exports from Chile at $34.9 million, an increase of 45 percent over that year.

The small volume of trade reflects the similarity of our economies. Chile, for example, has become largely self-sufficient in dairy products, and hence imports of New Zealand dairy products are quite small.

Nevertheless, New Zealand companies dealing with Chile view your country very favourably, due in large part to a shared commitment to an open economy and fair and transparent business law and regulation. The direct air service has also given new impetus to trade, and has meant that Chile is the natural starting point for New Zealand businesses seeking to trade and invest in Latin America.

New Zealand investment in Chile has been significant in the past and remains important. The most prominent example is, of course, Fonterra’s majority shareholding in the diary processing company Soprole. However, there are also significant investments in fishing by Sealord, and in kiwifruit production by Zespri. New examples of services trade are also emerging, for example a New Zealand engineering company maintains the Chilean Navy Orion aircraft. Chile is a frequent destination for New Zealand consultants in the agriculture and forestry sectors.

Recently Chile, New Zealand and Singapore have been working towards a free trade agreement known as the P3 agreement. I am aware that there have been some concerns raised within Chile regarding this agreement and the perceived risks for sectors of the Chilean economy.

My government believes it is important that all of the issues relating to free trade are widely examined prior to a commitment being made. We see the P3 agreement as a very positive prospect with considerable advantages on all sides:

It is largely a strategic agreement, as the current tariff barriers between the three partners are in fact low. What that means is that the agreement itself is not likely to expose businesses in any of the partner states to new competition from the others.

The strategic value lies in a number of areas:

First, P3 will strengthen co-operation in research, science and education (for example, our two Agriculture Ministers recently signed a Primary Industry Co-operation Arrangement which supplements the other recent bilateral cooperation agreements in the areas of education, science and technology and export promotion);

Second, it will increase the capacity of the three partners to secure better access to third country markets; and

Third, it will enable the partners to exert more influence at important international forums such as APEC and the WTO.

We are three small, open economies, strategically placed in Latin America, Asia and Oceania respectively. Better integration of our economies, through free trade and free flows of investment, will provide our businesses with an important launching pad into the larger economies around us.

Aside from the negotiations around the P3 agreement, there is a full agenda of co-operation between Chile and New Zealand on trade matters. We have strong common interests in the APEC agenda.

For example, as proponents of liberalisation of global trade we are both working to maintain the momentum in the Doha Round of the WTO. This has recently taken a giant leap forward with the agreement from the EU and the US to eliminate all agricultural export subsidies. This has taken enormous resources of patience and persistence by countries such as ours, especially after the seeming failure of last year’s Cancún Ministerial Conference.

This is a great outcome for Chile and for New Zealand, as fellow members of the Cairns Group of agricultural exporting nations. In time large producers will no longer be able to dump their surpluses onto global markets and collapse prices for our farmers.

Other items on the APEC agenda are of equal importance. Your Finance Minister is sponsoring a discussion on institution building for fiscal stability in the Asia-Pacific region. For many business people this may seem a remote concern. However, it is not. The experience of both Chile and New Zealand confirms that prudent management of public expenditure and revenue provides an underpinning of stability and security which encourages business investment and consumer confidence.

Fiscal instability creates an environment of uncertainty, where governments may have to alter tax policies or increase debt to fund essential services. It is therefore an important consideration for credit rating agencies and financial markets when they assess sovereign risk and determine interest rates.

Achieving fiscal stability is therefore one of the most important ways that governments can provide a supportive environment for economic growth. If countries like Chile and New Zealand, who have worked hard to stabilise fiscal policy settings, can encourage better performance across the Asia Pacific region, then there are very clear gains to be made in attracting more investment to the region.

In summary, I am extremely optimistic about the future economic relationship between our two countries. We share a similar outlook and have compatible business cultures. We have opportunities to increase the bilateral trade in goods and services, and to explore investment opportunities that will enable our export industries to develop new markets in third countries. And we have a broader relationship encompassing education, science, indigenous peoples development and diplomacy, that will build the trust and understanding upon which all enduring economic partnerships must rest.

Thank you.

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