Cullen Address to Expatriate Breakfast, New York
Michael Cullen Address to Expatriate Breakfast, New York City
[Harvard Club of New York City, New York City]
This morning I would like to do two things.
First, I would like to give you a brief update on the recent progress of the New Zealand economy. And second I would like to set out four compelling reasons why investing in the New Zealand economy makes good sense in the current environment.
If what I say makes any of you homesick and inspires you to pack up and return to New Zealand, so much the better. However, it is clear that the support and interest of the wider diaspora of Kiwis is an important boost to many New Zealand businesses, with a range of tangible and not so tangible benefits. So New York City may indeed be the best place for New Zealanders to practice their patriotism.
As you may have heard, the New Zealand economy has sustained a remarkable run of growth, and continues to outpace most of the OECD. Economic growth reached a peak of 4.6 per cent in the year to December 2002, and in the year to June 2004 remains a creditable 4.4 per cent.
The labour market is humming, and New Zealanders are back to work in droves. Employment grew 3.0 per cent in the year to June 2004, and the unemployment rate fell to 4.0 per cent, and has now fallen steadily from around 7 per cent in 1999 to be the second lowest in the OECD.
The new jobs are also paying well, and household income has been steadily increasing. Indeed total gross labour income increased 7.5 per cent between June 2003 and June 2004.
Understandably, increasing household wealth is driving domestic demand, with private consumption expanding 5.7 per cent, and residential investment 13 per cent in the year to June. However, that is by no means the complete picture. Business investment has also been expanding strongly, up 13.5 per cent in the year to June.
In 2003 we began to feel the impact of the high New Zealand dollar on the value of exports, however, export commodity prices have risen to record highs, and this has many forecasters revising their expectations of a slowdown later this year.
Although there is evidence that the long anticipated slow down is starting to occur, many forecasters are now picking growth in the 2004 calendar year of around 3.5 per cent.
So the resilience of the New Zealand economy continues to surprise the forecasters. What that suggests to me is that the slow transformation of the New Zealand economy, which has been underway in fits and starts for two decades, and which my government has attempted to accelerate by a more disciplined and strategic approach to economic leadership, is starting to happen.
So here I come to my four compelling reasons to invest in New Zealand. Why should a small, Pacific nation (Pacific both in geography and in its generally relaxed and peaceful orientation), one that is distant from many of its key markets be ranked highly in terms of the prospects for long term return on investment?
A regulatory environment that tops the world in terms of ease of doing business;
A skilled population with a long track record of performance in high added value industries with enormous global growth potential;
A strategic position on the edge of the Asian continent, strengthened by a high degree of economic integration, in terms of trade and investment flows, with many of our close neighbours; and
A stable far-sighted regime of fiscal management and monetary policy that is the envy of many nations.
Let me address these in turn.
First, the regulatory environment for business. We were very pleased to find a couple of weeks ago that New Zealand had ranked top in a World Bank study of 145 countries for ‘ease of doing business’, ahead of the United States, Singapore, Hong Kong, and Australia. The report looked at the cost and time taken to start-up a business, labour market flexibility, protect investors, register a property, enforce contracts and close a business.
This accolade is the result of concerted efforts over several years. For example, we established a joint government-business Panel on Business Compliance Costs and have so far implemented 80 percent of their recommendations. These related to better co-ordination of regulatory and business services across government, additional funding for the Environment Court, strengthening regulatory impact analysis to improve the transparency of regulatory decision-making, and changes to the health and safety regime.
We are also most of the way through a review of the Resource Management Act, which will take what is already regarded as one of the better pieces of resource management legislation in the world and further streamline its processes without sacrificing the underlying principles of a fair balancing of business, community and environmental interests.
New Zealand still 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.
Earlier this year we made a number of changes to our foreign direct investment regime. These increased protection for sensitive sites (the so-called ‘national interest’ areas that hold great significance for New Zealanders and probably feature prominently in the ‘home thoughts from abroad’ of ex-pat Kiwis), but conversely made investments in other types of land and in business assets more straightforward. We have removed screening altogether on investments in non-land business assets up to $100 million, so long as they involve a shareholding of 25 percent or less.
Purchases involving land with an unimproved value of more than $10 million will no longer require consent.
The criteria for approving investments above those thresholds are clear and logical, and the process is transparent and efficiently managed.
So investing in New Zealand, and conducting business once you are there, is an easy exercise, relative to other investment destinations.
My second compelling reason to invest is our skilled population, and our long track record of performance in high added value industries. I would add that in many of these industries there is considerable scope for further expansion, and hence enormous potential for growth in partnership with the right kind of investor.
New Zealand is unusual amongst developed nations in having an economy still heavily focussed on the production of agricultural commodities. The story of the last few decades has been one of trying to escape from the commodity trap.
There have been many successes in this regard, and there are major new sectors of the New Zealand economy that barely existed a couple of decades ago. Our tourism industry has made immense strides forward in terms both of visitor numbers and the capacity to cater for the high-value end of the market. Brand New Zealand has been further strengthened by our creative industries such as film and fashion.
Indeed, the Manhattan skyline to be featured in the upcoming remake of King Kong is being recreated in a quiet Wellington suburb, and I expect that Fay Wray will be dressed by one of New Zealand’s leading designers for her high-level encounters with the great primate.
There are similar stories to tell in terms of software, advanced telecommunications, yacht-building, and health care research. One could mention Blis tech, a bio-tech company whose origins were in the lab at Otago University, and which has developed products that use the human body’s naturally occurring bacteria to combat conditions such as tooth decay, ear infections and throat infections. Or there is Terabyte, a software company whose Virtual Spectator product is already widely used to provide real time animation effects in the coverage of various sports events.
In addition to expanding the base of the New Zealand economy, our innovators are increasingly turning back to the primary industries, where we have led the world in terms of productivity and are now poised to find greater leverage through the application of biotechnology. Far from being the sunset industries they have often been portrayed as, our primary production industries are a huge asset to be mined. The last decade has seen a great broadening of the range of products, primarily those which can command premium prices in the markets of the northern hemisphere.
When biotechnology is added to the mix the results are many and varied, from new types of wool grown to meet the specific requirements of some of Europe’s leading fashion houses, through to nutriceutical products to meet the demand for foodstuffs that are both nutritious and therapeutic.
One could cite many more examples. However, the issue we increasingly face is the need to accelerate the rate at which such innovations are transforming the economy. We recognised that our ‘innovation systems’, by which I mean everything that goes into growing a good idea into a winning business, needed a boost. We needed to get a strong alignment between our researchers, our entrepreneurs, our skilled workforce, our capital markets and our international networks.
This is where the Growth and Innovation Framework comes into play. This has been from its inception a joint government-business sector exercise to design and implement a strategy to grow the New Zealand economy through innovation.
It began with intensive research into identifying the major drivers of innovation and the obstacles or roadblocks that impeded the growth of innovative New Zealand companies. It has led to a co-ordinated strategy that encompasses government services and industry coordination, addressing issues such as skills, research, venture capital, foreign investment, branding and international linkages.
Some of the results so far include:
An increased focus on innovation by New Zealand firms;
Increased collaboration and networking between firms with more sector strategies, shared projects, key partnerships and information sharing;
Increased public and private sector expenditure on research, and enhanced collaboration between businesses, tertiary education providers, research institutes and central and local government;
A marked increase in the uptake of industry training; and
More effective whole-of-government processes and co-ordination to clear roadblocks quickly and to address complex issues of crosscutting importance.
There is still some distance to travel, but the improved alignment we have so far achieved is bearing fruit. Where we are heading is a version of ‘New Zealand Inc’ which focuses on high-value opportunities, efficiently marshals the resources of skills, technology and operational capability, and quickly clears obstacles to the growth of new business. That alignment, of business, research, education and central and local government, is, I would argue, a key reason why New Zealand is a good place to invest.
My third compelling reason is our strategic position on the edge of the Asian continent, aided by our increasing economic integration, in terms of trade and investment flows, with our close neighbours.
Economic integration is furthest advanced with Australia. I have been meeting regularly with Australian Treasurer, Peter Costello, in order to keep on track a significant work programme aimed at significantly reducing the transactions costs of doing business trans-Tasman. Work is well underway on harmonising securities law, company law and banking. We are working towards a ‘common citizenship’ for companies that will mean that once a company is registered in one country it can operate as of right in the other.
In addition, New Zealand is negotiating a number of free trade agreements. We are expecting to start negotiating an FTA with China shortly. This is an important coup, since we are the first Western nation to have done so.
At the same time we are working with Singapore and Chile on a three-way agreement that will be important not just because of the access to their domestic markets, but also because it is a strategic alliance featuring one partner each from Asia, Latin America and Oceania. We are aiming to create a kind of launching pad for businesses seeking to move into those three regions.
In the meantime, New Zealand agricultural exporters will be major beneficiaries of the recent decisions in the Doha round of the WTO regarding removal of agricultural subsidies.
In agriculture, we now have an historic commitment to eliminate export subsidies – the most egregious form of trade distorting support. For the first time in 50 years, the debate will now be about when and not whether we do it at all.
On market access, while the language could have been more ambitious, we have the basis for arguing for substantial improvement in market access for all products, including tariff quota expansion for sensitive products. And the framework sets the basis for big cuts in domestic subsidies.
The other important negotiation was on non-agricultural market access. NAMA covers what used to be known as “industrial goods”, which includes sectors of major importance to New Zealand, such as forestry and fisheries.
The potential benefits are immense. The Uruguay Round, negotiated from 1986 to 1994, has produced gains for the New Zealand economy over the last decade of more than NZ$9 billion. The successful completion of the Doha Round will again change the complexion of world trade, and we will be seeing the flow-on benefits of that for years to come.
My final compelling reason for investment is our country’s stable far-sighted regime of fiscal management and monetary policy that provides a backbone of stability for investors.
New Zealand has a set of government accounts that is envied throughout the world, and that has been achieved by careful management rather than by an excess of taxation. Tax rates on businesses in New Zealand are lower than in Australia, once the total picture of state and federal taxes and payroll levies is taken into account. And they compare very favourably with other developed nations.
What is more we have set the scene for future fiscal stability by establishing the New Zealand Superannuation Fund in order to partially pre-fund the cost of the state pension at the height of the demographic bulge towards the middle of the century. This fund (which is managed at arms length by independent funds managers) will provide future governments with a significant hedge against the rising cost of superannuation. The Fund also will have the effect of placing the Crown in a position of eliminating its net debt within the next decade. Few countries are able to boast of that.
We have also, this year, provided the Reserve Bank with an increased capacity to respond to the more wayward swings in the value of the New Zealand dollar. We are approaching this issue cautiously, but our view based on international evidence is that there may be some merit in having a greater capacity for foreign exchange rate intervention, similar to that of the other central banks, including the Reserve Bank of Australia.
So to sum up, there are many reasons to be bullish about the New Zealand economy, despite some ongoing turbulence in the global economy.
We have moved beyond the laissez-faire philosophy of the 1990s, which often became a game of standing back and watching nothing happen.
Instead, we have focussed on key areas in which government and business can work together to align our systems of innovation and overcome the barriers of distance and size in order to punch above our weight.
However, there are many opportunities to add more value, at all points in the value chain, be it in venture capital, links to marketing networks, or research links. How well we exploit those opportunities, and find investment partners around the world to share in that task, is what will drive New Zealand’s prosperity into the future.
It is still a long haul and New Zealand will always have to think smarter and act quicker than larger nations who enjoy the benefits of substantial domestic economies and the capacity to make very large investments in technology and infrastructure. However, New Zealand is very much on its way, thanks to its loyal supporters at home and scattered throughout the world.