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Cullen: Speech to Port Nicholson Rotary Club

3 November 2004

Cullen: Speech to Port Nicholson Rotary Club Hotel Intercontinental, Grey Street, Wellington

Last month New Zealand's export economy quietly passed an important milestone. In a study prepared for New Zealand Trade and Enterprise, Professor Ray Winger of Massey University's Institute of Food, Nutrition and Human Health showed that, for the first time, value added food and beverage exports represented more than half the value of our total food exports.

This represents significant progress in the long process of breaking our dependence on commodity exports, with their vulnerability to the volatile cycles of world commodity markets.

The study showed that value added food and beverage exports increased by 7 per cent from 2002 to 2003, up to 53 per cent of our total food exports. Value-added food products generated $7.6 billion of export income, an increase of $200 million over the year before.

This kind of change in the structure of our export economy is something New Zealand businesses and governments have been working towards for several decades. The fact that we are now starting to chalk up significant milestones is, I believe, one reason for the ongoing confidence of New Zealand businesses in their own future, and the confidence of overseas investors in New Zealand's long term prospects.

It may also have contributed to the extraordinary resilience our economy has shown in recent months. If you are one of those people who have been holding your breath, waiting for the economic slow down that was widely predicted for 2004, you are probably starting to turn blue.

Economic growth in the year to June 2004 was well above forecast, at 4.4 per cent. This has been propelled by a strong domestic economy, although it is very encouraging that growth over the past six months has broadened with exports and business investment picking up.

The strength of the domestic economy is reflected in a strong labour market. Employment grew 3 per cent in the year to June 2004, and the unemployment rate fell to 4 per cent, and has now fallen steadily from around 7 per cent in 1999 to be the second lowest in the OECD.

Correspondingly, household income has been steadily increasing, with total gross labour income increasing 7.5 per cent between June 2003 and June 2004 alone. Private consumption expanded 5.7 per cent and residential investment 13 per cent in the year to June.

The timing and severity of the predicted economic slowdown is now a matter of debate. The rise in the price of oil (which is now showing signs of having peaked), the high NZ dollar and a fall in net migration still cast a shadow over 2005 prospects; however, these impacts will be offset by high international commodity prices, recovering global growth, strong corporate balance sheets and profitability, and infrastructure investment.

The oil price rise is a double edged sword for New Zealand. If sustained it will dampen global growth prospects; however, oil prices are being driven higher by robust global growth, which is also driving other commodity prices to new highs. The immediate result is that New Zealand's terms of trade are relatively unaffected.

In raising the Official Cash Rate for six straight months, from 5 percent at the start of the year to 6.5 percent last week, the Governor of the Reserve Bank - whose focus, you will recall, is on inflationary pressures in the medium term - has signalled that the evidence shows an economy running to full capacity for some time to come. Three years of above trend growth have placed pressure on labour resources and capacity, which is not about to dissipate quickly.

The question that needs to be answered is whether we are starting to see a New Zealand economy which is capable of sustaining a higher growth rate over the long term, rather than the pattern of surges and retrenchment that characterises commodity-based economies.

Since the 1970s it has been abundantly clear that a commodity-based export economy would not deliver the kind of prosperity that New Zealanders aspired to, or were capable of.

The challenge has been how to achieve that transformation, and how to do so rapidly. Our approach as a government has always been that economic transformation is a matter for both government and the business community to achieve. What a decade of strongly laissez faire economic management showed us in the 1990s was that, in small economies that are distant from markets and barely register on the radar screen of major investors, the natural rate of economic transformation is not fast enough.

What we have sought to create is a new model of engagement whereby government and business work together, each doing what it does best, but guided by shared analysis, coordinated strategies, and - where appropriate - joint action.

So we are increasing government's investment in research by $212 million over the next four years. Importantly, a large portion of this increase has been targeted at research ventures involving CRIs and industries where public and private investment work hand in hand.

Similarly, we have worked hard on a set of skills policies that better orient tertiary education and immigration towards the future skills needs of New Zealand businesses. What many businesses have been telling us is that the major constraint on their growth is the shortage of skilled workers. This is an issue across many sectors, but it is a particular concern amongst employers in some of our key export industries, such as manufacturing, where it is the mid-level skills that are in short supply.

For that reason, we have been reforming the tertiary education system, so that tertiary institutions are now encouraged to become more integrated into their local and regional economies, and to link their teaching and research activities to the growth areas in the economy.

We have also turned immigration policy on its head, so that we are now actively targeting the skills that are in short supply, and changing policy settings to attract those people. With unemployment at 4 per cent, it is clear that we cannot meet labour demand without attracting skilled migrants. Last week, the Minister of Immigration announced increases in the number of points allocated to applicants for residency if they have qualifications and work experience in areas of skill shortage.

We have also placed recruitment officers in some key overseas markets, such as the UK and the West Coast of the USA.

Government and business have also been working together at building international linkages to realise growth potential. Traditionally we have been good at creating successful small to medium sized businesses, but have found it harder to grow that business beyond Australasia. The reasons for that are many and varied; however, an increasing number of businesses are developing and implementing strategies for expanding into new markets. We need to make sure that the next generation of businesses can benefit from their experience, and for that reason New Zealand Trade and Enterprise has a number of programmes aimed at helping businesses connect with overseas investors, distributors and marketing networks.

In the same vein, we have recognised the need to improve the level and quality of capital investment in the New Zealand economy. This is a crucial aspect of the effort to shift commodity-based export industries to a more value-added approach. Foreign investment gives our companies access to a larger pool of investment funds, but it is also often accompanied by access to new technology and links to global marketing and distribution systems.

We often hear concerns voiced about foreign investment, especially when it relates to so-called 'iconic' properties, or when it is limited to the short-term money markets. There are legitimate issues to be addressed, and earlier this year we introduced a number of changes to our foreign direct investment regime, which increased protection for sensitive sites, but raised a number of thresholds to make investments in other types of land and in non-land business assets more straightforward. Accessing foreign capital is one thing; but the real benefit comes when that is accompanied by the active participation of foreign businesses who see the potential of New Zealand firms and want to add value to them.

We have also make progress on more familiar issues, such as reducing compliance costs. It came as something of a surprise to some business people (in particular, to some of the most vocal of business lobbyists) when New Zealand 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, to hire and fire workers, protect investors, register a property, enforce contracts and close a business.

This accolade is a tribute to concerted efforts over several years. For example, we established a Ministerial Panel on Business Compliance Costs and have so far implemented 80 per cent of their recommendations, which 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.

Add to that an ongoing programme of tax simplification and an agenda of harmonisation of business laws and practices between New Zealand and Australia, and I think it becomes obvious why we have scored highly in the World Bank's study.

Indeed, it is interesting to note that when the Australian Productivity Commission recently called for submissions on proposals to harmonise trans-Tasman competition and consumer protection laws, Australian companies were generally enthusiastic about harmonising, so long as the more light-handed New Zealand model was the one that was adopted. New Zealand companies were understandably more cautious, fearing that the heavier-handed Australian model might be adopted as the norm.

All of these initiatives can seem disparate and unconnected, and there is a risk that businesses might become confused by a plethora of government agencies seeking to enrol them in a multitude of worthy projects. Recognising that, we have begun to develop a whole of government response to address the needs of major industry sectors. And to return to where I started, the food and beverage sector is the first of those sectors.

It accounts for roughly 10 per cent of GDP, and exports, which represent half of all merchandise exports by value, are $14 billion a year. The sector faces rapid change in international consumer demands, with increasing emphasis on health and well-being. What is needed is a growing sophistication encompassing product development and marketing innovation.

We are working with key leaders in the food and beverages sector to formulate a whole of government strategy for facilitating growth in this cluster of industries. The strategy is likely to include the design and delivery of business assistance programmes and the development of foundation policies (including regulatory and standard setting policies) that help shape the business environment. It may also extend to areas such as improving the co-ordination of investment in education, training and RS&T.

As the Massey University study showed, even though the food and beverage sector has crossed an important milestone in terms of value-added exports, it still has 47 per cent of its revenue tied to commodity markets. There is a great deal of work yet to be done.

The same can be said of other sectors of the New Zealand economy, such as forestry. What is clear is that we are well positioned to make this transition. By and large our primary industries are efficient producers, with a solid base of investment in skills and technology.

That is an excellent base upon which to build a prosperous future.

Thank you.

ENDS

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