Cullen - Keynote Address to the NZ Day Gala Dinner
9 March 2005
Hon Michael Cullen - Keynote Address to the NZ Day Gala Dinner, Sydney
Foundation Hall, Museum of Contemporary Art, Circular Quay, Sydney
It is a great pleasure to be here to celebrate the strength of the trans-Tasman business relationship. It is a relationship that is deep and longstanding, based on an appreciation of each other’s economies and a similar outlook on the world economy and on how smaller technologically advanced trading nations can thrive within it.
Indeed, the risk in such a relationship is that we assume too large a degree of familiarity with each other, focus our attention elsewhere, and fail to see new opportunities that arise, as it were, in our own back yard.
In the words of the song we can all sing, but would probably rather forget, “Everybody needs good neighbours. With a little understanding you can find the perfect blend. That’s when neighbours become good friends.”
I do not think we have yet achieved that ‘perfect blend’, and what I would like to focus on tonight is two important tasks that face the current generation of business and political leaders on both sides of the Tasman.
The first is creating a ‘common citizenship’ for business, and thereby creating effectively a single domestic economy.
The second is finding a more disciplined approach to leveraging our combined resources to achieve a higher value position for our exporters in world markets, and particularly in the Asian markets immediately to the north of us.
I am pleased to be here along with representatives of some of New Zealand’s leading companies, spanning a wide range of industries. I trust that two things have become obvious through the course of the day. First, the breadth of talent and experience within New Zealand business, the focus on leading edge technology and innovation, and the disciplined orientation towards exports, and high-value exports, as the way of securing our economic future. And second the high degree of strategic fit between the Australian and New Zealand business communities.
On the question of combining our domestic economies, the first thing to note is that we are already a considerable distance down the track towards having an integrated economy and a single market. Looking from a New Zealand perspective, Australia is our largest foreign investor representing around 58 per cent of our total stock of foreign invested capital with annual flows nearly two and a half times those of the United States or the United Kingdom.
Geographical and cultural proximity explains a portion of this. But there are many broader reasons why New Zealand has been a good place in which to invest.
Late last year, a World Bank study of 145 countries ranked New Zealand first 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 achievement reflects many of the basic prerequisites for a modern economy:
a stable and secure business environment;
unencumbered movement of capital;
firm intellectual property protection;
modern infrastructure; and
a highly educated, flexible and multi-skilled workforce.
We have worked hard to maintain and enhance these fundamentals, but have recognised that a small trading nation needs to be ahead of the game wherever possible. My government has had an important role to play here. In the last five years, we established a joint government-business Panel on Business Compliance Costs and have so far implemented 80 per cent 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 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.
Last year we announced a number of changes to our foreign direct investment regime. These will increase protection for sensitive sites that hold great significance for New Zealanders while conversely making investments in other types of land and in business assets more straightforward. We are removing screening altogether on investments in non-land business assets up to $100 million, so long as they involve a shareholding of 25 per cent or less.
Purchases involving land with an unimproved value of more than $10 million will no longer require consent unless they are caught by some other criterion.
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.
Investors also benefit from the simplicity and transparency of our tax system, based on a 33 per cent flat corporate tax, recoverable Goods and Service Tax and tax deductible business expenses (including R&D) and depreciation. There is no payroll tax, no social security tax, and no capital gains tax.
Although some business leaders in New Zealand hanker after the lower headline company tax rates in Australia and among some of our other trading partners, I have yet to meet anyone who would want a wholesale swap of the New Zealand company tax system for that in Australia and many other countries.
Those factors are only part of the investment climate, however. Low risk, low transactions costs and a stable business environment mean little unless there are good prospects for a return on investment.
By and large the New Zealand economy has rewarded the confidence of Australian investors. For example, Telstra's investment in Telstra Clear has certainly performed better that its investments in Asia. Similarly, the National Australia Bank's investment in the BNZ has so far proved more successful than its moves to enter the UK market.
Looking ahead there is every indication that growth will continue. For the past five years our domestic economy has developed an enormous head of steam. Household consumption was up 6.1 per cent over the September year. And this momentum looks likely to be maintained in the December quarter. House sales data and building consents data for December suggest that the recent signs of a slowdown in the housing sector may be on hold.
There is also strong growth in non-residential consents, pointing to strength in investment intentions by businesses in the quarters ahead. That is confirmed in surveys of business confidence, with the National Bank’s December business outlook finding that a net 27 per cent of companies expect to increase activity over the next 12 months, a net 20.5 per cent plan to invest more and a net 14 per cent expect employment to increase.
For most of the last five years, domestic growth has been matched by growth in the export sector, driven by high commodity prices and solid growth in tourism, but also by an increasing tide of diversification into higher value export products. In the last five years, New Zealand’s GDP growth has been running well ahead of the OECD average growth rate. Current forecasts see GDP coming in around 4.7 per cent for the year ending March 2005.
The expectation is that it will ease to about two and a half per cent for the year ending March 2006, and then rebuild to around 3 to 3.5 per cent over the medium term.
The major challenge we face is how to grow the capacity of our economy. This is one area in which better investment flows and stronger trans-Tasman alliances can help. Capacity utilisation in the economy remains extremely tight with a record high being recorded in December.
Like the Australian economy, we face severe labour shortages in some of our key industries. Last month our unemployment rate fell to a record low of 3.6 per cent, down from 3.8 per cent the previous quarter and from 4.5 per cent a year ago. This is the lowest unemployment rate of OECD nations with comparable data.
This is in the context of a growing population. The problem is it is simply not growing fast enough. Employment increased 1.6 per cent over the last quarter, and 4.4 per cent over the course of last year. That means that the economy has added 264,000 new jobs (or an increase of 14.7 per cent) since the start of 2000.
Hence the continued inflationary and wage pressure, with annual inflation in the year to December at 2.7 per cent. That puts us towards the top end of the Reserve Bank’s inflation target, although, after a year of steady rises, the Bank has left the Official Cash Rate unchanged at 6.5 per cent in January, believing it to be sufficient to achieve inflation between 1 and 3 per cent on average over the medium term.
The picture that emerges is of an economy that is pushing the boundaries, particularly the boundaries of the current workforce. We are asking ourselves how we might extend those boundaries and give ourselves more room to grow, and that is where inward investment comes sharply into focus.
While the skill levels of our workforce match those of Australia and the rest of the OECD, the level of capital investment per worker in New Zealand is relatively low. What this suggests is that there are productivity gains to be made, and hence value to be created, by investors with a high degree of familiarity with the New Zealand economy.
One of the features of the New Zealand economy has been a preponderance of small to medium sized enterprises. We are a nation of innovators. 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.
With this objective in mind, both governments have been pursuing an agenda of reforms aimed at reducing the remaining barriers to trans-Tasman investment flows.
New Zealand and Australia are amongst the most highly integrated banking markets in the world. We see further benefit in moving towards seamless regulation of the banking industry, and are forming a joint council involving the two Treasuries, the Australian Prudential Regulation Authority, and the Reserve Bank of New Zealand, to work towards that objective.
On some of the broader issues around competition and regulation, the Australian Productivity Commission recommended a work programme to more closely integrate our competition and consumer frameworks. We have endorsed those recommendations, and will continue the work programme recommended within that report, but we see the recommendations and the report as very much a first step towards the greater goal of establishing a joint regime rather than as ends in themselves. Generally, therefore, we see a two-step process: harmonisation leading over time to joint supervision.
The agreement establishing a mutual recognition regime for securities offerings is likely to be finalised within the next 2 to 3 months. That will be a major achievement in terms of the single economic market. It will allow issuers of securities in both Australia and New Zealand to use the same offer documents and structure. The aim is to promote investment and reduce the cost of raising capital, while maintaining investor protection through appropriate disclosure.
Substantial progress has been made towards standards alignment on accounting. Australia is slightly ahead of us in adopting international accounting standards, but they will be aligned very soon. We are now broadening the focus with a regional forum, to be held later this year and repeated regularly, to achieve greater coordination of standards across the region. The ultimate aim of this work is for a company to be able to keep only one set of accounts which serve both jurisdictions.
As I said at the outset, creating a single Australasian domestic economy is one of two important goals. The other is externally focused. How can we leverage our respective strengths in building our export performance? How can we create, in reality if not in name, a kind of ‘Australasia Inc’?
Answering that question requires far-sighted thinking, particularly around how the global economy will be altered by the significant advances in trade liberalisation that have occurred recently, and those that are under active negotiation.
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.
Australian and 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.
In addition, both Australia and New Zealand are in the process of negotiating and implementing a number of free trade agreements. Australia has signed an FTA with the US, while New Zealand’s progress on that front is slower but still encouraging.
We have started to negotiate an FTA with China. 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.
Meanwhile, both Australia and New Zealand have enjoyed a renewed dialogue with the ASEAN nations on free trade and economic cooperation.
When we bring all of these developments together, the result will be a significant redrawing of the trade map, both globally and in our hemisphere. Commodity producers in Australia and New Zealand are well-positioned to take advantage of this, but so too are commodity producers around the world.
The long game is still about finding high value niches in a range of markets. That is why we need to pay attention to the effectiveness of our ‘innovation systems’, by getting a stronger alignment between our researchers, our entrepreneurs, our skilled workforce, our capital markets and our international networks.
For New Zealand, this has been an important area of government-business co-operation. 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.
So we have implemented a co-ordinated strategy which encompasses government services, educational institutes, researchers and industry, 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 cross-cutting importance.
There is still some distance to travel, but the improved alignment we have so far achieved is bearing fruit.
We have significant new export-oriented sectors which barely existed two decades ago, and which have grown exponentially in the past five years. These include high-value tourism, international education, software, film production, and niche manufacturing in areas such as navigational equipment and baggage-handling systems.
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 per cent 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.
Meanwhile, New Zealand’s entrepreneurs 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.
In 2003, New Zealand’s value added food and beverage exports passed an important milestone, rising 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 represents a significant milestone in the long process of breaking our dependence on commodity exports, with their vulnerability to the volatile cycles of world commodity markets.
This is the kind of change in the structure of our export economy that New Zealand businesses and governments have been working towards.
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.
There is, I know, a similar transformation under way in sectors of the Australian economy, although you have a minerals sector which vastly outstrips ours and provides an underlying stability which we in the shaky isles envy. If we put that aside, our similarities become more apparent. We are small, multi-ethnic, technologically advanced nations, positioned on the edge of the Asian continent.
More often than not our interests coincide. I would argue that that is particularly the case if we look beyond developments in our domestic economies and focus our thinking, our planning and our investing on the world beyond our shores.