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Cullen: The NZ economy and its place in Asia

The NZ economy and its place in Asia

Speech to Singapore business breakfast


Speech to Singapore business breakfast hosted by LGT Bank of Liechtenstein

It's a pleasure to be back in such a dynamic and modern city. Though I must say it has only been ten days since I was last here albeit for a brief transit stop. I spent a relaxing three hours at this city's impressive airport and marvelled at the size of the economy contained in its two terminals.

Indeed, with a third terminal due to open in 2008 Changi Airport really is testimony to the extraordinary linkages developing between Asian countries and between Singapore and the rest of the world. It will expand annual capacity by 20 million passengers to 64 million and provide yet more options for tourists and businesses to connect to key markets across nearly 200 destinations.

Those linkages are increasingly important to New Zealand as we maintain our drive to broaden and deepen our connections with our Asian and Pacific neighbours.

Indeed, 10 out of our top 20 export markets are Asian countries. Include Australia and the United States in the mix and you can understand the importance of the Pacific Rim to our future. Nearly three quarters of New Zealand's two way trade is tied up with Asia-Pacific countries which also provide 68 per cent of our tourists.

And that's why New Zealand has been a leading voice at the annual meetings of Asia Pacific Economic Cooperation group of economies - the powerhouse group accounting for two thirds of the world's economies and one committed to trade liberalisation.

The APEC finance minsters' forum earlier this month in Hanoi is one I regularly like to attend for the ability to gain access to the key players who shape the financial communities so vital to New Zealand's future.

International connections are essential for a small, open economy like New Zealand's. They contribute to our transformation into a higher value-added economy in so many important ways.

Linking into global markets deepens our exposure to competition and our access to capital. It gives New Zealand a two-way flow of new ideas, fresh skills and leading technology. It provides our businesses with vital opportunities to further diversify their products and services, and establish and build on their presence in an expanding range of export destinations.

There's plenty of evidence that our increasing global integration is paying dividends. The world prices New Zealand gets for our non-commodity manufactured goods has been rising since the 1990s indicating we are getting much better at commanding a premium in offshore markets.

You may even be buying some of these high value brands yourself such as merino wool sportswear from Icebreaker and Pumpkin Patch baby wear. I hope you have also sampled our fine Marlborough sauvignon blanc.

The significance of international connections for our economic performance means we remain committed to further breaking down unreasonable barriers to cross-border trade and investment flows.

Progress within the framework of a comprehensive, multilateral rules-based global trading system remains a top priority for us, but we are realistic enough to know that waiting for the next World Trade Organisation breakthrough is like watching England in a World Cup penalty shoot-out: there is always hope, but you have to accept that there is a chance that you will be disappointed.

At the APEC finance ministers' meeting in Hanoi the frustration over Doha's failure so far was palpable around the conference table. Without a doubt, a multilateral deal is the best way of maximising the potential for world growth.

However, the uncertainty and long drawn out nature of WTO negotiations means you have to have a backstop. And that's why we haven't been standing still waiting for Doha.

For decades now New Zealand has been building a bilateral network of trade deals though the impetus for these has certainly sharpened in recent years. The Australia New Zealand Closer Economic Relations Agreement, perhaps the world's most comprehensive, effective and mutually compatible free trade deal, has been in place since 1983.

We secured a closer economic partnership deal with Singapore in 2001, negotiated the Trans-Pacific Strategic Economic Partnership linking Brunei, Chile, New Zealand and Singapore last year and signed a free trade agreement with Thailand in 2005.

We are also currently in the midst of trade access negotiations with Malaysia and China, and earlier this month we announced an agreement to enter into negotiations with six key Gulf states that currently provide New Zealand with an export market the size of Germany's.

Together with Australia, we are also involved with the ten-member Association of South East Asian Nations and we are engaged in the East Asia Summit (EAS) process - an initiative involving the ten ASEAN members plus China, Korea, Japan, India, Australia and New Zealand.

This grouping is particularly significant. All steps toward regional integration across the 16 countries offer tremendous potential for the future.

Our own consumers have of course long enjoyed the benefits of lower import barriers as we, starting in the mid 1980s, implemented principled, unilateral cuts to our own tariff protections, and export subsidies.

We fearlessly pursued the economic efficiency gains to be had in increased offshore competition to domestic producers and our reward is that our estimated potential output, that is the estimated pace of growth that the economy can sustain without generating undue inflationary pressures, has strengthened considerably over the past two decades.

It leaves us with a very responsive, flexible economy perfectly positioned to pounce on opportunities as they arise within our extremely dynamic Asia-Pacific neighbourhood as our neighbours in turn lower their barriers to trade.

Our idyllic and peaceful South Pacific homeland, where our cities, towns and communities score high points in surveys on the quality of family life, is increasingly an important base to do business with the emerging powerhouse of the Asia Pacific region.

We can also boast the fact that our economy has been a star-performer among the Organisation for Economic Cooperation and Development group of developed economies over the past decade or so.

Since the current government was elected in 1999, for example, annual growth in New Zealand has averaged 3.9 per cent, well above the 2.5 per cent average of the O.E.C.D group of rich economies. Since 1999, the New Zealand economy has grown around 24 per cent larger.

Ours has been a more than solid performance in spite of often challenging international and domestic conditions in the past seven years and there is just no question that our economy is much more resilient at the start of the 21st Century than it was in the last few decades of the 20th and that is due in no small measure to structural reforms to both our public and private sectors implemented since the early 1980s.

But having a more resilient, broad-based economy does not mean we are immune from business cycles.

Growth in real gross domestic product eased back to 2.2 per cent in the year to March 2006 from the 3.7 per cent recorded in the year to March 2005. After such a surge in growth, the economy needed to take a breather.

However, the hard landing some doomsayers predicted has not eventuated. Growth over the first half year looks to have remained reasonably positive. In fact the New Zealand Treasury recently revised upwards its forecasts, expecting growth over 2006 to now likely exceed the 1 per cent growth it initially forecast for the year - something like 1.5 per cent looks reasonable.

Notwithstanding the current period of slower growth, the Treasury still sees trend or potential growth running at around 3 per cent.

Many New Zealanders justifiably take heart from the fact that even at the bottom of our economic cycle these days, our growth rate is much higher than it was in the 1980s and early 1990s and more or less still matches the average recorded in many O.E.C.D. countries.

There is certainly much we can be proud of:
- The labour market is performing very well. The unemployment rate, at 3.6 per cent, is at around 20-year lows. Employment grew by 3 per cent between June 2005 and June 2006 and participation rates are very high and among the best in the O.E.C.D. The strength of the labour market has certainly helped boost household incomes.
- The government's fiscal position is also very strong. For the last decade, successive governments have run fiscal surpluses that have been applied to reducing debt. Gross debt is around 20 per cent of GDP and earlier this year New Zealand joined a relatively select number of countries in achieving a net financial asset position. In other words, we are a net saver. This is expected to improve substantially over the next decade or two as assets build up in the New Zealand Superannuation Fund - the pension fund dedicated to pre-funding part of the future cost of national superannuation. Indeed, credit rating agency Standard & Poor's has recently noted that New Zealand is one of the best-placed nations in the world to meet the challenges of an ageing population.

However, there are a few economic clouds:
- We are not alone in having inflation at uncomfortable levels. This follows the sustained period of strong domestic growth and current very high oil prices. Annual consumer price index inflation increased to 4.0 per cent in the June quarter and while it is expected to ease back a little in September, a sustained fall still looks some way off.
- We are also not alone in having a current account imbalance, even if ours is a little higher than most at the moment. Our households have been excellent consumers at the expense of saving and our exporters clearly need to do better.

The current account deficit should unwind slowly over the next few years especially as the dollar returns to lower levels as expected. Our policies to encourage greater savings and higher value added exporting will all help.

And I should stress that I see New Zealand's very liberal foreign direct investment regime is an important tool in the campaign to turn the balance of payments round.

We want more foreign investment in New Zealand-based firms that can export to the world, including to emerging Asia, in order to raise both our services and merchandise export receipts and underpin rising living standards and social services for all New Zealanders.

We fully recognise the importance of foreign investment because it gives New Zealand-based companies access to a larger pool of investment funds and also because it is often accompanied by access to new technology and new links to global marketing and distribution systems.

No business investment proposal has been denied under the business category since the early 1980s. I note that of all applications received since 1999 (across all investment categories), 97.1 per cent of applications have been approved.

I am also proud that New Zealand regularly ranks very highly in international surveys on the ease of establishing and running a business. The fact that Singapore has just pushed us out of the top slot in the latest World Bank Cost of Doing Business Report is in some ways flattering given how well this country has done in encouraging such impressive economic development over the last thirty years. I note with some glee, as one does Down Under, that our great sporting rival and friend, Australia, is still ranked six notches behind us.

However, we are are not resting on our laurels. We want to foster a business environment that encourages greater investment in innovation and exporting. A current review of business tax rules is likely to produce an attractive mix of a lower corporate tax rate and tax credits, particularly helping those businesses focused on tackling overseas markets.

We have also begun a comprehensive review of business regulation. We want to ensure we have a system that minimises the costs of complying for small and medium businesses - one that strikes a better balance between what's necessary to protect environments, borders and community interests and what's needed to encourage growth. This is not about new regulations, but about fine tuning existing rules to ensure we maximise opportunities for growth.

This should be seen in the broader context of the government's strategy to transform New Zealand into a high value added, knowledge-based economy. We have been actively pursuing an agenda to strengthen the fundamental drivers of a balanced, growing economy. Investing in infrastructure is a key plank. In land transport, for example, we have turned around a moribund record of under-investment with the biggest road building programme this country has seen.

Much of this has been focused on building a world class transport network for our commercial capital, Auckland. The city accounts for a third of the country's GDP. Ensuring Auckland becomes a globally competitive city is therefore essential for the economic health of the rest of the country.

A modern economy also needs a competitively priced, reliable and fast broadband service. That's why we acted to unbundle the local loop, and so create opportunities to encourage new investment and more competitive pricing. For the same reason we are looking at electricity markets to ensure regulation does not act to discourage much needed investment in new generation and transmission assets. Our desire, in tandem with competitive pricing, is also to ensure investors can achieve an adequate rate of return. At the end of the day, this country needs international capital if it is to build world class infrastructure and we are striving to ensure we provide the right signals that New Zealand welcomes foreign investment.

We are also investing heavily in research to drive greater innovation, we have revitalised skills training and we are currently revamping the tertiary sector to ensure the graduates it produces are more aligned with the needs of employers.

We are creating a more diversified economy that is providing greater security and opportunities for families young and old and a country with a distinctive national identity standing proudly in the South Pacific.

New Zealand in the late 19th and through much of the 20th centuries traditionally depended on its benign climate for its economic success, enabling us to produce and grow things better than our competitors.

A good climate remains key to our performance, although these days our focus is more than ever on the investment climate.

New Zealand is an essential place to invest for any diversified portfolio manager looking for a favourable base within the emerging Asia-Pacific region.

Let me reiterate:
- Our regulatory climate: We have an efficient, low cost regulatory environment, and one that encourages foreign investment,
- Our business climate: we remain one of the easiest places in the world to do business,
- Our fiscal climate: our solid fiscal profile is the envy of governments around the world
- We have a low cost, fair and efficient tax system,
- Our education climate: the system is heavily focused on investment in skills and linking businesses' needs to tertiary training;
- Our social climate: ours is a safe, contented and advanced multicultural civil society.

We may not be a King Kong economy like some of our Asian neighbours, but like the Peter Jackson Kiwi-made blockbuster we have the skills, technology and investment climate to allow New Zealand to beat its chest loudly in a crowded marketplace.

It all adds up to an attractive proposition for the investor with an eye to being positioned to maximise the gains from a growing world economy that will be increasingly focused on the Asia-Pacific region.


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