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Mallard Speech to Wellington Chamber of Commerce

The kiwi way - forging a national economic identity

Trevor Mallard Speech to the Wellington Chamber of Commerce

Thank-you for the opportunity to speak to your chamber today.

What I want to do is to use this speech to set out in quite a bit of detail what the government's thinking is around its economic transformation agenda, where it comes from, and where we are going with it.

I should signal from the outset that this speech is being accompanied by quite a large release of documents, including the two key cabinet papers that outline the government's economic transformation agenda, plus the release of a series of reviews around business assistance programmes.

First, let me start with a little history - as I believe that context is always important when it comes to understanding how we are shaping our policy programmes and the road ahead.

In 1999, the Labour-led coalition government inherited an economy that had been shaped by a firm belief in the so-called "Washington consensus". This policy prescription held that economic growth prospered only when a set of macroeconomic guidelines were followed.

Some of them, like fiscal discipline, protection of property rights and market determined interest and exchange rates have become uncontroversial as time has gone on.

Others, like an emphasis on flat taxes, excessive deregulation, wholesale privatisation and the removal of the state from any role in economic and industry development have been discredited by experience.

Successful economies have been those that have struck a balance between excessive intrusion by the government into market activities and total capitulation to market forces.

Over the last seven years, we have sought to redress the failures of the narrow and rigid elements of Washington consensus policies.

Even the World Bank now admits that few countries have been successful where the Washington consensus alone has been adopted in a wholesale manner.

They are now saying that "there is no unique universal set of rules" and there is no single formula for growth. It is not enough to simply rely on property rights, fiscal stability and non-corrupt institutions – some South American economies are testament to what can happen, or what fails to happen, if such a narrow approach to economic policy is taken.

The East Asian, Irish and Scandinavian economies, on the other hand, show what smart policies can do.

Like these countries, New Zealand is now characterised by an intelligent intermediate stand between the neoliberal market fundamentalist extreme and the other extreme of heavy-handed government.

We need to do more than simply rely on the likes of World Bank surveys – outstanding as they are – which show New Zealand as one of the best places in the world to do business with respect to regulation, compliance and good governance.

Just as there is no single set of rules that needs to be followed, it is also now clear that there is no single destination for what might constitute success. Despite globalisation and the freer flow of capital, finance, technology and labour, economies succeed by doing widely different things.

Success does not require that every country turns itself into a mini-USA.

In fact, a major conclusion of recent economic development studies is that the distinct national persona of an economy has not only survived but prospered under globalisation.

This is comforting for three reasons. One is that if the globalisation race was all about who can do the next big thing best, New Zealand would start at a competitive disadvantage given its small size, limited capital base, and distance from markets.

The second is that we can build on and from our natural and human endowments and our proven competencies: we are not starting again in a changed world.

Finally, nurturing our national economic personality nicely complements another of the government’s key priorities, namely celebrating our national identity.

We can be proud of the fact that we can and should do it the kiwi way when it comes to transforming our economy and lifting people's incomes.

In fact we are well on the way already to forging a unique national economic identity that is tailored to what is uniquely New Zealand and uniquely kiwi - our environment, our location on the globe, our natural strengths and resources, our talents in innovation, our kiwi-can-do attitude.

None of this means that we can be complacent, or that we can breathe a sigh of relief and return to the things we did in the past.

Noone wants to return New Zealand to a fortress economy strangled by an over zealous government getting in the way of business.

We are developing unique policy prescriptions that respond to our geography, economic specialisations, institutions and culture. Our country is small and far from the world’s major markets.

This can present challenges. Indeed, the IMF has suggested that up to half of the gap between our growth rate and the OECD average can be attributed to these factors alone.

With hindsight it is remarkable that anyone in New Zealand really thought that merely copying the standard economic development prescription for an economy that is distinct from nearly all of the world’s developed economies would deliver the growth outcomes New Zealanders want.

We have an abundant natural resource base, a hugely innovative culture, and, with a carefully managed environment, we can continue to produce even higher quality primary and biologically-based products thanks to know-how that has been built up over the last 150 years.

We need to build on our strengths and uniqueness, respond to new opportunities, and carve out a New Zealand approach that will bring about economic transformation.

In developing the policy approaches that will support New Zealand’s economic transformation, we recognise that the government does not have all the answers.

The challenges facing the New Zealand economy are complex.

The solutions are also complex and will ultimately rest on businesses rising to the challenge and on effective partnerships operating within the web of interests that contribute to success.

Success is a social phenomenon. It flows out of contributions from research and education providers, from the builders and operators of our infrastructure, from the business and union engagements in raising productivity.

It is underpinned by quality regulatory systems that protect our biosecurity and enhance the reputation of our product for safety and quality.

It is driven by a shared belief in New Zealand.

The Labour-led government is actively building a partnership model with business and other stakeholders to provide greater engagement and sharing of information so that, together, we can deliver New Zealand’s economic transformation.

The types of strategic partnerships that we are seeking are not easy to establish. Excessive fear of special pleading by business and other interests contributed to the near elimination of the government-business networks that are now commonplace in most developed economies.

To rebuild this network we have partnered with industries and regions across New Zealand and there's been some productive work through major regional initiatives and government-industry taskforces.

We have made good progress in this area, but acknowledge that at times our engagement processes have been slightly ‘clunky’ and perhaps too high-level.

We have taken on a brokering and co-ordinating role through the economic development agency New Zealand Trade and Enterprise, as needed, to overcome information and co-ordination problems. We have partnered with the ICT, biotechnology, design, screen, wood processing, niche manufacturing, food and beverage, aquaculture and textiles, clothing and footwear sectors.

Now, all regions have economic development strategies and 21 Major Regional Initiatives have been approved.

Through these initiatives, the private sector and the government are beginning to discover and identify what can be profitably produced and establishing the right skills and infrastructure to bring about this development.

Through strategic collaboration with the private sector we have sought to uncover where the most significant obstacles lie and what type of intervention would most likely remove them or mitigate their impact.

It is important that we continue to build the foundations for a strong, effective strategic partnership between government, business and other agencies if we are to lift economic development across New Zealand.

When we entered government, the cupboard was remarkably bare on our knowledge of sectoral and firm performance and constraints, but we now know much more about how to create policies fit for New Zealand and its regions.

We now have a much better understanding of the difficulties New Zealand firms face when establishing offshore production, distribution and marketing networks and the areas where government intervention can have a lasting impact.

But there is much more work to be done. While New Zealand has enjoyed one of the highest growth rates in the OECD over the last five years, we need to maintain these impressive growth rates to catch up to the OECD average income per capita.

We need to improve our export performance and our links with the rest of the world. We are reaching the limits of what we can do to get more people into work with relatively high labour utilisation and the lowest unemployment rate in the OECD.

That's why we need to lift the productivity of those working if we are to catch up.

Doing this is not straightforward. It involves attack across a range of fronts. But before I go on to tell you about what our plans are, let me tell you our vision for New Zealand’s economy.

We have taken a bold and aspirational view of what we want for a future high-income, knowledge based New Zealand economy that can deliver New Zealanders a great standard of living.

This government’s economic transformation agenda is about action, not words. It is about working with business and continually adapting and enhancing what we both do - to rise to the new global and market challenges that will continue to confront us.

You can see this for yourself by looking at the two economic transformation Cabinet papers I am releasing today.

These papers outline what we mean by economic transformation and provide an indicative detailed action plan for addressing the critical issues to achieving our economic transformation objectives.

Of course the action plan will evolve over time, with some things being added and others dropping off as we continue to learn more about New Zealand’s circumstances and how best to respond to them.

Our vision is based on New Zealand’s unique characteristics, the latest thinking on economic development and lessons learnt from our key comparator countries.

The New Zealand of the future will exhibit higher productivity and be a more active participant in the global economy, with higher levels of exports and more investment links with the rest of the world.

We will have firms and industries that are smarter with the resources they have, delivering innovative and high-value products and services for businesses and consumers around the world.

Our nation will be fully hooked into the latest technology, ideas, knowledge and market trends through world class infrastructure, higher levels of investment in science and technology, and strong people to people connections.

We will have more globally competitive firms that are nimble, creative and innovative, invest more in science and technology, and link into domestic and global value chains.

We will have a strong vibrant primary sector and innovative biologically-based industries and use our natural resources, including those belonging to Māori, efficiently and wisely for maximum long-term effect.

And we will also have more high-value upstream and downstream spin-off industries that leverage off our strengths and continue to diversify through the emergence and development of new areas of strength, as we have seen occur in tourism, screen and international education.

Our firms will benefit more from the country’s focus on enhancing its natural environment and effective management of the resource base, both through market positioning and new technologies.

New Zealand’s people will invest in acquiring new knowledge and skills and these are effectively applied in the workforce to create ideas and capitalise on them.

Auckland will be an internationally competitive city that has fit-for-purpose infrastructure, is a launch pad for our businesses to internationalise, is New Zealand’s gateway to the world, has effective governance, and has strong connections with the rest of the country.

As a country, we will take full advantage of our regional positioning, with greater business and government collaboration with Asia and Australia, creating a seamless trans-Tasman market to seize greater benefits from scale, specialisation and cooperation.

We are actively pursuing an agenda to drive our economic transformation by focussing our efforts around five key areas. These are: growing globally competitive firms; world-class infrastructure; innovative and productive workplaces underpinned by high standards in education, skills and research; environmental sustainability; and an internationally competitive city – Auckland.

To a large extent the challenge is yours to seize - businesses will need to drive this innovation and internationalisation, and businesses must take this responsibility on board.

It is very easy to play the "blame and moan" game but far more satisfying and constructive to be an active part of the solution. Achieving our vision requires sustained effort over many years. Innovation remains at the heart of our strategy. And by "innovation" I mean more than just "science" or "research".

Innovation is about creating new products and processes based on new ideas but also through adopting and absorbing ideas and knowledge from right around the world.

Specifically, these need to mesh in with the changing tastes and values of rapidly changing global markets, leverage the opportunities that new technologies create, and respond to the competitive challenges of emerging competitors.

It is no longer a case of competing against a low-quality, low-wage opposition. Increasingly, we are facing high-quality, low-wage opposition, which intensifies the pressure on being quicker and smarter and different.

Innovation is how we do it, but it also has to be a constant source of reinvigoration.

Innovation is pervasive and occurs across all industries, not just the so called "high tech" ones of ICT, biotechnology and multimedia. Innovation by its nature is collaborative given it is inherently risky and uncertain.

Innovation builds on previous learnings. So we are not going to create new industries overnight. Rather, new industries will typically develop off the back of existing strengths, particularly the primary sector and biologically-based industries.

This approach is consistent with the economic development path which most western European economies have taken historically.

In a number of these economies, public policy has contributed to the value-adding of the country’s existing resource base through persistent technological upgrading of resource-based and low-tech industries.

For example, Denmark, which has similar natural resource and size characteristics to New Zealand, has applied this approach successfully through a range of public policy approaches - some of them quite similar to what we are doing here.

They include building venture capital markets through the Business Development Finance programme, initiating a range of technology incubators to increase public-private R&D collaboration, providing industrial as well as tertiary grants for skills development in R&D intensive sectors and incentives for environmentally-sustainable production processes.

Denmark has by and large become rich by leveraging off its historical growth industries of agriculture, timber products and shipping to produce specialisations in areas such as high-value agriculture, agricultural equipment, domestic and office furniture, transport and ports, electronics and pharmaceuticals.

In New Zealand the government will continue to support the development of new industries developed from our existing strengths and we will continue to be responsive to more unexpected successes that may arise.

For instance, recently we announced support for Right Hemisphere by way of an interest-free US$8 million loan to establish and support a world-leading 3D digital content and graphics industry in New Zealand.

New Zealand already has a number of companies and organisations who are considered to be world class in the 3D digital content and graphics area.

Right Hemisphere has both the scale and technology to be a cornerstone in the development of a world leading ‘virtual cluster’ or ecosystem of private companies, researchers, and educators.

This ‘virtual cluster’ will create opportunities for the development of spin-off companies and industries. It will draw on the existing expertise in other firms and organisations and Right Hemisphere’s 3D technology, for applications across a wide range of industries, including education and training, health, design and manufacturing.

The initiative has been widely applauded by those in the industry who have grasped the massive potential for New Zealand of this niche market - estimated to be worth $10 billion in a decade.

The Right Hemisphere example illustrates how we are looking to better focus and target government resources.

It is very difficult for a small economy to take a scatter-gun approach, generating large numbers of new products in the hope that on the law of averages the odd one will hit the target.

While taking a more targeted approach is inherently a riskier strategy, the payoff is potentially much larger, particularly when managed smartly.

Tait Electronics’ receipt of a $10.6 million grant from the Foundation for Research, Science and Technology for a long-term R&D programme is likewise a step in the right direction and we are keenly monitoring the outcomes of this grant and other similar grants.

Earlier this year I announced a change in policy aimed at encouraging SOEs to consider expanding their scope of business. This means that shareholding ministers are inviting SOEs to be more adventurous in their commercial activity - although they must meet certain requirements.

SOEs are uniquely placed to contribute to New Zealand's economic transformation, given that they have a committed long-term owner, and a number have significant capacity and commercial capability to diversify.

This new policy environment does not, however, provide a mandate for SOEs to be frivolous with taxpayer assets. Diversification proposals will be subject to strict criteria, and be assessed within a framework currently being developed by officials.

We will build on our solid basis for lifting innovation in New Zealand by working in a more coherent way across government and better targeting government resources.

We will build on successes in science where we have increased funding for research, science and technology by 52 per cent over the last six years from $424 million in 1999/2000 to $646 million in 2006/07.

Initiatives such as research consortia and Centres of Research Excellence have forged links between researchers and industry and provide a platform for further engagement.

In the future, more emphasis will be placed on commercialising what comes out of our research system and we will continue to seek ways of getting the most out of our public research organisations.

This means ensuring our Crown Research Institutes (CRIs) are oriented toward meeting the research needs of business and that they make good judgements about the best route to commercialisation of their research.

We have asked CRIs to partner with industry at the earliest opportunity, and to focus on maximising spillovers and ongoing earnings to New Zealand in their commercialisation activities.

We will also be closely monitoring the effects of the negotiated contracts between CRIs and the government on research capability. We need to ensure that New Zealand captures the benefits of public investment in research and development.

Since 1999, industry training funding has increased from $56 million to $146 million in 2007, representing an increase of over 150 per cent. This is beginning to address the chronic skills shortages faced by many sectors with more trainees and qualifications being gained by New Zealanders. We are particularly pleased with the positive feedback we have received on the Modern Apprentices programme.

This government also streamlined the tertiary education sector through the creation of the Tertiary Education Commission and provided more direction for the system through the Tertiary Education Strategy.

We introduced Centres of Research Excellence and the Performance Based Research Fund to improve quality and specialisation in research. Our big push in the tertiary sector moving forward is to improve the relevance of education.

Rather than simply churning out more students, tertiary education organisations will be funded according to negotiated three-year plans. These will require tertiary education organisations to engage with firms and respond to national and regional skill needs.

The government is revamping its business assistance programmes so they better suit New Zealand’s needs. In 2000, we established these programmes and they have since grown to around $250 million per year.

Today I am releasing the overall review of government business assistance programmes and some evaluations of individual programmes.

Our expenditure review of business assistance shows that the range of support is both consistent with international best practice and relevant to specific issues facing New Zealand business.

It suggests strengthening our focus of support on innovation, internationalisation and access to capital.

As a result of the review, changes to enhance assistance will be made so that Ministry of Economic Development (MED) will work with agencies including the Ministry of Research, Science and Technology and the Tertiary Education Commission to review funding for programmes supporting innovation, education and business partnerships between firms, Crown Research Institutes and tertiary education institutes. This will ensure that priorities are more closely aligned.

Government agencies will also start working on a framework to allow them to jointly assess their priorities for business assistance. The Ministry of Economic Development (MED) will report back on this work to Cabinet by the end of April 2007.

We will also shift the focus of existing programmes to support more explicitly international connections, innovation and investment.

Other work underway, including the review of business tax, the Market Development Assistance Scheme and Export Year 2007 illustrates the pragmatic steps by government to help address these challenges.

In moving forward, we are listening carefully to the views of business leaders. It is pleasing to see that the review work that I have mentioned has taken close account of business experience and perspectives.

A key message coming from the business community is the need for better targeting of programmes. You will see from the reports that I am releasing today that this is a common theme.

That is why in some cases we have eliminated separate funding so that NZTE, as the delivery agency, has less product clutter and has more flexibility to respond to specific business and industry needs.

So far I have outlined our action in research and science, business assistance and training and tertiary education. As you know, over the past six years the government has made significant inroads into fixing this country’s infrastructure following the previous government’s massive underinvestment.

Road transport funding is increasing to $13.4 billion over the next five years, close to a doubling in funding.

A massive increase in capital expenditure on the electricity grid is planned, averaging around $470m a year over the next seven years compared to an average of $60m a year in the 1990s following Transpower’s establishment.

About 1500MW of new generating capacity is planned for the next five years and security margins are projected to increase. Management of dry years is improving with far more information available through the Electricity Commission than in the past, although we still need to see further improvements.

We also recognise the importance of ensuring that regulated businesses such as Transpower and distribution lines companies have incentives to invest in infrastructure.

We have established the Telecommunications Commissioner and unbundled the local loop to lift broadband penetration and uptake.

Our effort over the next few years will be to improve security of energy supply and transmission, ensure efficient use of transport infrastructure and continue efforts to improve ICT infrastructure and uptake. Our companies need secure supply chains if they are to succeed globally.

New Zealand’s environment underpins much of our economic and export activities – agriculture, horticulture, fisheries and forestry account for 67 per cent of merchandise exports.

As well as providing New Zealanders with a unique and enjoyable lifestyle, we see the environment as providing the platform for the economy now and into the future. Our firms need to be using environmental best practices and technologies and pushing the frontier out.

This will keep us up with international competitors and provide opportunities for new industries to develop. International developments in areas such as climate change and local challenges to our natural resource base have important implications for our economy.

These developments and challenges provide an opportunity to implement policies to encourage New Zealand firms to develop and adopt new technologies thus improving resource efficiency and potentially providing future competitive advantages.

There are opportunities to reduce emissions in a number of key sectors, including agriculture, transport and energy. A high priority of government is to prevent irreversible soil loss, enhance carbon sequestration and mitigate flood damage.

In 2011, New Zealand will be hosting the Rugby World Cup. This provides a unique opportunity for New Zealand, particularly Auckland as New Zealand’s gateway to the world, to gear up for the event and forge new business connections with visitors.

New Zealand will be in the global spotlight and government will work with Auckland to make sure we get the most out of it.

Governance changes in Auckland are key to ensuring the Auckland region is ready for the World Cup, but also critical for future planning and strategic vision.

Central government will back the changes that the region wishes to pursue and will legislate if necessary to support those changes.

I hope I have made it clear in this speech that through the economic transformation agenda we are committed to improving economic outcomes for all New Zealanders.

The New Zealand economy faces threats and challenges as do all economies, but it is also faced with many opportunities. As a young and nimble nation, together we can take on the world and make the most of the opportunities presented to us - forging a unique kiwi economy.

Thank you.

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