Hon Dr Michael Cullen
Deputy Prime Minister, Attorney-General, Minister of Finance, Minister for Tertiary Education, Leader of the House

24 September 2007 Speech Notes

Embargoed until: 1:30pm Monday 24 September

Public reform and management: what China and New Zealand can learn from reform

Lecture delivered at the China Executive Leadership Academy Pudong (CELAP), Shanghai. 9.30AM Monday, 24 September 2007

It is a great pleasure to be invited to address the China Executive Leadership Academy today.

New Zealand has a strong and growing relationship with China and I would like to outline what it means for us today. You have also asked me to address the experience of public sector management in New Zealand and our approach to fostering innovation.

I welcome China's interest in New Zealand's experience. In recent years we have enjoyed many exchanges at high level as we have sought deeper understanding of each other's experience.

New Zealand Prime Minister Helen Clark visited Beijing in 2005 and she came to Shanghai in 2001. Premier Wen Jiabao visited New Zealand last April, and before he came President Hu Jintao visited in 2003 and Chairman Wu Bangguo in 2005.

Last March, Vice Premier Zeng Peiyan visited us and there have been a great many ministerial exchanges in recent years.

These visits reflect the growth of our bilateral relationship.

Each year we welcome many Chinese to New Zealand. One hundred and fifty thousand New Zealanders identify as ethnically Chinese. Indeed, though this year marks the 35th anniversary of diplomatic relations with China, we have been enriched by Chinese migrants to New Zealand for at least 150 years.

The two-way relationship is strong. We welcomed almost a hundred thousand tourists from China last year – five times as many as in 1999. Around twenty-five thousand Chinese students are studying in New Zealand – more than from any other country. China has become New Zealand's fourth largest export destination. In return, many of our leading businesses have established important operations here in China.

These are not just transitory arrangements. They reflect a long-term commitment by our businesses to participate with China as partners, with considerable mutual benefit. Our highly innovative merino fashion company Icebreaker, for example, moved its manufacturing to China. It is still a New Zealand company, with design and marketing retained in New Zealand. But it is now also an international company, participating in China's competitive advantage in manufacturing.

It is obvious from these exchanges that both New Zealand and China are finding opportunities in our association. New Zealand has therefore welcomed the opportunity to be the first country to begin negotiations on a trade deal with China. There have been fourteen rounds of talks. The aim is to conclude an agreement by next April that is comprehensive, of high quality, balanced and in our mutual interest.

With five per cent of our exports coming to China, and thirteen per cent of our imports sourced from here, the opportunities for New Zealand from a high quality agreement are several.

Our exporters benefited when China entered the WTO in late 2001 and tariffs on a number of New Zealand products fell. We also benefit from increased certainty of access as a result of China becoming part of a rules-based system. And with 460 of the world's Fortune 500 companies active in China, the opportunity to contribute to the value chains they are creating is attractive to New Zealand, too.

In return, there is considerable potential for China from an agreement with New Zealand.

For example, significant opportunities exist for sharing our world-leading agricultural technology and techniques.

We can foster the exchange of personnel, and we can also offer advice on farm policy. We can offer our knowledge and expertise as the world’s most sophisticated, efficient and innovative agricultural exporting nation.

That innovation has helped us develop a very competitive industry. A generation ago we didn't have a wine industry to speak of; now our sauvignon blancs and pinot noirs are world-leading. Our dairy companies are inventing high-nutrition sports drinks. The horticulture sector is developing high value plant varieties like Zespri Gold kiwifruit and Jazz apples.

Partnerships to share technology and expertise are an integral part of global value chains today. We no longer expect every skill to be in one country, let alone one company. Trade policy should reflect the economic realities.

Our economies are largely complementary. We should work together in areas of common interest. New Zealand companies have successfully opened partnerships of this sort before.

Let me give you a couple of examples.

Fonterra is a leading multinational dairy company, fully owned by New Zealand dairy farmers. Fonterra comprises a global supply chain that takes milk from its own shareholders’ farms in New Zealand – and also from farms in other countries. And it delivers cheese, butter, milk powders and protein products, as well as branded dairy products in 140 countries. Fonterra invests in and works in partnership with local dairy companies. These partnerships cover marketing and sales of consumer products as well as manufacturing of bulk commodities and value-add ingredients from raw milk.

The partnership benefits from the local expertise of Fonterra’s partners. Those local partners benefit from Fonterra’s technological expertise in the dairy field and global marketing experience. For example, working through Dairy Partners America, Fonterra is the largest processor of milk in Brazil, through a local partnership processing around eight per cent of Brazil's milk.

In Chile there were fears that a free trade agreement with New Zealand would open Chile to imports of cheap New Zealand milk. The opposite happened. Through Soprole, the largest local dairy company, Fonterra invested in both consumer goods and processing. By sharing its technology and farm management practices, Fonterra helped Chilean dairy exporters to improve their efficiency and compete internationally. Chile has become a net dairy exporter for the first time.

These sorts of gains are available to China from a deepening bilateral relationship.

New Zealand is interested in deepening our partnerships with local producers. We want to be able to transfer technology and skills that we have developed in the world's leading agricultural economy.

And - looking at the bilateral relationship from the other end - New Zealand companies need to be internationally competitive and stay at the cutting edge of innovation and technology to capitalise on the opportunities China has to offer.

So New Zealand believes there are substantial gains at stake for both our economies if we can complete a trade deal.

Another area where it is possible China has something to gain from New Zealand is in awareness about our innovation in public sector management. I know this is an issue of particular interest to this audience. CELAP's Director-General (and our chair today), Dr Jiang Haishan, has been to New Zealand and seen that New Zealand is something of a laboratory for reform.

In the 1980s, New Zealand’s public sector management was radically and rapidly changed.

Change was driven by a number of factors. First, our external economy had fundamentally changed. Throughout most of the twentieth century, our economy was driven by exports of low value commodities like sheep meat and wool, mainly to the United Kingdom. When the United Kingdom entered the European common market we needed to adapt. By the eighties it was clear that we were not adapting fast enough. The government was shielding exporters from price signals. The payment of subsidies was increasing debt in the public sector. The government comprised a very large proportion of the New Zealand economy and operated inefficiently in many of those areas.

Subsidies for our agricultural exports were ended, but reform needed to go deeper. The government’s finances needed to be stabilised. The budget process gave no satisfactory way to deal with over-expenditure.

Before the reforms, ministers didn’t have enough information to make clear decisions. Centralised planning led to cumbersome bureaucracy. For example, Treasury issued detailed guidelines on how departments managed their vehicles. It even included instructions on the right way to park a car – they had to be left in gear, with the wheels turned towards the curb. But important decisions about actual outcomes were opaque. It was hard to get people to take responsibility for decisions. And managers operated under rules that made it difficult to keep good quality staff in key professional areas, or to redeploy staff and resources that were no longer needed.

We had to get rid of that model. In its place New Zealand switched from an administrative focus on compliance with rules to a management focus on achieving outcomes. Responsibility was devolved in exchange for accountability for performance.

The government’s trading activities were put into State Owned Enterprises, or SOEs, where they were managed independently. SOEs are run almost like private businesses – they have no separate privileges and they have to make a return on shareholder’s capital. (They also have some special responsibilities in law; for example, they are subject to more scrutiny by parliament than private companies, they are subject to transparency laws that can make them release non-sensitive information. And they are required to be good employers.) The state-owned businesses have generally been very successful. In twenty years, none has failed, though a few have struggled at times. In contrast, most of the top companies on our stock exchange twenty years ago have disappeared.

A State Sector Act set out a new relationship between ministers and chief executives. Departmental heads now have full responsibility for employing their staff, managing their departments and for allocating resources within the department.

Services are ‘purchased’ from the department. A formal agreement, scrutinised by parliament, sets out the services the department has to supply. Rather than having to get permission for each item they want to buy, managers are given guidelines and then they have freedom to manage for the outputs specified. In many cases, policy was split from operations, and funding and purchasing was split from providing services. The rules around financial reporting were changed to those in the private sector, to provide better accountability. For example, accrual accounting replaced cash accounting.

Improved financial accountability is one of the biggest benefits of the reforms. It is no coincidence that the government’s accounts are much more sound. Where government debt threatened to overwhelm the economy in the mid-eighties, we now have no net debt at all. We have some of the strongest fiscal surpluses in the developed world.

The changes have been effective in getting more efficient production of outputs. The public sector has become more responsive and better at delivering services. Decisions are more transparent, and we have a clearer focus on objectives along with accountability for managing toward those objectives. That allows better choices between competing demands for resources and policy attention.

New Zealand’s public sector was reformed very quickly. Enormous changes were introduced simultaneously across the public sector. As a result, not everything turned out as expected.

Although the provision of services has improved, the government has a longer term interest in the public sector such as the future organisational capability and strategic direction. But accountability revolves around the yearly cycle, and longer term considerations can be overlooked. So long term strategic direction is one area where we are working to improve our public sector management.

Accountability arrangements have caused problems as well. Cooperation between agencies is more difficult when they have been split. For example, our Department of Social Welfare was divided into a Department of Work and Income, a Department of Social Policy and a Department of Child, Youth, and Family. The split reflected the drive towards separating policy from delivery. But we found delivery always has a policy component, and in 2001 the government decided to put the departments back together in a newly created Ministry of Social Development.

As for the state businesses that were turned over to private ownership, the government had to step in and buy some back. The government bought back the railway tracks - though not the rail operations - to protect the public interest in having an efficient, sustainable public railway. We repurchased a majority share in our national airline, too, after it neared bankruptcy.

From a public policy point of view, not enough was done to protect the victims of reforms. Some parts of the country and large numbers of individuals were very negatively affected. There is a policy price as well as human price to pay for this: We need a societal consensus for the direction of economic growth. If the benefits of growth are shared inequitably, we undermine that consensus. Consensus around change is better secured when the rising tide of reform lifts all boats.

The New Zealand government believes we all benefit from a stronger, more cohesive country, where all families can share in the benefits of economic transformation. When there are people who don't have the chance to maximise their potential, we are wasting some of our strength as a country and some of our productive power. When we have more poor families we incur more costs in health care, welfare and even crime, because poor families are more likely to be a source of – and victims of – crime.

In short, a fair society underpins a strong economy.

The lesson this government draws is to make changes early; to ensure that the public sector is responsive; and to ensure public policy adapts to changing economic conditions.

New Zealand shied away from change when it was needed in the sixties and seventies. All that happened was that reform was much more sudden and unforgiving when it came, and we had further to catch up.

So now the government sees economic transformation as a continual process. It is not enough just to put a set of policies in place and pronounce the job finished. We need to adapt and respond continuously to a changing environment.

These days the emphasis in economic policy is on seeing our firms and farms creating higher value products, through innovation and exporting.

Although New Zealand is rich in certain resources, such as fertile soil and moderate climate that underpin our agriculture, it is not our natural environment that decides our economic well-being.

There are many countries rich in natural wealth where the people are desperately poor.

The world has roughly the same amount of resources as we had fifty or a hundred years ago. We have depleted some of our fossil fuels and other resources, but we have also discovered some new reserves. There is no more land in the world than there was then, and no more rain or sunshine or minerals.

Yet the world's total wealth has grown massively in that time.

What made the difference in that time was ideas. It is not that we have more resources, but that we do much more with the resources we have.

There are many ingredients in the mix of good ideas.

Good governance, property rights and trade, robust legal systems and sophisticated capital markets all make a contribution.

And just as essential to improving living standards, are skills and knowledge.

It is true everywhere. It was innovation, backed by capital investment, in high and medium-tech manufacturing that produced spectacular growth in Ireland. Australia’s five-year innovation plan worth A$2.9 billion underwrites its information & communications technology excellence, which has attracted more than 840 international companies and A$7 billion in new investment. Canberra spends another A$4.5 billion a year on research, development and programmes to support innovative industries. Research in the US found companies based on commercialising innovation account for only four per cent of American companies, but generated sixty per cent of new jobs.

The majority of New Zealand’s economic growth in the last fifteen years has been driven by innovation, especially in our primary sectors, that led to productivity growth.

We have a history of innovation in New Zealand. Over a hundred years ago, a New Zealander called Richard Pearse had a more advanced aircraft design than the Wright Brothers. Bill Gallagher is the world’s number one manufacturer of electric fences and animal management systems. Productivity from our dairy herds has increased by fifty per cent in the last thirty years. We produce more milk and dairy ingredients per cow than ever. This is solely through technological efficiency of advanced milking systems and nutritional knowledge – no New Zealand dairy cow is given hormones or steroids. And those gains are achieved before we even begin to look at advances in the range of products we are bringing to market.

The OECD found New Zealand leads developed countries for firm-level innovation, with four out of five of our manufacturing and service companies regularly introducing products, services or processes new to the firm – compared to two out of five in Finland.

It is probably because we are a bit further away from the rest of the world, we are used to having to be resourceful, and having the freedom to try things out. Lord Rutherford, the New Zealand scientist who won the Nobel Prize and was first to split the atom, said New Zealanders are innovative because ‘we don’t have much money, so we have to think.’

When the same OECD survey looked at innovation in China this year it said China has made some very impressive investment in R&D, human resources and R&D infrastructure. But it also advised there is a lot more to do to build a full-fledged and mature national innovation system.

Plainly this is an area where the opportunity exists for New Zealand and China to work together. It is another reason why both of our countries could benefit strongly from a closer economic partnership.

Today innovation helps us adapt to changing markets. Frozen whole legs of lamb were once a major export product. Today we still export lamb products, but they are more likely to be ready-to-cook diced lamb in sauce, chilled and vacuum packed, perhaps served with a side-dish of New Zealand olives and a glass of our excellent pinot noir – all products we didn’t make a generation ago.

We have innovators beyond our primary sector, too.

Tapestry Knitwear was the first company ever to blend opossum fur with merino wool, introducing the first new natural fibre in the world in a century. Tapestry is also the world’s first commercial knitwear company to be organically certified, and exports globally.

As globalisation connects the international economy more and more, rewards will increasingly flow to countries with skills and knowledge. So research, science and technology are crucial to transforming New Zealand's economy to a high-skill, high-value, globally-connected economy.

Generating wealth from knowledge requires a vibrant and well-integrated innovation system.

To increase our levels of innovation we have had to move on a number of fronts together.

Our innovation system needs to not only generate new ideas, but to also promote the development, uptake and expansion of our best ideas.

We are 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.

The need to build our capacity has meant we have had to overhaul our education and skills system. In addition to being New Zealand’s finance minister, with responsibility for the economy, I am the minister of tertiary education – that is precisely because of the strong link between knowledge and our long-term economic performance.

New Zealand wants more researchers, scientists and technicians and more doctoral candidates in our universities. We have strongly upgraded our workplace skills training, and we have overhauled our tertiary education system to focus more on quality and value for taxpayers’ money.

At the same time the government has worked in partnership with industry to attract world-class innovators, become more globally connected, and fuel research and development.

Because innovation is risky and the outcomes are unknown, there is sometimes a bias against private investment in innovative activity unless the government shares or spreads some of the cost.

It is essential for us to keep up the pressure through public science institutions and through our tax system to strengthen research capability and industry-science links. We also have to back that up with effective investment partnerships and market linkages. There are vital partnerships between government and industry to assist market development and to help our companies connect to global value chains. For example, here in China, New Zealand Trade & Enterprise is opening five more offices.

We are seeing results of our emphasis on innovation in new financing options, better skills and entrepreneurship development, and wider partnerships linking mentors, clusters and incubator schemes.

In addition to a developing basis for innovation, our economy is recognised by the World Bank as one of the easiest places in the world to do business.

It all makes for a good reason to have confidence in the future of the New Zealand economy.

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.

There are ample gains for China to make from a close alignment with New Zealand, and for our part New Zealand is strongly committed to the deepening partnership we are enjoying with China.

Thank you.

ENDS

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