Economic Challenges for NZ in 2008
4 April 2008 Speech
Economic Challenges for NZ in 2008 and beyond University of the Third Age course, Christchurch
You have asked me to talk about the economic challenges for New Zealand.
The topic reminds me of a speech I was asked to give last year on the subject of 'what's wrong with the New Zealand economy?'
I was able to quote the member of the All Blacks coaching staff who wisely analysed the world cup campaign and concluded that we didn't win the cup because we didn't score enough points.
In the same vein, what's wrong with the New Zealand economy is that we don't have enough money to do everything that we want to do - but then who does?
The crucial issue is what do we want to do?
We are lucky in New Zealand to have a relatively high level of consensus around the type of future we want.
We want a New Zealand where we can enjoy a standard of living at least comparable to that of countries we like to compare ourselves with.
We want a future where our young people can flourish and enjoy opportunities as attractive as any in the world.
We want a future where we care for all New Zealanders.
We want security from hardship for New Zealanders, we want social services available to anyone - schools, hospitals, safety in our homes and on our streets.
And we want to be connected to the best the world has to offer. If that's where we want to beâ€¦how are we doing?
There's an old joke about the tourist who stops in Dargaville and asks a local for directions to Christchurch. The local looks at him strangely and says, 'well if I were trying to get Christchurch, I wouldn't start from here!' For much of the middle twentieth century we did pretty well at running an economy capable of delivering the New Zealand most of us aspired to.
Our services were paid for with earnings from agricultural commodities sold into a guaranteed market where we earned very high returns.
But when the market changed we no longer earned returns capable of sustaining our place in the first rank of global economies.
We started to drift in the seventies, and the gap between New Zealand and the rest of the developed world widened in the eighties and nineties.
That drift was the reason why some of us argued we should stop doing things that weren't working - and start doing things that would work better. How have we done?
Since 1999, New Zealand has been enjoying the longest period of economic growth since World War II.
Our unemployment rate stands at a record-low of 3.4 per cent compared with 4.1 per cent in Australia.
More people are in work than ever before.
Over 370,000 new jobs have been created since 1999.
Household incomes, wages, and profits are all up.
Profits for firms are up thirteen per cent in real terms.
Real, inflation-adjusted wages are up 15 per cent.
Household incomes are up 25 per cent in real terms.
On the first of April the minimum wage was lifted to $12 an hour - $200 per week for the lowest paid workers than they received from $7 an hour in 1999.
Child poverty rates have fallen by more than at any time since the great depression.
The cost of seeing the doctor has been halved and the price of standard prescriptions has been cut from $15 to $3. (I am aware of some exceptions to this framework, which is Government policy, and I'm looking into them.) Superannuation rates have risen, from below 60 per cent of the after-tax, ordinary time wage in 1999 to 66 per cent now) and public services are thriving.
Workers have access to a minimum of four weeks annual holidays and fourteen weeks of paid parental leave.
On April 1, a company tax was cut, and personal tax rates for families are now so low that if you are an average wage earner with two kids - you virtually don't pay any tax at all. You have an average rate of barely two percent, and that is the lowest of any developed country.
That isn't a bad turn around from the drift of the last decades of the twentieth century.
Of course, if you are in the Opposition or the Business Roundtable and you want to go back to the failed policies of the past, you would try to find some measure that didn't look so good.
So they say, yes all that is much better, but we are still falling behind Australia. Is that true?
We started to fall behind Australia in the seventies.
We fell further, and faster, in the late eighties.
During the nineties, the wage gap between Australia and New Zealand grew by over 50 per cent.
Since 1999 it has grown by â€¦ 0.4 percent!!
The first economic challenge for New Zealand was to stop the rot. And we have.
The greatest economic challenge we have remaining is to catch up. The reasons for us not catching up are the greatest economic challenges we face.
For all the changes our economy has gone through over the last twenty-five years, our exports as a percentage of GDP have barely moved.
Our share of world trade has actually been falling.
The imbalance between our demand for goods and services from overseas, and our sales overseas, is vast.
We haven't run a current account surplus since 1973.
That is, for thirty-five years,we haven't earned more than we spend overseas. And while we have a monetary policy that deliberately puts the tradeable sector on the rack to restrain house prices, we are not likely to.
With a current account deficit as high as it is, and interest rates as high as they are, we will continue to own less of our own economy.
We will not climb the rankings of global economies.
When we look at what is wrong with the New Zealand economy, it is glaringly obvious that we need new monetary policy tools.
The Reserve Bank and Treasury are working on proposals as I speak.
Some of us have been arguing the point since 1989 - and I took my share of abuse for saying we needed more monetary policy tools than simply crucifying the tradeable goods sector. (The NBR once published a cartoon of me with horns on my head and stockbrokers jumping out of windows.)
I'm now welcoming the latecomers to the discussion over better policy tools. But even for those of us who who would change monetary policy so that we had a more stable and competitive currency, there are timeless truths which we have to face: Over time we want our incomes relative to the rest of the world to rise, and if they do, then our dollar will surely rise too.
We need export strategies built around prospering with a permanently higher exchange rate.
There's an analogy with a workers' pay - if you want to get a job you might agree to work for less. But if you want to earn more, you need to be paid more. And so you need a strategy that will earn you higher wages.
The same is true of New Zealand's economy as a whole.
We can't get richer by earning less.
If we want to increase the living standards of New Zealanders and enjoy the standard of living of countries we like to compare ourselves with, we have to sell more to the world.
There are three main strands to what we have to do: Deepen and broaden our economy. Achieve more value from our existing competitive advantages And save and invest more in our own economy.
The first strand is to develop more high-value, knowledge-based industries - job rich, high-value, high-tech sectors - that can sell to the world products and services dependent on our unique creativity and innovation.
We have hardly any large multinational companies that have the scale and sophistication to earn global incomes. We earn more of our income from undifferentiated commodity exports (apples versus high energy drink - powdered milk versus immune system-saving ingredients) than any other developed country - and it is no coincidence that we have a lower per capita income than most first-world developed economies.
I spent six years as Minister for Economic and Industry Development working with sectors and regions to lift the rate of growth and the connections our businesses have with global markets.
There are some encouraging successes - some have been spectacular, for example our film industry.
Others such as biotech, IT and the creative sectors are all growing well. But for all their success, productivity in the primary industries has grown at twice the rate of the rest of the economy since the early nineties.
For the foreseeable future, only our primary industries have the global scale, sophistication and competitive advantage to transform our incomes. So if we want to enjoy rising living standards with other countries we need to sell more of our primary production to the world.
By 'more', I mean we need to earn more from our sales to the world, not just sell more volume.
Earning more from our primary industries is the second of our economic challenges.
The prospects for our primary sector are very good.
There is a growing world demand for high-quality sustainably-produced protein. It will only continue to grow as populations rise and become more affluent.
Globally, the competition for agricultural land to produce biofuels is going to work in favour of agricultural-producing countries like ours, too.
Our pastoral farming techniques have built in advantages. We are more energy efficient than intensive animal farming in Europe, America, or Asia, we typically have better animal welfare and we are free from the negative consumer associations with 'factory farming'.
The challenge for our primary industries is to remain competitive. We will need to better align our food and pastoral sectors with trends and opportunities in global markets.
And that means we need more innovation.
Innovation is vital to equipping our primary sector for an age when our climate is changing. It always takes more than one magic bullet. But science and innovation is a necessary part of the solution.
That's why last month the Government announced New Zealand Fast Forward. It is the largest ever investment in science and innovation. This is genuinely a partnership between the government and the private sector.
The government is putting in $700 million, which over the life of the fund will grow to be as much as a billion. With matching industry contributions, that amounts to two billion dollars over ten to 15 years.
Innovation in our pastoral industries offers the single greatest chance to achieve a breakthrough that can restore the place we lost in the seventies, eighties and nineties at the table of the world's winning economies.
It's an opportunity, the likes of which don't come along very often, to change the economic destiny of New Zealand.
The third strand is to increase our returns from activity in the rest of the world through saving and investment.
New Zealand's savings levels by international comparisons are very low. More savings would take inflationary pressure off - which leads to lower interest rates and a more stable and competitive currency.
More savings also have the happy result of increasing the living standards of families and individuals over their lives. Only one in three couples and one in eight individuals have superannuation assets. Households in low and middle-income brackets are particularly poorly placed.
More savings would mean better access to more of our own capital for development.
We need to earn more from investment overseas as well.
The largest contributor to our gigantic current account deficit is our gigantic investment income deficit.
Overseas companies operating here are earning returns worth billions of dollars a year in profits from New Zealand companies, (for example, overseas-owned banks, versus KiwiBank).
In comparison, our returns from our investment overseas are puny. We want access to overseas capital, for the technology contributions, networks and disciplines it provides us.
But we need to do better at earning overseas. Compare our most successful company, Fonterra, to a business like the German manufacturer Seimens. It started exporting about the same time as New Zealand, in the mid nineteenth century.
Today it is Europe's largest engineering firm, operating in 190 countries with revenue last year larger than the size of New Zealand's GDP: â‚87 billion, or nearly NZ$170 billion.
Eighty percent of its sales, three quarters of its factories and two thirds of its workforce of nearly half a million people are outside its German homeland. In other words, that one company earns far more of its revenue outside its home.
None of our companies are even slightly as global in scope and integration as the European leaders.
This is important because it tells a story about the way we earn our living and our ability to earn high value returns.
While we have been focusing on changing trade rules to open new markets, other countries have been focusing on doing stuff, not just on talking and on regulation.
We need to do better at investing in overseas business and earning something from that.
I spoke at a dairying conference this week where I put it this way: When I sit down at a Christchurch pub and order a Heineken beer, some of the price I pay goes to Europe.
The beer is poured in Christchurch, bottled in New Zealand from hops grown in New Zealand and the brewery that makes it is in New Zealand. But someone in Europe clips the ticket.
They partly collect because we borrow some of their capital. But they also collect because we use their brand, ideas and recipes.
If they can profit when we drink our own beer, then we should be looking to profit more often when they drink their own milk or eat their own milk products.
This is a difficult issue for many of our farmers to accept. Our instinct is to see ownership of overseas dairying as a way of funding competition and putting ourselves out of a job.
But we need to be more sophisticated than that or we will never maximise our returns, we will never achieve the standard of living other countries are able to earn, and we will always be in a defensive position. Ask yourself if New Zealand could ever supply all the world's milk? Of course we couldn't. But we can aspire to derive revenue even in markets where we can't directly supply.
We can hope to do it partly because we have a competitive advantage in growing milk. We know a lot about how to produce milk efficiently. Fonterra's review of its capital structure is motivated, partly, by the need to consider structuring their business in a better way.
But if we want, as a country, to earn more from investment then we also need to save more.
One of our main challenges as a country is our poor savings rate. The government has introduced the NZ Superannuation Fund and KiwiSaver.
Kiwisaver in particular is a landmark piece of social and economic legislation and if enough New Zealanders save through Kiwisaver it will reduce interest rates, the exchange rate and it will make a substantial difference to the strength of our export sector.
When we look at our income gap with Australia, one of the major explanations for Australia's success has been the trillion dollar pool of investment funds its compulsory superannuation scheme has created. Those super funds are behind those Australian investment firms that keep coming over here and buying up our most promising companies.
Of course, one of the other big sources of investment flows out of New Zealand is the flow of profits earned by big overseas banks here.
In the last financial year for which figures are available, registered banks made a net, after-tax profit in New Zealand of $3,199 million.
Nearly all of it went back overseas to the banks' owners.
Most of it used to stay here in New Zealand, when those banks were owned by us.
I predicted the investment flows would happen when I opposed the sale of those banks - BNZ, TrustBank, PO Savings Bank.
And I did something about it by getting Kiwibank going.
After six years, I think we can declare the bank a success.
I was on a television debate last week and I asked Rodney Hide if he still thought it was a dog.
He wasn't so keen to answer. Six hundred thousand New Zealanders have voted with their feet and opened accounts. They bank with Kiwibank because fees are lower and there are branches in their communities.
And they do it because it's ours.
Rodney was one opponent of the bank. The other was a professor Tripe. He popped up on the radio the other day where he was so apoplectic about Kiwibank he told a reporter that it's "not at all clear" Kiwibank's audited, public accounts "are in fact a fair representation of the truth."
That is just a pathetic exercise in self-justification.
The accounts are signed off by a respected board, they are audited and the bank is subject to Reserve Bank supervision.
If it were making up its profitability, there would be an awful lot of people involved in the conspiracy.
One of Mr Tripe's issues with Kiwibank is that it is less profitable than big overseas banks.
But that's the whole point of the bank.
What that shows you is the shallow nature of the opposition to good ideas. It shows that - no matter the evidence - there are still people who will oppose good ideas.
I think our main economic challenge is to avoid going back to policies that failed us before.
When we talk about the challenges to our economy, our challenge is to consign to the historical dustbin of failure the failed ideas of the past - like bringing back Roger Douglas!
Selling off assets like Kiwibank and Air New Zealand didn't work. Slashing and burning our economy didn't work.
Stunting the growth of our regions didn't make New Zealand stronger. Forcing down wages didn't lift our incomes.
Between 1982 and 1996, men aged 15-25 took a 45 per cent cut in their real personal income. Women in the same age range, whose incomes were lowest to start with, took a thirty percent cut.
Is it any wonder suicide and crime rates went through the roof at the same time?
The lessons of history tell us that we can't get richer as a country by selecting victims in the economy and trying to get stronger at their expense. We can't get richer by selecting regions, or welfare beneficiaries, or low-paid workers and saying they need to be paid less.
The challenge for New Zealand is to create a high-wage, job-rich, globally connected and innovative economy that succeeds by being better and smarter.
The alternative is a low skill, low wage economy that competes on price. And while an economy like that might offer some returns to a few, it cannot deliver enough for the majority of New Zealanders.
The globally economy is facing a real downturn right now.
The sub-prime crisis in the US is going to push up interest rates and slow economic activity. It may well lead to further instability.
Energy prices around the world will rise.
We are enduring a drought that is going to cost our economy around $1.24 billion.
That works out as $25,200 for the average sheep and beef farm and $79,400 for the average dairy farm.
That's across the whole country, but farmers in more acutely affected regions are facing much larger losses. Some individual sheep and beef farmers are forecast to have income reductions in excess of $100,000. They will get overdrafts being capitalised back into mortgages and reduced equity at a time when interest rates are high.
Last time we experienced similar global ripples, coming on top of a drought, the economy went into a recession. The government then responded with a package of income and services cuts.
It included reductions in the floor or New Zealand Superannuation down to 60 per cent of the average wage, compared with 65 per cent where it had previously been set.
I believe the coming downturn will show the wisdom of building up the strength we have.
Our public accounts today are in better shape than most other countries'. Our government debt levels are much lower. We have invested strongly in infrastructure projects. We are better placed to ride through the storm. And we will be able to do so without weakening New Zealand or by failing to take care of our communities.
So I think we are well placed to meet the challenges ahead.
Everywhere you look around the world where economies have been successfully transformed to the benefit of their people and their communities, the pattern has been the same.
It has been without exception, where the Government has worked alongside industry.
That is why development and innovation has been a passion and a priority for me for nine years in government.
We need a stronger New Zealand if we are to be a more caring New Zealand.
That's our main economic challenge, and I believe we are meeting it well.