Cunliffe: New Zealand’s Economic Upgrade
14 March 2014 SPEECH
EMBARGOED UNTIL 11:00AM
NEW ZEALAND’S ECONOMIC UPGRADE
Tena koutou, tena koutou, tena koutou katoa.
I would like to acknowledge the New Zealand Initiative and its Executive Director, Dr Oliver Hartwich. Oliver it’s great to be here with you today - and I know this group greatly values the open contest of ideas.
You were formed from a merger of the New Zealand Institute and the Business Roundtable. This is not an audience that some would naturally associate with the Labour Party.
But I believe that we have a shared interest in an economic upgrade to a high-value economy that will support better jobs and higher incomes.
It is a project that matters to all New Zealanders, and it is one in which I have personal experience.
Before I entered politics I worked as a business consultant for The Boston Consulting Group. We worked to help companies grow, export and create more value in their operations.
In one project I led a team of mill workers at a large NZ pulp and paper mill.
Our goal was to seek practical ideas from the shop floor workers about how to do things smarter and reduce waste.
My role was to build the system that allowed all the team to contribute their best ideas, and to ensure they were analysed, implemented and tracked.
It worked beyond our expectations. Millions of dollars a year were saved by ideas as simple as changing the wrapping on paper bales and improving work flows.
Together, we saved jobs and helped build the business. It’s a tough industry and there have been other changes since, but we got the best we could out of what we had.
And working together – that’s what we must now do for the New Zealand economy as a whole.
New Zealanders love to say we live in the best country in the world. And it’s true. The people are great, our landscapes are spectacular, and we have a wonderful multi-cultural society.
But we are not making the most of our potential.
The problem is, while this is the best country in the world to live in, it’s not the best place to make a living.
I want to shift the New Zealand economy into high gear.
I have a vision of a New Zealand that harnesses the potential of all our people.
A vision of a country with the most productive and competitive businesses in the world.
A vision of a country with better jobs and higher wages.
It is a big step to get there.
To achieve this vision we need an economic upgrade.
That’s what I’m here to talk about today.
What’s the problem?
An old Chinese proverb says: “A peasant must stand a long time on a hillside with his mouth open before a roast duck flies in.”
It’s a warning.
Sometimes good things can fall into our lap, like periods of high commodity prices.
But it’s not a serious long-term strategy to tie our economic well-being to forces that are largely beyond our control.
Yes, New Zealand floats like a small boat on the ocean of the global economy. But I refuse to accept we can’t influence our own destiny. Together, we can achieve sustainable long-term growth.
Small states like Sweden, Norway and Singapore prove it is possible. It’s time we woke up to what has been happening in these economies, rather than staying locked in a 1990s time warp.
I’m sure there will be some in the room who disagree. But it is the view of the Labour Party that a disproportionate and growing share of the value of the New Zealand economy is accruing to the top few percent.
Labour supports positive business, but trickle-down economics and its neoliberal parentage have failed New Zealanders and left many of our emerging businesses starved of investment capital and skills.
The opportunity gaps have widened and there is no clear, shared strategy to a high value, high income future.
That’s something Labour will change. We want an economy that works for all New Zealanders.
But in order to share wealth, first we have to make it.
We need to move away from a dependence on commodity price cycles, to build an enduring, high-value, job-rich economy that leverages our innate strengths.
What’s the solution?
An economic upgrade is needed because our economy runs on old “software”.
It’s a combination of poorly-structured investment in infrastructure, macro settings geared towards the interests of a small number of speculators, a hands-off approach to innovation, and a deficit of government-industry partnerships.
We keep doing what we’ve always done in spite of the evidence from those vibrant economies overseas. They show an intelligent hands-on approach plays an essential part in securing long-term sustainable growth.
A successful economy needs the right kinds of capital investment. It needs a culture of innovation and risk-taking which takes years to mature, and sometimes only months to lose.
It often needs partnerships at a regional and sector basis which are hard to build and to maintain.
And it needs a focus on producing more value in our businesses and our economy, instead of just a greater volume of the same old raw products.
A value focus will take a strong, far-sighted government, in partnership with business, to progress.
I have watched with dismay as many sectors of the New Zealand economy have found it increasingly hard to maintain the focus on value. The goal seems to have slipped further away under the current government.
It will be a major strategic priority for the incoming Labour-led Government to support New Zealand business in the journey from volume to value.
From an economy driven by land banking and speculation to one extended by advanced manufacturing and innovation.
I want to set out three main parts to Labour’s economic upgrade:
We cannot upgrade our economy without investment. To become a high-tech economy with better jobs and higher wages, then more money going into the right areas is essential.
At the moment there is a serious shortage of cash. The NZX is a shallow cousin of stock markets around the globe. Our savings rate is dismal, meaning most new investment comes from overseas and not from local sources. Our poorly structured foreign direct investment means profits far too often drain overseas, deepening the hole in our current account.
There is significant shortage of capital, especially venture capital to go towards Kiwi businesses.
To make matters worse, most of our investment goes into the out-of-control housing market where property speculators make a killing. The productive economy sees very little of that money.
Our banking and insurance sectors, which are supposed to be the main conduit for financing smart Kiwi businesses, have become almost entirely overseas owned. That doesn’t help Kiwis build an economy they own.
Labour’s strategy is to upgrade the size and focus of our capital markets.
We will dramatically increase the local investment pool available to New Zealand businesses.
We will make KiwiSaver universal.
Every employee will contribute to their KiwiSaver account, not only ensuring financial security for New Zealanders in old age, but also making a significant boost to available for investment now. We have seen the success of this across the Tasman. I want to replicate that, and I know I am supported in that goal by many New Zealand businesses.
We are also committed to restarting contributions to the Super Fund. This was one of the great successes of the last Labour Government, and it will be so again under the next one.
But increasing the investment pool is not enough in itself.
Our capital gains tax will dissuade investors from speculating in the housing market and encourage them to put money into the productive exporting side of the economy.
That’s money to invest in the economic upgrade. It’s also policy many New Zealand businesses support.
The second major element to the investment upgrade is overseas investment. Foreign direct investment (FDI) is a good thing, if managed well.
But right now FDI is poorly managed, and it’s Kiwis who are losing out. Overseas investors are buying up land, farms and good companies, then sending the profits and jobs offshore.
New Zealanders want choices in their future. We need to make sure this happens.
Labour will revamp FDI to attract quality investors with a credible business cases designed around creating jobs and providing new technology to New Zealand companies.
Overseas investors are welcome to be part of our economy but they must contribute to the upgrade.
Our changes to Overseas Investment Office (OIO) rules will ensure overseas investors will bring access to leading-edge technology and new overseas markets.
Investment works best if costs and barriers to business are reduced. The biggest obstacle to our exporting businesses is the consistently overvalued and volatile exchange rate. Labour has long signalled it will review monetary policy to ensure our dollar is more fairly valued to help business and lower our external balance.
My deputy and Finance spokesperson David Parker is leading this work and will be speaking more on this in the near future.
Increasing investment and getting it into the right areas with the right payoffs will be a major part of the economic upgrade. Primarily it will help fund the economic upgrade for innovation.
Innovation is essential to New Zealand’s economic upgrade. To be a high-tech, sustainable economy that offers skilled jobs and high wages we need to be at the forefront of global innovation.
If we don’t innovate we can’t compete.
The innovation upgrade won’t just be about new gadgets and great products. It will require a culture of change.
Thankfully New Zealanders have an innovative culture. We think outside the square. We’ve always had to. We have great bones to build on.
But in commercial terms New Zealand’s investment in R&D is well below par in global terms, and it is in private R&D that we are particularly weak.
Our R&D spend is currently 1.27% (2012) of GDP, of which only 0.58% is private spending. Compare that to Denmark, with 3.07% (2010) or Israel at 4.34% (2010).
We need to turn our numbers around, and fast.
Labour in government will restart New Zealand’s stalled innovation story.
We will renew the R&D tax credit.
We will significantly increase Crown investment in R&D, with a focus on co-funding from the private sector.
Before I became a business consultant and entered politics, I had the privilege of studying at Harvard University. In the United States I saw the value of universities, industry and venture capital working together.
That is the culture Labour will be encouraging in our research and teaching institutions; unleashing our best minds into partnerships with industry.
Labour also brings a broader concept of innovation to the table.
We must meld our creativity with capital to build small to medium companies which dominate in market niches. We must foster talent to develop innovative products and services that people want to buy, and we must protect our intellectual property.
We need to honour and replicate the likes of HamiltonJet, Icebreaker and Orion Health - mid-sized companies that have developed innovative products and services that the world wants to buy.
In these cases, the high value activity and ownership has remained in New Zealand.
But innovation is not just about hard science and new products. It is also about the softer aspects of business, such as distribution and marketing.
Our current innovation problems are hurting us in the industry that will drive our future – ICT.
If we compare ourselves with other smaller successful nations, it soon becomes clear that we have a deficit of around ten thousand high-tech jobs.
Many of our children, and those who are teaching them, are running yesterday’s technology, and are falling behind their peers in the rest of the developed world.
We cannot let that continue. ICT today plays a role similar to the railway in the 19th century. It is the infrastructure that opens up new markets and new supply chains.
Places like Israel have realised the importance of upgrading ICT skills and related creative skills to support growth and innovation in other industries.
We need to follow in their footsteps to upgrade our ICT industry.
Labour is committed to overcoming the digital divide. We will not build a tech-savvy generation without new generation technology.
That’s why our policy is to raise the bar in terms of ensuring access to fast broadband within low-decile schools.
And Labour will introduce a “digital bill of rights” to give certainty to business and all New Zealanders that we can live, work and play safely and productively in the digital world.
We will make further announcements in this important area.
Investment and innovation are the essential frameworks for supporting business and growth and leading the economic upgrade.
But it is also essential that government mucks in and supports businesses. While I back our business community to lead in the global economy we are competing with far bigger and stronger players than us.
Government should back positive Kiwi businesses, not leave it to the wolves of international trade. Labour will do that. We want good jobs in every region in New Zealand.
That also means attracting industry to New Zealand regions that need it most.
Industry policy has become a dirty word. It isn’t. Regional development has also fallen by the wayside. Labour will bring it back. We want good jobs in every region of New Zealand.
We have witnessed a loss of heart in regional New Zealand. There are opportunities for growth, investment and innovation in our regions, and in sectors such as forestry.
Yes, there are challenges. But experience has shown there are ways to partner with local businesses to create value.
So under Labour the regions will play a major role in the economic upgrade.
It is time that central government stopped treating regional and local government (and their economic development agencies) as second class citizens.
Sustainable economic development means jointly developing one vision, one strategy and one engagement structure for each region.
That means simplifying the governance structures and no wrong door for businesses and communities wanting to engage in building a better future.
It means enhanced coordination and prioritisation of Crown investments, with a focus on transformative projects executed within a strong strategic framework.
Examples could include new infrastructure like a rail head to Northport or dredging the Opotiki Harbour bar to drive new aquaculture.
Or expanding research projects tailored to lead industry clusters like Scion’s Rotorua forestry expertise, or the Marlborough Wine Research Centre.
Or harnessing our polytechs to provide industry-specific training to the 70% of NZ school-leavers who do not go on to university; as centres of excellence that serve the key industries in their area, such as in forestry, tourism, fisheries, ICT, CAD, construction and viticulture.
And post-settlement iwi will have an important role as core asset owners and employers in our regions. They must be part of our shared future.
Success stories tell us something, and that is that when government is a partner in the long journey from volume to value then regions and communities can thrive.
There is no set template for regional growth. But disengagement achieves nothing. We must work together and ensure all our industries are humming.
In the very near future, I’ll be making the first of a series of industry announcements, providing concrete examples of how the economic upgrade will work.
Today I have outlined the framework for New Zealand’s economic journey to a higher value, higher knowledge, higher income and renewable future.
We want better jobs and higher wages for all New Zealanders.
We all know that in order to sustainably lift incomes we need to sustainably lift productivity.
We all know that just being a producer of raw materials, stuck on the treadmill of commodity price cycles, is not the way to that better future.
Especially when our warped tax system and our inadequate savings system incentivise over-investment in real estate, and under-investment in innovation.
New Zealand must be more than a farm to be harvested by offshore banks. We must grow our manufacturing and high-end services sectors. We must provide opportunities to inspire our best and brightest young innovators to build job creating businesses here in New Zealand.
Today I have set out for you the crucial elements of an economic upgrade that will put us on the road to shared prosperity: Investment, Innovation and Industry.
These require serious policy changes, not tinkering. That’s why we will have:
• Capital gains tax to move from speculation to innovation,
• Universal KiwiSaver to grow our onshore investment capital,
• Monetary policy reform to back our exporters,
• R&D tax credits to encourage innovation,
• A series of industry and regional strategies that grow New Zealand’s wealth.
And all of this will leverage off a sound fiscal policy based on fairness, responsibility and sustainability.
We are a wonderful, beautiful country. We can be a land of hope and opportunity for all New Zealanders. We can truly be - as the late Sir Paul Callaghan dreamed – a place where global talent wants to live.
We are small in size but we don’t have to be small in vision. We cannot bet on all possible futures at once – but we can focus on what we can do well, and do it even better.
Actually we should aim to be world class in every niche we enter into.
And that – by definition – must be a shared journey. We are all in this together. Government and business, employers and workers.
Today has been about setting out the vision for a high value, sustainable future with better jobs and higher wages.
Labour’s economic upgrade is an opportunity to provide the decent society we all want.