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Nothing to Fear But Fear Itself

Speech by Hon John Luxton

"Nothing to Fear But Fear Itself"

NZ Game Industry Board Formal General Meeting
War Memorial Conference Centre, Napier
10 June 1999
(check against delivery)


Ladies and gentleman, board members, chairman Clive Jermy, growers...

Earlier this week we were expecting the result of US deliberations over lamb access to the US market. Sunday's expected announcement was delayed till Tuesday and then as you can see nothing yet.

The fact we have heard nothing yet could be a positive sign or it could be negative. In either event the very fact the US trade commissioners and the President are considering raising a new tax against New Zealand meat producers is extremely disappointing.

On the eve of a new "millennium" round at the World Trade Organisation it conjures up all of our worst memories of past, destructive, trading practices in agricultural commodities.

After all, if the US - which outwardly says it is committed to an agenda of trade liberalisation - is willing to compromise its principles in such a way to protect the interests of an industry as small as the US lamb producers, then what hope can we have for the bigger picture?

In these circumstances it is extremely important not to allow this decision to distract us from the objective benefits of trade liberalisation.

In some diplomatic circles trade liberalisation is stilled viewed as a zero sum game - exporting countries win and importing countries lose.

Applying this theory some argue vigorously that all trade concessions should be made only in response to an equal counterbalancing concession from the opposing party state. Some also dispute how New Zealand can bargain on an equal footing with the US, an economy 100 times larger than New Zealand's.

This proposition however fails to appreciate the very real benefits of trade liberalisation on the country implementing reform.

New Zealand, some say, has been naive in opening up its markets to all manner of tariff free imported goods.

And yet New Zealand has, following these reforms, experienced its longest period of sustained growth since the 1960s.

"So what?" I can hear the sceptics respond. "That would have happened anyway."

Would it? I beg to disagree.

It is true that New Zealand along with Hong Kong and Singapore is unusual in having practised a policy of unilateral trade liberalisation. But in doing so it has proved what many economists have long argued - that unilateral trade liberalisation is beneficial to the nation state which adopts it.

In this regard New Zealand is unusual but not unique. Singapore and Chile have also pursued unilateral trade liberalisation and, like New Zealand, both have experienced lengthy periods of sustained growth.

This is because removing trade barriers and exposing domestic industries to the "winds of international trade" promotes the efficient use of capital. In a free trading environment investment decisions are driven not by considerations of where the government's umbrella provides the best protection or the largest subsidy against the elements, but rather by judgements on where a dollar invested is most likely to earn another dollar.

But don't take my word for it.

In a speech earlier this month in Boston US Federal Reserve Chairman Alan Greenspan eloquently argued the economic benefits of unilateral trade liberalisation.

"Trade is not a zero sum game," the chairman said.

"If trade barriers are lowered by both parties, each clearly benefits, But if one lowers barriers and the other does not, the country that lowered barriers unilaterally would still be better off having done so."

Chairman Greenspan went on in his speech to express concern at an "evident weakening of support for free trade" in the US, called the development a potential "tragedy".

"Should we endeavour to freeze competitive progress in place, we will almost certainly slow economic growth overall, and impart substantial harm to those workers who would otherwise seek more effective longer-term job opportunities."

Similarly - also speaking in the last two weeks - US Agricultural Secretary Dan Glickman is singing from the same song sheet.

Talking of the goals of the US administration in the next WTO round Secretary Glickman talked of the "ambitious goal" of constructing "an entire rules-based world trading system, based on open competition and market principles, where food and fibre are passed freely across oceans and continents."

Secretary Glickman continued: "Of course, like most grand ambitions, this one faces considerable opposition.....It is these obstacles that we will confront later this year in Seattle at the next round of WTO negotiations. The United States has a bold agricultural agenda for Seattle.

"We want to eliminate export subsidies, which make for unfair trading practices and depress world commodity prices for all producers. We must restrict State Trading Enterprises, which continue to block our path to an open, transparent trading system. We must further reduce tariffs, which average 50% on agricultural goods around the world. We need to expand markets by raising the ceilings on tariff rate quotas, even as we try to phase them out over the long run."

Hear. Hear.

"But so much for rhetoric, what about reality? If what Secretary Glickman and Chairman Greenspan is saying is true then how can President Clinton come so close to announcing a new tariff on New Zealand lamb?"

I can hear the sceptics chorus again. And they have a point.

And the answer of course is politics. Just like New Zealand the US administration is constrained by the political environment and when it comes to the problem of special interest politics the US could probably teach New Zealand a few lessons.

This may seem dismissive but it is the truth. That said in my mind the US lamb issue raises another question:

Are the latest moves by the US Trade Commission a dying gasp of a failing system or the beginning of a backlash against trade liberalisation?

For my part I would far rather be in the same camp as Chairman Greenspan, Secretary Glickman and mainstream economic theorists than in that of the Alliance party - who would presumably have us believe that the drive towards free trade is a global conspiracy against the worker.

The truth is that forces of globalisation are driving the growth of world trade at three times the pace of growth in GDP.

This is important because it means that trade liberalisation is happening anyway. As some might say the horse has now bolted.

Call me an optimist if you like. But in my view the "last gasp" scenario is far and away the more credible explanation for recent US actions than the "backlash" theory.

What all this boils down to is that we in New Zealand have nothing to fear at present except fear itself.

I would now like to turn to another argument.

When it comes to the forces ranged against the trade liberalisation agenda there are some very unlikely alliances. Small holder farmers in the US and EU, the organised labour movement and a sizeable chunk of the green movement.

On the other hand the developing world - who many from the left of the political spectrum would claim to have concern for, is united in its desire for trade liberalisation.

Last year in Geneva when negotiating preparations for the next round of World Trade Organisation negotiations two speakers received what is for the WTO an unusual distinction of applause.

One of the speakers was our very own trade minister Lockwood Smith who urged the Western nations - particularly the US and EU to recognise economic gains they would receive through adopting a trade liberalisation agenda.

The other speaker to receive applause was South African president Nelson Mandela.

President Mandela eloquently urged the Western nations to appreciate how much good could be done for the developing world, for what would be, for them, relatively minor reforms. In this context he also hinted at the potential for harm caused to Western security interests by protectionism.

Recent events in Russia, Indonesia and to a lesser extent Kosovo bear out much of what he said.

It is important also to remember that South Africa, New Zealand are members of, and the US has expressed its support of the Cairns Group of agricultural producing nations who are pushing for comprehensive reform in the trade of agricultural commodities in the next WTO round.

So what should New Zealand's response to these circumstances be?

On the question of free trade New Zealand's sails are set. New Zealand's agricultural producers are free traders.

As such they are very well positioned to reap the benefits of trade reform when it comes.

The chairman of the Meat Board Mr John Acland recently suggested that because New Zealand had removed its tariff barriers it was doing the equivalent of stripping naked while its competitors were yet to take off their top hat.

In my view this analogy is patently false.

My response to Mr Acland has been to ask him to name a single protection the government has removed in the last 15 years, which has been detrimental to farming incomes. He has come back to me and agreed.

A far truer version of the analogy likens New Zealand as a competitor in an international marathon race between nations to improve living standards by attracting more jobs and investment.

To perform well in such a marathon the open economy runner progressively strips away the impediments to performance. They become fit, take off that excess fat, become agile, flexible and responsive to the changing conditions en route. They prepare physically and mentally for the race ensure they are appropriately clothed.

The open economy runner will, over time, out perform the protected economy runner who is by comparison still over-weight, wearing a heavy greatcoat, a top hat and carrying a rucksack of protective costs.

New Zealand has over the past decade become that superb athlete. We are out there taking the world on whilst many in the northern hemisphere countries, particularly in the agricultural sectors, will never become competitive unless they too embrace change along the lines that New Zealand has taken.

Finally today I would like to return to the subject matter of this conference. The future of the Deer industry and the current reform process.

Preparing for today's speech I had before me a series of papers concerning progress in the board reform process.

Firstly I have your consultation document (hold up blue book) which embodies an very important step in the process - namely consulting with you, the industry, on your concerns and needs.

Secondly I received a series of notes prepared for me by my officials. These dealt with important issues such as the definitions of important concepts such as "market failure" and "industry good".

Looking at these two documents to be honest I felt a little disheartened.

It is difficult not to conclude that in a manner the process of reform, particularly in regard to the non-trading boards - Game, Meat and Wool - has become bogged down in the detail at the expense of the more important - in my view - strategic view.

For example I note the Game Industry Board's consultation document makes the recommendation that the chairman of the Game Industry Board should in future be elected from within the board and should not have a casting vote - as I understand it this will maintain the status quo.

Now this is all very well but does anyone here really think it will make a great deal of difference whether the chairman has a casting vote or not?

From my reading of the document most of the discussion concerns the political structure, voting rights and accountability of the board. And sure you want these things resolved. But to be honest I think they largely miss the point.

The purpose of the reform process the government began last year was to enable New Zealand's agricultural industries to chart a path to prosperity in the 21st century.

The reforms were sparked by the impact of a number of forces over the past two decades - most significantly the fall in commodity prices - has seen New Zealand's agricultural industries lag behind in growth terms.

The Deer Industry of course is not one of these it has grown remarkably in the past two decades but while that may be so - has it grown in an efficient manner.

Public policy objectives of reforming non trading producer boards such as the GIB are at two specific objectives:

- accountability
- and lowering costs

The key objective in the process is to improve efficiency of investment and hence industry income.

Reading the consultation document I am encouraged to read that the recommendation is to reduce the levy over the next two years from its present 19 cents a kilogram to 10 cents a kilogram.

This is undoubtedly a step in the right direction.

Similarly it appears the board has listened to deer farmers on the future of Cervena - namely that it is a commercial venture and that it should be funded commercially.

Which I think is where in many ways we get to the nub of the producer board reform process.

On one level the Cervena branding project has been highly successful. Venison volumes into the US have doubled in five years and very high prices have been achieved.

However the cost of the Cervena project has also been high. Over the campaign period, in-market advertising alone (excluding the costs of advertising preparation etc.), has been $13 million.

Figures from the last reported season, 1998, show $1.4 million of the $5.6 million collected in venison levies, 25%, was spent on a campaign relating to 6% of the venison volume. Budgeted figures for the 1999 season indicate expenditure for Cervena in the 1998-99 season was planned to be around $1.7 million.

By contrast $522,000, or 9.3% of venison levies, is reported as being spent in Europe and Asia where 88% of venison is exported and consumed.

If the average board levy on a deer sent to the works is around $23 then in 1998 of this roughly $6 was spent on Cervena and $2 elsewhere. Is this fair? Is this sensible?

I read in the consultation document that the industry has now decided to transition the Cervena campaign to become a "stand-alone" entity. Negotiations are underway, and the intention is to transfer the assets to a trust and to transitionally fund it to the tune of around $700,000 for the next two years.

The reasons for doing so are also shown fairly clearly in last year's annual report. Cervena chairman Richard Janes reports that 80% of respondents in an industry consultation voted for Cervena to continue as a stand-alone entity and "not at the direct cost of all levy payers".

Looks to me as if deer farmers have been doing the sums.

Now, for me, the question raised by this is not whether the industry has taken the correct decision in seeking to transition the project away from its drain on levy resources - obviously it has- but rather, how can New Zealand's deer farmers insure that such outcomes are avoided in the future?

I note, also from the 1998 annual report, that $300,000 is budgeted for legal expenses relating to a claim lodged against the board in the US.

In my mind this is a very clear indication - if any is needed - of why compulsory levies ought not to be used to fund commercial enterprises, namely, that commercial enterprises necessarily entail commercial risks.

From what I understand of this case it is a relatively speculative action. I also understand that it is likely that there is nothing the board could have done to avoid the risk. The problem for the board is that the legal system in the US does inherently create considerable commercial risk. And as a soft target with considerable backing the board is particularly vulnerable to this sort of attack.

So when considering the questions in your consultation document today I would ask you - the industry - to look closely to what you want to achieve.

Are you receiving sufficient accountability at present from the board?

Is the cost of the board reasonable?

Has the cost of the board been reasonable in the past and if not why not?

Is levy money being spent where you as a farmer want it to be?

If you want to change the levy spend, can you?

And how long will it take for industry views on levy spend to be adopted by the board?

In the final analysis it will only be in the light of clear answers to this sort of question that you will be able to adequately consider many of the more detailed questions raised in your consultation document.

After all how can you decide whether having processors at the board unless you have defined the functions and outcomes you want from your levies.

In the absence of this sort of analysis you instead find yourself arguing the same old issues over and over again with little hope of any real resolution. Bogged down in detail.

In conclusion I would like to commend the board on its work towards addressing the concerns raised by the government in its producer board reform process.

The aim of this process has been to provide leadership in agriculture and food production in New Zealand. To get rural industries to focus on the future and its opportunities instead of basking in past glory.

The New Zealand deer industry has a proud record of growth and innovation. How many agricultural industries around the world can claim to have domesticated a new animal? You are world leaders and the challenge the government has set both you and itself is to ensure that you remain at the forefront of agricultural innovation and success.

To you the farmers I would like to make it clear that the government will not be implementing changes to your industry structure unless we are confident that they will deliver a durable quality public policy solution.

In the meantime, good luck in your deliberations.

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