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Peter Reith's Address to ACT 2002 Conference

Escape from the Middle Kingdom

Speech by Hon Peter Reith, BEc, LLB Former Australian Minister Address to ACT 2002 Annual Conference at Crowne Plaza Hotel 16 March, 2002

Escape from the Middle Kingdom
I am delighted to give this address here in Auckland. It is my maiden speech since retiring from politics in Australia at the last federal election. I have no regrets in leaving although politics is now so benign in Australia that even my opponents still want to keep me in political life.

It is not my intention to be party-political in New Zealand. I have enjoyed my relationships and contacts across the political spectrum and hope to keep it that way in the future.

Of course, like many Aussies I have been here before. Last time I was at a family wedding. On other occasions I was here to learn about good policy from both Labour Party and National Party administrations and to benefit from your experiences in policy implementation.

Your GST is one of the world’s best-designed and fairest consumption taxes. When I was Shadow Treasurer in Australia in the early 1990’s advocating a consumption tax I pressed for Australia to adopt the same “GST” name because your system was so much better than the European “VAT”. I also came to see the benefits of labor market changes for both employers and employees through higher wages paid by more successful businesses.

There was a time, not so long ago, when New Zealand was at the forefront of economic reform and you had a reputation to match. Recently, when cleaning out one of my offices, I came across a little plastic card the size of a credit card. The Australian Institute for Public Policy issued it and I think they sent one to every Federal M.P. I’ve still got mine with my name printed on it! It was a recital of Roger Douglas’s ten principles of structural reform.

I am sorry to say that no one today would think to take a lead from New Zealand like that. Today, Australians who come to New Zealand want to see if New Zealand now looks like Tasmania.

Aussies now want to know what approach is being taken to re-regulate the labor market. Unions in Australia are saying that if it can be done in New Zealand then Australia should also be re-regulating. But I take the optimistic approach. New Zealand is a wonderful country with great people and it can have a great future.

New Zealanders can be very productive, enterprising and entertaining.

New Zealand’s success in producing the Lord of the Rings film makes the point. It is clearly encouraging that New Zealand has been able to join countries such as Canada, Britain and Australia in competing successfully against what had previously seemed almost a monopoly of Hollywood production. The employment benefits were also obviously considerable, reflected in the full employment apparently provided for New Zealand actors for about nine months.

Are there some messages here for New Zealand? Even allowing for the government assistance provided to the film producers, it surely again confirms New Zealand’s capacity to compete internationally. Of course, those Hollywood unions must be angry, particularly as about one-third of Hollywood film productions have been lost to overseas locations able to offer lower costs. But it is good to know that even the United States can successfully be competed against.

The film offers a possible pointer to a further way forward for New Zealand. The Hobbit leader, Frodo, faced great obstacles to crossing Tolkien’s Middle Kingdom but eventually overcame his fears and tackled them. His eventual success in crossing, and being able to throw the evil ring in the fire, conveyed a clear message that obstacles to change, dare I say to reform, can be overcome by those prepared to make a real effort to escape from the Middle Kingdom.

Yet many of New Zealand’s friends are concerned that there is some hesitancy here about moving forward and a danger of getting stuck in the middle. That concern is not only for New Zealanders themselves but also for those who look to this country as a market. Let me be more specific.

Although GDP per head has often been criticized as an incomplete statistic of economic well-being, it remains a cornerstone indicator of economic performance of individual countries. The OECD is now regularly adjusting national figures of GDP per head to take account of differences in international price levels that do not necessarily become reflected in differences in exchange rates. This provides the so-called purchasing power parity or PPP measure of living standards[i], which is the best available indicator for comparing the performance of the various countries.

The disturbing thing for New Zealand’s friends is the markedly slower growth it has been achieving in its GDP per head (on a PPP basis) than in most other developed countries. In the early 1970s New Zealanders had an average GDP per head that was slightly above the average for Western Europe, about the same as for Australia and only about 25 per cent less than the average American.[ii] Since then New Zealanders have experienced real growth in their average incomes but at a much slower rate than for almost all others. As a result, today they have a GDP per head that has fallen to almost half that for the Americans, less than 80 per cent of West Europeans and just above 70 per cent of Australians. Nor has this slippage been confined to a particular period: it continued in the 1990s at much the same rate as it did over the previous twenty years.

The latest estimates by the OECD Statistical Directorate puts countries into four groups, with New Zealand in the second lowest - what it calls the “low-middle income group” – and now well below Western European countries.[iii] Some may argue that such a Middle Kingdom classification reflects disadvantages derived from the country’s small population and that a closer economic relationship with Australia is required. But countries such as Finland, Denmark, and Austria with populations only a little smaller have performed much better than New Zealand over the past quarter century. Most economists agree there is no evidence to suggest that population size is a major determining factor in growth per head.

Australia, of course, wants to see strong growth in New Zealand because you provide a natural, major market for some of our exports. Some 7 per cent of our exports of goods and services came here in 1999-00 and only Japan and the United States took more.[iv] But, although the proportion of exports going to New Zealand increased slightly during the nineties, even the Closer Economic Relations Trade Agreement (CER) has not been sufficient to turn New Zealand into the growth market it could be if its economy was performing better.

In Australia’s case, our Productivity Commission has attributed our improved economic performance in the 1990s[v] more to economic reforms than to the application of information technology or the business cycle. The lesson I draw from the 1990s is that Australia thrived in the more competitive environment flowing from these reforms. Some were initiated when Labor was in office and more comprehensive reforms have been introduced under the Howard administration. There seems no reason why New Zealand could not follow suit.

Of course, it would be wrong to suggest that Australia has tackled all the obstacles to crossing the Middle Kingdom. We have a good deal of reform still to do, particularly in reducing the regulation of employer-employee relations that inhibits both employment and risk taking. But we can reasonably claim to have done better than just avoiding becoming stuck in the middle.

But comparisons with the Middle Kingdom are not the only relevant benchmarks. I find the comparison between New Zealand and Tasmania very interesting. It is an obvious point, but still worth making, namely if economic management is poor then you will not have the resources to defend yourself. Jeffrey Rae in his study for the New Zealand Business Roundtable commented:

“As a consequence of this poor record, Tasmanian households, on average, make no contribution to the costs of running Commonwealth government programmes, such as the Defence Force and the federal judiciary. In other words, they get the benefits of these programmes without having to make any contribution towards their upkeep.”

It seems that Mr. Rae is calling Tasmanians a pack of bludgers!

Good economic management is a pre-requisite to good defence management because it gives you the financial capacity to acquire the resources both human and capital that are needed for an effective defence force. The two issues are inextricably linked. But before turning to defence, another fundamental point stands out.

You should know what needs to be done. If you do not then Roger Kerr will give you a list to start with. To know what to do is not the issue. The issue for New Zealand is whether it can muster the political will to implement reform. I think you have a systemic problem with the electoral system. Like Tasmania, systems that give disproportional influence to minorities prevent the adoption of policies that will benefit the majority. You would be better to have introduced a bi-cameral parliament than MMP. I used to think that at least MMP would lock in reforms but instead it institutionalizes policy drift. In a world where economies compete everyday for scarce capital you have to keep up with the competition. It is like sport. You have to keep training if you want to stay in the game.

This is certainly the case with defence.

The defence relationship between Australia and New Zealand and New Zealand’s defence posture are matters of fundamental importance.

The relationship must be seen in a broader context. Both of our Prime Ministers, John Howard and Helen Clark have placed a high priority on working together in a constructive fashion. In some ways they are a better team than Fraser and Muldoon or Hawke and Lange and they are on a par with Howard and Bolger and Howard and Shipley.

There is no question that Australia and New Zealand have been a good combination in the region. I experienced this at last year’s Pacific Leaders Forum when I represented John Howard at the meeting in Nauru. The progress being made in Bougainville is another example as has been our cooperation in the pursuit of better governance in the Solomons.

In taking some of the persons from M.V. Tampa New Zealand accepted a role in making a Pacific contribution to the problems of people smuggling.

And in East Timor our defence personnel have no better, no more reliable or more trusted allies than their Kiwi mates.

Given our rich history, the current good relationship and the respect that one democratic government will accord to the policy decisions of another, it is not surprising that the Australian reaction to shifts in New Zealand’s defence posture have been muted.

No longer do I speak as a minister but rather now as a private citizen albeit one who wholeheartedly values and supports the relationship between our countries and as an advocate of making the relationship even stronger in the future. I accepted the invitation to speak today because there are some things that need to be said.

New Zealand made a dreadful error of judgment in pulling out of Anzus. The decision was taken due to misplaced concerns about nuclear armed ships. This no longer applies. Concerns about the safety of nuclear powered ships have been addressed in the Summers Report and so it is hard to understand why the errors of the past remain unattended.

The United Nations will never defend New Zealand. You have to be prepared to do that in conjunction with your trusted friends and allies. You neglect your own national interest if you leave defence policy to greenies and peaceniks.

United States involvement in our region is critical to Australian security just as much as it is to yours. We share with the US basic values, which make our relationship comprehensive and sustainable. A strong United States is vitally important to both of us. But that does not mean we can leave the hard work all to our friends. I know this proposition has been accepted in New Zealand because of your contribution to East Timor. But East Timor is not the last challenge we will face. Nor will future challenges necessarily be the same as East Timor. There will be others and we have to carry our share of the responsibilities. New Zealand’s defence policy should not be tainted by a tinge of 1970's anti-Americanism.

The awful truth for New Zealanders is that although George Bush rang your P.M. in the aftermath of September 11 basically your international reputation has suffered since you abandoned Anzus.

For Australia Anzus has become a bilateral relationship. It is no longer the trilateral relationship it was once.

In the early 70,s it was said the U.S. President preferred to meet the President of Zaire in preference to the Prime Minister of New Zealand. For Australia Anzus is the “foundation of a relationship that is one of our great national assets” (White Paper Page 34). Logically I can’t understand how it can really be any different for New Zealand and it was not - until the fateful abandonment of Anzus.

The 1991 N.Z. White Paper said that since Anzus the capabilities of the New Zealand Defence Force had atrophied in areas such as exercising and training; collection of intelligence and logistic support. The loss of training had lowered professional standards. It is obvious that this judgment still stands. New Zealand needs to tackle this most basic issue.

It should also be said that this is not just a defence issue. By not being in the mainstream on defence as you once were, you no longer have the same clout on other issues such as trade negotiations. And that can then impact, over time, on investment. That really is a loss for New Zealand. You can play above your weight in rugby, cricket, the film industry and other areas of human endeavor so why not play your full role in security issues?

Related to the Anzus matter is New Zealand’s strategic assessment. I reject any suggestion that Australia and New Zealand face different strategic circumstances. In my view we are a single strategic entity. The Centre for Strategic Studies: New Zealand put it bluntly when it concluded:

“Ultimately, New Zealand’s defence rests on the defence of Australia. If Australia goes down New Zealand will surely go with it”.

(Strategic Briefing Papers February 2000)

That is not to say that we have identical interests but we do have overlapping interests.

New Zealand is kidding itself if it thinks that its geography gives it the luxury of considering itself isolated and unaffected by the strategic uncertainties of our region let alone by international issues. New Zealand’s strategic environment is not benign. New Zealand cannot escape the conclusion reached in Australia’s 2000 White Paper that the possibility of major conflict between states cannot be ruled out and so armed force will remain a key factor in international affairs. In our region there remains a small but significant possibility of confrontation.

If you accept these propositions then the issue is how to structure New Zealand’s defence forces to meet the strategic environment. The most important point to make is that armed forces should first and foremost be trained, equipped and made ready for war. This is not to say that war is nigh but rather it is essential to understand that an effective military force takes years to put in place and so it cannot be put off until you think you may have a problem. By then it will be too late. Putting money aside now is an investment governments need to make to fulfill their most basic obligation to society namely, the defence of the nation’s sovereignty. This function is not peace-keeping for some-one else who can’t manage their own affairs. Important as the peace-keeping function may be it should not supplant the primary role of the defence force.

Even if peace-keeping were a primary objective for a defence force the neglect of conventional forces would be a mistake. One of the lessons of East Timor is that the availability of conventional forces such as surface fleet and air combat units plays a very important back-up role to such operations.

Budgets are always tight. New Zealand is not a big economy and priorities must be set.

What seems to be lacking is a commitment to a force structure that can give future New Zealand Governments the maximum range of options possible within the budget to deal with the most likely regional scenarios.

New Zealand’s forces lack the mobility necessary for all manner of operations in its area of interest in the south Pacific. New Zealand is short on sea and air strategic lift.

By taking only two of the Anzac frigates New Zealand has also lost the opportunity to boost its maritime surveillance capacity even though that is an aim of the current policy. How that policy is implemented is relevant. For example, one of the lessons from the Solomons deployment is that you need to be able to embark a helicopter because if there are problems then you must be able to support your people on the ground quickly or evacuate them.

It could be said that I have a vested interest in making this remark but for those new to the defence portfolio they might note that a company that builds frigates could equally do a good job in building the multi-purpose ship and two patrol boats now being proposed. But my point is a simple one. Two ships of one class are barely enough as an operational unit. The usual rule is that you need one ship on training, one in maintenance and one available for operations. So you really need three ships. Four ships as originally proposed would be even better again.

New Zealand has also lost the opportunity to upgrade its P3 aircraft. These planes have a surveillance purpose for fisheries and an air-sea rescue role but they are unable to fulfill a more strategic operational function. For this purpose they need further technical upgrades. This would have the extra benefit of adding real value to New Zealand’s participation in the Five Power Defence Arrangement -an important regional forum that should have New Zealand’s active support.

I know that New Zealand’s Air Force will not be flying F22’s and I hope that New Zealand will upgrade its C130’s for lift purposes. But why not look at the armed reconnaissance helicopters being purchased by Australia? They have tremendous capability and can provide genuine force protection especially in any situation likely to be encountered in our region. Too much lip service and not enough attention are given to inter-operability - this might be a chance to acquire real capability at a realistic price in conjunction with the R.A.A.F. As an aside, this is an issue where Australia should do better in the future. Inter-operability is too low on the priority list at Russell.

Informed commentators such as the Centre for Strategic Studies: New Zealand are saying that there is a significant change now being effected to New Zealand’s approach to defence ( Briefing Papers Nov. 2000) and it seems likely to continue unless there is a strong political reaction and demand for a pro-defence policy.

I do not detect much enthusiasm for Anzus or for higher defence expenditure but that is not to say that a constituency for such changes cannot be built. Using 1999 figures, spending per capita in Australia was $US 538 compared to New Zealand’s $US225 (CSS Strategic Briefing Papers Nov.2000). Since then, in Australia we are spending more on defence and we are able to do so because the Howard Government has been prepared to argue the case. It may have to do more, given the demands on the ADF in the last 12 months and the pressures from within the Australian Treasury and Finance to cut White Paper spending to pay for current priorities.

Sadly, it seems that New Zealand is unlikely to adopt a new approach. The National Party lost the opportunity to buy a third frigate at a bargain basement price and should have but never confronted the Anzus issue. Now senior people in New Zealand seriously believe that all NZ need is a Coast Guard and a capacity to provide supplies to the islands in the Pacific.

I hope that that is not where New Zealand is heading. And whilst acquisition policy is critical, in the end if you do not have good people then your forces will deteriorate. Good people will not be attracted to the N.Z. Defence Force unless there is a real commitment at the political level to its future.

In conclusion, whilst there are many great aspects of the defence relationship between us it is impossible not to be concerned about its future. We need to work together and as CDR is already in place it provides a good framework for a more concerted effort.

Throughout our history people on both sides of the Tasman have worked to ensure the best possible relationship between our two great countries. Your party’s interest in both economic and defence reforms is not just welcome but important for both Australia and New Zealand. I thank you for inviting me and I wish you well for the balance of your conference.

Postscript: Although I accept full responsibility for these few words I acknowledge the assistance I have had from Des Moore who kindly produced the OECD figures referred to above and gave me some other comments on the New Zealand economy.


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