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Dr Michael Cullen - Canterbury Chamber of Commerce

20 July 2000
Speech Notes
Embargoed until: 1.00 pm Thursday 20 July 2000

Canterbury Employers' Chamber of Commerce and Chartered Accountants

Centra Hotel Christchurch

Thank you for inviting me to speak with you today. The Government is making a concerted effort to build sustainable relationships with business on as many levels as possible – from the self-employed to the corporate sector, from farmers to foreign investors.

Our goal is to build an economy and a society in which everyone can participate. The objective is not growth for its own sake or growth at any price but growth which enhances the living standards and life prospects of all New Zealanders.

Our desire to be a government for all New Zealanders is one of the fundamental differences between this administration and the last.

So it is important to this Government that we develop a good relationship with business. Of course we will not always see eye to eye but we do need to be able to work though our differences together in a sensible, pragmatic fashion.
We recognise the contribution of the wealth creators, and we want to offer practical assistance where we can.

That was a central theme of my first budget, and will be a central theme of this Government. Industry New Zealand has been allocated secure funding of almost $332 million over the next four years.

That money intelligently invested can make a real difference. It will mean that enterprises and market opportunities which would otherwise have failed through lack of access to capital or good advice might now be able to succeed.

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The budget also delivered a big funding increase for research and development. We have raised government expenditure in this area by more than 10 percent in this year alone.

Included in that is a record $20 million R&D package for the private sector. This is comprised of $11.8 million for a new grants scheme and $8.5 million to expand Technology New Zealand.

I do not want to get involved here in the argument over whether grants or tax deductions but I think it is worth noting that if all the grants budget is taken up, the effect will be to increase private sector expenditure on R&D by about 10 percent in a single year. That has got to be good for the economy.

New Zealand needs a sustainably growing economy, capable of producing ever more sophisticated goods and services which can guarantee us higher living standards for everyone.

The government's strategy to achieve this is three-fold: we need to expand exports, we need to add knowledge to our production base and we need to revitalise the regions.

Let me take a moment to set the economic scene with you. Later on I will discuss some the economic implications and rationale behind the Employment Relations Bill and the repeal of the Employment Contracts Act.

The domestic economy finished last year strongly, buoyed by a good agricultural season, Y2K preparation spending, millennium partying and a successful America's Cup defence.

Once these effects wore off it was inevitable there would be some loss of momentum in the domestic sector – especially in the cities.

But the fundamentals point to ongoing economic growth averaging around 3 percent over the next three years.

The drivers for this growth are now coming from the export sector and tourism. Exports are growing on the back of strong world demand, improving commodity prices, a good growing season and a competitive dollar.

Right now our regional economies, based on the primary industries, are outperforming the metropolitan centres with exports forecast to grow by about 15 percent through this year and the next.

The mood is bullish in the farming sector, especially in dairying where prices are solid and production is at record levels. Earlier this week I was talking to dairy farmers in the Manawatu and can report that they are feeling very good about the world and their prospects for the next 12 months.

The switch in the growth pattern to the export sector will achieve two positives. It will take pressure off the current account deficit, and it will put the recovery on to a more sustainable footing. New Zealand is simply too small to sustain a recovery led by domestic consumption and tax cuts, especially given the balance of payments weakness and the high levels of household and private sector debt.

And eventually the greater export returns will flow through to the rest of the economy. That is why I am confident that the recent slump in business confidence, which I think largely reflects the slowing of growth in the domestic sector, will soon rebound. In fact there is evidence that it has begun to rebound already although - obviously - it is still at very low levels.

The Watties Heinz announcement this week that it will be closing down its Dandenong plant in Victoria and transferring 39,000 tonnes of production to Hastings should help. The move will create another 50 jobs in the Hawkes Bay and will make the Hastings cannery one of the largest in the Southern Hemisphere.

Fisher and Paykel have also announced recently plans to expand whiteware production at their Mosgiel plant, largely for export to the North American market. And I have put on record the Government's willingness to take a more pragmatic attitude toward encouraging foreign investment in New Zealand, especially greenfields investment which brings with it new technologies and high quality jobs.

The slide in business confidence has exposed the Government to criticism, some of it over-blown in my view. I do not deny that some of the fall reflects concern by some in business at some aspects of the Government's policy programme.

But I would suggest that these concerns are out of proportion to what is being proposed. This is by no means a lurch to the left. We are engaged in a moderate rebalancing of policy in line with our election promises and with majority public opinion as reflected in the election result.

That seems to be understood overseas. Research put out this week by Deutsche Bank shows government policies have had little or no negative impact on foreign investors and that there has been no increase in the risk premium on New Zealand assets.

I would also suggest that the role of policy in precipitating the fall in confidence has been exaggerated. Business confidence in Australia, for example, has also dropped sharply over the last two quarters - even more sharply than in New Zealand by some measures. To me this says most of the explanation lies in factors common to the two economies such as increased interest rates, rising petrol prices and weaker domestic demand.

I am not saying there is no policy effect - gst is being blamed across the Tasman, the ACC changes and the ERB are being blamed here. I am simply saying that the policy effect should not be over-stated and that the size of the task the government is embarked on should be kept in perspective. I would characterise what we are doing as introducing some much needed pragmatism into the economic policy mix.

Peter Montagnon, a writer for the Financial Times, was in New Zealand recently and did a round of interviews with senior politicians, including myself and - apparently - Max Bradford. Mr Montagnon quotes Mr Bradford as conceding that perhaps New Zealand had concentrated too long on driving down costs rather than looking at ways we could grow the pie.

It is not often I have the opportunity to say this so I will say it slowly. I agree with Mr Bradford. The government agrees with Mr Bradford. The focus of economic policy has been too narrow, and too little concerned with promoting growth.

We aim to redress that: it is what our R&D policies are about, it is what the telecommunications review is about and - more subtly - it is what our labour relations and ACC reforms are about.

The ACC reforms were designed to protect the principles of rehabilitation, no fault cover and compensation and to prevent the return to expensive and time-consuming litigation. Litigation carries with it a high risk to both parties. For the worker, it may mean massive damages - or nothing. For employers, the risk is stronger because they have to cover against the prospect of massive damages. And that means large premiums.

So in the longer term, I am confident that the changes we have made will keep business costs down. And even in the shorter term, we have managed deliver savings. Employers will pay $25 million less on ACC premiums this year than they did last year. It is estimated that between 70 and 80 percent of individual employers now pay a cheaper premium than they did under the private system.

But of course, under the law of averages, some will pay more, as indeed occurred in the transition to the privatised system.

In the last couple of months I have talked to a large number of employer groups, in public and in private, about issues associated with the Employment Relations Bill.

There is a lot of interest in the technical details of the Bill, and in the sorts of changes that may be made to it.

Invariably though, just as we are about to close off on the discussion of detail, I get a last minute plea in mitigation for the Employment Contracts Act. I normally get two assertions. One is that the ECA has given New Zealand an edge and is central to maintaining its international competitiveness. The second is that productivity has increased as a result of the flexibilities that the ECA offers employers.

Let me try and un-pick this clutch of arguments that are, at the end of the day, interwoven.

Firstly, it is painfully obvious that either because of or in spite of the ECA, New Zealand has not maintained its international competitiveness. We spend more on economic transactions with the rest of the world than we earn in it. The amounts are large. They equate to eight percent of annual production.

In an international context we are spending $1.08 for every $1 we earn. I am sorry, these are painful facts, but they are facts nonetheless. No amount of rhetoric or assertion about our world beating industrial relations system can hide the fact that we are not beating the world at economics.

The second fact is the rate of growth of labour productivity has declined, not increased, since the ECA was enacted. Again, this might be in spite of, not because of the ECA, but the decline is a fact. The numbers are not that difficult to find. Statistics New Zealand measures the value of production in any given year and calls this GDP. It then conducts surveys to find out how many people are employed.

Divide GDP by employment and you get output per labour unit – that is labour productivity. The numbers show a low rate of growth of labour productivity in the 1990s. A hard and sorry fact, but a fact nonetheless.

You can look at your workplace and see a lot fewer workers working a lot harder for a lot less and say that labour productivity has increased. It has.
But only in one dimension. As a nation we need to have a very clear focus on our strategic goal.

Productivity is the value of output per worker. I have to say that in recent times, in too many industries, the focus has been on stripping labour cost out, not adding value to the labour input. There are obvious limits to that strategy.

We must start to think value and contain cost, as opposed to ignoring value and being obsessed with cost.

Value comes when all the combinations are right. It results when modern equipment is used by skilled workers to produce a high value product sold in a vibrant market, all organised efficiently by go-ahead management.

It is that value that creates the potential to reward all stakeholders: the manager, the worker and the shareholder. That is the sort of productivity growth that we need to aim at.

There is an argument – and I put it no stronger than that – that the ECA created lazy management. It allowed short-term cost containment to displace long term value maximisation as the focus of managerial attention. My own view is that the ECA was a subsidiary influence – but both ways. It was neither the cause of relatively poor performance with productivity and international competitiveness nor the contributor to economic success.

The main failure was a failure of vision. The vision that was lacking was a vision of high value production in a rapidly changing global marketplace.

In re-focussing production on earning more rather than squeezing the last bit of non-disposable cost out of the system, it is important to recognise that there is no silver bullet. We are talking about interacting systems, and we are talking about them interacting over a reasonably long period of time.

The first of the systems is the education system. The regime of education, training and retraining is vital to the future of a value added economic system.

The government has moved quite aggressively on this front. By suspending interest payments on student loans while students are studying, there should be a strong encouragement for young people to seek additional qualifications, and less of an inducement for them to migrate once they have acquired them. The pilot of the modern apprenticeship programme will hopefully extend the penetration of skills. A revitalisation of tertiary education will take a little longer, but it is firmly on the policy agenda.

The second system is the technological system. Partly this involves basic science, it is partly applied research and the development of applications of basic science, and it is partly technology transfer – making sure that there is maximum uptake of the technology that is available.

A technology upgrade is much more than the debate between tax deductibility of R&D versus grants. It is about a properly functioning network of Crown Research Institutes, vibrant university research projects, partnerships with private research agencies and well designed government funding to leverage private investment in R&D.
It requires information about technological opportunities and the linking of innovators and entrepreneurs through business incubators. The government is working on all of these fronts.

The third system is the financial system. There is a real problem in New Zealand of low savings rates and thin capital markets. The government is doing its bit to lift national savings rates through an appropriately tight fiscal stance. I need to point out that the net effect of all of our tax and spending initiatives has been to lift the government surplus by an average of about $300 million a year in comparison with the pre-election policy settings of the National led coalition.

The next stage in the programme to improve national savings will be to establish a fund to meet the emerging costs of New Zealand Superannuation, and after that we will look at the incentive regime that applies to private savings.

Savings is only one side of the coin. The other is investment. Investment in high value, outward looking production needs more than a level playing field. With a policy neutral setting, investment is just as likely to be channelled into commercial and residential real estate. I am not trying to belittle this sort of investment, but just to acknowledge that it is possible to over-invest in property compared with export earning activity from the perspective of long term national viability.

There is a need for a lot of things to go together if the higher risk, higher return investment is to gain momentum. I list a few: access to information about offshore market opportunity, export credit insurance at affordable cost, access to venture capital, responsive financial systems to provide working capital and assurances of access to credit, well performing equity markets.

There are things on this list that the government cannot do. There are things that it can facilitate. There are things that it can support directly. We do have an active economic development and regional development programme in mind and under construction and I am confident that it will have very strong investment impacts.

I am suggesting that there is a bigger picture out there and the government is moving carefully and systematically to develop and integrate the systems needed to get the productivity growth and the truly competitive economic structure that is vital to employment growth and financial self-sufficiency.

I make two points.

One is that as the focus narrows – say onto this clause or that in the ERB, we risk losing sight of the wider vision. Issue based protest action can be counter-productive even to the interest of those who are mounting the protest.

The second, and much more important point is to see things in context.
In the context of short-term cost minimisation, I understand that employers could legitimately see the ERB as a threat.

On the other hand, in the context of a more supportive, integrated value added development strategy it should be seen as an opportunity.

The opportunity is that the parties are being brought together to try and establish productive employment relationships built around equitable shares of a growing cake.

This is replacing an adversarial contest for a shrinking cake. Because that is what the ERB is designed to achieve. It establishes processes and expectations of appropriate behaviour for all parties.

Thank you for inviting me here today. Let me assure you that this Government is prepared to listen to and talk with business. Yes, there will be times when we disagree but my personal promise to you is that my door will be kept open so we can work together to build a growing, healthy economy that delivers the goods in terms of the quantity and quality of life for every one.


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