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Dr Michael Cullen Speech To The Export Institue

30August 2000
Speech Notes
Wednesday 30 August 2000
Export Institute of New Zealand

Totara Room, Logan Park Hotel, 187 Campbell Road, Greenlane, Auckland


Good evening, ladies and gentlemen.

It is a pleasure to be with you here at the annual dinner of the Export Institute of New Zealand.

The Export Institute provides an important voice for exporters. The Government values your wealth of experience and your willingness to work with us on a wide range of matters.

As Finance Minister I heartily endorse your commitment to focus solely on ways of earning more foreign exchange for the country.

I cannot stress enough how absolutely vital this goal is to the well being of New Zealand. For while New Zealand's fiscal position is strong by international standards, our current accounts are weak. Our balance of payments deficit is currently hovering around 8 percent of GDP. Fortunately a modest improvement is expected with the deficit forecast to fall to around 5.5 percent in 2003.

There is no quick fix to the deficit problem but certainly the holistic intent of our policy package is to encourage, in a practical way, the move to the
'knowledge economy' and to diversify and grow our export base and finally, to lift our national savings rate.
Let me put this government’s attitude to exports in context.

In pure market theory, exports are not special. Resources flow to the areas where they are most profitably employed. This maximises national income.
A mix of relative price changes corrects any imbalances in transactions with the rest of the world – in other words by changes in the exchange rate and capital flows – asset sales or borrowing in plain language.

This theory has been followed at great cost to New Zealand over the last decade.

The theory is wrong. Exports do matter, and exports are harder.

Exports do matter because at the end of the day we have to pay for what we buy from the rest of the world. Short-term stopgaps like hocking off assets to cover the difference, or borrowing, are just that – short term. We run out of assets to sell and use up our capacity to borrow. This is the legacy of the past National and National led governments.

A country can sustain a current account deficit indefinitely if capital inflows are invested productively and the growth rate of GDP is roughly in line with the deficit as a percentage of GDP. It is all a matter of degree and duration.

The new government is uncomfortable with the size of the deficit and its durability, and we are determined to make the health of the export sector a policy priority.

The government recognises that exporting is special and hard.

It is hard because exporters have no competitive shield. They are up against the rest of the world. They are trading a long way from home. They have currency and credit risks to face. There are often language barriers, unfamiliar institutional arrangements and local trading alliances that have to be faced.

In this context, the government has a multi-pronged approach to nurturing exporting and encouraging a diversification of the export base. It runs from the macro to the micro.

At the macroeconomic level the government is determined to maintain a strong fiscal stance. In policy terms, the net effects of tax and spending changes have increased the forecast operating surplus by about $300 million a year compared with the policy settings of the outgoing government.

This does take the pressure off monetary policy and allows kinder interest and exchange rate settings as far as exporters are concerned.

A second macro level policy is to deepen capital markets. The government has announced a diversification of the portfolio of the Government Superannuation Fund. It has authorised the Earthquake Commission to explore options for diversifying the National Disaster Fund. It has indicated a willingness to help with any legislative requirements for closer integration of the Australian and New Zealand stock exchanges, if that is what those parties want. It is making good progress on establishing a fund to meet some of the future cost of New Zealand Superannuation.

The government is also committed to expanding trading partnerships to improve access of exporters to foreign markets. I will talk a bit more about this later.

At the sector level, the Minister of Economic Development is putting various economic development programmes in place.

The government is actively encouraging e-commerce to make our commercial environment modern and relevant. There have been strong moves to encourage young New Zealanders to upgrade their skills. Suspending interest on student loans while students are studying, and moving to establish a Modern Apprenticeship Programme are examples. A strategic review of tertiary education is under way and we have frozen fees at every university and most polytechnics next year in return for a 2.3 percent funding increase.

The government is upgrading its commitment to science, improving the regulatory framework for electricity and telecommunications, increasing the resources for trade promotion and the provision of information to exporters about trade opportunities and exploring options for export credit insurance.

This is a very pro exporter package. It is comprehensive, coherent, relevant and modern. It does not involve a one-size fits all solution and it is not a case of government knows best. We are maintaining a supportive macroeconomic environment, facilitating exporter effort and forging partnerships for sustainable development.

That is the context. I cannot talk in detail about every aspect of that programme, but I would like to talk about New Zealand's approach to trade liberalisation.

This Government is determined to be smarter about it than the previous administration. We will not be driven by an ideological crusade for an abstract free trade ideal.

Our interests are strongly in favour of opening up markets for New Zealand exports. Many of those markets are still massively protected.

It is estimated that even a 50 percent reduction in trade barriers on a global level could add around 4 percent to our GDP.

Obviously there is an enormous amount at stake. And we want a fair crack at accessing those markets.

For 15 years New Zealand has been leading the world in unilateral tariff liberalisation. We have few tariffs left. At the moment, 95 percent by value of our imports enter duty free; over 90 percent of our current applied rates are at zero and the average weighted applied tariff is now 0.7 percent.

While we are not moving away from that, it is time to get a sense of perspective and set ourselves some reasonable priorities.

We are looking for greater efforts on tariff reductions from some of our trading partners.

So we have frozen our remaining tariffs for five years and by the end of next year we will have completed a review of the future course of tariff policy in line with the Government's broader economic strategy. This will give those industries that still have a small level of tariff protection a little more time to adjust.

But, more importantly, this time allows us to take part in properly structured trade negotiations which are mutually beneficial. We want our trading partners making reductions in line with any further moves on our part.

It has been said that other countries see no point in negotiating with New Zealand because we have already reduced our tariffs so much.

Well, we see it differently. Our approach is based on reciprocity, but fully in keeping with the APEC Bogor Goals of free trade by 2010. It is a commitment on behalf of all APEC economies to open up.

We are already seeing the fruits of our willingness to negotiate economic partnerships with other economies that are prepared to give us genuinely reciprocal market access.

This is evident by our current negotiations on a closer economic partnership with Singapore and by our new strategy for building relationships with South America.

This government is committed to broadening and strengthening the relationships it has with Latin America across three broad areas: international and regional co-operation, economic and trade issues, and people-to-people links.

Latin America holds great potential for New Zealand. Its population is forecast to reach 625 million within the next 15 years. Trade between New Zealand and the region has risen sharply in recent years, with exports rising from $184 million in 1990 to $841 million in 1998, before falling back due to the region's recent economic slump.

There is considerable scope for exports to rise and diversify. Brazil alone, with a population of 170 million, is barely known to New Zealand exporters, yet spends around US$57 billion a year on imports.

The strategy provides a framework for New Zealand to engage with Latin America on trade and economic issues. The government has tagged $100,000 of the Trade Access Support Programme to improve access to Latin American countries.

New Zealand will also continue to seek Chile's participation in a closer economic partnership with us and Singapore, and Australia and the United States if they agree to be part of it.

I couldn’t get away with talking to you tonight without making some mention of recent trends in the exchange rate.

It is important to remember that when we talk about the exchange rate there are a number of dimensions that we need to consider.

These are:
 The level of the dollar
 The extent and pace of recent declines.
 The causes.
 Possible responses.
They are inter-related.

It is important to remember that every currency apart from the Yen is depreciating in relation to the US$. Of particular relevance in our case is the fact that the Australian $ has declined against the US$, so we haven't lost huge ground in one of our most important export markets.

The NZ$ is not alone, although there are particular factors that are impacting on it.

Some of the short-term influences can be highly idiosyncratic.

Market commentators are suggesting that the trigger for the recent run on the dollar was a worse than expected result from a survey of business confidence in Germany!

The logic is that poor confidence in Germany impacted on the Euro and because some market trades link the NZ$ with the Aus$ and the Aus$ with the Euro, this provoked a sell-off of the NZ$.

I am not trying to blame that or find a scapegoat.
I am just trying to point out that this sort of link has no logical rationale: it is a quirk of the mechanical trading that is a part of the market. We have to learn to live with it and not be spooked by the occasional mechanical trade. They tend to reverse.

There is no objective way to assess what a natural or equilibrium exchange rate is although there are theories that give a reasonable idea of where it should settle. It is even harder to define what an ideal exchange rate is. We know an exchange rate can be too high. The experiences of the 1990s confirmed that. The dollar is not a measure of our economic health.

It is important to remember, though, that it can also be too low. If it is too low inflationary pressures start to emerge and the benefits of a lower exchange rate can be offset by higher interest rates. In addition, if the low dollar is not a reflection of the underlying economic fundamentals, it will rise again.

Businesses that were established or expanded in response to an artificially low currency will be stranded when it reverts to its natural level, with the attendant waste of resources that that implies.

Even allowing for a wide range of results, the current exchange rate is significantly below the bottom of most estimates of the equilibrium real exchange rate.

In other words, in relation to the economic fundamentals that underpin the exchange rate, the NZ$ seems to have been oversold and it is currently undervalued.

The current exchange rate appears to be the result of a confluence of three factors:
(a) Structural. A country running a large balance of payments deficit would tend to expect downward pressure on the exchange rate. This would normally be gradual. There appears to have been a significant over-correction on this front.
(b) Cyclical. The maturity profile of foreign held debt tends to exhibit a cyclical pattern. There were large inflows of funds via the purchase of Eurokiwi and Samurai bonds in the mid 1990s. Many of these are maturing. It is natural that a substantial portion of them will relocate in country of origin, causing a net outflow of funds.
(c) Technical. This relates to the formula trading that can at times be designed to cover positions and is unrelated to the underlying fundamentals. Technical positions usually reverse relatively quickly.

It is a combination of all four that has provoked the recent weakness. In normal circumstances some of these will reverse. When and how quickly are impossible to predict.

There are no obvious remedies that the government can apply, particularly in the short term.

I note that when the Reserve Bank raised interest rates in May, some commentators suggested that the dollar fell because of that. Now some commentators are saying that the dollar fell again because the Bank did not raise interest rates in August!

In the long term, policy needs to reverse the indifference that characterised the 1990s.

That was an indifference to levels of national saving, an indifference to the health of the exporting and import substituting sectors and an indifference to the size of the balance of payments deficit.

The government is working on active policies to deal with each of these.

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