Cullen Speech to Los Angeles World Affairs Council
4 September 2002
Hon Dr Michael Cullen
Embargoed until: 7am, 4 September NZ time
Speech to the Los Angeles World Affairs Council
President Curtis Mack and guests.
Thank you for coming today. New Zealand and the United States are, in the words of Secretary of State Colin Powell, “very, very, very good friends”. I don’t know how many of you have visited New Zealand, but the Americans I have spoken to who have visited us remark on three things: how friendly the people are, how beautiful the countryside is, and how uncluttered the environment is.
I certainly hope that when the Americas Cup challenge series gets under way in the next few months, more of you will take the opportunity to experience our hospitality, and extend your visit to enjoy the natural beauty of our landscape.
On the other feature of New Zealand, let me say that we won’t exactly mind if you do try and add a bit of clutter. We welcome inward investment into ventures that build on our natural advantages and aptitudes.
I will come back to this issue of New Zealand as a location for inward investment, but before doing that I will give you a brief overview of the state of our economy.
I am on my way to the Apec Finance Ministers meeting in Los Cabos, Mexico. I suspect that I am one of the few finance ministers going there with relatively few concerns about how the economy in my care is performing.
all the turbulence and uncertainties of the last few years,
the New Zealand economy is in good heart. The economy has
been growing at around 3 percent a year. Despite the highest
ever recorded level of labour force participation,
unemployment is the lowest it has been for 14 years.
Our current account deficit has also dropped to a 14 year low.
In the last financial year, the government ran a fiscal surplus of 2 percent of GDP. Gross public debt is a modest 30 percent of GDP, and we have financial assets of around 13 percent of GDP so the government’s financial position is solid. Inflation is below 3 percent a year and projected to decline.
All of this counts for nothing if the outlook is for bad times ahead. There are three risks that we need to be aware of. We are a small, distant, lightly populated and widely dispersed economy, and are sensitive to transport costs and transport prices. We are obviously keeping a wary eye on global oil prices.
Second, primary production is an important foundation of our economic structure, particularly with regard to export earnings. World dairy prices have declined substantially in recent months although, it has to be said, from record highs.
there is the question of how the global fallout from a
bursting asset price bubble, and the loss of investor
confidence, will wash over New Zealand.
I will make two observations. To date, we seem to have sailed through global turbulence with remarkably little damage. And we have a degree of macroeconomic headroom that gives us scope to adjust in the event of an excessive slowdown being transmitted to us from offshore.
The global asset value decline has had little direct impact on New Zealand. We didn’t have the asset bubble that many other countries had in the 1990s, and therefore didn’t have the degree of share price correction that they had. In fact our share markets have fallen by a little over 10 percent from their 1999-2000 peaks, compared with declines of between 30 and 50 percent in other countries.
There has been an indirect effect from the share market turbulence, mainly through reduced export prices and volumes. In our case though, these have been offset by higher tourist flows, an increased level of net inward migration, more construction activity and robust consumer spending.
As I said, the future is still uncertain. But we have relatively high interest rates, not the close to zero rates that have closed out monetary policy options in some parts of the world, and we have good fiscal surpluses and low debt. So we do have some fiscal options in responding to a crisis, and our labour market has the potential to absorb some shocks without catastrophic social consequences.
I need to stress that there is absolutely no intention to move to a more stimulatory macroeconomic stance. We went on alert after 11 September, but made it clear we would react if, and only if, those events provoked a deeper recession, and then only to the extent necessary. We held our nerve and that proved to be the correct decision.
The economy is growing well with capacity constraints emerging in some areas, particularly with some skill shortages. There is no need for us to alter our economic settings, but I just make the point that I go to APEC with slightly more comfort and a wider range of options than some of my colleagues as we discuss the possibilities of lower global growth scenarios.
As I have said, we are in good heart, and not in damage control mode. We are focussed on lifting our economic game: raising the long-run sustainable growth rate of our economy and regaining some lost ground in terms of the rest of the OECD in relative per capita incomes.
There is no magic bullet. We need to make steady progress on a range of fronts. New Zealand does have some advantages in being small and relatively isolated. But these features also carry disadvantages. They can mean that we have small markets, overheads are spread thinly, foreign markets are a long way away and costly to service.
We have adopted a growth strategy that seeks to build on our natural advantages and to deal with the tyrannies of scale and distance. I will not go through all aspects of it here, but there are aspects of it that will interest you.
The first is trade. We need to grow by accessing the larger markets that we lack domestically. This means that the New Zealand government puts a high value on trade liberalisation, and has pursued that globally, regionally and bilaterally.
We share US objectives for trade reform in the current WTO Doha round, with agriculture being particularly important to us. We will work with the US to this end. APEC’s work in trade facilitation adds considerable value to meeting the goals of free and fair trade in our region.
Bilaterally we have close economic partnerships with Australia and Singapore. We are negotiating another one with Hong Kong. We seek a closer economic partnership with the United States. Our analysis shows that this would be mutually beneficial, with only minor adjustment costs. We support Australia’s bid for a closer economic partnership with the United States, with New Zealand in close proximity. Given the close economic relationship between Australia and New Zealand, this is economically and politically rational.
The United States is already New Zealand’s second biggest trading partner. A closer economic partnership will significantly boost trade in both directions. It will also have substantial benefits in other areas of economic activity. In a world where knowledge and capital combine to create new global centres of great economic potency, New Zealand is seeking partners that will help it leverage its competitive advantages. It offers attractive benefits in return.
This leads on to investment. New Zealand has one of the most welcoming inward investment regulatory regimes in the world. We have the basic institutional infrastructure that investors find attractive: a well functioning, transparent and corruption free bureaucracy and judiciary, relatively low compliance cost regulations, a sound fiscal base, stable prices and so on. These days, these are the necessary conditions to attract inward investment, so we have to offer more.
We have put a lot of emphasis on being a good place to do business, rather than on crude financial inducements. At the end of the day, inducements will not compensate for the fact that a location is inhospitable.
There are some basic competencies that are attractive to most businesses. We have a well-educated workforce, labour costs are low by developed world standards, the infrastructure is generally efficient, utilities are relatively cheap, and we exhibit a high degree of innovation and ingenuity. New Zealand has a ‘can do’ attitude and a very strong problem-solving orientation.
Of course anyone is welcome to tap into that talent pool. But until recently, we tended to promote generic investment attractions, not target them. The result was that, if anything, we tended to exacerbate the disadvantages of scale and distance: doing too many disconnected things, and not developing the industry clusters that have been the base of success in a number of regions around the world and even whole countries.
This is changing. We have identified three areas where we believe New Zealand is especially well placed in terms of international competitive advantage, partly because of where past investments in education and research have left us, and partly because of the latent potential of our natural and human endowment.
These are biotechnologies, information and communications technologies and the creative industries. These are not industry winners that we have picked. They are more in the form of sectoral competencies that have the potential to build new industries and add value and extend existing ones.
Two relatively high profile examples that you might well be aware of perhaps highlight this. We are defending the Americas Cup. No other country apart from the USA has mounted a successful defence. America’s Cup challenges are legendary in the sense that they are big ventures sponsored by high tech, mega-dollar individuals. How did a small country win and defend the cup?
Basically by very imaginative design, the use of leading edge technology in fine-tuning both construction and competition, and the co-ordination of contributions from a variety of participating sponsors. Team effort with world-beating leading edge innovation. A number of industries like luxury yacht construction and the tourism and hospitality sectors have bounced off Americas Cup exposure.
The second film in the Lord of the Rings Trilogy is about to be released. It was filmed entirely in New Zealand. New Zealand design and technology supply companies won Oscars for their contribution to the first film. The scenery, the talents, the inventiveness and the simple ‘can do’ effective management of New Zealanders produced an international film success story out of all proportion to our size.
We are also upgrading the back-up inputs needed to transform our economy around higher performing, outward looking industries. These involve moving to focus research and development through Centres of Excellence, upgrading the funding of ventures at the seed and start up ends and getting a much better fit between what our tertiary education and training institutions offer and what students and employers need.
We also put a lot of emphasis on what we are calling connectedness. Connecting potential investors with investment opportunities, connecting potential exporters with new market opportunities, connecting researchers at home with others abroad and so on.
There is a new feeling of confidence among New Zealanders. A very high proportion of people, regardless of who they vote for, tell opinion polls that they believe New Zealand is heading in the right direction. That confidence will be self-reinforcing I am sure, and will reinforce economic growth.
Thank you for your attention. Do visit us and take home pleasant memories. But the cup is staying.