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Goff: Succeeding in a Globalised World

Hon Phil Goff Minister of Trade

15 December 2006

Speech Notes

Succeeding in a Globalised World: The New Zealand Experience Address to Koc University, Istanbul, delivered on 11 December
Professor Attila Askar, President of Koc University, Ambassador Hamish Cooper, Honorary Consul Izzet Hatem

Thank you for inviting me to speak today on “New Zealand’s experience in succeeding in a globalised world”.

In discussing this topic, I would like to explore three areas.

The first is the domestic economic reforms New Zealand has implemented since the 1980s, and how these have given us a base for continued strong economic performance.

I would then like to touch on New Zealand’s commitment to the multilateral trading system, and the benefits that open trading policies can bring to countries like New Zealand and Turkey - as we face the realities of a globalised world.

This will include New Zealand’s approach to negotiating bilateral and plurilateral trade agreements.

Finally, I want to talk about Turkey and New Zealand, and how New Zealand’s experience, outlook and approach might relate to the particular challenges Turkey faces in its part of the world.

New Zealand’s Domestic Economic Reforms New Zealand is a trading nation: we need both to export and to import to meet our economic needs. We recognise that in order to succeed in the global economy, we need to have domestic policy settings in place that are conducive to allowing firms to be internationally competitive. New Zealand is now one of the most open and business-friendly economies in the world.
The World Bank rated us as the easiest country in the world to do business from 2003 to 2005, with Singapore just edging us into second place in 2006. Getting to this position, however, has required significant economic reforms over the past twenty years. In the 1950s New Zealand was one of the richest countries in the world on a per capita basis. The official number of unemployed in 1959 was 21. A year later it was 22.
We joked that the Prime Minister personally knew the names of everyone who didn't have a job! In the late 1960s and 1970s, however, New Zealand experienced a series of external shocks, which resulted in a significant downturn in its economic performance. Britain’s entry into the European Economic Community in 1973 largely removed the preferential access our agriculture products had enjoyed into the UK market.

The oil price shocks of the early 1970s pushed the prices of imported oil up threefold. Successive governments sought to maintain New Zealand’s high standard of living, and full employment, by increasing levels of overseas borrowing, and instituting increasingly interventionist economic policies. Trade barriers were imposed to protect domestic industry, which resulted in New Zealand’s manufacturing sector becoming increasingly inefficient.

This inefficiency spread to other sectors. Many of the protected manufacturing industries and services provided inputs to agriculture.

The added costs associated with domestic manufacturing began to erode the international competitiveness of New Zealand’s critical agricultural sector. The government of the day's response was to further subsidise the agricultural sector in an effort to lift production volumes and thus maintain farm incomes. By 1984, the New Zealand economy was in deep trouble. Unemployment had soared, debt levels rose sharply, inflation was in double digits - and was curtailed only by a wage and price freeze.

Economic change was clearly needed, or our country would have been bankrupted. To address the economic crisis, New Zealand instituted wide-ranging micro- and macro-economic reforms in the mid 1980s. These reforms emphasised the role of transparency, predictability of policy, the market mechanism, competition, and reduction of government intervention. We reformed our agricultural sector. Assistance to farmers, which had reached a peak in 1983, was drastically reduced. Most subsidies were removed over a very short period.

The reform of Producer Board monopoly powers began and the public sector and the government’s research and development agencies were restructured to improve efficiency. With all major reform and adjustment processes, there are some adjustment pains and some who are adversely affected.

These were not, however, as extensive as many had feared. Original estimates were that up to 10 percent of farmers would be forced off the land during the reform adjustment period. But only around 1 percent of farmers actually had to do so. Despite these adjustment pains, a slow recovery in farm profit began after two to three years. Farmers began to respond directly to international market signals and capital flowed into more efficient, diverse and profitable farming operations. There was a rapid recognition that the New Zealand agriculture sector would have to find ways to diversify products, and markets – which in many cases meant farming smarter, as well as more efficiently.

As a result of the reforms, and the agriculture sector's adjustment to them, New Zealand’s agriculture sector is now the least assisted among OECD countries: we farm without subsidies.

The New Zealand farming sector has emerged as a dynamic, diverse, responsive and internationally competitive one. No farmer today wants to return to government supported farming. Productivity in the farming sector has soared. Export revenues generated from around 40 million sheep in 2002, for instance, exceeded that generated from 70 million sheep in the 1980s, even after taking into account price increases.

The impacts of the mid-1980s reforms were felt beyond the farming sector. Their radical nature caused some short-term impacts, with unemployment temporarily lifting and growth easing. But by the early 1990s, some positive signs started to emerge. Inflation moved to within the then target range of 0-2%. The Balance of Payments deficit dropped below 2% of GDP and the government’s operating balance moved from deficit to surplus. These improved macroeconomic fundamentals positioned the New Zealand economy well for its subsequent growth phase. Since the mid-1990s, New Zealand’s economic performance has been strong. GDP growth has averaged around 3.5% since 1995 and the unemployment rate has steadily dropped to be the lowest in the OECD at well below 4%. Our economy is now much more flexible and dynamic.

Entrepreneurs are rewarded for their creativity; and a focus on innovation is resulting in high value-added offshoots from our traditional agricultural strength, such as biotechnology. New Zealand learned several important lessons from our economic reform experience.

First, agricultural market support does not lead to sustainable farm and rural incomes. Insulating farmers from market signals leads to inefficiencies and loss of competitiveness over time. Second, broad economic reforms are feasible, and rural areas can develop without subsidies. Third, well-targeted safety net programmes tailored to the specific needs of those communities that are most affected by the reforms are necessary to mitigate the transitional costs of adjustment.

Fourth, the credibility and sustainability of reforms over time are essential for successful adjustment. If we want to change their behaviour, farmers, firms and consumers must be sure that there is no chance of policy U-turns. Fifth, farmers reacting to global market signals tend to be better at producing goods for the global market. The importance of trade, and trade access, increases.

NZ and the WTO

A successful conclusion to the current World Trade Organisation Round, the Doha Development Round, remains New Zealand’s top trade priority.

The value of a successful conclusion of the Doha Round for countries such as Turkey and New Zealand is clear.

The WTO offers the best hope of reducing distortions to trade at the global level, by reducing export incentives and domestic subsidies – particularly in developing countries. One of its key objectives is also to bring predictability and fairness to world trade.

Its multilateral rules are based on principles that include progressive liberalisation, non-discrimination and decision-making by consensus. It has a dispute settlement system to see that the rules are enforced.

A rules-based multilateral process is especially important for the more vulnerable members of the international community, including smaller and developing countries.

A successful conclusion of the Doha Round would maximise the opportunities for continued economic growth and enhanced global prosperity. Such economic conditions increase the likelihood of sustained peace and stability.

The world economy is relatively benign at present, but we should not be complacent. Continued economic growth is not automatic. There is scope for friction as new trading relationships, and powers, emerge.

An effective WTO system can help mitigate these risks.

Before the suspension of WTO negotiations in July, New Zealand was working for ambitious results in agriculture, industrials, services and rules. Reforms in these areas have real potential to stimulate growth and reduce global poverty. The prospects for lifting millions of people out of poverty have been diminished by the suspension.

More than a billion people live on US$1 a day, while OECD countries spend close to US$1 billion per day, between them, on agriculture support. Failure of the Round would have high costs for all of us. The breakdown in July resulted from the failure of key players – the European Union, the United States, India and Brazil – to find a way to move forward on three key problem areas: agricultural market access, agricultural subsidies and industrial tariffs.

While there has been, as yet, no substantive breakthrough on these issues the suspension has, since November, been replaced by an agreement to resume work in the negotiating groups. A strong call was also made by APEC Leaders at their recent meeting in Ha Noi for efforts to break the deadlock. The key political message was that all countries had to be prepared to move beyond their established positions. The test will be whether WTO members will match that rhetoric with new flexibility. And we have a small window of opportunity – from November this year until early 2007 - in which to make sufficient progress to give some prospect of an extension of the Trade Promotion Authority by the US Congress. New Zealand is working to try and ensure this happens. New Zealand, FTAs and Turkey

While the WTO remains New Zealand’s top trade priority, we operate a multi-track trade policy. Free trade agreements – either bilateral deals or initiatives involving a wider group or region – are a key plank in that strategy. We began with our neighbour and major trading partner Australia. Our Closer Economic Relations partnership with Australia set a standard for economic integration that others followed, notably the US and Canada with NAFTA.

CER makes the relatively small New Zealand market of 4 million people and US$100 billion in GDP in effect into a large market of 24 million people and US$800 billion in GDP – in the top 20 global markets, with per capita purchasing power comparable to leading European countries.

For New Zealand, the wider Asia-Pacific region is an area of focus. We are a member of APEC, which represents nearly half of the world’s trade and 60% of the world economy. For the first time APEC this year placed on its formal agenda, discussion of plans for a Free Trade Agreement of Asia and the Pacific. Likewise, within the East Asia Summit, which New Zealand is also a member of, Japan has produced plans – and invested US$100 million in researching it to promote economic integration of ASEAN, China, Japan, Korea, India, Australia and New Zealand. New Zealand has existing bilateral free trade agreements with Australia, Singapore, and Thailand and, through the P4 agreement, with Chile and Brunei. We have a large negotiating agenda already with China, Malaysia and ASEAN. Beyond that it is not hard to identify targets for new FTAs. There are good potential gains from better access to any of the major Asia-Pacific economies – the US, Japan, Korea, Canada or Mexico. The same economies are important as potential sources of investment, something we would expect an FTA relationship to stimulate.

But our global trading interests require us to look further afield, and to develop links as we can with other economies. New Zealand is currently entering FTA negotiations with the Gulf Cooperation Council.

The EU remains one of our leading trade and investment partners and an objective for better economic integration.

Turkey has been an important destination for New Zealand exports in the past, and we remain hopeful that the untapped potential will be realised in the future. Turkey’s large population and EU membership intentions enhance its potential as a market for New Zealand, but we continue to face virtually insuperable barriers for many of our exports, especially food, into the Turkish market.

We are currently focusing on areas where we do have a chance to overcome these barriers. These include services such as earthquake engineering and tertiary education, where New Zealand is particularly competitive - as well as high-end manufacturing.

Conclusion To conclude, both New Zealand and turkey are part of the globalising world.

New Zealand’s experience is that its former protectionist domestic policy settings damaged our agriculture, and other exporting industries, by blocking market signals and undermining their efficiency and competitiveness in the world.

While the reform process can be painful, we emerged from it more efficient, dynamic and competitive.

While each country needs to take into account its own national circumstances, and adapt its reform programme accordingly, there is reason to believe that similar reforms in Turkey would benefit not only its consumers, but also – ultimately – its producers.

Equally, we believe all countries will benefit from multilateral reform of the world trading system.

We are committed to the successful conclusion of the Doha Development Round, and to a rules-based multilateral system.

Removal of trade-distorting subsidies and the lowering of tariff barriers will both produce overall welfare gains, and be of specific assistance to developing countries.

We should work together to secure progress in completing the Round.

Bilaterally, we should also look for new trading opportunities.
Accession to the European Union is important to Turkey, with over half of its trade going to the EU – but that should not stop it looking beyond Europe.

For New Zealand, Turkey could be our gateway into Eastern Europe, Central Asia and the Middle East.
With New Zealand’s increasingly important trading links with the Asia-Pacific, its contacts there could be of benefit to Turkey. Greater engagement between us can help us lift current trade levels closer to their real potential.

Thank you for the opportunity to talk to you today. I look forward to hearing your comments and questions.


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