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Hodgson: Advancing Economic Development Speech

4 December 2007

Advancing Economic Development

Pete Hodgson speaks to the AucklandPlus, and releases a Cabinet Paper on Advancing Economic Transformation.

Thank you for the opportunity to share with you some recent Labour-led government thinking about the performance and prospects for the New Zealand economy.

I don’t intend this to be a political advertisement, but I think it is useful to put what we are doing now, into historical context.

When we came to office in 1999, we made three quite fundamental changes to the principles that guided our approach to economic management.

Firstly, we abandoned the balanced budget approach to managing the government’s own finances, and instead decided to look through cyclical movements in the economy and let the automatic stabilisers operate. This was quite radical in the sense that during the seventies, traditional Keynesian economics got a bad name: everyone wanted to be a Keynesian during slow times, but nobody wanted to be one in the good times. The result was that globally, government debt ratcheted up during each successive downturn. We have looked through the good times, and the government’s finances are in better shape than they have been for over 30 years.

Our second change was to abandon the dogma that asserted that unfettered market forces always produced the best outcome for economies. Instead, we recognised that the success stories of the world – especially for the smaller economies – relied on a partnership between governments and the private sector. We made a conscious decision to take a more active facilitative role in fostering regional and industry development.

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Finally, we embraced the principle that a cohesive and inclusive society was not only an important purpose of a strong economy, but in turn contributed to one. Inclusion is an economic strength and divisiveness is an economic weakness.

We have therefore had an activist economic policy agenda, and this has covered diverse fields such as more investment in innovation, attention to the quality of tertiary education, a different approach to immigration, a more aggressive upgrade of our infrastructure, attention to savings, deliberate emphasis on some industry sectors, and so on.

The point I am making is that economic transformation is not a new fad. We have been nurturing economic revitalisation since day one, taking it a step at a time, moving forward as past results generated the resources to finance the next initiative and not pandering to short-term opportunism.

And it has produced results. GDP, in real terms, grew by 25 per cent in the last seven years. There are 362,000 more people in work now, than there were when we took office. Gross government debt has fallen from 34.2 per cent of GDP in the 1999 financial year to 24.8 per cent now. We have also built up financial assets equal to 39.8 per cent of GDP to assist with the transition to an older population structure – over double the percentage in 1999. I could go on, but the point is that the economy in 2007 is a radically different beast from the one we inherited in 1999. It is richer, more balanced and more stable, and a number of the settings in place now, will contribute to our improvement.

But it won’t be enough. Today I have released a Cabinet Paper - Advancing Economic Transformation – describing our progress in Economic Transformation and areas for future emphasis. We’ve seen other countries reinvent themselves. Ireland, Singapore and Finland for starters have all transformed their economies successfully.

They’ve done it in different ways, but one thing they do have in common is that business and government agreed on the direction to head in, and acted together.

Today I want to share the next phase of the government’s thinking with you.

We need to intensify our economic transformation effort significantly and we need to adopt a sharper focus in a number of key areas, for three reasons:
 Our productivity and growth rates need to improve;
 We need to better position ourselves to take advantage of the global economy; and
 We need to be well placed to respond to and capture the opportunities arising out of the pressure to be environmentally sustainable.

But we need, also, to avoid the temptation of trying to do everything at once, so we have chosen just a handful of initiatives for increased emphasis. The number could have been 10 or 15, but we have chosen six. These six are the agenda for next year, and beyond. Here they are:

1 To improve access to quality, fast, reliable broadband services.

2 To position New Zealand as a world-leading exponent of smart and innovative environmental solutions.

3 To further develop our workplace skills, this time with an emphasis on basic literacy and numeracy.

4 To support the internationalisation of our businesses as the best way for them to grow and extract more value from the global supply chain.

5 To focus government investment in discrete areas that reflect and extend New Zealand’s strengths, in the biological sector and elsewhere.

6 To make Auckland a world-class hub of innovation and internationalisation.

The first area – to improve access to quality, fast, reliable broadband services was the subject of a two-day Digital Summit here in Auckland last week. There is little argument about why we need to do this, and little argument over our historic lack of competition or relative underinvestment. We are past seeing this as a discretionary activity or an enabling part of a modern economy. Indeed it is better viewed as a prerequisite.

The level of investment must quicken, and the reach of broadband must be extended. My colleague David Cunliffe leads the government’s role in this area, and the Prime Minister and Deputy Prime Minister have a keen interest, just as they do across the entire economic transformation agenda.

The second area – positioning New Zealand as an exponent of innovative environmental solutions – has a lot to do with acknowledging our somewhat hidden talents in this field and capturing the rapidly growing commercial opportunities as they emerge from global demands for sustainability.

We tend to overlook the progress on sustainability that we have embedded in our land-based industries, in fishing or in energy, and we tend to overlook our skills in eco-verification, or our role as a ‘test-bed’, or our legacy of environmental science.

We can develop and refine eco-standards that have value globally. We must also adopt them ourselves more quickly, and reliably.

Just last week Fonterra, Zespri and the wine industry all announced that they will measure and make public their respective greenhouse gas footprints, and that they would then set out to reduce them. This injects integrity and evidence into the food miles debate, and it also drives further efficiency.

Climate change is a rich potential source of economic opportunity, which we have barely begun to tap. I’m engaged with many ministers in this area, including Ministers Anderton, Mallard, and Parker.

The third area in the Cabinet Paper – “Skills” is equal measures of basics and brilliance. Just as our tertiary education strategy is starting to bite with a lift in the number of science students, or a very large increase in doctoral students across all disciplines, so too must we pay attention to the basics. About one third of our working population has literacy, language and numeracy skills below those needed to participate fully in a modern, knowledge society. That is not unusual by international standards, but it is unacceptable. It is also a rather obvious way to improve our productivity.

So we need a unifying skills strategy to improve the skills of our existing workforce. Such a strategy is almost to hand and literacy, language and numeracy are at its heart. Our investment and our capacity in this area must, and will, increase. I’m involved twice in this area, wearing both my Economic Development and Tertiary Education hats, but so is Maryan Street, my associate in both portfolios, who has a strong feel for the issues.

The fourth area is a well canvassed one – that is to support the internationalisation of our businesses. The links between a kiwi business and the international market it competes in and with are becoming far more complex. New Zealand firms need to organise, and sometimes invest in complex systems that span many countries. We need to be the location of choice for those elements of the process that generate additional value in areas where we can sustain an edge, whether that edge comes from established skills and competencies, or from recent inventiveness in design, marketing or research and development.

The various elements of the one billion dollar tax package self-evidently helps this aspect of transformation, but so do the lessons from Export Year 2007 and the strong partnerships between business and government that emerged. The Platform document, released two weeks ago, is a predominantly private sector view of the road map ahead and the government backs it. In particular New Zealand Trade and Enterprise will continue to reconfigure itself to form stronger relationships with a smaller number of high-growth and high-growth potential kiwi firms who are internationalising.

All my colleagues in economic development, trade, and foreign affairs have an involvement in this area, and various opportunities for transformational initiatives are now starting to shape up.

The fifth area of effort will see a focus of government investment in specific areas or technologies that reflect and extend New Zealand’s strengths. As with the growth and innovation framework that I helped design several years ago, this is the idea of a government placing disproportionate attention into selective parts of our economy, research efforts or skills development.

The Cabinet paper lists the six candidates we are proposing and we are currently at the point where we wish to publicly discuss them, then better define and refine them. The six are:
 pastoral solutions
 environmental solutions
 advanced foods
 health solutions
 new materials, and
 digital content.

A lot of thinking had gone into this list so far, long before I took on my new portfolios, but it now falls to us all to sharpen the focus on them, to consider public and private investment opportunities, to nail the detail and then to get on with it. More needs to be said about this piece of work, in times to come.

The last area of attention in the Cabinet Paper, and the last topic of this address, is Auckland, and the need for New Zealand to have at least one globally competitive city. New Zealand needs Auckland to perform.

It already does of course. It has just picked up fifth-equal place in a contest for the most liveable city in the world. But that isn’t good enough, and neither yet is broadband, land transport, or the waterfront, or the commercialisation of innovation, or security of electricity transmission.

Auckland is, and will be, a continued focus for this government. We can be pleased about considerable progress with public transport, productivity statistics, or infrastructure progress. We have a Royal Commission established to make progress on governance.

But we do not yet have the world’s largest Polynesian city bursting with enough industry clusters or innovation precincts, comfortable about the components of supply chain effectiveness, or fully capitalising on its multi-ethnic, internationally-connected population. The Government is ambitious to make progress.

So there you have it – a Labour-led government that has been working hard to lift our fortunes for the last eight years, has set its sights higher and further for economic transformation. I invite you to read the Cabinet Paper, I invite your participation in the work we have ahead of us.

The Prime Minister coined the term Minister of Innovation as my new Cabinet responsibilities cover Economic Development, Tertiary Education and Research, Science and Technology. This collection of portfolios was deliberate.

It now falls on me to progress the contents of this Cabinet Paper. People in Auckland will, for example, want to know when we might make progress on any innovation precinct. So do I. People will want to know how quickly action on language literacy and numeracy will flow, or how the areas of focus will be refined, or how we will progress new renewable energy technologies. So do I.
The Prime Minister does too. And she has charged me with making progress. I don’t intend to attempt to do it alone and no-one is asking me to. But like I said the collection of the three portfolios I now hold was deliberate, and 2008 is going to be a busy year for me. We have detail to progress and I look forward to the support and the wisdom of the business community, local government and academia as the new year gets underway.

Thank you for your attention.


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