Manufacturing and middle NZ
Spokesperson for Finance
16 August 2012, 8.00am SPEECH
Manufacturing and middle NZ
Transforming NZ job by job
Welcome and thanks for coming out this morning, and joining with me, David Cunliffe, and your former President Andrew Little. Your local MP, Annette King, sends her apologies.
I know that all of you care about the jobs we need.
This was well emphasised by the EPMU and the CTU when you recently brought economist and manufacturing expert Gooran Roos to New Zealand.
Today I want to continue that discussion about how we can create a high wage economy that we will all benefit from.
More specifically I want to talk to you about jobs – the well-paid and interesting jobs of which we have too few left in NZ - and about some of the fundamental changes Labour proposes to improve our jobs, our productivity and our earnings.
The Australian Treasurer Wayne Swan recently gave a major speech where he said the truth at the core of our labour movement is that the wealth of our country is created by everyone.
“The worst thing we can do as economic managers is create a society in which there are just a few at the top and teeming millions at the bottom, with hardly anyone in-between.
“That type of society is an economic disaster waiting to happen, because where vast inequalities exist, fewer people are able to gain the skills, knowledge and encouragement they need to succeed.
“There is less achievement, less wealth creation, and less prosperity for everyone to enjoy.”
So building a society that strives for full employment with a vast middle in good jobs, a fair share of assets, and a high degree of social mobility, is key to economic equality, and a core purpose of Labour today.
He could have added this is similar to the challenge faced by Labour following the great depression in the 20th century.
And that now, as then, a prosperous and secure working population allows political support and economic means to stand with the vulnerable.
In New Zealand we too have a choice between two types of economy:
One with the middle hollowed out, or one with a modern, high-wage, high-mobility economy.
I’m going to argue that to get the modern, fair economy that grows for all New Zealanders, we need a change of course from what’s been happening for over twenty years.
I will explain why in Labour’s view, manufacturing is a crucial part of the solution.
Just this week David Shearer emphasised 25,000 manufacturing jobs have been lost under this government. So, it’s going to take some big changes.
If we don’t change, more and more will continue to leave to make a new life in Australia and further afield.
53,000 went in the last year - a new record month after month.
Two out of five – 40% - were young New Zealanders, aged between 18 and 30.
What’s driving twenty-somethings to Australia is the opportunity to earn higher wages.
Too many of those who stay end up in low paid jobs - usually service jobs, like pulling coffees and caring for the aged.
Those are necessary jobs - dignified jobs that deserve a living wage.
These jobs contribute a huge amount to our society as a whole, but they have limited career scope.
We need more jobs that increase the productive output of our country and can pay better wages and career advancement.
It’s harder to lift the wages of someone paid $14 per hour cleaning when skilled trades are not getting paid much more.
That’s not to diminish the contribution of anyone whose job is repetitive or low paid.
There is a dignity about work that is at the heart of the Labour movement.
And I’ve had my share of those jobs myself.
My first ones were milk runs. Those 5am starts ruined my desire to see dawn.
When I was 17 I got my first full time job, working for Wrightson NMA.
I paid my way through university with part time work. We were lucky not to have student debt in those days, but I still needed to earn a living and I spent years cleaning in factories and schools.
The job I least liked was a stint handling “seedy” wool – a euphemism for dags full of prickles. It was the most unpleasant job I ever had. Those prickles were worse than the barbs of politics.
One year while working as a road construction worker on Stewart Island, I suffered a serious head injury – fractured skull, covered head to toe in cold-mix bitumen emulsion, and lacerations to my face that required being put back together by a plastic surgeon.
So I know what that work is like, and I know what those jobs teach about life, work and responsibility - and how to avoid bitumen!
I’ve also had a few jobs that required a lot less physical exertion. I trained as a lawyer and accountant.
I was a litigation and managing partner of Anderson Lloyd – the largest south island based law firm.
I started up a number of businesses – some retail, a fund management company, some forestry partnerships and a variety of other ventures.
At one stage I lost my shirt and had to hang out my shingle as a lawyer for a while before venturing out again and helping found agricultural/biotech companies, one of which I managed from start-up to the main board of the stock exchange.
I cover this because I want you to know that my work life has been varied. I’m not speaking from an ivory tower.
We are all wealth creators.
Whether you work for a business or own one, whether you work on the top floor of an office tower, in a factory or down a mine, at home, or on a paddock.
That’s why we all have a right to an economy that fairly delivers for working people.
The real problem is that not enough people are on good middle incomes.
The policy challenge for me, and Labour, is how we achieve this.
I don’t agree with some Greens when they say we don’t need economic growth.
I don’t agree with the National Government’s hands-off, leave-it-to-the-market strategy.
I want an economy which delivers social well-being and maintains NZs control of our own destiny.
Redistribution through the income tax system is important but is not be enough to deliver fairness, nor lift our productivity to change our economic destiny.
To grow the incomes earned by New Zealanders we require a stronger working New Zealand.
Growing working New Zealand will take a breakthrough in productivity gains.
And that in turn is going to require a stronger manufacturing sector.
Pouring more coffees, servicing more tourists or selling more raw commodities doesn’t add enough to our productivity.
What we really need to do is transform more of our products, and create value.
Governments have been banging on about ‘added value’ and exporting more for decades.
And yet exports as a proportion of our GDP haven’t grown, our share of world trade has been dropping, and all the talk of added value hasn’t grown middle New Zealand.
To see why that is you need to have a look at what’s been going on since the 80s and 90s.
That was when globalisation of world trade accelerated exponentially.
In New Zealand, we took a wrong turn. National made a policy choice to compete in the global economy by trying to be a low wage economy.
This was the wrong decision, and we’ve been paying for it ever since.
We could have conceded to low labour-cost countries those lower-value products with high labour content, but at the same time moved our manufacturing sector into high value niches.
We should have encouraged investment in the sophisticated plant and innovation needed to improve labour productivity and sustain high wages.
They went the other way.
National’s Employment Contracts Act helped to drive down wages.
New Zealand as a whole under-invested in new plant and technology.
Savings were low, monetary policy jacked up our exchange rate and deterred productive investment, incentives for research and development went, and tax policy advantaged speculation for capital gain.
The labour market was slanted towards lower skill jobs, where working people on low wages substituted for capital investment.
That wrong turn led to a dead-end.
Even with low wages we could not compete against developing countries when producing lower-value high-labour content manufactured goods.
Our failure to save and invest sufficient new capital compounded. We didn’t raise productivity, and so we fell further behind productivity improvements in other countries.
Productivity is about increasing the value of what we produce, not through more hours - less pay cost cutting.
Many people think Australia’s superior economic performance is the result of a mining boom.
They’re certainly getting the benefit of a resources boom today. But for most of the 90s mining was in a slump and still the Australian economy cleared out on us.
That was because they saved more than us, invested more than us, and they didn’t try to compete by paying lower wages.
Even in mining, they have invested heavily in the capital equipment to fully exploit the opportunity.
Those big mines are not worked by men or women with shovels and pick axes.
In New Zealand, we did the opposite.
As a consequence while there are exceptions, our productive and export base has narrowed and we have hollowed out well-paid jobs.
A few years ago the New Zealand Institute, when it was still around, pointed out that the wage differential between New Zealand and Australia is almost entirely accounted for by the productivity differences.
A New Zealand worker’s productivity is about three quarters of an Australian worker’s.
We’re not work shy (despite what Australian folklore might say). We actually work longer hours, but we earn less.
In the 2000s, Labour sought to improve these problems.
We were successful in some crucial areas: we got unemployment down lower than anywhere in the world. We sustained the longest period of continuous growth in a generation. We started KiwiSaver.
We ran budget surpluses and so left stronger government books than most countries had when the global financial crisis hit.
But growth is now modest. Exports are dropping and we are still over-reliant on consumption and overseas debt, instead of exports and productivity growth.
We’ve had a balance of payments deficit with the rest of the world for forty years.
As private borrowing mounted up, more of our income went to overseas lenders, and more of our assets were sold to foreign owners.
This debt and our external deficit are why our credit rating was downgraded last year.
Our net international liabilities have risen for decades. After a dip following the recession, and the insurance inflows following the earthquakes, our liabilities are projected to increase further – and they’re already at European levels.
This is another way of saying we’re getting relatively poorer as a country.
The slide is not happening evenly across all New Zealand.
Instead, middle New Zealand is being hollowed out.
The tax bias which favours investment in land and buildings over investment in productive businesses is one reason and is a serious problem.
Some of New Zealand’s wealthiest people pay lower rates of tax than less wealthy New Zealanders, which is plainly unfair.
That tax bias also contributes to our underinvestment in productive plant and manufacturing equipment.
We need a breakthrough in our economy.
History shows that the fair distribution of the rewards of work is necessary for a fair and prosperous society.
This is why the UN Declaration of Human Rights gives prominence to freedom of association – the right of workers to join unions so they can better negotiate their share through collective bargaining.
A fair share for workers, higher wages and higher productivity go together.
The late Sir Paul Callaghan’s figures of earnings per employee in various industries show where our economy should head.
It is abundantly clear to me that New Zealand cannot survive on the back of our pastoral, fishing and forestry industries.
Click for big version.
Yes, they are critical to our economy.
Yes, some of our manufacturing potential lies in further processing of our fish and wood products.
This is important, but even that additional manufacturing is not enough.
We must broaden the base of our exports. That requires more high value manufacturing exports. We cannot succeed off the back of our primary sectors alone.
My intention today is to show how Labour can help, by pulling levers big and small. We can address labour productivity, increase the amount of capital available, and encourage that capital into the productive manufacturing sector. More and higher paid jobs the reward.
Firstly, why is manufacturing so important?
As Gooran Roos noted in his recent address to the CTU and EPMU, no western country can be prosperous without a vibrant and innovative manufacturing and processing sector.
He and others estimate that every dollar of turnover in manufacturing directly generates $1.74 turnover in the rest of the economy. This is not a multiple based on wages being re-spent, it is a direct contribution to other parts of the economy.
Jobs in manufacturing produce two to five more jobs downstream.
They sustain the designers of products, the makers of equipment, the technicians and trades who install and operate them, those who service them, those who supply the raw materials or sell what is made.
If you want to see what a difference manufacturing can make, and how it can be achieved, look at the dairy industry’s investment in world-class capital equipment, and in research and development, all sustaining well-paid jobs.
Dairy science and research is driving investment in technology behind so-called neutra-ceuticals - high value products derived from milk.
It also sustains more traditional sectors, like NDA Engineering, who manufacture large stainless steel vessels in Hamilton.
They first made these as evaporation towers for milk powder. Now they sell related products internationally for use in the chemicals and petroleum distillation.
Dairying produced the animal management business Gallaghers, which in turn has gone on to become a global high-tech, high-value business.
Capital investment in innovation spreads across the economy.
And yet since the 1980s our economic settings have hurt manufacturing.
I hail from Dunedin.
We have lost well-paid jobs at Fisher and Paykell making whiteware, at Methvens making taps, at Hillside workshops, at tanneries, at soap makers, at brickworks, in finance, in insurance, in radio, in fish processing, in textiles, in carpet yarn.
The list makes for sad reading because jobs have been lost all along the production chain: from designers, to trades involved in making, installing or maintaining equipment, to the technicians who operate the computers and machinery and the managers. .
When the railway workshop at Hillside decline, it’s not only the jobs directly affected that are lost - suppliers are also affected.
So are other businesses that need fitters and turners, and the engineers trained at a site like Hillside.
The knock on effects hurt everyone.
We should use government procurement to assist the development of New Zealand’s economy.
And Labour will.
At the very least training, skills and capability, spillover benefits to other parts of the economy, as well as the additional revenue to the Crown from PAYE and other tax lost if an overseas bidder is preferred should all be taken into account to properly value the benefits to the country. Value for money is more than the cheapest price.
Some businesses move their manufacturing overseas, or choose not to take the risk to invest in exports from New Zealand, for many reasons.
Where the reasons for relocation are unavoidable, then we can’t stop it.
But if monetary policy drives them away, then it needs to change.
Labour is not afraid to make these changes
Time and again exporting businesses say their greatest challenge is volatility in and overvaluation of our exchange rate. The IMF agrees our currency is overvalued.
Our dollar is volatile against all currencies except Australia, and is sustained at uncompetitive levels. This is often the difference between profit and loss. Between employing, exporting and not.
In my view, we face competitive devaluation abroad and ignore it at our peril. Other countries are competing to increase their exports by devaluing and manipulating their exchange rates.
But we operate monetary policy as if the history of the last two decades didn’t happen.
Our Reserve Bank Act was written in a time when the main economic threat was inflation.
A more pressing challenge now is how our exporters, and their employees, are hindered by an uncompetitive dollar.
You don’t have to be soft on price stability to recognise that we have a problem with our overseas debt, with underperformance in export growth and with instability in our monetary conditions.
We need to focus on the changes needed to compete in specialised niches which provide opportunities for high value returns.
We must encourage and value trades and technicians. That means more focus on their training, and on the parts of the economy where those skills are gainfully employed.
In Otorohanga they started up a scheme to get hold of young people as they transitioned out of school, and resolved not to let them fall through the cracks or end up on the dole.
They gave them skills instead. Since the scheme started in 2006, the town has consistently had very low youth unemployment – as little as zero to as high as four people.
Large employers are benefitting from access to skilled young staff, and the town has minimal problems with frustrated, unemployed and under-appreciated young people.
We need pro-growth tax reform.
A capital gains tax is fundamentally important to direct investment capital into productive exports on the basis of profitability – instead of away from it because of a tax bias.
A research and development tax credit will encourage the development of the innovative products and services we need to produce and sell.
We can’t compete with China in labour intensive industries producing low value goods.
We have to compete by innovating, by design, by science.
We need to save more, so that we have the capital needed to invest in the plant and equipment.
Labour’s breakthrough policies on tax, savings, monetary policy, skills will do much to foster high valued manufacturing.
But we also want to engage more with unions and companies, and the best examples world-wide, to develop the full range of other measures needed to lift our manufacturing game.
We should consider incentives which help our exporters. Some should be targeted at the enterprise and others at investors.
Some of these will be economy wide, some not.
We need to grapple with the provision of capital to regional New Zealand.
Beyond the dominant pastoral farming sector, I’m not sure that innovative businesses in our heartland have enough access to capital at an affordable price for development.
At the last election, we adopted an idea from the NZ Institute who recommended that some investment in innovative export companies ought to be tax deductible – to encourage investment in the technology that brings high value jobs and exports.
Should we also give consideration to accelerated depreciation, to encourage more capital investment in plant that improves productivity and creates jobs?
Maybe our heartland could benefit from regional lending initiatives. How is this best achieved? Should we also consider special incentives for our most depressed areas?
Some of these policies will be about working with individual sectors to make the very best of what we’ve got.
Building world-class capabilities in areas of growing international demand is key.
David Cunliffe our Economic Development spokesperson is working on this area and will want to engage with you in more detail.
The changes needed touch many portfolios. We should reduce over-regulation of ordinary share capital raising, so that it’s easier for firms to raise the capital they need to expand. Existing compliance costs effectively make this uneconomic for all but larger companies. How can that be right in a country of small businesses?
What we are really talking about is a change of direction.
There is a larger point than the specific initiatives on the list I’ve just given you: They all represent a breakthrough change from the old orthodoxies.
Orthodoxies are hard to change.
They became orthodox with a broad consensus of support that was believed correct at that time.
They survive because they are comfortable and are surrounded by institutions that favour the status quo.
There is always resistance to change, and this resistance means some orthodoxies are held onto after their use-by date.
But sooner or later there has to be a breakthrough, because what we have isn’t good enough.
Mistakes made over twenty years ago have squeezed working New Zealanders ever since.
Labour will modernise.
That’s how we are going to help the vast majority of New Zealanders - to grow middle New Zealand and help lift our poorest out of the poverty trap.
And it’s why I’m impatient with those who say we are unsure what we stand for.
I firmly reject our critics who accuse Labour of having an economic policy little different from National’s.
The accusation is cheap, and false.
There have been few times in our history when the main parties have had such strongly divergent analyses of what needs to be fixed.
Look at the long list of important changes Labour is proposing – all of which have been off the table for major parties:
Pro-growth tax reform, in the form of capital gains tax and research and development tax credits.
A commitment to a high wage economy as the pathway to higher living standards.
Honesty about superannuation. A willingness to adjust the age to deal with the increase in retired New Zealanders that longer life expectancy and the baby boom bulge is bringing, while providing protection for those who can’t work past 65 in their normal job and need the equivalent.
A willingness to challenge the deeply rooted orthodoxy around monetary policy.
A Universal KiwiSaver scheme to bring the deeper savings which so clearly benefit Australia and their workers, and an increase to the minimum wage in part to help low earners save.
All of these initiatives are opposed by National.
All of them break with the old orthodoxies.
All of them are motivated because Labour rejects National’s view that things are going along mostly okay.
We cannot ever achieve the New Zealand we want unless we grow the incomes and jobs New Zealanders need, and that takes a fundamental modernisation which will build a Kiwi manufacturing strategy.
If we can grow middle New Zealand we will give people a reason to stay here.
What I am arguing today is that we have to grow New Zealand, and a crucial way to do that is through a stronger manufacturing sector.
Decisions taken two decades ago have been hollowing out New Zealand – it’s no coincidence that middle has shrunk, while manufacturing has been under-valued.
A modern economy needs a big middle.
Modern high value manufacturing exports create good jobs, in our heartland in the regions as well as our cities.
That’s what Labour wants.
National’s alternative is a hollowed out economy, with rewards for the top, hardship for the many at the bottom, a squeeze in the middle, an ageing population and ever more of our people leaving for Australia.
I reject that.
I want a New Zealand that grows, provides for the vulnerable, and creates the jobs, mobility and opportunity that fairness demands.
And we have to make changes to create that New Zealand.