ADDRESS TO NO 38 STAFF COURSE

  • John Luxton
Associate Minister of International Trade

INTRODUCTION

Commander, Squadron Leader, Ladies and Gentlemen, thank you for the invitation to speak to you today. I must say that I was impressed by the focus of the staff course, as it mirrors similar themes that run through senior management in the Wellington bureaucracy.

I have been given a clear brief for my lecture. What I intend to do over the next 50 or so minutes is to give a brief historical review of industry development in New Zealand, examine the relative importance of industry sectors over time and present an overview of the changes New Zealand industry has experienced over the last decade or so. I will then address some of the specifics I have been asked to talk about and given Michael Porter's recent visit to New Zealand and the renewed interest in his 1991 report, spend some time looking at the 1991 Porter Report and its relevance for New Zealand today.

Let me say up front, I don't really want to lecture to you per se, I hope you will see this more as a seminar, where my presentation gives an overview, and provides a stimulus for discussion on strategic topics.

The development of industry in New Zealand

During this century New Zealand industry has developed within a capitalist system but with a considerable degree of State involvement in industrial protection and assistance. The primary sector (farming, forestry, fishing) involves large scale and relatively efficient operations (despite some price subsidies in the past). The manufacturing sector was highly protected from foreign and domestic competition by import licensing, high tariffs, expensive freight rates, concessional treatment and widespread regulations. Not surprisingly, in this distorted environment, a wide range of small scale import substituting manufacturing firms emerged, that were uncompetitive and not dynamic.

The depression of the 1930's led countries to close their borders to trade in an effort to stimulate local industry and boost employment. In New Zealand, in comparison to other countries, more reliance was placed on quantitative controls, rather than tariffs to restrict imports. This protectionist policy continued well after the Second World War at a level that was unusually high amongst the relatively wealthy countries.

The protectionist policy gradually led to a lower level of real income in New Zealand as the gains from trade and competition in the economy were reduced. However, these effects were hidden for some time, partially as a result of the Korean War in the 1950s which resulted in a commodity price boom. As a result of this boom New Zealand found itself with a standard of living amongst the highest in the world and an unemployment rate amongst the lowest. Given these factors, there was no impetus for change.

Once the effects of the commodity boom faded, the economic performance of our economy declined. The protectionist regime reduced the need for the domestic manufacturing industry to keep up with developments in the rest of the world, and rising agricultural protection overseas meant that New Zealand was unable to fully exploit its comparative advantage in agriculture.

The declining economic performance was initially only evident in a sustained fall in income per head when compared with other OECD countries, particularly in the period up to 1970. However, this effect was masked as incomes continued to grow in New Zealand albeit at a slower pace than countries overseas. Other economic statistics remained healthy over this time with low unemployment and inflation and this also acted to reduce the impetus for change.

It was only in the 1970s, with the effect of the oil price shocks that the weaknesses in the economy became exposed.
The oil price shocks revealed inflationary pressures, managerial inefficiency and very low productivity growth within the economy. Some industries were uncompetitive by world standards and budgetary pressures on the government meant that the levels of assistance were unsustainable.

Net overseas debt increased from approximately 0 in 1973 to around 50% of GDP by 1984. The cost of servicing the debt was inevitably going to impose very severe constraints on the economy and on New Zealanders for many years to come.

The government flirted with reform in the late 1970s but in the face of increasing inflation, reverted to a price and wage freeze in 1981. It was apparent to many economists that there would need to be major policy changes. The alternative of employing further interventions as a solution to the problems of the economy had been tried and had largely failed. The costs of these policies were becoming clear and few believed that the solution was simply more of the same.
In 1983, change began with meat and transport industry deregulation and the signing of CER with Australia. In 1984, the election of the Labour government brought with it a fundamental change in New Zealand's economic policy. Industry regulations, assistance and protection were abolished, under the rationale that firms and farms should be exposed to international market signals to guide investment to its best use.

The reforms were comprehensive and rapid, beginning with the removal of support from agriculture. Concessional finance and subsidies on livestock prices were abolished. Today, the agricultural sector is essentially unprotected.

Reform of the manufacturing and service sectors has been comprehensive. Much industry regulation has been systematically removed, price controls eliminated, import licensing abolished and tariffs lowered. Controls on capital flows into and out of New Zealand were also removed. In the service sector, the energy and finance sectors were also deregulated. The labour market was reformed in 1991, with the passing of the Employment Contracts Act.

Legislation governing business and the use of natural resources was reformed, through the Commerce Act and the Resource Management Act. These Acts changed the nature of legislation from highly prescriptive approaches to broader generic or policy stating legislation. Taxation was also reformed with the introduction of GST, personal taxes moved to a flatter lower rate and company taxation was reduced and exemptions removed.
So what we have today are open and competitive markets that are more able to respond to changes in the global economic environment.

Types of industry in New Zealand

New Zealand has not experienced a typical pattern of economic development compared to other Western economies. Typically, development starts with an agriculturally based economy, develops through a phase where manufacturing becomes the dominant sector, and then culminates in a stage where the services sector plays a dominant role.

In New Zealand, by contrast, agriculture and the processing of agricultural products has continued to play a major role in the economy and although there has been rapid growth in New Zealand manufacturing over recent years, as yet New Zealand has not experienced a phase where non primary manufacturing has dominated the economy or export earnings.
The services sector is likely to become increasingly important to the economy in the next century. Forecasters predict that the services sector could account for almost 50% of GDP by 2001, compared to around 44% at present.

The small size of the New Zealand economy means that trade is relatively more important to gain economies of scale and therefore a high proportion of production is exported. For example, exports of agricultural products are typically around 80-95% of total agricultural production.

Prior to the reforms, the majority of exports were agricultural- primarily, meat, wool and dairy products. These exports are still important, but other primary products such as forestry products and fruit have grown rapidly in recent years.
The rapid growth of New Zealand manufacturing over recent years reflects manufacturers response to the economic reforms. Non Primary Manufacturing exports have increased as a proportion of total exports, reflecting the increased competitiveness of the sector. In 1996, exports of primary products were 46%, non-primary manufactured goods 28% and services 26% of total exports.

While the range of exports has broadened, export markets have also diversified. In 1950, the UK took around 67% of all our exports but by 1996 this had decreased to only 6%. Australia and Japan remain New Zealand's largest export markets for merchandise goods, with Australia accounting for around 20% of exports and Japan 16%. The United States is the third most important single country export destination at 9%. The United Kingdom and the Republic of Korea rank fourth and fifth respectively.

Overview of change

The focus of the economic reforms was to create an economy that was internationally competitive. This was achieved at a microeconomic level by removing the barriers which prevented market signals from reaching firms in the economy. At the macroeconomic level, the reforms were aimed at providing a consistent policy framework and economic stability.

In the short term, however, the traded goods sector, (which comprises of goods that can be internationally traded) found adjustment to the new regime difficult. The removal of exchange rate and capital controls led to an appreciation of the New Zealand dollar, making businesses less competitive and bringing about a "restructuring recession". Many businesses were unable to restructure quickly enough and between 1986 and 1991, employment in the manufacturing sector fell by one third.

The services sector also experienced a recession following the sharemarket crash of 1987, which hit the construction and finance sectors particularly hard.

As a result, unemployment in New Zealand rose to reach a high of 11%. Between 1986 and 1991, there was no growth in income per head.

By the late 1980's the exchange rate started to fall and the private sector recovery began. Major gains in efficiency and productivity were recorded, and those businesses which had survived the recession started to realise big competitive advantages. This was particularly true of the manufacturing sector and exports, especially to Australia, grew rapidly.

Economic growth has slowed recently, as a result of slowing domestic demand and the strength of the New Zealand dollar and falling international commodity prices. Recent GDP growth has fallen from 4.3% in 1994/1995 to 1.3% in 1995/96. However, growth is forecasted to rebuild slowly to 1.7% in 1996/97 before it should peak at around 3.6% next year.

The appreciation of the exchange rate that began in 1995 reflects this strong economic growth. However, it is making it more difficult for New Zealand business to compete, at least in the short term, on world markets.
Businesses are starting to recognise the need to broaden their bases of competitive advantage. Quality is still the most used competitive strategy but other strategies such as market and product leadership are also becoming more frequent. The need to manage technology for competitive advantage is slowly being recognised with the proportion of businesses using co-ordinated strategies to manage technology rising from around 40% in 1994 to 47% in 1996. These figures illustrate that there is still room for improvement in this area.

Businesses need to continue to reduce costs and increase productivity to improve their competitiveness. They also need to have management strategies for handling currency risk.

Their competitiveness will, in part, depend upon factors such as the ability of managers to:

adopt more involving, empowering relationships with their employees;

adopt strategies of greater specialisation and co-operate within networks of business partnerships; and

devote themselves and their organisations to the creation of distinctive customer value.

Manufacturers are becoming more focused on the export market and exports are now more than 34% of output, an increase of around 10% since 1990. These exports now reach most countries around the world. However, Australia remains the major export market for many exporters, and takes around half the exports of a typical New Zealand manufacturer.

Investment in the manufacturing sector has also risen and in the year ended December 1996, manufacturers invested $2.3 billion in plant and equipment, a 14% increase over the average level of investment during the 1980s. This figure, however, underestimates the true rate of investment as a very substantial investment has been directed in market and product development, training, quality and management improvements.

New Zealand businesses have come a long way since the reforms started in 1983. However, it is important to remember that to maintain and enhance the economic growth we have seen over recent years, business must continue to increase their competitiveness on world markets.
It is equally important that the government continues to have policies that offer businesses a stable economic environment. In line with this objective, I recently announced details of a comprehensive review of the costs to business of government regulation.

Comment on the problems of trading internationally with particular reference to CER, the 1994 GATT agreement, AFTA and NAFTA. What problems, advantages and disadvantages are there for industry in the Asia 2000 initiatives
Trading internationally opens up a much larger market for our products but other countries generally have barriers to protect their own industry. New Zealand exporters have to meet the cost of shipping, transport, distribution etc. as well as tariff or non tariff barriers (i.e., quality standards etc.). A key role of government has been to negotiate easier and cheaper access to other countries' markets. Hence CER, GATT, NAFTA, WTO, APEC, Cairns Group and the like are vitally important to New Zealand's export success.

CER

The Australia-New Zealand Closer Economic Relations Trade Agreement (the CER Agreement) is the agreement governing the conduct of trade between Australia and New Zealand in goods and services. It is New Zealand's key bilateral trade arrangement. Its central provision is the creation of a free trade area consisting of Australia and New Zealand.

Since its inception in 1983 the CER Agreement has undergone three general reviews which:

accelerated the achievement of free trade in goods meeting the CER rules of origin, so that by June 1990 all tariffs and quantitative restrictions on trade were eliminated;

widened the scope of the 1983 Agreement to include trade in services; and,

deepened the CER Agreement by seeking to harmonise a range of non-tariff measures that affect the free flow of goods and services, including in respect of quarantine and customs issues, standards and business law.
In addition, several aspects of the CER Agreement have, over the years, been amended, refined or simply become redundant. The more important of these changes include refinements to the rules of origin and the phasing out of margin of preference obligations.

The two countries accord each other's exports duty-free treatment so long as the goods concerned have an Australia/New Zealand ``area content'' of at least 50 percent on an ex-factory cost basis and the last process of manufacture was performed in the country claiming the tariff preferences.

The CER Agreement is now one of the most comprehensive bilateral free trade agreements in existence.

CER has continued to deliver concrete results for both Australia and New Zealand in terms of increased trade and investment flows. Australia and New Zealand remain each other's major market for manufactured goods. Australia is New Zealand's largest overseas market. New Zealand is Australia's third largest export market.

As well as providing the framework for the progressive and automatic accomplishment of a free trade area, CER was seen by both countries as a mechanism for facilitating structural adjustment and increasing global competitiveness of their respective economies.

Industry policy is nevertheless an area where differing national approaches have always had the potential to hinder full realisation of the single market concept underlying CER. Economic integration has not reached a stage at which either government would be willing to constrain their sovereign rights to develop or restructure their industries as they see fit.

Although both countries have similar broad objectives of encouraging efficient and internationally competitive industry, there are significant differences in the scope and structure of industry and in the approach of the Governments to domestic economic and industry assistance reform.

Australia continues with a strategic sector-specific assistance approach (focused particularly in ``high-tech'' areas of IT and telecommunications) of a kind which New Zealand has not pursued under its ``level playing field'' approach.

The Trans Tasman Mutual Recognition Arrangement (``TTMRA'') was signed by New Zealand, The Commonwealth and all States and Territories of Australia in June 1996. The Arrangement is based on two key principles.

Firstly, if goods may be legally sold in New Zealand they may be sold in any Australian jurisdiction, and vice versa;

Second, if a person is registered to practice an occupation in New Zealand he or she will be entitled to practice an equivalent occupation in an Australian jurisdiction, and vice versa.
The TTMRA is illustrative of the degree of maturity which has developed in the relationship between New Zealand and Australia. It will allow goods to be traded freely, and will enhance the freedom of individuals to work in either country.

The TTMRA is intended to remove remaining regulatory impediments to trade across the Tasman. Until these barriers are reduced the full benefits of trade liberalisation under the Closer Economic Relations (CER) Agreement cannot be realised.

The benefits of TTMRA are particularly significant where differences in regulatory regimes between the two countries reflect national historical or institutional arrangements, rather than the objective assessment of risks to public health, safety or the environment.

New Zealand and Australian Trade Ministers and officials meet annually to review CER, to consider the operation of the Agreement as a whole and ways in which the trans-Tasman business environment can be improved to gain the maximum benefit from liberalised trade in goods and services.

While CER has brought to industry in both countries the benefits of a larger combined ``domestic'' market, that market is an increasingly competitive one. Ultimately, our industries must stand or fall by their competitiveness against the rest of the world.

The two countries' common interest in establishing a strong and competitive Australasian economic base for our industries to compete in global and regional markets is reflected in our similar approaches to supporting multilateral trade liberalisation through the WTO and regional liberalisation through APEC.

The Uruguay Round of GATT

Since 1947, the world trading environment has been regulated through the General Agreement on Tariffs and Trade, or GATT. GATT evolved through a series of ``rounds'' of negotiations. The most recent set, launched in Uruguay, was both long - seven years - and very far-reaching. When the Uruguay Round was finished in 1994, New Zealand trade analysts could look back on years of hard work, but also look forward to a change that probably ranks alongside milestones such as Britain's entry into the EC, and the CER relationship with Australia.

The Uruguay Round was the first GATT round to consider agriculture comprehensively, as previously domestic agricultural policies were largely exempt from international trade rules. Many nations (and until the late 1980s, we were no exception) were pretty well addicted to subsidising farmers and protecting agriculture.

The Uruguay Round not only included agriculture, but it also contained a whole new thrust towards freeing up international trade from tariffs and other tariff barriers. Governments have committed themselves to maintaining a single set of rules for economic relations between countries. The ultimate benefit will be greater certainty and an environment that encourages trade and investment.

As has often been said, New Zealand is one of the countries which stands to gain the most, over the medium to long term, from the successful conclusion of the Uruguay Round of multilateral trade negotiations in 1994, especially in terms of agriculture trade. Key elements of the result are market access commitments and subsidy disciplines for agriculture and industrial goods. There are also commitments in so-called ``new areas'' such as trade in services and trade-related aspects of intellectual property rights. The package is a balance of gains and concessions accepted by all participants representing a wide range of interests, and in both developed and developing countries.

For industrial goods, developed country participants in the Uruguay Round agreed to reduce their tariffs over a five year period by one-third on an average trade-weighted basis. New Zealand export industries will also gain from deeper tariff reductions by the major trading nations in a number of important sectors including elimination of tariffs on steel, pulp and paper, agricultural equipment, beer and furniture.

New Zealand's Uruguay Round commitments serve to reinforce and ``cement in'' the domestic market reforms we have made over the past decade. These reforms have already made New Zealand industry more competitive at home and abroad. The challenge for industry now is to maintain and improve its international competitiveness in an increasingly open and competitive domestic and world trading environment.

A New Era: The World Trade Organisation

A new World Trade Organisation (WTO), has been set up to encompass the revised General Agreement on Tariffs and Trade (GATT 1994) and the multilateral agreements established under the Uruguay Round.

The WTO now has nearly 130 members, including most of the New Zealand's major trading partners. Of our top 15 export markets only China and Taiwan are not WTO members but they, and a number of other non-members, have applied to join the WTO.

The WTO is not merely GATT under a new name. It:

oversees all the Uruguay Round agreements on goods, services, intellectual property and dispute settlement;

requires member countries to remove import prohibitions and reduce import tariffs;

administers the trade policy review mechanism, which keeps members informed of changes in one another's trade policies and requires them to explain trade actions which affect other countries;

is a permanent forum for members to discuss implementation of the Uruguay Round, as well as new trade issues such as the impact of trade on the environment; and

is a forum for resolving trade disputes - while it has a formal disputes settlement procedure and can impose ``penalties'', the aim is to prevent disputes and resolve them through consultation before they get to this stage.
WTO members must agree to abide by all its provisions (including the multilateral agreements). This will increase consistency and certainty.

Two important new WTO agreements were concluded earlier this year liberalising basic telecommunications and reducing to zero by the year 2000 tariffs on information technology products. Both will be of benefit to consumers and business.

Regional Trade

While the Uruguay Round continued, uncertainty as to the outcome heightened consideration by countries in the Asian Pacific rim of arrangements to promote intra-regional trade in this dynamic region of the world economy.

Interest in economic regionalism was also spurred by the conclusion of the North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico and the agreement among ASEAN members to establish an ASEAN Free Trade Area (AFTA). The European Union is another regional free trade area.

These developments strengthened concerns that trade liberalisation in the area should be promoted on a basis consistent with GATT multilateral trade rules, and not on the basis of exclusive preferential trade blocs like NAFTA or the European Union which have the potential to distort global trade patterns through trade diversion and undermine the basic non-discrimination principle of the WTO and GATT.

Out of this context emerged the institution of Asia Pacific Economic Cooperation (APEC), whose 18 members include the ASEAN countries, Japan, Korea, the Peoples' Republic of China, Chinese Taipei, Hong Kong, Mexico and PNG, along with the US, Canada, Australia and New Zealand, as the vehicle for trade facilitation and liberalisation on the basis of ``open regionalism''.

In the so-called Bogor Declaration, New Zealand and the other APEC members committed themselves to the long-term goal of free and open trade and investment in the Asia-Pacific region by 2010 for industrialised economies and 2020 for developing economies.

This is consistent with the Government's unilateral decision, announced in December 1994, ``that tariffs for post-2000 should be reviewed in 1998, and that the government would determine at that time how to move towards a zero end-point under a unilateral domestic tariff reduction programme''. The 1998 review ``will be conducted against the background of Bogor goals and timeframes''.

The Coalition Government has now announced in its recent Budget that the 1998 Tariff Review will set a timetable to remove all remaining tariffs well before its APEC target of 2010. This review is expected to be completed before the end of June next year.

Asia 2000

New Zealand's participation in APEC in large part reflects our interest in the Asian region, which is of crucial and growing importance to us in trade terms. New Zealand's trading future will increasingly depend on the vitality and outward orientation of the Asian region, and APEC as an active forum for trade and economic cooperation can contribute to this.

The Government's support for the ``Asia 2000 Foundation'' is a further reflection of the importance we now attach to developing New Zealand's relations with the Asian region. Asia 2000's mission is to develop New Zealanders' knowledge and understanding of the countries and people of Asia, to help New Zealanders to develop the right skills to work effectively in Asia and to build New Zealand's links with Asia. These aims are achieved through a business exchange programme, education exchanges, media and cultural events and public affairs activities. Asia 2000 has generated a high level of interest in developing business links with Asia and in heightened awareness of the positive impact on New Zealand's economy of overseas investment and tourism partic ularly from Asian sources.

Heightened interest in regional trade, the success of the CER Agreement and the rapid evolution of the ASEAN Free Trade Area (AFTA) have resulted in an initiative to develop linkages between the two groupings. This initiative got underway in 1995 and has focused on trade facilitation. The AFTA/CER process is an important aspect of reducing barriers to trade and investment between CER and ASEAN.

We are not neglecting other regions either. The Government is interested in following up prospects of free trade with the United States. Also we remain hopeful of being able to achieve a free trade agreement with the Republic of Chile in the near future. Both these initiatives are likely to have not only a current payoff for New Zealand, but are strategically important too, and would link for the first time the eastern and western sides of the Pacific in a formal economic integration. Moreover both these initiatives would serve and achieve core objectives of the APEC liberalisation process.

Such changes expose the New Zealand economy to the world market more than ever before. That forces constant change and innovation onto our economy to keep us ahead of our competitors. But it also allows more investment to create new opportunities for New Zealand industry. A new dynamism is appearing through industry with a focus on the customer and quality of product and service.

Comment on the importance of technological advances and research and development to NZ industrial growth. Compare NZ with other countries in our area of strategic importance.

As we have seen, the New Zealand economy has undergone a significant transformation in the last ten years, moving from a highly regulated, protected and subsidised environment in which firms and businesses operated, to an open economy that is largely freed up and driven by market forces.

The changes in the economy over the last decade have seen firms placing greater value on knowledge creation and technological innovation as they strive for sustainable competitive advantage. Firms that are investing in technology are doing so at internationally competitive levels. This level of investment needs to be more widespread. Success and international competitiveness will depend on the ability of firms to undertake technology development to improve productivity, develop new products, and whole new areas of business.

The last comprehensive study of comparisons between New Zealand and other OECD countries of research and development expenditure uses data from 1991. We therefore need to be careful when making these comparisons. What the information does tell us is that New Zealand is behind in terms of R&D spending measured as a percentage of GDP.
New Zealand OECD Average
Public Sector 0.6% 0.8%
Private Sector 0.3% 0.9%
Total 0.9% 1.7%

The major feature of this table is the very low level of research funded by the private sector in New Zealand. The public sector investment is not much below the OECD average. The problem with such an input comparison is that high R&D expenditure does not necessarily bring greater returns than those who invest less.

The 1997 World Competitiveness Report suggests that New Zealand may not be performing as badly as the above figures suggest. They recently ranked New Zealand;

8th out of 46 countries on the level of technical co-operation between companies (an increase of 5 places from 1996)

5th out of 46 countries on the level of research co-operation between companies and universities

10th out of 46 countries on the degree to which basic research supports long term economic and technological development.

How useful was the Porter report as a blueprint for the economy and New Zealand's future? Does it have any relevance today?

In 1991, the Trade Development Board published the results of a study entitled ``Upgrading New Zealand's Competitive Advantage,'' conducted by Crocombe, Enright and Porter. Porter and his team reviewed the performance of the New Zealand economy, and undertook detailed studies into a wide range of New Zealand industries.

The 1991 study concluded that New Zealand had to rebuild the base of the economy from the ground up so that we could compete successfully in a global economy. Porter called for urgent attention on three levels:
business
associations and
government.
According to Porter the most fundamental changes required were in the business and government arenas. Here are some of his 1991 prescriptions for change in business and government:

Business
Compete beyond the cost base
Leverage New Zealand's home advantages
Understand global competition
Focus on innovation
Develop human resources
Globalise strategies

Government
Transcend macroeconomics
Upgrade human resources
Stimulate local competition
Improve business access to capital
Provide incentives promoting national prosperity
Improve weak national technology
Foster:
high quality ethos and banish the ``Kiwi knocking machine''
development via clusters
new business formation
the rebalancing of government- business relationships.
The Report was very controversial and was hotly debated throughout the country, drawing its share of criticism. Porter's report permeated through the business world in New Zealand and was described recently in the National Business Review as ``the bible for modern corporate behaviour in New Zealand'' at that time.

In the seven years since the study, significant upgrading of the economy has been undertaken, both at a macro and micro level and much of the change has been consistent with Porter's prescriptions. The changes made at the macro and micro level have, and are bearing fruit for New Zealand.

For example, in the most recent World Competitiveness Report, New Zealand was rated 13th out of 46 countries in a Swiss survey of world competitiveness, ahead of Australia and Germany. The quality of our government was ranked third and in infrastructure and management we were ranked 13th and 11th respectively.

New Zealand was described in the 1996 World Competitiveness Yearbook as a ``small but brilliant star'' and is proof that in a global world, distance is less and less often an obstacle to competitiveness. New Zealand has, and is showing that it is competitive with the best.

While Porter's prescriptions undoubtedly had a significant effect on New Zealand's business community it would not be accurate to say that Porter's prescriptions for government became the ``blueprint'' for the economy. Many reforms at the macro level were well under way by 1991, reflected by the introduction of the 1986 Commerce Act and the 1991 Employment Contracts Act.

The passing of legislation such as this reflected the government's recognition that a major overhaul of the economy was needed.

So do Porter's prescriptions have any relevance for New Zealand today? In his recent visit to New Zealand (in April this year), Porter acknowledged that we have made good progress in introducing competition to the local economy which has allowed us to prosper abroad. But he also warned us against complacency. He said that the challenge now was whether we enjoy a brief moment of prosperity and lapse back, or if we are going to continue forward.

According to Porter we need more change to ensure more gain for the New Zealand economy. In particular, continuous upgrading of the business environment and accelerating the growth of clusters are seen by Porter as vital.

The government is committed to a continuous improvement of the business environment through its economic policy and at the micro economic level through regulatory reform.

Porter's call for the development of industry clusters has been taken aboard by Tradenz, who with a major banking organisation in New Zealand have recently set up a joint effort focused specifically on clusters.

In short, Porter's 1991 report contained useful prescriptions for business direction in New Zealand which remain relevant today. His macro level prescriptions coincided with general direction set by government in 1991 and as such could not be considered a ``blueprint'' for the economy. Maintenance of a free and competitive environment for business with continuous improvement where and when necessary has become the relevant issue and one that the government is committed to. In line with this, the government is fully involved with an audit of the Porter Report that seeks to establish the extent to which Porter's 1991 prescriptions have been adopted in New Zealand.

Comment on the New Zealand Industrial/Military Relationship. How can the situation be improved.
While not establishing a local defence industry as such, the provision of opportunities for New Zealand firms to supply Defence needs can serve strategic military purposes by developing an ongoing logistic support capability in the home base. In the process, provided there is a strong element of competition, defence procurement can also make an effective contribution to the development of technologically advanced, internationally competitive and sustainable industry in New Zealand.

In his foreword to the Defence Offsets Policy published in September 1991, the Minister of Defence stated:

``There is a strategic value in encouraging local participation in Defence contracts and New Zealand seeks the security of some measure of independent support for its armed forces. This does not imply a major Defence industry base; that would be unwarranted and commercially unsound in today's climate. However, there is a core of valuable skills within our existing industry which needs to be regularly exercised and encouraged to keep up with international developments.''

The strategic interest of Defence in fostering a limited support capability in New Zealand industry, on a commercially sound and internationally competitive basis, is consistent with the Government's approach to public sector purchasing in general. The Government's policy is that purchasing by its agencies afford domestic industry full and fair opportunity to compete on a value for money basis.

The Ministry of Commerce has issued the publication ``Government Purchasing in New Zealand: Policy Guide for Purchasers'', which recommends procedures purchasing agencies should follow to ensure that they are giving full opportunity to local industry in a manner consistent with effective competition and value-for-money. These guidelines contain best practice advice, some elements of which I will return to at the end of this lecture. Copies are available from the Border, Industry and Environment Policy Group of the Ministry.

The Closer Economic Relationship (CER) with Australia figures largely in the Government's purchasing policy and in defence purchasing in particular. New Zealand and Australia recognise that benefits can flow to industry and to government purchasing bodies by treating the two countries as a single market for government procurement purposes.

A key component is the Australia and New Zealand Government Procurement Agreement (GPA) which enables Australian and New Zealand suppliers to compete on an equal footing for government contracts (goods and/or services) on a value for money basis in the Australian and New Zealand markets. As the New Zealand Minister responsible for the GPA, I am involved in matters related to this agreement. A current five-yearly review has just been finalised with a result which is consistent with New Zealand's interest in maintaining non-discrimination. It is also more consistent with the current economic environment, including a more outward-looking approach to trade and investment in accordance with our domestic policy, and both countries' CER and APEC commitments. The new GPA text is scheduled to be signed next month.

In the specific context of the cooperative defence relationship with Australia, there is the related concept of a ``common industry base for defence procurement purposes'', enshrined in the ANZAC Ships Treaty and the Cooperative Defence Logistics Supply Agreement (CDLSA). A milestone in the cooperative procurement relationship was reached with the handing over to the New Zealand Government on 16 May 1997 of the first ANZAC frigate for New Zealand, the Te Kaha. Its sister ship, Te Mana has been launched from Melbourne also. Both frigates demonstrate excellence in Australasian industry and a trans-Tasman capability to work together.

So far, ANZAC ship contracts worth just under $500 million have been placed with more than 400 competitive New Zealand companies. Work undertaken in New Zealand includes software development, electronic manufacture, mechanical design, fabrication, metal casting, heavy electrical manufacture and light and medium engineering. The project has contributed significantly to New Zealand industry in the areas of quality systems development (to ISO certification standards), project management practices, technology advances, international marketing assistance, and wider business relationships.

Industry programmes were offered by all bidders for the maritime helicopter replacement project. This contract was won by Kaman of the USA which included an industry programme expected to put $100 million of work in New Zealand over the next 10 years. Work includes new manufacture and expected overhaul maintenance.

New Zealand industry is now in a good position to secure involvement on a competitive basis in contracts arising from any future joint ANZ defence procurement. A welcome spin-off from New Zealand industry involvement in the ships project is the development of high tech exports of military software and telecommunications to the wider international market. The Project has been the catalyst for participating companies to co-operatively look to the export of the skills and capability developed. The export of defence related products now totals over $90 million per year.

Participation on the Project has built the credibility of many New Zealand companies. Three companies blooded on the ANZAC Ship Project have now won contracts associated with two other Australian Naval procurement projects, for Minehunters and for Oceanographic vessels.

In addition, the New Zealand Industrial Supplies Office of the Ministry of Commerce can assist communication between domestic suppliers and government purchasers. Since its establishment, however, there has been an improvement in the information for buyers (on product or industry capability) and sellers (on government supply opportunities) available through commercial channels in both print and increasingly, sophisticated electronic systems. The Government's decisions on the future of the NZISO will need to take this change into account.

Finally, as perhaps a new dimension to purchasing (or any dealing with industry), I would like to see government-funded organisations ensure that paper work or any ``red tape'' for potential suppliers is kept to a necessary minimum. In the interest of encouraging potential suppliers (including from domestic industry), I believe this is an area where each government organisation in its own self interest should critique its practices to ensure that this happens.

Greater international competitive pressure is now placed on business, heightening the awareness of the effects of the domestic regulatory environment in a global setting.

The review of the effects of government regulation which I mentioned earlier, forms part of a bigger package which includes looking at a number of Acts including the Resource Management Act 1991; the Health and Safety in Employment Act 1992 an the Human Rights Act 1993.

I have been saying for some time that we as Government need to ensure we are not putting barriers in the way of business ``the wealth creators in our economy''.

I leave you with that thought.

Thank you.INTRODUCTION

Commander, Squadron Leader, Ladies and Gentlemen, thank you for the invitation to speak to you today. I must say that I was impressed by the focus of the staff course, as it mirrors similar themes that run through senior management in the Wellington bureaucracy.

I have been given a clear brief for my lecture. What I intend to do over the next 50 or so minutes is to give a brief historical review of industry development in New Zealand, examine the relative importance of industry sectors over time and present an overview of the changes New Zealand industry has experienced over the last decade or so. I will then address some of the specifics I have been asked to talk about and given Michael Porter's recent visit to New Zealand and the renewed interest in his 1991 report, spend some time looking at the 1991 Porter Report and its relevance for New Zealand today.

Let me say up front, I don't really want to lecture to you per se, I hope you will see this more as a seminar, where my presentation gives an overview, and provides a stimulus for discussion on strategic topics.

The development of industry in New Zealand

During this century New Zealand industry has developed within a capitalist system but with a considerable degree of State involvement in industrial protection and assistance. The primary sector (farming, forestry, fishing) involves large scale and relatively efficient operations (despite some price subsidies in the past). The manufacturing sector was highly protected from foreign and domestic competition by import licensing, high tariffs, expensive freight rates, concessional treatment and widespread regulations. Not surprisingly, in this distorted environment, a wide range of small scale import substituting manufacturing firms emerged, that were uncompetitive and not dynamic.

The depression of the 1930's led countries to close their borders to trade in an effort to stimulate local industry and boost employment. In New Zealand, in comparison to other countries, more reliance was placed on quantitative controls, rather than tariffs to restrict imports. This protectionist policy continued well after the Second World War at a level that was unusually high amongst the relatively wealthy countries.

The protectionist policy gradually led to a lower level of real income in New Zealand as the gains from trade and competition in the economy were reduced. However, these effects were hidden for some time, partially as a result of the Korean War in the 1950s which resulted in a commodity price boom. As a result of this boom New Zealand found itself with a standard of living amongst the highest in the world and an unemployment rate amongst the lowest. Given these factors, there was no impetus for change.

Once the effects of the commodity boom faded, the economic performance of our economy declined. The protectionist regime reduced the need for the domestic manufacturing industry to keep up with developments in the rest of the world, and rising agricultural protection overseas meant that New Zealand was unable to fully exploit its comparative advantage in agriculture.

The declining economic performance was initially only evident in a sustained fall in income per head when compared with other OECD countries, particularly in the period up to 1970. However, this effect was masked as incomes continued to grow in New Zealand albeit at a slower pace than countries overseas. Other economic statistics remained healthy over this time with low unemployment and inflation and this also acted to reduce the impetus for change.

It was only in the 1970s, with the effect of the oil price shocks that the weaknesses in the economy became exposed.
The oil price shocks revealed inflationary pressures, managerial inefficiency and very low productivity growth within the economy. Some industries were uncompetitive by world standards and budgetary pressures on the government meant that the levels of assistance were unsustainable.

Net overseas debt increased from approximately 0 in 1973 to around 50% of GDP by 1984. The cost of servicing the debt was inevitably going to impose very severe constraints on the economy and on New Zealanders for many years to come.

The government flirted with reform in the late 1970s but in the face of increasing inflation, reverted to a price and wage freeze in 1981. It was apparent to many economists that there would need to be major policy changes. The alternative of employing further interventions as a solution to the problems of the economy had been tried and had largely failed. The costs of these policies were becoming clear and few believed that the solution was simply more of the same.
In 1983, change began with meat and transport industry deregulation and the signing of CER with Australia. In 1984, the election of the Labour government brought with it a fundamental change in New Zealand's economic policy. Industry regulations, assistance and protection were abolished, under the rationale that firms and farms should be exposed to international market signals to guide investment to its best use.

The reforms were comprehensive and rapid, beginning with the removal of support from agriculture. Concessional finance and subsidies on livestock prices were abolished. Today, the agricultural sector is essentially unprotected.

Reform of the manufacturing and service sectors has been comprehensive. Much industry regulation has been systematically removed, price controls eliminated, import licensing abolished and tariffs lowered. Controls on capital flows into and out of New Zealand were also removed. In the service sector, the energy and finance sectors were also deregulated. The labour market was reformed in 1991, with the passing of the Employment Contracts Act.

Legislation governing business and the use of natural resources was reformed, through the Commerce Act and the Resource Management Act. These Acts changed the nature of legislation from highly prescriptive approaches to broader generic or policy stating legislation. Taxation was also reformed with the introduction of GST, personal taxes moved to a flatter lower rate and company taxation was reduced and exemptions removed.
So what we have today are open and competitive markets that are more able to respond to changes in the global economic environment.

Types of industry in New Zealand

New Zealand has not experienced a typical pattern of economic development compared to other Western economies. Typically, development starts with an agriculturally based economy, develops through a phase where manufacturing becomes the dominant sector, and then culminates in a stage where the services sector plays a dominant role.

In New Zealand, by contrast, agriculture and the processing of agricultural products has continued to play a major role in the economy and although there has been rapid growth in New Zealand manufacturing over recent years, as yet New Zealand has not experienced a phase where non primary manufacturing has dominated the economy or export earnings.
The services sector is likely to become increasingly important to the economy in the next century. Forecasters predict that the services sector could account for almost 50% of GDP by 2001, compared to around 44% at present.

The small size of the New Zealand economy means that trade is relatively more important to gain economies of scale and therefore a high proportion of production is exported. For example, exports of agricultural products are typically around 80-95% of total agricultural production.

Prior to the reforms, the majority of exports were agricultural- primarily, meat, wool and dairy products. These exports are still important, but other primary products such as forestry products and fruit have grown rapidly in recent years.
The rapid growth of New Zealand manufacturing over recent years reflects manufacturers response to the economic reforms. Non Primary Manufacturing exports have increased as a proportion of total exports, reflecting the increased competitiveness of the sector. In 1996, exports of primary products were 46%, non-primary manufactured goods 28% and services 26% of total exports.

While the range of exports has broadened, export markets have also diversified. In 1950, the UK took around 67% of all our exports but by 1996 this had decreased to only 6%. Australia and Japan remain New Zealand's largest export markets for merchandise goods, with Australia accounting for around 20% of exports and Japan 16%. The United States is the third most important single country export destination at 9%. The United Kingdom and the Republic of Korea rank fourth and fifth respectively.

Overview of change

The focus of the economic reforms was to create an economy that was internationally competitive. This was achieved at a microeconomic level by removing the barriers which prevented market signals from reaching firms in the economy. At the macroeconomic level, the reforms were aimed at providing a consistent policy framework and economic stability.

In the short term, however, the traded goods sector, (which comprises of goods that can be internationally traded) found adjustment to the new regime difficult. The removal of exchange rate and capital controls led to an appreciation of the New Zealand dollar, making businesses less competitive and bringing about a "restructuring recession". Many businesses were unable to restructure quickly enough and between 1986 and 1991, employment in the manufacturing sector fell by one third.

The services sector also experienced a recession following the sharemarket crash of 1987, which hit the construction and finance sectors particularly hard.

As a result, unemployment in New Zealand rose to reach a high of 11%. Between 1986 and 1991, there was no growth in income per head.

By the late 1980's the exchange rate started to fall and the private sector recovery began. Major gains in efficiency and productivity were recorded, and those businesses which had survived the recession started to realise big competitive advantages. This was particularly true of the manufacturing sector and exports, especially to Australia, grew rapidly.

Economic growth has slowed recently, as a result of slowing domestic demand and the strength of the New Zealand dollar and falling international commodity prices. Recent GDP growth has fallen from 4.3% in 1994/1995 to 1.3% in 1995/96. However, growth is forecasted to rebuild slowly to 1.7% in 1996/97 before it should peak at around 3.6% next year.

The appreciation of the exchange rate that began in 1995 reflects this strong economic growth. However, it is making it more difficult for New Zealand business to compete, at least in the short term, on world markets.
Businesses are starting to recognise the need to broaden their bases of competitive advantage. Quality is still the most used competitive strategy but other strategies such as market and product leadership are also becoming more frequent. The need to manage technology for competitive advantage is slowly being recognised with the proportion of businesses using co-ordinated strategies to manage technology rising from around 40% in 1994 to 47% in 1996. These figures illustrate that there is still room for improvement in this area.

Businesses need to continue to reduce costs and increase productivity to improve their competitiveness. They also need to have management strategies for handling currency risk.

Their competitiveness will, in part, depend upon factors such as the ability of managers to:

adopt more involving, empowering relationships with their employees;

adopt strategies of greater specialisation and co-operate within networks of business partnerships; and

devote themselves and their organisations to the creation of distinctive customer value.

Manufacturers are becoming more focused on the export market and exports are now more than 34% of output, an increase of around 10% since 1990. These exports now reach most countries around the world. However, Australia remains the major export market for many exporters, and takes around half the exports of a typical New Zealand manufacturer.

Investment in the manufacturing sector has also risen and in the year ended December 1996, manufacturers invested $2.3 billion in plant and equipment, a 14% increase over the average level of investment during the 1980s. This figure, however, underestimates the true rate of investment as a very substantial investment has been directed in market and product development, training, quality and management improvements.

New Zealand businesses have come a long way since the reforms started in 1983. However, it is important to remember that to maintain and enhance the economic growth we have seen over recent years, business must continue to increase their competitiveness on world markets.
It is equally important that the government continues to have policies that offer businesses a stable economic environment. In line with this objective, I recently announced details of a comprehensive review of the costs to business of government regulation.

Comment on the problems of trading internationally with particular reference to CER, the 1994 GATT agreement, AFTA and NAFTA. What problems, advantages and disadvantages are there for industry in the Asia 2000 initiatives
Trading internationally opens up a much larger market for our products but other countries generally have barriers to protect their own industry. New Zealand exporters have to meet the cost of shipping, transport, distribution etc. as well as tariff or non tariff barriers (i.e., quality standards etc.). A key role of government has been to negotiate easier and cheaper access to other countries' markets. Hence CER, GATT, NAFTA, WTO, APEC, Cairns Group and the like are vitally important to New Zealand's export success.

CER

The Australia-New Zealand Closer Economic Relations Trade Agreement (the CER Agreement) is the agreement governing the conduct of trade between Australia and New Zealand in goods and services. It is New Zealand's key bilateral trade arrangement. Its central provision is the creation of a free trade area consisting of Australia and New Zealand.

Since its inception in 1983 the CER Agreement has undergone three general reviews which:

accelerated the achievement of free trade in goods meeting the CER rules of origin, so that by June 1990 all tariffs and quantitative restrictions on trade were eliminated;

widened the scope of the 1983 Agreement to include trade in services; and,

deepened the CER Agreement by seeking to harmonise a range of non-tariff measures that affect the free flow of goods and services, including in respect of quarantine and customs issues, standards and business law.
In addition, several aspects of the CER Agreement have, over the years, been amended, refined or simply become redundant. The more important of these changes include refinements to the rules of origin and the phasing out of margin of preference obligations.

The two countries accord each other's exports duty-free treatment so long as the goods concerned have an Australia/New Zealand ``area content'' of at least 50 percent on an ex-factory cost basis and the last process of manufacture was performed in the country claiming the tariff preferences.

The CER Agreement is now one of the most comprehensive bilateral free trade agreements in existence.

CER has continued to deliver concrete results for both Australia and New Zealand in terms of increased trade and investment flows. Australia and New Zealand remain each other's major market for manufactured goods. Australia is New Zealand's largest overseas market. New Zealand is Australia's third largest export market.

As well as providing the framework for the progressive and automatic accomplishment of a free trade area, CER was seen by both countries as a mechanism for facilitating structural adjustment and increasing global competitiveness of their respective economies.

Industry policy is nevertheless an area where differing national approaches have always had the potential to hinder full realisation of the single market concept underlying CER. Economic integration has not reached a stage at which either government would be willing to constrain their sovereign rights to develop or restructure their industries as they see fit.

Although both countries have similar broad objectives of encouraging efficient and internationally competitive industry, there are significant differences in the scope and structure of industry and in the approach of the Governments to domestic economic and industry assistance reform.

Australia continues with a strategic sector-specific assistance approach (focused particularly in ``high-tech'' areas of IT and telecommunications) of a kind which New Zealand has not pursued under its ``level playing field'' approach.

The Trans Tasman Mutual Recognition Arrangement (``TTMRA'') was signed by New Zealand, The Commonwealth and all States and Territories of Australia in June 1996. The Arrangement is based on two key principles.

Firstly, if goods may be legally sold in New Zealand they may be sold in any Australian jurisdiction, and vice versa;

Second, if a person is registered to practice an occupation in New Zealand he or she will be entitled to practice an equivalent occupation in an Australian jurisdiction, and vice versa.
The TTMRA is illustrative of the degree of maturity which has developed in the relationship between New Zealand and Australia. It will allow goods to be traded freely, and will enhance the freedom of individuals to work in either country.

The TTMRA is intended to remove remaining regulatory impediments to trade across the Tasman. Until these barriers are reduced the full benefits of trade liberalisation under the Closer Economic Relations (CER) Agreement cannot be realised.

The benefits of TTMRA are particularly significant where differences in regulatory regimes between the two countries reflect national historical or institutional arrangements, rather than the objective assessment of risks to public health, safety or the environment.

New Zealand and Australian Trade Ministers and officials meet annually to review CER, to consider the operation of the Agreement as a whole and ways in which the trans-Tasman business environment can be improved to gain the maximum benefit from liberalised trade in goods and services.

While CER has brought to industry in both countries the benefits of a larger combined ``domestic'' market, that market is an increasingly competitive one. Ultimately, our industries must stand or fall by their competitiveness against the rest of the world.

The two countries' common interest in establishing a strong and competitive Australasian economic base for our industries to compete in global and regional markets is reflected in our similar approaches to supporting multilateral trade liberalisation through the WTO and regional liberalisation through APEC.

The Uruguay Round of GATT

Since 1947, the world trading environment has been regulated through the General Agreement on Tariffs and Trade, or GATT. GATT evolved through a series of ``rounds'' of negotiations. The most recent set, launched in Uruguay, was both long - seven years - and very far-reaching. When the Uruguay Round was finished in 1994, New Zealand trade analysts could look back on years of hard work, but also look forward to a change that probably ranks alongside milestones such as Britain's entry into the EC, and the CER relationship with Australia.

The Uruguay Round was the first GATT round to consider agriculture comprehensively, as previously domestic agricultural policies were largely exempt from international trade rules. Many nations (and until the late 1980s, we were no exception) were pretty well addicted to subsidising farmers and protecting agriculture.

The Uruguay Round not only included agriculture, but it also contained a whole new thrust towards freeing up international trade from tariffs and other tariff barriers. Governments have committed themselves to maintaining a single set of rules for economic relations between countries. The ultimate benefit will be greater certainty and an environment that encourages trade and investment.

As has often been said, New Zealand is one of the countries which stands to gain the most, over the medium to long term, from the successful conclusion of the Uruguay Round of multilateral trade negotiations in 1994, especially in terms of agriculture trade. Key elements of the result are market access commitments and subsidy disciplines for agriculture and industrial goods. There are also commitments in so-called ``new areas'' such as trade in services and trade-related aspects of intellectual property rights. The package is a balance of gains and concessions accepted by all participants representing a wide range of interests, and in both developed and developing countries.

For industrial goods, developed country participants in the Uruguay Round agreed to reduce their tariffs over a five year period by one-third on an average trade-weighted basis. New Zealand export industries will also gain from deeper tariff reductions by the major trading nations in a number of important sectors including elimination of tariffs on steel, pulp and paper, agricultural equipment, beer and furniture.

New Zealand's Uruguay Round commitments serve to reinforce and ``cement in'' the domestic market reforms we have made over the past decade. These reforms have already made New Zealand industry more competitive at home and abroad. The challenge for industry now is to maintain and improve its international competitiveness in an increasingly open and competitive domestic and world trading environment.

A New Era: The World Trade Organisation

A new World Trade Organisation (WTO), has been set up to encompass the revised General Agreement on Tariffs and Trade (GATT 1994) and the multilateral agreements established under the Uruguay Round.

The WTO now has nearly 130 members, including most of the New Zealand's major trading partners. Of our top 15 export markets only China and Taiwan are not WTO members but they, and a number of other non-members, have applied to join the WTO.

The WTO is not merely GATT under a new name. It:

oversees all the Uruguay Round agreements on goods, services, intellectual property and dispute settlement;

requires member countries to remove import prohibitions and reduce import tariffs;

administers the trade policy review mechanism, which keeps members informed of changes in one another's trade policies and requires them to explain trade actions which affect other countries;

is a permanent forum for members to discuss implementation of the Uruguay Round, as well as new trade issues such as the impact of trade on the environment; and

is a forum for resolving trade disputes - while it has a formal disputes settlement procedure and can impose ``penalties'', the aim is to prevent disputes and resolve them through consultation before they get to this stage.
WTO members must agree to abide by all its provisions (including the multilateral agreements). This will increase consistency and certainty.

Two important new WTO agreements were concluded earlier this year liberalising basic telecommunications and reducing to zero by the year 2000 tariffs on information technology products. Both will be of benefit to consumers and business.

Regional Trade

While the Uruguay Round continued, uncertainty as to the outcome heightened consideration by countries in the Asian Pacific rim of arrangements to promote intra-regional trade in this dynamic region of the world economy.

Interest in economic regionalism was also spurred by the conclusion of the North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico and the agreement among ASEAN members to establish an ASEAN Free Trade Area (AFTA). The European Union is another regional free trade area.

These developments strengthened concerns that trade liberalisation in the area should be promoted on a basis consistent with GATT multilateral trade rules, and not on the basis of exclusive preferential trade blocs like NAFTA or the European Union which have the potential to distort global trade patterns through trade diversion and undermine the basic non-discrimination principle of the WTO and GATT.

Out of this context emerged the institution of Asia Pacific Economic Cooperation (APEC), whose 18 members include the ASEAN countries, Japan, Korea, the Peoples' Republic of China, Chinese Taipei, Hong Kong, Mexico and PNG, along with the US, Canada, Australia and New Zealand, as the vehicle for trade facilitation and liberalisation on the basis of ``open regionalism''.

In the so-called Bogor Declaration, New Zealand and the other APEC members committed themselves to the long-term goal of free and open trade and investment in the Asia-Pacific region by 2010 for industrialised economies and 2020 for developing economies.

This is consistent with the Government's unilateral decision, announced in December 1994, ``that tariffs for post-2000 should be reviewed in 1998, and that the government would determine at that time how to move towards a zero end-point under a unilateral domestic tariff reduction programme''. The 1998 review ``will be conducted against the background of Bogor goals and timeframes''.

The Coalition Government has now announced in its recent Budget that the 1998 Tariff Review will set a timetable to remove all remaining tariffs well before its APEC target of 2010. This review is expected to be completed before the end of June next year.

Asia 2000

New Zealand's participation in APEC in large part reflects our interest in the Asian region, which is of crucial and growing importance to us in trade terms. New Zealand's trading future will increasingly depend on the vitality and outward orientation of the Asian region, and APEC as an active forum for trade and economic cooperation can contribute to this.

The Government's support for the ``Asia 2000 Foundation'' is a further reflection of the importance we now attach to developing New Zealand's relations with the Asian region. Asia 2000's mission is to develop New Zealanders' knowledge and understanding of the countries and people of Asia, to help New Zealanders to develop the right skills to work effectively in Asia and to build New Zealand's links with Asia. These aims are achieved through a business exchange programme, education exchanges, media and cultural events and public affairs activities. Asia 2000 has generated a high level of interest in developing business links with Asia and in heightened awareness of the positive impact on New Zealand's economy of overseas investment and tourism partic ularly from Asian sources.

Heightened interest in regional trade, the success of the CER Agreement and the rapid evolution of the ASEAN Free Trade Area (AFTA) have resulted in an initiative to develop linkages between the two groupings. This initiative got underway in 1995 and has focused on trade facilitation. The AFTA/CER process is an important aspect of reducing barriers to trade and investment between CER and ASEAN.

We are not neglecting other regions either. The Government is interested in following up prospects of free trade with the United States. Also we remain hopeful of being able to achieve a free trade agreement with the Republic of Chile in the near future. Both these initiatives are likely to have not only a current payoff for New Zealand, but are strategically important too, and would link for the first time the eastern and western sides of the Pacific in a formal economic integration. Moreover both these initiatives would serve and achieve core objectives of the APEC liberalisation process.

Such changes expose the New Zealand economy to the world market more than ever before. That forces constant change and innovation onto our economy to keep us ahead of our competitors. But it also allows more investment to create new opportunities for New Zealand industry. A new dynamism is appearing through industry with a focus on the customer and quality of product and service.

Comment on the importance of technological advances and research and development to NZ industrial growth. Compare NZ with other countries in our area of strategic importance.

As we have seen, the New Zealand economy has undergone a significant transformation in the last ten years, moving from a highly regulated, protected and subsidised environment in which firms and businesses operated, to an open economy that is largely freed up and driven by market forces.

The changes in the economy over the last decade have seen firms placing greater value on knowledge creation and technological innovation as they strive for sustainable competitive advantage. Firms that are investing in technology are doing so at internationally competitive levels. This level of investment needs to be more widespread. Success and international competitiveness will depend on the ability of firms to undertake technology development to improve productivity, develop new products, and whole new areas of business.

The last comprehensive study of comparisons between New Zealand and other OECD countries of research and development expenditure uses data from 1991. We therefore need to be careful when making these comparisons. What the information does tell us is that New Zealand is behind in terms of R&D spending measured as a percentage of GDP.
New Zealand OECD Average
Public Sector 0.6% 0.8%
Private Sector 0.3% 0.9%
Total 0.9% 1.7%

The major feature of this table is the very low level of research funded by the private sector in New Zealand. The public sector investment is not much below the OECD average. The problem with such an input comparison is that high R&D expenditure does not necessarily bring greater returns than those who invest less.

The 1997 World Competitiveness Report suggests that New Zealand may not be performing as badly as the above figures suggest. They recently ranked New Zealand;

8th out of 46 countries on the level of technical co-operation between companies (an increase of 5 places from 1996)

5th out of 46 countries on the level of research co-operation between companies and universities

10th out of 46 countries on the degree to which basic research supports long term economic and technological development.

How useful was the Porter report as a blueprint for the economy and New Zealand's future? Does it have any relevance today?

In 1991, the Trade Development Board published the results of a study entitled ``Upgrading New Zealand's Competitive Advantage,'' conducted by Crocombe, Enright and Porter. Porter and his team reviewed the performance of the New Zealand economy, and undertook detailed studies into a wide range of New Zealand industries.

The 1991 study concluded that New Zealand had to rebuild the base of the economy from the ground up so that we could compete successfully in a global economy. Porter called for urgent attention on three levels:
business
associations and
government.
According to Porter the most fundamental changes required were in the business and government arenas. Here are some of his 1991 prescriptions for change in business and government:

Business
Compete beyond the cost base
Leverage New Zealand's home advantages
Understand global competition
Focus on innovation
Develop human resources
Globalise strategies

Government
Transcend macroeconomics
Upgrade human resources
Stimulate local competition
Improve business access to capital
Provide incentives promoting national prosperity
Improve weak national technology
Foster:
high quality ethos and banish the ``Kiwi knocking machine''
development via clusters
new business formation
the rebalancing of government- business relationships.
The Report was very controversial and was hotly debated throughout the country, drawing its share of criticism. Porter's report permeated through the business world in New Zealand and was described recently in the National Business Review as ``the bible for modern corporate behaviour in New Zealand'' at that time.

In the seven years since the study, significant upgrading of the economy has been undertaken, both at a macro and micro level and much of the change has been consistent with Porter's prescriptions. The changes made at the macro and micro level have, and are bearing fruit for New Zealand.

For example, in the most recent World Competitiveness Report, New Zealand was rated 13th out of 46 countries in a Swiss survey of world competitiveness, ahead of Australia and Germany. The quality of our government was ranked third and in infrastructure and management we were ranked 13th and 11th respectively.

New Zealand was described in the 1996 World Competitiveness Yearbook as a ``small but brilliant star'' and is proof that in a global world, distance is less and less often an obstacle to competitiveness. New Zealand has, and is showing that it is competitive with the best.

While Porter's prescriptions undoubtedly had a significant effect on New Zealand's business community it would not be accurate to say that Porter's prescriptions for government became the ``blueprint'' for the economy. Many reforms at the macro level were well under way by 1991, reflected by the introduction of the 1986 Commerce Act and the 1991 Employment Contracts Act.

The passing of legislation such as this reflected the government's recognition that a major overhaul of the economy was needed.

So do Porter's prescriptions have any relevance for New Zealand today? In his recent visit to New Zealand (in April this year), Porter acknowledged that we have made good progress in introducing competition to the local economy which has allowed us to prosper abroad. But he also warned us against complacency. He said that the challenge now was whether we enjoy a brief moment of prosperity and lapse back, or if we are going to continue forward.

According to Porter we need more change to ensure more gain for the New Zealand economy. In particular, continuous upgrading of the business environment and accelerating the growth of clusters are seen by Porter as vital.

The government is committed to a continuous improvement of the business environment through its economic policy and at the micro economic level through regulatory reform.

Porter's call for the development of industry clusters has been taken aboard by Tradenz, who with a major banking organisation in New Zealand have recently set up a joint effort focused specifically on clusters.

In short, Porter's 1991 report contained useful prescriptions for business direction in New Zealand which remain relevant today. His macro level prescriptions coincided with general direction set by government in 1991 and as such could not be considered a ``blueprint'' for the economy. Maintenance of a free and competitive environment for business with continuous improvement where and when necessary has become the relevant issue and one that the government is committed to. In line with this, the government is fully involved with an audit of the Porter Report that seeks to establish the extent to which Porter's 1991 prescriptions have been adopted in New Zealand.

Comment on the New Zealand Industrial/Military Relationship. How can the situation be improved.
While not establishing a local defence industry as such, the provision of opportunities for New Zealand firms to supply Defence needs can serve strategic military purposes by developing an ongoing logistic support capability in the home base. In the process, provided there is a strong element of competition, defence procurement can also make an effective contribution to the development of technologically advanced, internationally competitive and sustainable industry in New Zealand.

In his foreword to the Defence Offsets Policy published in September 1991, the Minister of Defence stated:

``There is a strategic value in encouraging local participation in Defence contracts and New Zealand seeks the security of some measure of independent support for its armed forces. This does not imply a major Defence industry base; that would be unwarranted and commercially unsound in today's climate. However, there is a core of valuable skills within our existing industry which needs to be regularly exercised and encouraged to keep up with international developments.''

The strategic interest of Defence in fostering a limited support capability in New Zealand industry, on a commercially sound and internationally competitive basis, is consistent with the Government's approach to public sector purchasing in general. The Government's policy is that purchasing by its agencies afford domestic industry full and fair opportunity to compete on a value for money basis.

The Ministry of Commerce has issued the publication ``Government Purchasing in New Zealand: Policy Guide for Purchasers'', which recommends procedures purchasing agencies should follow to ensure that they are giving full opportunity to local industry in a manner consistent with effective competition and value-for-money. These guidelines contain best practice advice, some elements of which I will return to at the end of this lecture. Copies are available from the Border, Industry and Environment Policy Group of the Ministry.

The Closer Economic Relationship (CER) with Australia figures largely in the Government's purchasing policy and in defence purchasing in particular. New Zealand and Australia recognise that benefits can flow to industry and to government purchasing bodies by treating the two countries as a single market for government procurement purposes.

A key component is the Australia and New Zealand Government Procurement Agreement (GPA) which enables Australian and New Zealand suppliers to compete on an equal footing for government contracts (goods and/or services) on a value for money basis in the Australian and New Zealand markets. As the New Zealand Minister responsible for the GPA, I am involved in matters related to this agreement. A current five-yearly review has just been finalised with a result which is consistent with New Zealand's interest in maintaining non-discrimination. It is also more consistent with the current economic environment, including a more outward-looking approach to trade and investment in accordance with our domestic policy, and both countries' CER and APEC commitments. The new GPA text is scheduled to be signed next month.

In the specific context of the cooperative defence relationship with Australia, there is the related concept of a ``common industry base for defence procurement purposes'', enshrined in the ANZAC Ships Treaty and the Cooperative Defence Logistics Supply Agreement (CDLSA). A milestone in the cooperative procurement relationship was reached with the handing over to the New Zealand Government on 16 May 1997 of the first ANZAC frigate for New Zealand, the Te Kaha. Its sister ship, Te Mana has been launched from Melbourne also. Both frigates demonstrate excellence in Australasian industry and a trans-Tasman capability to work together.

So far, ANZAC ship contracts worth just under $500 million have been placed with more than 400 competitive New Zealand companies. Work undertaken in New Zealand includes software development, electronic manufacture, mechanical design, fabrication, metal casting, heavy electrical manufacture and light and medium engineering. The project has contributed significantly to New Zealand industry in the areas of quality systems development (to ISO certification standards), project management practices, technology advances, international marketing assistance, and wider business relationships.

Industry programmes were offered by all bidders for the maritime helicopter replacement project. This contract was won by Kaman of the USA which included an industry programme expected to put $100 million of work in New Zealand over the next 10 years. Work includes new manufacture and expected overhaul maintenance.

New Zealand industry is now in a good position to secure involvement on a competitive basis in contracts arising from any future joint ANZ defence procurement. A welcome spin-off from New Zealand industry involvement in the ships project is the development of high tech exports of military software and telecommunications to the wider international market. The Project has been the catalyst for participating companies to co-operatively look to the export of the skills and capability developed. The export of defence related products now totals over $90 million per year.

Participation on the Project has built the credibility of many New Zealand companies. Three companies blooded on the ANZAC Ship Project have now won contracts associated with two other Australian Naval procurement projects, for Minehunters and for Oceanographic vessels.

In addition, the New Zealand Industrial Supplies Office of the Ministry of Commerce can assist communication between domestic suppliers and government purchasers. Since its establishment, however, there has been an improvement in the information for buyers (on product or industry capability) and sellers (on government supply opportunities) available through commercial channels in both print and increasingly, sophisticated electronic systems. The Government's decisions on the future of the NZISO will need to take this change into account.

Finally, as perhaps a new dimension to purchasing (or any dealing with industry), I would like to see government-funded organisations ensure that paper work or any ``red tape'' for potential suppliers is kept to a necessary minimum. In the interest of encouraging potential suppliers (including from domestic industry), I believe this is an area where each government organisation in its own self interest should critique its practices to ensure that this happens.

Greater international competitive pressure is now placed on business, heightening the awareness of the effects of the domestic regulatory environment in a global setting.

The review of the effects of government regulation which I mentioned earlier, forms part of a bigger package which includes looking at a number of Acts including the Resource Management Act 1991; the Health and Safety in Employment Act 1992 an the Human Rights Act 1993.

I have been saying for some time that we as Government need to ensure we are not putting barriers in the way of business ``the wealth creators in our economy''.

I leave you with that thought.

Thank you.INTRODUCTION

Commander, Squadron Leader, Ladies and Gentlemen, thank you for the invitation to speak to you today. I must say that I was impressed by the focus of the staff course, as it mirrors similar themes that run through senior management in the Wellington bureaucracy.

I have been given a clear brief for my lecture. What I intend to do over the next 50 or so minutes is to give a brief historical review of industry development in New Zealand, examine the relative importance of industry sectors over time and present an overview of the changes New Zealand industry has experienced over the last decade or so. I will then address some of the specifics I have been asked to talk about and given Michael Porter's recent visit to New Zealand and the renewed interest in his 1991 report, spend some time looking at the 1991 Porter Report and its relevance for New Zealand today.

Let me say up front, I don't really want to lecture to you per se, I hope you will see this more as a seminar, where my presentation gives an overview, and provides a stimulus for discussion on strategic topics.

The development of industry in New Zealand

During this century New Zealand industry has developed within a capitalist system but with a considerable degree of State involvement in industrial protection and assistance. The primary sector (farming, forestry, fishing) involves large scale and relatively efficient operations (despite some price subsidies in the past). The manufacturing sector was highly protected from foreign and domestic competition by import licensing, high tariffs, expensive freight rates, concessional treatment and widespread regulations. Not surprisingly, in this distorted environment, a wide range of small scale import substituting manufacturing firms emerged, that were uncompetitive and not dynamic.

The depression of the 1930's led countries to close their borders to trade in an effort to stimulate local industry and boost employment. In New Zealand, in comparison to other countries, more reliance was placed on quantitative controls, rather than tariffs to restrict imports. This protectionist policy continued well after the Second World War at a level that was unusually high amongst the relatively wealthy countries.

The protectionist policy gradually led to a lower level of real income in New Zealand as the gains from trade and competition in the economy were reduced. However, these effects were hidden for some time, partially as a result of the Korean War in the 1950s which resulted in a commodity price boom. As a result of this boom New Zealand found itself with a standard of living amongst the highest in the world and an unemployment rate amongst the lowest. Given these factors, there was no impetus for change.

Once the effects of the commodity boom faded, the economic performance of our economy declined. The protectionist regime reduced the need for the domestic manufacturing industry to keep up with developments in the rest of the world, and rising agricultural protection overseas meant that New Zealand was unable to fully exploit its comparative advantage in agriculture.

The declining economic performance was initially only evident in a sustained fall in income per head when compared with other OECD countries, particularly in the period up to 1970. However, this effect was masked as incomes continued to grow in New Zealand albeit at a slower pace than countries overseas. Other economic statistics remained healthy over this time with low unemployment and inflation and this also acted to reduce the impetus for change.

It was only in the 1970s, with the effect of the oil price shocks that the weaknesses in the economy became exposed.
The oil price shocks revealed inflationary pressures, managerial inefficiency and very low productivity growth within the economy. Some industries were uncompetitive by world standards and budgetary pressures on the government meant that the levels of assistance were unsustainable.

Net overseas debt increased from approximately 0 in 1973 to around 50% of GDP by 1984. The cost of servicing the debt was inevitably going to impose very severe constraints on the economy and on New Zealanders for many years to come.

The government flirted with reform in the late 1970s but in the face of increasing inflation, reverted to a price and wage freeze in 1981. It was apparent to many economists that there would need to be major policy changes. The alternative of employing further interventions as a solution to the problems of the economy had been tried and had largely failed. The costs of these policies were becoming clear and few believed that the solution was simply more of the same.
In 1983, change began with meat and transport industry deregulation and the signing of CER with Australia. In 1984, the election of the Labour government brought with it a fundamental change in New Zealand's economic policy. Industry regulations, assistance and protection were abolished, under the rationale that firms and farms should be exposed to international market signals to guide investment to its best use.

The reforms were comprehensive and rapid, beginning with the removal of support from agriculture. Concessional finance and subsidies on livestock prices were abolished. Today, the agricultural sector is essentially unprotected.

Reform of the manufacturing and service sectors has been comprehensive. Much industry regulation has been systematically removed, price controls eliminated, import licensing abolished and tariffs lowered. Controls on capital flows into and out of New Zealand were also removed. In the service sector, the energy and finance sectors were also deregulated. The labour market was reformed in 1991, with the passing of the Employment Contracts Act.

Legislation governing business and the use of natural resources was reformed, through the Commerce Act and the Resource Management Act. These Acts changed the nature of legislation from highly prescriptive approaches to broader generic or policy stating legislation. Taxation was also reformed with the introduction of GST, personal taxes moved to a flatter lower rate and company taxation was reduced and exemptions removed.
So what we have today are open and competitive markets that are more able to respond to changes in the global economic environment.

Types of industry in New Zealand

New Zealand has not experienced a typical pattern of economic development compared to other Western economies. Typically, development starts with an agriculturally based economy, develops through a phase where manufacturing becomes the dominant sector, and then culminates in a stage where the services sector plays a dominant role.

In New Zealand, by contrast, agriculture and the processing of agricultural products has continued to play a major role in the economy and although there has been rapid growth in New Zealand manufacturing over recent years, as yet New Zealand has not experienced a phase where non primary manufacturing has dominated the economy or export earnings.
The services sector is likely to become increasingly important to the economy in the next century. Forecasters predict that the services sector could account for almost 50% of GDP by 2001, compared to around 44% at present.

The small size of the New Zealand economy means that trade is relatively more important to gain economies of scale and therefore a high proportion of production is exported. For example, exports of agricultural products are typically around 80-95% of total agricultural production.

Prior to the reforms, the majority of exports were agricultural- primarily, meat, wool and dairy products. These exports are still important, but other primary products such as forestry products and fruit have grown rapidly in recent years.
The rapid growth of New Zealand manufacturing over recent years reflects manufacturers response to the economic reforms. Non Primary Manufacturing exports have increased as a proportion of total exports, reflecting the increased competitiveness of the sector. In 1996, exports of primary products were 46%, non-primary manufactured goods 28% and services 26% of total exports.

While the range of exports has broadened, export markets have also diversified. In 1950, the UK took around 67% of all our exports but by 1996 this had decreased to only 6%. Australia and Japan remain New Zealand's largest export markets for merchandise goods, with Australia accounting for around 20% of exports and Japan 16%. The United States is the third most important single country export destination at 9%. The United Kingdom and the Republic of Korea rank fourth and fifth respectively.

Overview of change

The focus of the economic reforms was to create an economy that was internationally competitive. This was achieved at a microeconomic level by removing the barriers which prevented market signals from reaching firms in the economy. At the macroeconomic level, the reforms were aimed at providing a consistent policy framework and economic stability.

In the short term, however, the traded goods sector, (which comprises of goods that can be internationally traded) found adjustment to the new regime difficult. The removal of exchange rate and capital controls led to an appreciation of the New Zealand dollar, making businesses less competitive and bringing about a "restructuring recession". Many businesses were unable to restructure quickly enough and between 1986 and 1991, employment in the manufacturing sector fell by one third.

The services sector also experienced a recession following the sharemarket crash of 1987, which hit the construction and finance sectors particularly hard.

As a result, unemployment in New Zealand rose to reach a high of 11%. Between 1986 and 1991, there was no growth in income per head.

By the late 1980's the exchange rate started to fall and the private sector recovery began. Major gains in efficiency and productivity were recorded, and those businesses which had survived the recession started to realise big competitive advantages. This was particularly true of the manufacturing sector and exports, especially to Australia, grew rapidly.

Economic growth has slowed recently, as a result of slowing domestic demand and the strength of the New Zealand dollar and falling international commodity prices. Recent GDP growth has fallen from 4.3% in 1994/1995 to 1.3% in 1995/96. However, growth is forecasted to rebuild slowly to 1.7% in 1996/97 before it should peak at around 3.6% next year.

The appreciation of the exchange rate that began in 1995 reflects this strong economic growth. However, it is making it more difficult for New Zealand business to compete, at least in the short term, on world markets.
Businesses are starting to recognise the need to broaden their bases of competitive advantage. Quality is still the most used competitive strategy but other strategies such as market and product leadership are also becoming more frequent. The need to manage technology for competitive advantage is slowly being recognised with the proportion of businesses using co-ordinated strategies to manage technology rising from around 40% in 1994 to 47% in 1996. These figures illustrate that there is still room for improvement in this area.

Businesses need to continue to reduce costs and increase productivity to improve their competitiveness. They also need to have management strategies for handling currency risk.

Their competitiveness will, in part, depend upon factors such as the ability of managers to:

adopt more involving, empowering relationships with their employees;

adopt strategies of greater specialisation and co-operate within networks of business partnerships; and

devote themselves and their organisations to the creation of distinctive customer value.

Manufacturers are becoming more focused on the export market and exports are now more than 34% of output, an increase of around 10% since 1990. These exports now reach most countries around the world. However, Australia remains the major export market for many exporters, and takes around half the exports of a typical New Zealand manufacturer.

Investment in the manufacturing sector has also risen and in the year ended December 1996, manufacturers invested $2.3 billion in plant and equipment, a 14% increase over the average level of investment during the 1980s. This figure, however, underestimates the true rate of investment as a very substantial investment has been directed in market and product development, training, quality and management improvements.

New Zealand businesses have come a long way since the reforms started in 1983. However, it is important to remember that to maintain and enhance the economic growth we have seen over recent years, business must continue to increase their competitiveness on world markets.
It is equally important that the government continues to have policies that offer businesses a stable economic environment. In line with this objective, I recently announced details of a comprehensive review of the costs to business of government regulation.

Comment on the problems of trading internationally with particular reference to CER, the 1994 GATT agreement, AFTA and NAFTA. What problems, advantages and disadvantages are there for industry in the Asia 2000 initiatives
Trading internationally opens up a much larger market for our products but other countries generally have barriers to protect their own industry. New Zealand exporters have to meet the cost of shipping, transport, distribution etc. as well as tariff or non tariff barriers (i.e., quality standards etc.). A key role of government has been to negotiate easier and cheaper access to other countries' markets. Hence CER, GATT, NAFTA, WTO, APEC, Cairns Group and the like are vitally important to New Zealand's export success.

CER

The Australia-New Zealand Closer Economic Relations Trade Agreement (the CER Agreement) is the agreement governing the conduct of trade between Australia and New Zealand in goods and services. It is New Zealand's key bilateral trade arrangement. Its central provision is the creation of a free trade area consisting of Australia and New Zealand.

Since its inception in 1983 the CER Agreement has undergone three general reviews which:

accelerated the achievement of free trade in goods meeting the CER rules of origin, so that by June 1990 all tariffs and quantitative restrictions on trade were eliminated;

widened the scope of the 1983 Agreement to include trade in services; and,

deepened the CER Agreement by seeking to harmonise a range of non-tariff measures that affect the free flow of goods and services, including in respect of quarantine and customs issues, standards and business law.
In addition, several aspects of the CER Agreement have, over the years, been amended, refined or simply become redundant. The more important of these changes include refinements to the rules of origin and the phasing out of margin of preference obligations.

The two countries accord each other's exports duty-free treatment so long as the goods concerned have an Australia/New Zealand ``area content'' of at least 50 percent on an ex-factory cost basis and the last process of manufacture was performed in the country claiming the tariff preferences.

The CER Agreement is now one of the most comprehensive bilateral free trade agreements in existence.

CER has continued to deliver concrete results for both Australia and New Zealand in terms of increased trade and investment flows. Australia and New Zealand remain each other's major market for manufactured goods. Australia is New Zealand's largest overseas market. New Zealand is Australia's third largest export market.

As well as providing the framework for the progressive and automatic accomplishment of a free trade area, CER was seen by both countries as a mechanism for facilitating structural adjustment and increasing global competitiveness of their respective economies.

Industry policy is nevertheless an area where differing national approaches have always had the potential to hinder full realisation of the single market concept underlying CER. Economic integration has not reached a stage at which either government would be willing to constrain their sovereign rights to develop or restructure their industries as they see fit.

Although both countries have similar broad objectives of encouraging efficient and internationally competitive industry, there are significant differences in the scope and structure of industry and in the approach of the Governments to domestic economic and industry assistance reform.

Australia continues with a strategic sector-specific assistance approach (focused particularly in ``high-tech'' areas of IT and telecommunications) of a kind which New Zealand has not pursued under its ``level playing field'' approach.

The Trans Tasman Mutual Recognition Arrangement (``TTMRA'') was signed by New Zealand, The Commonwealth and all States and Territories of Australia in June 1996. The Arrangement is based on two key principles.

Firstly, if goods may be legally sold in New Zealand they may be sold in any Australian jurisdiction, and vice versa;

Second, if a person is registered to practice an occupation in New Zealand he or she will be entitled to practice an equivalent occupation in an Australian jurisdiction, and vice versa.
The TTMRA is illustrative of the degree of maturity which has developed in the relationship between New Zealand and Australia. It will allow goods to be traded freely, and will enhance the freedom of individuals to work in either country.

The TTMRA is intended to remove remaining regulatory impediments to trade across the Tasman. Until these barriers are reduced the full benefits of trade liberalisation under the Closer Economic Relations (CER) Agreement cannot be realised.

The benefits of TTMRA are particularly significant where differences in regulatory regimes between the two countries reflect national historical or institutional arrangements, rather than the objective assessment of risks to public health, safety or the environment.

New Zealand and Australian Trade Ministers and officials meet annually to review CER, to consider the operation of the Agreement as a whole and ways in which the trans-Tasman business environment can be improved to gain the maximum benefit from liberalised trade in goods and services.

While CER has brought to industry in both countries the benefits of a larger combined ``domestic'' market, that market is an increasingly competitive one. Ultimately, our industries must stand or fall by their competitiveness against the rest of the world.

The two countries' common interest in establishing a strong and competitive Australasian economic base for our industries to compete in global and regional markets is reflected in our similar approaches to supporting multilateral trade liberalisation through the WTO and regional liberalisation through APEC.

The Uruguay Round of GATT

Since 1947, the world trading environment has been regulated through the General Agreement on Tariffs and Trade, or GATT. GATT evolved through a series of ``rounds'' of negotiations. The most recent set, launched in Uruguay, was both long - seven years - and very far-reaching. When the Uruguay Round was finished in 1994, New Zealand trade analysts could look back on years of hard work, but also look forward to a change that probably ranks alongside milestones such as Britain's entry into the EC, and the CER relationship with Australia.

The Uruguay Round was the first GATT round to consider agriculture comprehensively, as previously domestic agricultural policies were largely exempt from international trade rules. Many nations (and until the late 1980s, we were no exception) were pretty well addicted to subsidising farmers and protecting agriculture.

The Uruguay Round not only included agriculture, but it also contained a whole new thrust towards freeing up international trade from tariffs and other tariff barriers. Governments have committed themselves to maintaining a single set of rules for economic relations between countries. The ultimate benefit will be greater certainty and an environment that encourages trade and investment.

As has often been said, New Zealand is one of the countries which stands to gain the most, over the medium to long term, from the successful conclusion of the Uruguay Round of multilateral trade negotiations in 1994, especially in terms of agriculture trade. Key elements of the result are market access commitments and subsidy disciplines for agriculture and industrial goods. There are also commitments in so-called ``new areas'' such as trade in services and trade-related aspects of intellectual property rights. The package is a balance of gains and concessions accepted by all participants representing a wide range of interests, and in both developed and developing countries.

For industrial goods, developed country participants in the Uruguay Round agreed to reduce their tariffs over a five year period by one-third on an average trade-weighted basis. New Zealand export industries will also gain from deeper tariff reductions by the major trading nations in a number of important sectors including elimination of tariffs on steel, pulp and paper, agricultural equipment, beer and furniture.

New Zealand's Uruguay Round commitments serve to reinforce and ``cement in'' the domestic market reforms we have made over the past decade. These reforms have already made New Zealand industry more competitive at home and abroad. The challenge for industry now is to maintain and improve its international competitiveness in an increasingly open and competitive domestic and world trading environment.

A New Era: The World Trade Organisation

A new World Trade Organisation (WTO), has been set up to encompass the revised General Agreement on Tariffs and Trade (GATT 1994) and the multilateral agreements established under the Uruguay Round.

The WTO now has nearly 130 members, including most of the New Zealand's major trading partners. Of our top 15 export markets only China and Taiwan are not WTO members but they, and a number of other non-members, have applied to join the WTO.

The WTO is not merely GATT under a new name. It:

oversees all the Uruguay Round agreements on goods, services, intellectual property and dispute settlement;

requires member countries to remove import prohibitions and reduce import tariffs;

administers the trade policy review mechanism, which keeps members informed of changes in one another's trade policies and requires them to explain trade actions which affect other countries;

is a permanent forum for members to discuss implementation of the Uruguay Round, as well as new trade issues such as the impact of trade on the environment; and

is a forum for resolving trade disputes - while it has a formal disputes settlement procedure and can impose ``penalties'', the aim is to prevent disputes and resolve them through consultation before they get to this stage.
WTO members must agree to abide by all its provisions (including the multilateral agreements). This will increase consistency and certainty.

Two important new WTO agreements were concluded earlier this year liberalising basic telecommunications and reducing to zero by the year 2000 tariffs on information technology products. Both will be of benefit to consumers and business.

Regional Trade

While the Uruguay Round continued, uncertainty as to the outcome heightened consideration by countries in the Asian Pacific rim of arrangements to promote intra-regional trade in this dynamic region of the world economy.

Interest in economic regionalism was also spurred by the conclusion of the North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico and the agreement among ASEAN members to establish an ASEAN Free Trade Area (AFTA). The European Union is another regional free trade area.

These developments strengthened concerns that trade liberalisation in the area should be promoted on a basis consistent with GATT multilateral trade rules, and not on the basis of exclusive preferential trade blocs like NAFTA or the European Union which have the potential to distort global trade patterns through trade diversion and undermine the basic non-discrimination principle of the WTO and GATT.

Out of this context emerged the institution of Asia Pacific Economic Cooperation (APEC), whose 18 members include the ASEAN countries, Japan, Korea, the Peoples' Republic of China, Chinese Taipei, Hong Kong, Mexico and PNG, along with the US, Canada, Australia and New Zealand, as the vehicle for trade facilitation and liberalisation on the basis of ``open regionalism''.

In the so-called Bogor Declaration, New Zealand and the other APEC members committed themselves to the long-term goal of free and open trade and investment in the Asia-Pacific region by 2010 for industrialised economies and 2020 for developing economies.

This is consistent with the Government's unilateral decision, announced in December 1994, ``that tariffs for post-2000 should be reviewed in 1998, and that the government would determine at that time how to move towards a zero end-point under a unilateral domestic tariff reduction programme''. The 1998 review ``will be conducted against the background of Bogor goals and timeframes''.

The Coalition Government has now announced in its recent Budget that the 1998 Tariff Review will set a timetable to remove all remaining tariffs well before its APEC target of 2010. This review is expected to be completed before the end of June next year.

Asia 2000

New Zealand's participation in APEC in large part reflects our interest in the Asian region, which is of crucial and growing importance to us in trade terms. New Zealand's trading future will increasingly depend on the vitality and outward orientation of the Asian region, and APEC as an active forum for trade and economic cooperation can contribute to this.

The Government's support for the ``Asia 2000 Foundation'' is a further reflection of the importance we now attach to developing New Zealand's relations with the Asian region. Asia 2000's mission is to develop New Zealanders' knowledge and understanding of the countries and people of Asia, to help New Zealanders to develop the right skills to work effectively in Asia and to build New Zealand's links with Asia. These aims are achieved through a business exchange programme, education exchanges, media and cultural events and public affairs activities. Asia 2000 has generated a high level of interest in developing business links with Asia and in heightened awareness of the positive impact on New Zealand's economy of overseas investment and tourism partic ularly from Asian sources.

Heightened interest in regional trade, the success of the CER Agreement and the rapid evolution of the ASEAN Free Trade Area (AFTA) have resulted in an initiative to develop linkages between the two groupings. This initiative got underway in 1995 and has focused on trade facilitation. The AFTA/CER process is an important aspect of reducing barriers to trade and investment between CER and ASEAN.

We are not neglecting other regions either. The Government is interested in following up prospects of free trade with the United States. Also we remain hopeful of being able to achieve a free trade agreement with the Republic of Chile in the near future. Both these initiatives are likely to have not only a current payoff for New Zealand, but are strategically important too, and would link for the first time the eastern and western sides of the Pacific in a formal economic integration. Moreover both these initiatives would serve and achieve core objectives of the APEC liberalisation process.

Such changes expose the New Zealand economy to the world market more than ever before. That forces constant change and innovation onto our economy to keep us ahead of our competitors. But it also allows more investment to create new opportunities for New Zealand industry. A new dynamism is appearing through industry with a focus on the customer and quality of product and service.

Comment on the importance of technological advances and research and development to NZ industrial growth. Compare NZ with other countries in our area of strategic importance.

As we have seen, the New Zealand economy has undergone a significant transformation in the last ten years, moving from a highly regulated, protected and subsidised environment in which firms and businesses operated, to an open economy that is largely freed up and driven by market forces.

The changes in the economy over the last decade have seen firms placing greater value on knowledge creation and technological innovation as they strive for sustainable competitive advantage. Firms that are investing in technology are doing so at internationally competitive levels. This level of investment needs to be more widespread. Success and international competitiveness will depend on the ability of firms to undertake technology development to improve productivity, develop new products, and whole new areas of business.

The last comprehensive study of comparisons between New Zealand and other OECD countries of research and development expenditure uses data from 1991. We therefore need to be careful when making these comparisons. What the information does tell us is that New Zealand is behind in terms of R&D spending measured as a percentage of GDP.
New Zealand OECD Average
Public Sector 0.6% 0.8%
Private Sector 0.3% 0.9%
Total 0.9% 1.7%

The major feature of this table is the very low level of research funded by the private sector in New Zealand. The public sector investment is not much below the OECD average. The problem with such an input comparison is that high R&D expenditure does not necessarily bring greater returns than those who invest less.

The 1997 World Competitiveness Report suggests that New Zealand may not be performing as badly as the above figures suggest. They recently ranked New Zealand;

8th out of 46 countries on the level of technical co-operation between companies (an increase of 5 places from 1996)

5th out of 46 countries on the level of research co-operation between companies and universities

10th out of 46 countries on the degree to which basic research supports long term economic and technological development.

How useful was the Porter report as a blueprint for the economy and New Zealand's future? Does it have any relevance today?

In 1991, the Trade Development Board published the results of a study entitled ``Upgrading New Zealand's Competitive Advantage,'' conducted by Crocombe, Enright and Porter. Porter and his team reviewed the performance of the New Zealand economy, and undertook detailed studies into a wide range of New Zealand industries.

The 1991 study concluded that New Zealand had to rebuild the base of the economy from the ground up so that we could compete successfully in a global economy. Porter called for urgent attention on three levels:
business
associations and
government.
According to Porter the most fundamental changes required were in the business and government arenas. Here are some of his 1991 prescriptions for change in business and government:

Business
Compete beyond the cost base
Leverage New Zealand's home advantages
Understand global competition
Focus on innovation
Develop human resources
Globalise strategies

Government
Transcend macroeconomics
Upgrade human resources
Stimulate local competition
Improve business access to capital
Provide incentives promoting national prosperity
Improve weak national technology
Foster:
high quality ethos and banish the ``Kiwi knocking machine''
development via clusters
new business formation
the rebalancing of government- business relationships.
The Report was very controversial and was hotly debated throughout the country, drawing its share of criticism. Porter's report permeated through the business world in New Zealand and was described recently in the National Business Review as ``the bible for modern corporate behaviour in New Zealand'' at that time.

In the seven years since the study, significant upgrading of the economy has been undertaken, both at a macro and micro level and much of the change has been consistent with Porter's prescriptions. The changes made at the macro and micro level have, and are bearing fruit for New Zealand.

For example, in the most recent World Competitiveness Report, New Zealand was rated 13th out of 46 countries in a Swiss survey of world competitiveness, ahead of Australia and Germany. The quality of our government was ranked third and in infrastructure and management we were ranked 13th and 11th respectively.

New Zealand was described in the 1996 World Competitiveness Yearbook as a ``small but brilliant star'' and is proof that in a global world, distance is less and less often an obstacle to competitiveness. New Zealand has, and is showing that it is competitive with the best.

While Porter's prescriptions undoubtedly had a significant effect on New Zealand's business community it would not be accurate to say that Porter's prescriptions for government became the ``blueprint'' for the economy. Many reforms at the macro level were well under way by 1991, reflected by the introduction of the 1986 Commerce Act and the 1991 Employment Contracts Act.

The passing of legislation such as this reflected the government's recognition that a major overhaul of the economy was needed.

So do Porter's prescriptions have any relevance for New Zealand today? In his recent visit to New Zealand (in April this year), Porter acknowledged that we have made good progress in introducing competition to the local economy which has allowed us to prosper abroad. But he also warned us against complacency. He said that the challenge now was whether we enjoy a brief moment of prosperity and lapse back, or if we are going to continue forward.

According to Porter we need more change to ensure more gain for the New Zealand economy. In particular, continuous upgrading of the business environment and accelerating the growth of clusters are seen by Porter as vital.

The government is committed to a continuous improvement of the business environment through its economic policy and at the micro economic level through regulatory reform.

Porter's call for the development of industry clusters has been taken aboard by Tradenz, who with a major banking organisation in New Zealand have recently set up a joint effort focused specifically on clusters.

In short, Porter's 1991 report contained useful prescriptions for business direction in New Zealand which remain relevant today. His macro level prescriptions coincided with general direction set by government in 1991 and as such could not be considered a ``blueprint'' for the economy. Maintenance of a free and competitive environment for business with continuous improvement where and when necessary has become the relevant issue and one that the government is committed to. In line with this, the government is fully involved with an audit of the Porter Report that seeks to establish the extent to which Porter's 1991 prescriptions have been adopted in New Zealand.

Comment on the New Zealand Industrial/Military Relationship. How can the situation be improved.
While not establishing a local defence industry as such, the provision of opportunities for New Zealand firms to supply Defence needs can serve strategic military purposes by developing an ongoing logistic support capability in the home base. In the process, provided there is a strong element of competition, defence procurement can also make an effective contribution to the development of technologically advanced, internationally competitive and sustainable industry in New Zealand.

In his foreword to the Defence Offsets Policy published in September 1991, the Minister of Defence stated:

``There is a strategic value in encouraging local participation in Defence contracts and New Zealand seeks the security of some measure of independent support for its armed forces. This does not imply a major Defence industry base; that would be unwarranted and commercially unsound in today's climate. However, there is a core of valuable skills within our existing industry which needs to be regularly exercised and encouraged to keep up with international developments.''

The strategic interest of Defence in fostering a limited support capability in New Zealand industry, on a commercially sound and internationally competitive basis, is consistent with the Government's approach to public sector purchasing in general. The Government's policy is that purchasing by its agencies afford domestic industry full and fair opportunity to compete on a value for money basis.

The Ministry of Commerce has issued the publication ``Government Purchasing in New Zealand: Policy Guide for Purchasers'', which recommends procedures purchasing agencies should follow to ensure that they are giving full opportunity to local industry in a manner consistent with effective competition and value-for-money. These guidelines contain best practice advice, some elements of which I will return to at the end of this lecture. Copies are available from the Border, Industry and Environment Policy Group of the Ministry.

The Closer Economic Relationship (CER) with Australia figures largely in the Government's purchasing policy and in defence purchasing in particular. New Zealand and Australia recognise that benefits can flow to industry and to government purchasing bodies by treating the two countries as a single market for government procurement purposes.

A key component is the Australia and New Zealand Government Procurement Agreement (GPA) which enables Australian and New Zealand suppliers to compete on an equal footing for government contracts (goods and/or services) on a value for money basis in the Australian and New Zealand markets. As the New Zealand Minister responsible for the GPA, I am involved in matters related to this agreement. A current five-yearly review has just been finalised with a result which is consistent with New Zealand's interest in maintaining non-discrimination. It is also more consistent with the current economic environment, including a more outward-looking approach to trade and investment in accordance with our domestic policy, and both countries' CER and APEC commitments. The new GPA text is scheduled to be signed next month.

In the specific context of the cooperative defence relationship with Australia, there is the related concept of a ``common industry base for defence procurement purposes'', enshrined in the ANZAC Ships Treaty and the Cooperative Defence Logistics Supply Agreement (CDLSA). A milestone in the cooperative procurement relationship was reached with the handing over to the New Zealand Government on 16 May 1997 of the first ANZAC frigate for New Zealand, the Te Kaha. Its sister ship, Te Mana has been launched from Melbourne also. Both frigates demonstrate excellence in Australasian industry and a trans-Tasman capability to work together.

So far, ANZAC ship contracts worth just under $500 million have been placed with more than 400 competitive New Zealand companies. Work undertaken in New Zealand includes software development, electronic manufacture, mechanical design, fabrication, metal casting, heavy electrical manufacture and light and medium engineering. The project has contributed significantly to New Zealand industry in the areas of quality systems development (to ISO certification standards), project management practices, technology advances, international marketing assistance, and wider business relationships.

Industry programmes were offered by all bidders for the maritime helicopter replacement project. This contract was won by Kaman of the USA which included an industry programme expected to put $100 million of work in New Zealand over the next 10 years. Work includes new manufacture and expected overhaul maintenance.

New Zealand industry is now in a good position to secure involvement on a competitive basis in contracts arising from any future joint ANZ defence procurement. A welcome spin-off from New Zealand industry involvement in the ships project is the development of high tech exports of military software and telecommunications to the wider international market. The Project has been the catalyst for participating companies to co-operatively look to the export of the skills and capability developed. The export of defence related products now totals over $90 million per year.

Participation on the Project has built the credibility of many New Zealand companies. Three companies blooded on the ANZAC Ship Project have now won contracts associated with two other Australian Naval procurement projects, for Minehunters and for Oceanographic vessels.

In addition, the New Zealand Industrial Supplies Office of the Ministry of Commerce can assist communication between domestic suppliers and government purchasers. Since its establishment, however, there has been an improvement in the information for buyers (on product or industry capability) and sellers (on government supply opportunities) available through commercial channels in both print and increasingly, sophisticated electronic systems. The Government's decisions on the future of the NZISO will need to take this change into account.

Finally, as perhaps a new dimension to purchasing (or any dealing with industry), I would like to see government-funded organisations ensure that paper work or any ``red tape'' for potential suppliers is kept to a necessary minimum. In the interest of encouraging potential suppliers (including from domestic industry), I believe this is an area where each government organisation in its own self interest should critique its practices to ensure that this happens.

Greater international competitive pressure is now placed on business, heightening the awareness of the effects of the domestic regulatory environment in a global setting.

The review of the effects of government regulation which I mentioned earlier, forms part of a bigger package which includes looking at a number of Acts including the Resource Management Act 1991; the Health and Safety in Employment Act 1992 an the Human Rights Act 1993.

I have been saying for some time that we as Government need to ensure we are not putting barriers in the way of business ``the wealth creators in our economy''.

I leave you with that thought.

Thank you.INTRODUCTION

Commander, Squadron Leader, Ladies and Gentlemen, thank you for the invitation to speak to you today. I must say that I was impressed by the focus of the staff course, as it mirrors similar themes that run through senior management in the Wellington bureaucracy.

I have been given a clear brief for my lecture. What I intend to do over the next 50 or so minutes is to give a brief historical review of industry development in New Zealand, examine the relative importance of industry sectors over time and present an overview of the changes New Zealand industry has experienced over the last decade or so. I will then address some of the specifics I have been asked to talk about and given Michael Porter's recent visit to New Zealand and the renewed interest in his 1991 report, spend some time looking at the 1991 Porter Report and its relevance for New Zealand today.

Let me say up front, I don't really want to lecture to you per se, I hope you will see this more as a seminar, where my presentation gives an overview, and provides a stimulus for discussion on strategic topics.

The development of industry in New Zealand

During this century New Zealand industry has developed within a capitalist system but with a considerable degree of State involvement in industrial protection and assistance. The primary sector (farming, forestry, fishing) involves large scale and relatively efficient operations (despite some price subsidies in the past). The manufacturing sector was highly protected from foreign and domestic competition by import licensing, high tariffs, expensive freight rates, concessional treatment and widespread regulations. Not surprisingly, in this distorted environment, a wide range of small scale import substituting manufacturing firms emerged, that were uncompetitive and not dynamic.

The depression of the 1930's led countries to close their borders to trade in an effort to stimulate local industry and boost employment. In New Zealand, in comparison to other countries, more reliance was placed on quantitative controls, rather than tariffs to restrict imports. This protectionist policy continued well after the Second World War at a level that was unusually high amongst the relatively wealthy countries.

The protectionist policy gradually led to a lower level of real income in New Zealand as the gains from trade and competition in the economy were reduced. However, these effects were hidden for some time, partially as a result of the Korean War in the 1950s which resulted in a commodity price boom. As a result of this boom New Zealand found itself with a standard of living amongst the highest in the world and an unemployment rate amongst the lowest. Given these factors, there was no impetus for change.

Once the effects of the commodity boom faded, the economic performance of our economy declined. The protectionist regime reduced the need for the domestic manufacturing industry to keep up with developments in the rest of the world, and rising agricultural protection overseas meant that New Zealand was unable to fully exploit its comparative advantage in agriculture.

The declining economic performance was initially only evident in a sustained fall in income per head when compared with other OECD countries, particularly in the period up to 1970. However, this effect was masked as incomes continued to grow in New Zealand albeit at a slower pace than countries overseas. Other economic statistics remained healthy over this time with low unemployment and inflation and this also acted to reduce the impetus for change.

It was only in the 1970s, with the effect of the oil price shocks that the weaknesses in the economy became exposed.
The oil price shocks revealed inflationary pressures, managerial inefficiency and very low productivity growth within the economy. Some industries were uncompetitive by world standards and budgetary pressures on the government meant that the levels of assistance were unsustainable.

Net overseas debt increased from approximately 0 in 1973 to around 50% of GDP by 1984. The cost of servicing the debt was inevitably going to impose very severe constraints on the economy and on New Zealanders for many years to come.

The government flirted with reform in the late 1970s but in the face of increasing inflation, reverted to a price and wage freeze in 1981. It was apparent to many economists that there would need to be major policy changes. The alternative of employing further interventions as a solution to the problems of the economy had been tried and had largely failed. The costs of these policies were becoming clear and few believed that the solution was simply more of the same.
In 1983, change began with meat and transport industry deregulation and the signing of CER with Australia. In 1984, the election of the Labour government brought with it a fundamental change in New Zealand's economic policy. Industry regulations, assistance and protection were abolished, under the rationale that firms and farms should be exposed to international market signals to guide investment to its best use.

The reforms were comprehensive and rapid, beginning with the removal of support from agriculture. Concessional finance and subsidies on livestock prices were abolished. Today, the agricultural sector is essentially unprotected.

Reform of the manufacturing and service sectors has been comprehensive. Much industry regulation has been systematically removed, price controls eliminated, import licensing abolished and tariffs lowered. Controls on capital flows into and out of New Zealand were also removed. In the service sector, the energy and finance sectors were also deregulated. The labour market was reformed in 1991, with the passing of the Employment Contracts Act.

Legislation governing business and the use of natural resources was reformed, through the Commerce Act and the Resource Management Act. These Acts changed the nature of legislation from highly prescriptive approaches to broader generic or policy stating legislation. Taxation was also reformed with the introduction of GST, personal taxes moved to a flatter lower rate and company taxation was reduced and exemptions removed.
So what we have today are open and competitive markets that are more able to respond to changes in the global economic environment.

Types of industry in New Zealand

New Zealand has not experienced a typical pattern of economic development compared to other Western economies. Typically, development starts with an agriculturally based economy, develops through a phase where manufacturing becomes the dominant sector, and then culminates in a stage where the services sector plays a dominant role.

In New Zealand, by contrast, agriculture and the processing of agricultural products has continued to play a major role in the economy and although there has been rapid growth in New Zealand manufacturing over recent years, as yet New Zealand has not experienced a phase where non primary manufacturing has dominated the economy or export earnings.
The services sector is likely to become increasingly important to the economy in the next century. Forecasters predict that the services sector could account for almost 50% of GDP by 2001, compared to around 44% at present.

The small size of the New Zealand economy means that trade is relatively more important to gain economies of scale and therefore a high proportion of production is exported. For example, exports of agricultural products are typically around 80-95% of total agricultural production.

Prior to the reforms, the majority of exports were agricultural- primarily, meat, wool and dairy products. These exports are still important, but other primary products such as forestry products and fruit have grown rapidly in recent years.
The rapid growth of New Zealand manufacturing over recent years reflects manufacturers response to the economic reforms. Non Primary Manufacturing exports have increased as a proportion of total exports, reflecting the increased competitiveness of the sector. In 1996, exports of primary products were 46%, non-primary manufactured goods 28% and services 26% of total exports.

While the range of exports has broadened, export markets have also diversified. In 1950, the UK took around 67% of all our exports but by 1996 this had decreased to only 6%. Australia and Japan remain New Zealand's largest export markets for merchandise goods, with Australia accounting for around 20% of exports and Japan 16%. The United States is the third most important single country export destination at 9%. The United Kingdom and the Republic of Korea rank fourth and fifth respectively.

Overview of change

The focus of the economic reforms was to create an economy that was internationally competitive. This was achieved at a microeconomic level by removing the barriers which prevented market signals from reaching firms in the economy. At the macroeconomic level, the reforms were aimed at providing a consistent policy framework and economic stability.

In the short term, however, the traded goods sector, (which comprises of goods that can be internationally traded) found adjustment to the new regime difficult. The removal of exchange rate and capital controls led to an appreciation of the New Zealand dollar, making businesses less competitive and bringing about a "restructuring recession". Many businesses were unable to restructure quickly enough and between 1986 and 1991, employment in the manufacturing sector fell by one third.

The services sector also experienced a recession following the sharemarket crash of 1987, which hit the construction and finance sectors particularly hard.

As a result, unemployment in New Zealand rose to reach a high of 11%. Between 1986 and 1991, there was no growth in income per head.

By the late 1980's the exchange rate started to fall and the private sector recovery began. Major gains in efficiency and productivity were recorded, and those businesses which had survived the recession started to realise big competitive advantages. This was particularly true of the manufacturing sector and exports, especially to Australia, grew rapidly.

Economic growth has slowed recently, as a result of slowing domestic demand and the strength of the New Zealand dollar and falling international commodity prices. Recent GDP growth has fallen from 4.3% in 1994/1995 to 1.3% in 1995/96. However, growth is forecasted to rebuild slowly to 1.7% in 1996/97 before it should peak at around 3.6% next year.

The appreciation of the exchange rate that began in 1995 reflects this strong economic growth. However, it is making it more difficult for New Zealand business to compete, at least in the short term, on world markets.
Businesses are starting to recognise the need to broaden their bases of competitive advantage. Quality is still the most used competitive strategy but other strategies such as market and product leadership are also becoming more frequent. The need to manage technology for competitive advantage is slowly being recognised with the proportion of businesses using co-ordinated strategies to manage technology rising from around 40% in 1994 to 47% in 1996. These figures illustrate that there is still room for improvement in this area.

Businesses need to continue to reduce costs and increase productivity to improve their competitiveness. They also need to have management strategies for handling currency risk.

Their competitiveness will, in part, depend upon factors such as the ability of managers to:

adopt more involving, empowering relationships with their employees;

adopt strategies of greater specialisation and co-operate within networks of business partnerships; and

devote themselves and their organisations to the creation of distinctive customer value.

Manufacturers are becoming more focused on the export market and exports are now more than 34% of output, an increase of around 10% since 1990. These exports now reach most countries around the world. However, Australia remains the major export market for many exporters, and takes around half the exports of a typical New Zealand manufacturer.

Investment in the manufacturing sector has also risen and in the year ended December 1996, manufacturers invested $2.3 billion in plant and equipment, a 14% increase over the average level of investment during the 1980s. This figure, however, underestimates the true rate of investment as a very substantial investment has been directed in market and product development, training, quality and management improvements.

New Zealand businesses have come a long way since the reforms started in 1983. However, it is important to remember that to maintain and enhance the economic growth we have seen over recent years, business must continue to increase their competitiveness on world markets.
It is equally important that the government continues to have policies that offer businesses a stable economic environment. In line with this objective, I recently announced details of a comprehensive review of the costs to business of government regulation.

Comment on the problems of trading internationally with particular reference to CER, the 1994 GATT agreement, AFTA and NAFTA. What problems, advantages and disadvantages are there for industry in the Asia 2000 initiatives
Trading internationally opens up a much larger market for our products but other countries generally have barriers to protect their own industry. New Zealand exporters have to meet the cost of shipping, transport, distribution etc. as well as tariff or non tariff barriers (i.e., quality standards etc.). A key role of government has been to negotiate easier and cheaper access to other countries' markets. Hence CER, GATT, NAFTA, WTO, APEC, Cairns Group and the like are vitally important to New Zealand's export success.

CER

The Australia-New Zealand Closer Economic Relations Trade Agreement (the CER Agreement) is the agreement governing the conduct of trade between Australia and New Zealand in goods and services. It is New Zealand's key bilateral trade arrangement. Its central provision is the creation of a free trade area consisting of Australia and New Zealand.

Since its inception in 1983 the CER Agreement has undergone three general reviews which:

accelerated the achievement of free trade in goods meeting the CER rules of origin, so that by June 1990 all tariffs and quantitative restrictions on trade were eliminated;

widened the scope of the 1983 Agreement to include trade in services; and,

deepened the CER Agreement by seeking to harmonise a range of non-tariff measures that affect the free flow of goods and services, including in respect of quarantine and customs issues, standards and business law.
In addition, several aspects of the CER Agreement have, over the years, been amended, refined or simply become redundant. The more important of these changes include refinements to the rules of origin and the phasing out of margin of preference obligations.

The two countries accord each other's exports duty-free treatment so long as the goods concerned have an Australia/New Zealand ``area content'' of at least 50 percent on an ex-factory cost basis and the last process of manufacture was performed in the country claiming the tariff preferences.

The CER Agreement is now one of the most comprehensive bilateral free trade agreements in existence.

CER has continued to deliver concrete results for both Australia and New Zealand in terms of increased trade and investment flows. Australia and New Zealand remain each other's major market for manufactured goods. Australia is New Zealand's largest overseas market. New Zealand is Australia's third largest export market.

As well as providing the framework for the progressive and automatic accomplishment of a free trade area, CER was seen by both countries as a mechanism for facilitating structural adjustment and increasing global competitiveness of their respective economies.

Industry policy is nevertheless an area where differing national approaches have always had the potential to hinder full realisation of the single market concept underlying CER. Economic integration has not reached a stage at which either government would be willing to constrain their sovereign rights to develop or restructure their industries as they see fit.

Although both countries have similar broad objectives of encouraging efficient and internationally competitive industry, there are significant differences in the scope and structure of industry and in the approach of the Governments to domestic economic and industry assistance reform.

Australia continues with a strategic sector-specific assistance approach (focused particularly in ``high-tech'' areas of IT and telecommunications) of a kind which New Zealand has not pursued under its ``level playing field'' approach.

The Trans Tasman Mutual Recognition Arrangement (``TTMRA'') was signed by New Zealand, The Commonwealth and all States and Territories of Australia in June 1996. The Arrangement is based on two key principles.

Firstly, if goods may be legally sold in New Zealand they may be sold in any Australian jurisdiction, and vice versa;

Second, if a person is registered to practice an occupation in New Zealand he or she will be entitled to practice an equivalent occupation in an Australian jurisdiction, and vice versa.
The TTMRA is illustrative of the degree of maturity which has developed in the relationship between New Zealand and Australia. It will allow goods to be traded freely, and will enhance the freedom of individuals to work in either country.

The TTMRA is intended to remove remaining regulatory impediments to trade across the Tasman. Until these barriers are reduced the full benefits of trade liberalisation under the Closer Economic Relations (CER) Agreement cannot be realised.

The benefits of TTMRA are particularly significant where differences in regulatory regimes between the two countries reflect national historical or institutional arrangements, rather than the objective assessment of risks to public health, safety or the environment.

New Zealand and Australian Trade Ministers and officials meet annually to review CER, to consider the operation of the Agreement as a whole and ways in which the trans-Tasman business environment can be improved to gain the maximum benefit from liberalised trade in goods and services.

While CER has brought to industry in both countries the benefits of a larger combined ``domestic'' market, that market is an increasingly competitive one. Ultimately, our industries must stand or fall by their competitiveness against the rest of the world.

The two countries' common interest in establishing a strong and competitive Australasian economic base for our industries to compete in global and regional markets is reflected in our similar approaches to supporting multilateral trade liberalisation through the WTO and regional liberalisation through APEC.

The Uruguay Round of GATT

Since 1947, the world trading environment has been regulated through the General Agreement on Tariffs and Trade, or GATT. GATT evolved through a series of ``rounds'' of negotiations. The most recent set, launched in Uruguay, was both long - seven years - and very far-reaching. When the Uruguay Round was finished in 1994, New Zealand trade analysts could look back on years of hard work, but also look forward to a change that probably ranks alongside milestones such as Britain's entry into the EC, and the CER relationship with Australia.

The Uruguay Round was the first GATT round to consider agriculture comprehensively, as previously domestic agricultural policies were largely exempt from international trade rules. Many nations (and until the late 1980s, we were no exception) were pretty well addicted to subsidising farmers and protecting agriculture.

The Uruguay Round not only included agriculture, but it also contained a whole new thrust towards freeing up international trade from tariffs and other tariff barriers. Governments have committed themselves to maintaining a single set of rules for economic relations between countries. The ultimate benefit will be greater certainty and an environment that encourages trade and investment.

As has often been said, New Zealand is one of the countries which stands to gain the most, over the medium to long term, from the successful conclusion of the Uruguay Round of multilateral trade negotiations in 1994, especially in terms of agriculture trade. Key elements of the result are market access commitments and subsidy disciplines for agriculture and industrial goods. There are also commitments in so-called ``new areas'' such as trade in services and trade-related aspects of intellectual property rights. The package is a balance of gains and concessions accepted by all participants representing a wide range of interests, and in both developed and developing countries.

For industrial goods, developed country participants in the Uruguay Round agreed to reduce their tariffs over a five year period by one-third on an average trade-weighted basis. New Zealand export industries will also gain from deeper tariff reductions by the major trading nations in a number of important sectors including elimination of tariffs on steel, pulp and paper, agricultural equipment, beer and furniture.

New Zealand's Uruguay Round commitments serve to reinforce and ``cement in'' the domestic market reforms we have made over the past decade. These reforms have already made New Zealand industry more competitive at home and abroad. The challenge for industry now is to maintain and improve its international competitiveness in an increasingly open and competitive domestic and world trading environment.

A New Era: The World Trade Organisation

A new World Trade Organisation (WTO), has been set up to encompass the revised General Agreement on Tariffs and Trade (GATT 1994) and the multilateral agreements established under the Uruguay Round.

The WTO now has nearly 130 members, including most of the New Zealand's major trading partners. Of our top 15 export markets only China and Taiwan are not WTO members but they, and a number of other non-members, have applied to join the WTO.

The WTO is not merely GATT under a new name. It:

oversees all the Uruguay Round agreements on goods, services, intellectual property and dispute settlement;

requires member countries to remove import prohibitions and reduce import tariffs;

administers the trade policy review mechanism, which keeps members informed of changes in one another's trade policies and requires them to explain trade actions which affect other countries;

is a permanent forum for members to discuss implementation of the Uruguay Round, as well as new trade issues such as the impact of trade on the environment; and

is a forum for resolving trade disputes - while it has a formal disputes settlement procedure and can impose ``penalties'', the aim is to prevent disputes and resolve them through consultation before they get to this stage.
WTO members must agree to abide by all its provisions (including the multilateral agreements). This will increase consistency and certainty.

Two important new WTO agreements were concluded earlier this year liberalising basic telecommunications and reducing to zero by the year 2000 tariffs on information technology products. Both will be of benefit to consumers and business.

Regional Trade

While the Uruguay Round continued, uncertainty as to the outcome heightened consideration by countries in the Asian Pacific rim of arrangements to promote intra-regional trade in this dynamic region of the world economy.

Interest in economic regionalism was also spurred by the conclusion of the North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico and the agreement among ASEAN members to establish an ASEAN Free Trade Area (AFTA). The European Union is another regional free trade area.

These developments strengthened concerns that trade liberalisation in the area should be promoted on a basis consistent with GATT multilateral trade rules, and not on the basis of exclusive preferential trade blocs like NAFTA or the European Union which have the potential to distort global trade patterns through trade diversion and undermine the basic non-discrimination principle of the WTO and GATT.

Out of this context emerged the institution of Asia Pacific Economic Cooperation (APEC), whose 18 members include the ASEAN countries, Japan, Korea, the Peoples' Republic of China, Chinese Taipei, Hong Kong, Mexico and PNG, along with the US, Canada, Australia and New Zealand, as the vehicle for trade facilitation and liberalisation on the basis of ``open regionalism''.

In the so-called Bogor Declaration, New Zealand and the other APEC members committed themselves to the long-term goal of free and open trade and investment in the Asia-Pacific region by 2010 for industrialised economies and 2020 for developing economies.

This is consistent with the Government's unilateral decision, announced in December 1994, ``that tariffs for post-2000 should be reviewed in 1998, and that the government would determine at that time how to move towards a zero end-point under a unilateral domestic tariff reduction programme''. The 1998 review ``will be conducted against the background of Bogor goals and timeframes''.

The Coalition Government has now announced in its recent Budget that the 1998 Tariff Review will set a timetable to remove all remaining tariffs well before its APEC target of 2010. This review is expected to be completed before the end of June next year.

Asia 2000

New Zealand's participation in APEC in large part reflects our interest in the Asian region, which is of crucial and growing importance to us in trade terms. New Zealand's trading future will increasingly depend on the vitality and outward orientation of the Asian region, and APEC as an active forum for trade and economic cooperation can contribute to this.

The Government's support for the ``Asia 2000 Foundation'' is a further reflection of the importance we now attach to developing New Zealand's relations with the Asian region. Asia 2000's mission is to develop New Zealanders' knowledge and understanding of the countries and people of Asia, to help New Zealanders to develop the right skills to work effectively in Asia and to build New Zealand's links with Asia. These aims are achieved through a business exchange programme, education exchanges, media and cultural events and public affairs activities. Asia 2000 has generated a high level of interest in developing business links with Asia and in heightened awareness of the positive impact on New Zealand's economy of overseas investment and tourism partic ularly from Asian sources.

Heightened interest in regional trade, the success of the CER Agreement and the rapid evolution of the ASEAN Free Trade Area (AFTA) have resulted in an initiative to develop linkages between the two groupings. This initiative got underway in 1995 and has focused on trade facilitation. The AFTA/CER process is an important aspect of reducing barriers to trade and investment between CER and ASEAN.

We are not neglecting other regions either. The Government is interested in following up prospects of free trade with the United States. Also we remain hopeful of being able to achieve a free trade agreement with the Republic of Chile in the near future. Both these initiatives are likely to have not only a current payoff for New Zealand, but are strategically important too, and would link for the first time the eastern and western sides of the Pacific in a formal economic integration. Moreover both these initiatives would serve and achieve core objectives of the APEC liberalisation process.

Such changes expose the New Zealand economy to the world market more than ever before. That forces constant change and innovation onto our economy to keep us ahead of our competitors. But it also allows more investment to create new opportunities for New Zealand industry. A new dynamism is appearing through industry with a focus on the customer and quality of product and service.

Comment on the importance of technological advances and research and development to NZ industrial growth. Compare NZ with other countries in our area of strategic importance.

As we have seen, the New Zealand economy has undergone a significant transformation in the last ten years, moving from a highly regulated, protected and subsidised environment in which firms and businesses operated, to an open economy that is largely freed up and driven by market forces.

The changes in the economy over the last decade have seen firms placing greater value on knowledge creation and technological innovation as they strive for sustainable competitive advantage. Firms that are investing in technology are doing so at internationally competitive levels. This level of investment needs to be more widespread. Success and international competitiveness will depend on the ability of firms to undertake technology development to improve productivity, develop new products, and whole new areas of business.

The last comprehensive study of comparisons between New Zealand and other OECD countries of research and development expenditure uses data from 1991. We therefore need to be careful when making these comparisons. What the information does tell us is that New Zealand is behind in terms of R&D spending measured as a percentage of GDP.
New Zealand OECD Average
Public Sector 0.6% 0.8%
Private Sector 0.3% 0.9%
Total 0.9% 1.7%

The major feature of this table is the very low level of research funded by the private sector in New Zealand. The public sector investment is not much below the OECD average. The problem with such an input comparison is that high R&D expenditure does not necessarily bring greater returns than those who invest less.

The 1997 World Competitiveness Report suggests that New Zealand may not be performing as badly as the above figures suggest. They recently ranked New Zealand;

8th out of 46 countries on the level of technical co-operation between companies (an increase of 5 places from 1996)

5th out of 46 countries on the level of research co-operation between companies and universities

10th out of 46 countries on the degree to which basic research supports long term economic and technological development.

How useful was the Porter report as a blueprint for the economy and New Zealand's future? Does it have any relevance today?

In 1991, the Trade Development Board published the results of a study entitled ``Upgrading New Zealand's Competitive Advantage,'' conducted by Crocombe, Enright and Porter. Porter and his team reviewed the performance of the New Zealand economy, and undertook detailed studies into a wide range of New Zealand industries.

The 1991 study concluded that New Zealand had to rebuild the base of the economy from the ground up so that we could compete successfully in a global economy. Porter called for urgent attention on three levels:
business
associations and
government.
According to Porter the most fundamental changes required were in the business and government arenas. Here are some of his 1991 prescriptions for change in business and government:

Business
Compete beyond the cost base
Leverage New Zealand's home advantages
Understand global competition
Focus on innovation
Develop human resources
Globalise strategies

Government
Transcend macroeconomics
Upgrade human resources
Stimulate local competition
Improve business access to capital
Provide incentives promoting national prosperity
Improve weak national technology
Foster:
high quality ethos and banish the ``Kiwi knocking machine''
development via clusters
new business formation
the rebalancing of government- business relationships.
The Report was very controversial and was hotly debated throughout the country, drawing its share of criticism. Porter's report permeated through the business world in New Zealand and was described recently in the National Business Review as ``the bible for modern corporate behaviour in New Zealand'' at that time.

In the seven years since the study, significant upgrading of the economy has been undertaken, both at a macro and micro level and much of the change has been consistent with Porter's prescriptions. The changes made at the macro and micro level have, and are bearing fruit for New Zealand.

For example, in the most recent World Competitiveness Report, New Zealand was rated 13th out of 46 countries in a Swiss survey of world competitiveness, ahead of Australia and Germany. The quality of our government was ranked third and in infrastructure and management we were ranked 13th and 11th respectively.

New Zealand was described in the 1996 World Competitiveness Yearbook as a ``small but brilliant star'' and is proof that in a global world, distance is less and less often an obstacle to competitiveness. New Zealand has, and is showing that it is competitive with the best.

While Porter's prescriptions undoubtedly had a significant effect on New Zealand's business community it would not be accurate to say that Porter's prescriptions for government became the ``blueprint'' for the economy. Many reforms at the macro level were well under way by 1991, reflected by the introduction of the 1986 Commerce Act and the 1991 Employment Contracts Act.

The passing of legislation such as this reflected the government's recognition that a major overhaul of the economy was needed.

So do Porter's prescriptions have any relevance for New Zealand today? In his recent visit to New Zealand (in April this year), Porter acknowledged that we have made good progress in introducing competition to the local economy which has allowed us to prosper abroad. But he also warned us against complacency. He said that the challenge now was whether we enjoy a brief moment of prosperity and lapse back, or if we are going to continue forward.

According to Porter we need more change to ensure more gain for the New Zealand economy. In particular, continuous upgrading of the business environment and accelerating the growth of clusters are seen by Porter as vital.

The government is committed to a continuous improvement of the business environment through its economic policy and at the micro economic level through regulatory reform.

Porter's call for the development of industry clusters has been taken aboard by Tradenz, who with a major banking organisation in New Zealand have recently set up a joint effort focused specifically on clusters.

In short, Porter's 1991 report contained useful prescriptions for business direction in New Zealand which remain relevant today. His macro level prescriptions coincided with general direction set by government in 1991 and as such could not be considered a ``blueprint'' for the economy. Maintenance of a free and competitive environment for business with continuous improvement where and when necessary has become the relevant issue and one that the government is committed to. In line with this, the government is fully involved with an audit of the Porter Report that seeks to establish the extent to which Porter's 1991 prescriptions have been adopted in New Zealand.

Comment on the New Zealand Industrial/Military Relationship. How can the situation be improved.
While not establishing a local defence industry as such, the provision of opportunities for New Zealand firms to supply Defence needs can serve strategic military purposes by developing an ongoing logistic support capability in the home base. In the process, provided there is a strong element of competition, defence procurement can also make an effective contribution to the development of technologically advanced, internationally competitive and sustainable industry in New Zealand.

In his foreword to the Defence Offsets Policy published in September 1991, the Minister of Defence stated:

``There is a strategic value in encouraging local participation in Defence contracts and New Zealand seeks the security of some measure of independent support for its armed forces. This does not imply a major Defence industry base; that would be unwarranted and commercially unsound in today's climate. However, there is a core of valuable skills within our existing industry which needs to be regularly exercised and encouraged to keep up with international developments.''

The strategic interest of Defence in fostering a limited support capability in New Zealand industry, on a commercially sound and internationally competitive basis, is consistent with the Government's approach to public sector purchasing in general. The Government's policy is that purchasing by its agencies afford domestic industry full and fair opportunity to compete on a value for money basis.

The Ministry of Commerce has issued the publication ``Government Purchasing in New Zealand: Policy Guide for Purchasers'', which recommends procedures purchasing agencies should follow to ensure that they are giving full opportunity to local industry in a manner consistent with effective competition and value-for-money. These guidelines contain best practice advice, some elements of which I will return to at the end of this lecture. Copies are available from the Border, Industry and Environment Policy Group of the Ministry.

The Closer Economic Relationship (CER) with Australia figures largely in the Government's purchasing policy and in defence purchasing in particular. New Zealand and Australia recognise that benefits can flow to industry and to government purchasing bodies by treating the two countries as a single market for government procurement purposes.

A key component is the Australia and New Zealand Government Procurement Agreement (GPA) which enables Australian and New Zealand suppliers to compete on an equal footing for government contracts (goods and/or services) on a value for money basis in the Australian and New Zealand markets. As the New Zealand Minister responsible for the GPA, I am involved in matters related to this agreement. A current five-yearly review has just been finalised with a result which is consistent with New Zealand's interest in maintaining non-discrimination. It is also more consistent with the current economic environment, including a more outward-looking approach to trade and investment in accordance with our domestic policy, and both countries' CER and APEC commitments. The new GPA text is scheduled to be signed next month.

In the specific context of the cooperative defence relationship with Australia, there is the related concept of a ``common industry base for defence procurement purposes'', enshrined in the ANZAC Ships Treaty and the Cooperative Defence Logistics Supply Agreement (CDLSA). A milestone in the cooperative procurement relationship was reached with the handing over to the New Zealand Government on 16 May 1997 of the first ANZAC frigate for New Zealand, the Te Kaha. Its sister ship, Te Mana has been launched from Melbourne also. Both frigates demonstrate excellence in Australasian industry and a trans-Tasman capability to work together.

So far, ANZAC ship contracts worth just under $500 million have been placed with more than 400 competitive New Zealand companies. Work undertaken in New Zealand includes software development, electronic manufacture, mechanical design, fabrication, metal casting, heavy electrical manufacture and light and medium engineering. The project has contributed significantly to New Zealand industry in the areas of quality systems development (to ISO certification standards), project management practices, technology advances, international marketing assistance, and wider business relationships.

Industry programmes were offered by all bidders for the maritime helicopter replacement project. This contract was won by Kaman of the USA which included an industry programme expected to put $100 million of work in New Zealand over the next 10 years. Work includes new manufacture and expected overhaul maintenance.

New Zealand industry is now in a good position to secure involvement on a competitive basis in contracts arising from any future joint ANZ defence procurement. A welcome spin-off from New Zealand industry involvement in the ships project is the development of high tech exports of military software and telecommunications to the wider international market. The Project has been the catalyst for participating companies to co-operatively look to the export of the skills and capability developed. The export of defence related products now totals over $90 million per year.

Participation on the Project has built the credibility of many New Zealand companies. Three companies blooded on the ANZAC Ship Project have now won contracts associated with two other Australian Naval procurement projects, for Minehunters and for Oceanographic vessels.

In addition, the New Zealand Industrial Supplies Office of the Ministry of Commerce can assist communication between domestic suppliers and government purchasers. Since its establishment, however, there has been an improvement in the information for buyers (on product or industry capability) and sellers (on government supply opportunities) available through commercial channels in both print and increasingly, sophisticated electronic systems. The Government's decisions on the future of the NZISO will need to take this change into account.

Finally, as perhaps a new dimension to purchasing (or any dealing with industry), I would like to see government-funded organisations ensure that paper work or any ``red tape'' for potential suppliers is kept to a necessary minimum. In the interest of encouraging potential suppliers (including from domestic industry), I believe this is an area where each government organisation in its own self interest should critique its practices to ensure that this happens.

Greater international competitive pressure is now placed on business, heightening the awareness of the effects of the domestic regulatory environment in a global setting.

The review of the effects of government regulation which I mentioned earlier, forms part of a bigger package which includes looking at a number of Acts including the Resource Management Act 1991; the Health and Safety in Employment Act 1992 an the Human Rights Act 1993.

I have been saying for some time that we as Government need to ensure we are not putting barriers in the way of business ``the wealth creators in our economy''.

I leave you with that thought.

Thank you.