Address to Top Exporters Club

  • Michael Cullen
Finance

Embargoed to 3.45 pm, Tuesday 4 December 2001

Address to the Top Exporters Club Conference

Banquet Hall, Parliament

I would like to thank my colleague Jim Sutton for organising this forum today to discuss the economic aftermath of the events of September 11. I know that there is concern over the likely impact on our economy and our future growth and this is what Jim has asked me to speak to this afternoon.

I think you will be largely cheered by what I have to share with you today.

I have said many times over the past month or so, that New Zealand is in a better position than many other countries to ride out a global slowdown.
For the first time in many years, we have a range of economic indicators all moving in the same and the right direction:

·The economy grew by 2 percent in the June quarter. Most industries recorded increases with the manufacturing sector leading the way with a 4.8 percent rise in activity;
·The export sector doing well, so the current account deficit is coming down sharply from the levels we inherited – it is now 4 percent of GDP – that’s the lowest it has been for 7 years;
·Unemployment has fallen to the lowest levels in 13 year - 5.2 percent;
·We have fiscal surpluses and government debt that is low by relative and historical standards;
·Global demand for New Zealand products is still reasonably good despite the slow down the world has experienced over the last year;

And inflation is low unless you like eating red meat – in which case you can remind yourself that exports are going very well, and we have good prices for lamb and beef, which is the other side to the equation.

Even though most forecasts have downgraded our growth prospects for the next year they are still well into positive territory - which is a good deal better than many other small economies.

But I think it is important to keep reminding ourselves that what we consider to be positive territory is not actually good enough for New Zealand.

We are still chugging along with a sustainable growth rate of 2 ½ - 3 percent per annum. At that level we are not going to catch up over the medium to longer term. We will catch up this year only because other economies are actually doing worse that that.

But in general terms we are not catching up – crucially, we are not catching up with Australia, which is on a 3 ½ to 4 percent sustainable growth rate. And that 1 percent difference compounded year by year, on average, translates into a big difference over ten, fifteen and twenty years.

So what can we do about it?

What I think governments have been doing for some time is trying to get the big framework right.

So they have said, if we get the big framework right: deregulated economy, extract costs out of the economy and so on, then everything will happen by itself and we will have a successful economy.

We have done most of that. By the latest international measures we have the fourth freest economy in the developed world – one notch above the United States. Another survey said we had the second most entrepreneurial economy in the developed world.

But something is not quite working.

The reality is, the big picture is not good enough. The medium and small picture is still important. That means doing some things at a targeted and specific level is just as crucial to improving economic performance.

This government is focused on being smarter and more active while recognising it cannot get back into the position of telling everyone what to do and managing every aspect of the economy.

Part of smart, active government is about business and industry development through Industry New Zealand and about attracting quality foreign investment. We want to attract specific businesses to set up in New Zealand – creating employment and exports.

And we have seen significant successes in some special areas – and we will see a lot more. All of this is very new. We are really learning to walk at the present time and Industry New Zealand still has yet to reach even its first full year cost of funding, which will be in next year’s budget.

We have also seen some very good spinoffs in terms of a lift in regional confidence where Industry New Zealand has been collaborating on strategic plans and bringing together groups and key players. That has given quite a boost to some of those regions like Northland and the East Coast where things were very gloomy indeed when we first became government.

Another area where the government needs to play a much smarter role is in skills development.

Previous governments created a system that was intensely competitive but the results were sometimes perverse. We saw a move away from the focus on skills development in terms of technology and trade skills in the polytechnic area, and an emphasis towards degrees being the most important aspect of tertiary education.

We are trying to get a better focus, more differentiation, more specialisation and more relevance in terms of the skills needs of both the society and economy that is emerging within New Zealand.

The government has been adopting a much more focused attempt at investment attraction into New Zealand. A recent analysis showed that big economies usually had a big picture investment approach and small economies targeted specific sectors and specific businesses.
New Zealand was the only small economy, which took a big picture approach. And that is perhaps why we were not succeeding too well.

We need to go out there and identify target companies that we are trying to get to invest in New Zealand. We need to tailor packages unique to them by way of cutting through red tape, fast tracking resource consents and so on.

Just saying that we are nice and clean and green and we have a reasonably deregulated labour market by international standards and low port costs and so on is not enough to get people to invest in our country.

In trade there has been a lot more effort into supporting the expansion of trade and exporting. The Closer Economic Partnership with Singapore, working on the Hong Kong agreement, and the success at Doha are all very much outcomes consistent with New Zealand’s interests.

There has also been a change in the regulatory regimes to try to drive stronger competition.
Simply freeing things up does not always create competition in areas like telecommunications where you have dominant players. Unless you actually change the structure of the regulatory environment you are not going to maximise the potential impact you can get competition.

One of the most important changes this government has made has been in the growth of the partnership approach, especially between central and local government.

That approach is also working increasingly well between central government and the business sector. For instance, Jim Anderton has been working very hard on getting the key players in the forest industry together so they can sort out how we can maximise the returns from this important industry.

Regional New Zealand has a tremendous opportunity at its fingertips with what has been called the “wall of wood”. We need to work hard to maximise the returns of the forestry industry over the long term.

That is not going to be as easy as some people think because one thing we have to achieve comes back to the trade issue. Until we get tariff barriers lowered substantially for processed wood products, we are pushing it up hill very hard indeed to significantly expand our processed wood exports.

Foreigners will take our logs for zero tariffs but by the time they get up to MDF we are looking at 60 to 70 percent tariffs in some countries.

So we need to achieve those kinds of changes in the international trading environment if we are to be successful.

Now let me turn to the question which has brought us all here today: are we threatened by recent events overseas?

The initial reaction to the awful events in New York and Washington was that this was going to lead to a major downturn in the world economy. The financial sector economists are still extremely gloomy about the next year or two – both in New Zealand and the rest of the world.

But if you look at what has actually happened then things do not look so bad.

Forecasts for the tourism sector are now for much less of a downturn than was previously thought. Already those numbers are starting to come back. The Australian market, the Korean market, the Chinese markets have been unaffected – indeed there is almost a positive reaction for us in those markets: we are seen as a safer place to come to.

The American market is down considerably because Americans have simply stopped flying as much as they can. The Japanese market has gone very cold, partly because of the advice to the Japanese not to travel, and partly because the Japanese economy is in an awful state.

However, last month we announced an extra $2 million to fund a major marketing campaign to boost the number of Japanese tourists visiting New Zealand.

My own belief is that we are going to see an earlier upturn than many of the experts are forecasting at the present time.
I think the financial sector economists are rather too much talking to themselves. In New Zealand if you talk to people in the real economy, generally speaking there is a much more positive outlook than within the financial sector.

And I think that will be more reflected in the final outcomes.

The government’s response to the aftermath of September 11 is a measured one. There is not the slightest indication that we are facing a level of downturn that means that the government should push the panic button. The reason for that is not just the forecasts. It is that the panic button is a very difficult one for government to hit.

If you try to engage in aggressively countercyclical spending, you are just as likely to end up spending the money in the upturn of the economy rather than the downturn by the time you have worked out how you are going to spend it.

Secondly, you tend to end up with changes that are structural like tax cuts or increase in baseline spending which you cannot then claw back when the economy starts taking off again. So you simply put your self in a weaker fiscal position in the long term.

Thirdly, it sends the signal that the government thinks there is reason to panic instead of sending a very clear signal that there is not a reason to panic over the New Zealand economy.

So basically what we are saying is if the economy slows down then the tax take will tend to slow with it, government expenditure will tend to rise with it and there is going to be some automatic stabilisers working within the economy in any case.

The important thing in this situation is not to do two things. We need to learn the lesson of the 1930s. Firstly you do not cut spending if the economy is slowing down. That is an exceptionally bad idea because it makes the slow down worse.

Secondly you do not engage in trade protectionism during a period when the world economy is slowing down. You do exactly the reverse as is happening at the present time and try and free up international trade because that is likely to spur confidence, spur economic activity and spur investment and therefore lift economic growth.

So my view is that we face a reasonably strong economic outlook in New Zealand but that strength is still based around a long term sustainable growth rate which is not adequate.

The trick for us is going to be lifting that growth rate from 2 ½ to 3 percent to 3 ½ to 4 percent. If we can get ourselves on the 3 ½ to 4 percent average growth rate track we will gradually, over time, overtake other members of the OECD and start working our way back up the league tables.

Crucially we will start to see ordinary New Zealanders experiencing real increases in their incomes over time. At 2½ to 3 percent you do not see that happening. That is only about sufficient to cover growth in the workforce. It does not leave enough over for people to experience real income increases.

We have made a start and we are determined to improve our performance. It has taken us about 40 years to slip down the international league tables. I am not saying it will take us 40 years to get back up but we cannot expect to do it in a few years either.

Finally, I think it wants saying that the major mistake that successive governments made since 1984 is not in particular policy areas at all. They told people that if we just do a few dramatic things, and go through a period of pain, then there are a whole heap of gain on the other side if we endure it.

And that, I think, is a profoundly silly message to give to people. The message that we have to get out there and that we must all understand, is that in the modern world change is a continuous and incremental process. You can never stop still and enjoy the fruits of the changes that you have been introducing over a number of years.

So it is not a matter of a few years of nasty change and then gain. It is a matter of ongoing change that everybody is committed to and can benefit from.

The important message we have to get out there is that we are not inflicting change upon people.

Rather, we are working with people, with business and local government, community groups and so to deliver a process of change that people can be part of and can benefit from.

If we can achieve that understanding then we will reduce the cost of change and increase the benefits of change.

I think this is a critically important factor in lifting New Zealand’s economic performance. It is time to move to a broader agenda for change that is more widely supported.