A New Mood In New Zealand

  • Dr Lockwood Smith
International Trade

Tonight I can report to you that there is a new mood in New Zealand.

Nineteen ninety-eight is behind us and we're growing again.

Last year was probably the most difficult New Zealand's experienced since 1991, or even earlier.

We were hit by the Asian Economic Crisis, and, in parts of New Zealand, the worst drought in living memory.

The economy shrunk. The Government's surplus evaporated. Worst of all, jobs were lost.

Political developments - the change of Government last year - didn't necessarily give people the sense of stability required for confidence in the future either.

But in the last few weeks of last year and the first six of this year, the mood has changed.

Business confidence is at a four year high.

Consumer confidence also bounced back to optimism in the December quarter.

The Government's books are back in the black.

Inflation and interest rates remain at thirty-year lows.

Exports are up significantly.

The ANZ now tells us the number of job advertisements in January was up over 2% compared with December.

The economy is growing again.

It's important to understand the magnitude of the Asian Economic Crisis.

It was the biggest world trading shock in 50 years.

It occurred in a region which took over 1/3rd of our exports, and supplied 22% of our tourists and 10% of our external investment.

We were also exposed to indirect effects through our biggest export and tourism market, and our biggest source of investment, Australia.

When we faced a crisis of similar proportions in the 1970s - the Oil Shocks - we entered into a cycle of deficit and debt from which it took us 17 years to recover.

Even after the 1987 sharemarket crash, unemployment rose for four long years.

In contrast, we have bounced back from the Asian Economic Crisis relatively smoothly and in about a year.

The difference today is the economic framework put into place by the Lange/Douglas Labour Government and National-led Government since 1990:

Price stability through the Reserve Bank Act Labour market flexibility under the Employment Contracts Act Sensible spending policies under the Fiscal Responsibility Act A low-rate, broad-base tax system. Opening our economy to the world. It's a framework that works.

It has delivered high levels of growth - 37% through the decade and an average of 600 new jobs every week.

Now it has shown it offers far better "protection" from international shocks than the subsidies and import licensing of the past.

It appears we may even have found the formula for sustainable, non-inflationary growth.

Given a decade of proven performance, new Finance Minister Bill English has said that theoretical debates about the economic framework should now be well behind us.

I agree with him.

It seems to me that only a mean spirit could be behind Michael Cullen's desire to give unions more power and raise tax.

Why else, in 1999, would you base your policy platform around ideas which have been dead for a decade?

The Government's focus has now moved on. Government in New Zealand is now about ongoing problem-solving and steady improvement.

It's another sense in which there's a new mood in New Zealand.

The Prime Minister has made clear the two key themes for her Administration: prosperity and security.

We want families to be better off, and we want families to be secure: in their jobs, in terms of keeping more of their earnings, and in their own homes.

Already we can point to clear evidence that families have become better off.

The tax cut programme, for example, has put nearly $100 a week extra into the take-home pay of a single income earner on the average wage.

The drop in interest rates has improved the position of a family or business with a mortgage considerably.

Floating rates, for example, have fallen 4.75%, delivering savings of $140 per fortnight to families with a $100,000 mortgage.

Electricity bills are falling.

The removal of tariffs and the introduction of parallel importing means goods in New Zealand should be as cheap as they are anywhere in the world.

The price of a new car, for example, has fallen between $3,000 and $6,000.

Vigorous competition has reduced petrol and diesel prices.

On TV and radio, and in the newspapers, there are products being advertised at prices far lower than just a year ago.

In terms of security, there has also been progress.

While the rise in unemployment last year is the worst impact of the Asian Economic Crisis, the creation of 600 new jobs every week since 1991 provides a higher level of employment security than when unemployment was nearly 11% in 1990.

The Government's better financial position means ongoing funding for health and education is more secure.

We've been able to put more than $2,000 extra funding per household into both the health and education sectors every year compared with 1990.

And we've been able to put another 800 police officers on the street compared with 1990.

New law and order initiatives will be delivered this year.

But there is still a lot more that can be done to achieve the Prime Minister's twin goals of prosperity and security.

Through the 1990s, New Zealand has achieved much higher levels of economic growth than in the previous two decades.

As I said, the economy has grown 37% this decade.

But we have also seen through the 1990s a fairly clear limit to our growth potential.

Basically, it appears our economy struggles to sustainably grow by more than around 3-4% a year.

There have been exceptions.

In the year to March 1994, we grew 6.2%, and 5.4% the following year.

But many argue now that those growth levels were unsustainable and led to inflationary pressure.

We simply don't seem to be getting the levels of economic growth required, for example, to pay for an aging population.

The Government's key task this year is to look at ways - beyond the obvious of maintaining the economic framework - by which we can achieve sustainable economic growth above that apparent 3-4% limit.

Our thinking is deliberately embryonic.

We need to consult with business extensively and are planning a nationwide roadshow for that purpose.

But our approach is based on the premise summed up by the World Bank: that the balance between knowledge and resources has shifted so that knowledge is now perhaps the more important driver of growth.

In the past, the more important resources were more fixed: physical resources often, such as minerals or the great farm-land we have in New Zealand.

Even people were more tied to particular geographical areas than they are now. Transportation and communication were more difficult.

But, now, knowledge and skills are more important, and people with knowledge and skills can live and work anywhere in the world.

People can take today's important resources - their knowledge and skills, and their money - wherever they like.

This process is potentially very liberating.

If you look at history with a Marxist perspective, you could almost say it's the long-awaited triumph of labour over capital, albeit high-skilled labour.

It means that the ownership of tangible resources becomes less important than the knowledge and skills to lift production and design and market products.

But it challenges us as a nation and requires a comprehensive response.

We need to develop knowledge, skills and innovation here in New Zealand, and we need to encourage them to stay here, or come to New Zealand.

It's not enough, for example, to have a world-class education system, because without other conditions we could merely be spending money educating people who will then choose to live overseas.

It's not enough redoubling our R&D efforts if we don't have the capital to take commercial advantage of new discoveries and technology.

And so on.

The Government has therefore developed a five-point plan to respond to the new era:

Lifting New Zealander's skills and New Zealand's intellectual knowledge base, and leveraging off the success of winners Better focussing and directing the Government's efforts in R&D Improving access to capital, and especially international finance Ensuring regulations and laws support, and not frustrate, innovation, and Actively promoting success and helping build a culture supportive of innovation and enterprise. We believe these are elements which will help New Zealand grow faster in the future, providing more jobs and the tax revenue for high quality social services.

I'll give you a taste of the sorts of initiatives that we believe will help achieve our goals.

To help lift the knowledge base of New Zealand, for example, we've reviewed tertiary education to make it more responsive to wider needs.

To attract additional expertise, new business-focussed immigration policies were implemented last year.

At the small business level, we've modified our assistance programme away from being a grants scheme towards helping develop the management and financial skills of small and medium sized businesses.

We'll be examining how the concept of "industry clustering" can lift the performance of knowledge-based sectors with high growth potential.

A good example of industry clustering in New Zealand right now is the sailing industry in Auckland.

The best in all associated fields are clustered in one area - complementing one another; learning from one another; strengthening one another.

The Government will also look at how better to align the $600 million the taxpayer spends on research, science and technology each year to the needs of knowledge-based businesses.

To encourage greater investment in small and medium sized businesses, I'm exploring a Swedish "innovation sharemarket" concept.

We are developing a "New Zealand Inc" prospectus to attract investment to New Zealand, along with other initiatives.

Our work on laws and regulations is to be redoubled, to eliminate those getting in the way of growth.

The Ministry of Commerce advises that 20% of its regulations are redundant yet, presumably, some people still have to comply with them.

We have therefore asked departments to review all the regulations they administer from scratch.

In particular, we don't want old-fashioned rules and regulations to hold up the development of commerce through the internet.

I stress again the Government's thinking is deliberately embryonic.

We need the input of business - small and medium businesses in particular - to develop our ideas further.

I urge you to get involved in the roadshow to be announced next month.

It's also important to consider what we don't want in a world of greater human and capital mobility; a world where harnessing knowledge, skills and creativity is more important than exploiting physical resources.

We don't want high tax.

Already in New Zealand, the Government takes 36% of everything produced.

High tax rates are a disincentive for those with world class skills to stay in New Zealand, or come to New Zealand.

The Government plans to cut the top tax rate when the time is right because this will encourage the business activity we need to create more jobs.

It doesn't benefit just the rich. It benefits everyone earning over $38,000 a year, and all the unemployed who move into the new jobs that tax cuts create.

We certainly can't afford to increase tax at any level.

The second thing we can't afford is for big unions to control the workplace.

Where economic growth depended on organising vast numbers of people to perform often repetitive tasks, flexible employment arrangements may not have been as important.

In that environment, across-the-board employment arrangements were arguably appropriate and low-skilled workers did need greater protection from old-fashioned exploitation.

But it's not the case any more.

Union bosses in Wellington, and employer representatives in Wellington, aren't able to cater to the needs of every worker and every business.

Attempting to centralise employment arrangements in that fashion stifles the creativity and innovation that the economy now needs more than ever.

And centralised employment arrangements inevitably lead to strikes.

Between 1987 and 1990, 905,900 working days were lost to strikes.

Today, over an equivalent period, the number of days lost is just 147,500 - only around a sixth as many.

I don't believe its good for employers or employees or anyone for New Zealand to go back to having six times as many strikes.

The third thing we don't want is for the Government to take a dictatorial role in the economy.

We don't want politicians and bureaucrats making decisions about what industries to support, and investing taxpayers' money in risky ventures.

We've been down that track and we learnt two things in particular.

Every time the Government advantages one sector it disadvantages another.

And the only businesses which will require taxpayer money will be those whose ventures have been judged too risky by banks and private investors.

These aren't the ventures we want our taxes going into rather than hospitals and schools.

I don't believe New Zealand companies should go on the dole. I don't believe New Zealand companies need to go on the dole.

It's sad, therefore, that Michael Cullen's only three proposals are higher tax, the repeal of the Employment Contracts Act and a $100 million risky industry policy.

It's sad that a party with a long and proud tradition in New Zealand has to offer our country only three rather pitiful and old-fashioned proposals.

I don't believe voters are going to consider that an adequate vision for the future.

I don't believe the Labour Party understands how political debate has moved on, along with changes in the world of work and business.

Labour's policies continue to based on ideas which have been dead for a decade.

There's a new mood in New Zealand.

The Government intends to work with the business sector to develop programmes for the future which reflect that new mood.