New Zealand's Place In A Competitive World

  • Dr Lockwood Smith
International Trade

Wellington Regional Chamber of Commerce
Plaza Ballroom
Plaza International Hotel
WELLINGTON

Nineteen-ninety eight was probably the most difficult New Zealand has 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 almost evaporated. Worst of all, jobs were lost.

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

But this year, the mood has changed.

The latest National Bank Confidence Survey shows that 64% expect business conditions to improve.

A net 21% of firms are expecting to increase investment. Just 5% expect things to decline.

The Government's books are back in the black.

Inflation and interest rates remain at thirty-year lows.

Exports to the end of February 1999 have increased over the same period last year.

The number of job advertisements for January and February increased by 2% over each previous month, and are a staggering 8.6% higher than in March 1998.

The economy is growing again.

But despite these positive indicators, we can't afford to be complacent.

The days of guaranteed markets are gone. No-one owes New Zealand a living.

Competition is now the key. We will either sink or swim, flourish or perish, strictly on our ability to produce and deliver the goods and services wanted by our overseas customers at a better quality, better price and better delivery than other countries can match.

New Zealand must move quickly to seal its place in this competitive global environment.

Independent international research shows that we're already well placed to meet these challenges.

One of the keys to New Zealand's preparedness 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.

But in addition to working in the good times, the economic framework also serves us well in our response to external shocks.

Take the Asian Economic and Financial Crisis, for example. This crisis 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 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, New Zealand has bounced back from the Asian Economic Crisis relatively smoothly and in about a year.

Our exchange rate tracked rationally with the changing conditions, without requiring Government spending to 'defend' the currency.

Our swift recovery demonstrates that our current model provides far better "protection" from international shocks than the subsidies and import licensing of the past.

Given the 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 flawed understanding of economic incentives could be behind Michael Cullen's desire to give unions more power, raise taxes, and put companies on the dole.

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 about consolidating New Zealand's place in a competitive world.

It's about improving our capacity for growth.

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

However, we've also seen a fairly clear limit to our growth potential.

Basically, it appears our economy struggles to obtain sustainable growth of 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% threshold.

Our thinking is deliberately embryonic.

We need to consult with business extensively. The Prime Minister and Mr Bradford launched a nationwide programme of workshops in Dunedin yesterday to provide a forum for consultation with the private sector.

Our approach is based on the premise 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, such as minerals or the great farm-land we have in New Zealand.

But now, knowledge and skills are more important.

People with knowledge and skills can live and work anywhere in the world.

This process is potentially very liberating.

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

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;
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 don't 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 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 this roadshow - the Wellington workshop will be held on 22 April.

While it's important to consider what we need to promote economic development in New Zealand, this is only half the equation.

It's equally 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.

First, 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 additional jobs.

The benefits of tax cuts are not limited to the rich. Everyone earning over $38,000 a year, and all the unemployed who move into the new jobs that tax cuts create would benefit from a cut to the top tax rate.

We certainly can't afford to increase tax at any level. That would simply reduce growth, and cost us jobs.

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

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

But it's not the case any more.

Union bosses 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 it's good for employers, employees or anyone in 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.

A couple of weeks ago Jim Anderton spoke to this same audience. His solution to supporting industry involved a development bank to "lead investment".

On Monday, Anderton's buddies in the Labour Party announced their elaborate 100 million dollar corporate welfare policy.

We've tried these policies before in New Zealand, and learnt two very important lessons.

Every time the Government spends taxpayer money to advantage one sector, it disadvantages another.

In this case, Labour's proposing to take $400 million out of the productive economy in tax increases to pay for their $100 million handout to industry through a corporate welfare scheme.

Why are development grants for some businesses better than lower taxes for everyone?

The second lesson we learnt is that the only businesses which will require corporate welfare 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.

Make no mistake. The solutions offered by the Labour-Alliance block will tie up business in more red tape. They mean more control by politicians and bureaucrats who will choose which companies deserve taxpayer support.

The Labour Party's answer to how its former university lecturers, trade unionists, teachers and public servants can pick winners is to appoint a private sector board to run their corporate welfare agency.

In practice, this means an army of bureaucrats deciding how to spend industry's hard earned tax revenue to support the development of competitors for existing companies.

If I've learnt one thing during my time in politics, it's that politicians and bureaucrats are terrible at running business. The incentives are all wrong.

I can't believe that Labour has returned to the past, and that Labour thinks that New Zealand industry will buy into this programme of yesteryear.

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

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

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

The 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 National-led Government intends to work with the business sector to develop programmes which reflect this new mood, and to solidify New Zealand's place in a competitive world.