Hon David Cunliffe
Minister of Communications
Minister for Information Technology
Associate Minister for Economic Development
Member of Parliament for New Lynn

8 September 2006 Speech

Going Global without Hollowing Out:
The challenge of transforming a small, open economy

Speech to the Auckland University Public Policy Discussion Group

Nga iwi Ngati Whatua, Nga iwi o te motu, tena kotou, tena kotou, tena kotou katoa.

Fellow panelists, distinguished guests. It’s a pleasure to be here.
Introduction

Economic transformation: it is one of the key goals of this government. It is central to almost all portfolios and is a factor that drives many of our policy decisions.

The reason is simple: New Zealand must undergo economic transformation and it must happen now.

To fail means that we risk falling behind the rest of the modern world. Fall too far and we may not catch up.

But my message today is that I believe we can and will achieve this crucial economic transformation.

The economic direction of New Zealand right now is in the hands of every business owner, every shareholder, every board member, and every consumer.

And that direction is determined every time they make a purchase, every time they invest in plant, every time they hire, every time they choose to take over or be taken over.

From what I can see of the audience, a significant part of the economic leadership of New Zealand is in this room right now. Let’s use this time well.

Economic transformation is essential to achieving the government's goal of a more prosperous, fairer and more sustainable New Zealand.

We must transform New Zealand into to a high income, knowledge-based market economy that is both innovative and creative, providing a unique quality of life to all New Zealanders.

Today, I'd like to talk about:

- Firstly, the government's economic transformation agenda;

- The challenge of hollowing out;

- A framework for analysis;

- And finally, going global together.

But first, a "disclaimer" – I am offering a personal perspective on an evolving issue, rather than presenting a government policy position.

Our current position

Let me "set the scene" for this speech by briefly outlining New Zealand's current economic position.

Overall, we are doing very well. Our gross domestic product grew by over 25 percent in the six years to March 2005, and it has grown further since then.

Put another way, 20 cents of every dollar that is generated from our economy comes out of the growth that has been achieved in only the last six years, compared with the 80 cents from investment and development over the entire span of the rest of our history.

With this growth has come change. In the past six years, we have added over 300,000 new jobs.

This is an impressive picture and we shouldn't sell ourselves short.

Our aim though should always be higher. The status quo is never good enough. We cannot stand still.

For the world around us is certainly not stationary. The global economy is becoming more competitive. Economies are becoming more internationally integrated and the rate of technological change is rapid.

Much of the recent growth was achieved by adding more inputs rather than by increasing productivity from each unit of labour or capital that we use.

In itself that is not necessarily a bad thing. It means, for example, that we have reduced our unemployment rate to the lowest in the developed world.

But it is definitely something that we must address. I will speak more on this point later.

The government's economic transformation agenda

There are five key action areas for economic transformation:

- Growing globally competitive firms – New Zealand does not have enough firms with a global reach or competitive advantage;

- World-class infrastructure – New Zealand's historical underinvestment in infrastructure needs to be addressed;

- Innovation and productive workplaces, underpinned by high standards in education, skills and research to boost the productivity growth of New Zealand firms and industries;

- Environmental sustainability – including more efficient resource use and better management of risk;

- An internationally competitive city – greater Auckland needs to strengthen its role as New Zealand's gateway to the world (and get its act together).

Though the government is committed to facilitating economic transformation – our policies will never be the sole determinant for success.

In fact, there is no single remedy.

It will only come through a combination of better workforce skills, enhanced management and leadership capability, innovation workplace cultures, greater business and infrastructure investment and a supportive economic and social environment.

The government has a clear role to play in this but there are some necessary limits to what government can and should do.

But it is firms that employ people, it is firms that hone their skills, it is firms that create new products, it is firms that sell goods on export markets.

The government can do everything to create the environment and to ensure an uninterrupted flow of inputs, but if the firms are not ready, willing and able to do business, those initiatives go nowhere.

What we therefore need is a collaborative partnership between the government, business and stakeholders to ensure that we are creating the environment that New Zealand needs to thrive.

This government is committed to engaging with stakeholders. With the business tax review, for example, we have formulated a series of options in the form of a discussion document and have asked for feedback. We did the same with the Immigration Act Review.

This government wants to partner with business and stakeholders to ensure the success of our policies and ultimately further growth for New Zealand.

The Challenge of Hollowing Out

So as we consider New Zealand's economic position and what must be done to ensure we keep in step with the changing global marketplace – there is the real question of whether we are "hollowed out".

There may well be speakers after me who will suggest that “hollowing out" is not a problem for New Zealand. Dunedin worries about the ‘northward drift’ to Auckland. Auckland worries about corporates jumping the ditch to Australia. Australian states worry about the gravitational pull of Sydney’s financial centre. Sydney worries about migration to London or New York. New York and London worry about being outsourced to Bangalore or bought out by Dubai.

These forces of globalization are a fact of life, not a philosophy.

Globalisation seems to be an "inevitable force" and if left unchecked it can make our whole national system unhealthy, and we need to respond to that.

So what can we do?

In a previous speech to this group in 2004, I posited three broad options:

- "Bury our heads in the sand" by returning to a regime of closed borders;

- "Open up and hope" that the forces of global capitalism left unchecked will cause a thousand flowers to bloom in our back yard; or

- "Smart engagement" that recognizes the dynamics of the global game and actively maximizes our chances of playing to win.

Smart engagement is active. It is based on a sober assessment of New Zealand's economic and geo-strategic circumstances: "of being a dagger pointed at the heart of Antarctica" as one commentator put it.

It implies a coherent approach to economic transformation based on a deep understanding of the drivers of domestic productivity and international connectedness.

New Zealand cannot rely on sentiment and patriotism alone to keep kiwis here - principally because it doesn’t work.

Hundreds of thousands of young Kiwis will leave for a while, and like me, John, David and Mark, most will come back (and getting Rod to stay was just a bonus).

Leaving New Zealand – either as an individual, family or firm, doesn’t make you unpatriotic. Economic churn is necessary, has its benefits, and is a permanent fixture of our economic landscape.

Our Kiwi diaspora is a national asset to be leveraged; and our skills needs can be addressed through up-skilling, education and well-managed immigration. Our immigration programme recognizes that fact. That's why we have launched the New Zealand Now information web portal to keep Kiwi expats in touch.

So let’s not push the patriotic emotion-button too often here.

However, I want to be very clear with you all: while this government leads New Zealand, we will never be a proxy state of any other country.

The government will continue to identify the public interest, protect, build and expand a cohesive public sphere, proactively engage with commerce and intervene only where necessary to advance the public interest.

A Framework for Analysis

Let's examine this more closely - are we too much a branch manager's economy?
If we are to work out how to "go global" without "hollowing out, we need a framework for analysing the costs and benefits of globalisation.

Foreign Investment

A key driver is foreign investment.

Our relationship with foreign investment has historically been a relationship of mutual convenience. Now is the time to think about it as a relationship of mutual advantage.

If foreign investors have come here only to secure a raw material resource supply, or to serve a portion of their global market, the spin-offs for New Zealand will be limited.

That is not to discount the benefits that foreign investment and ownership has brought to New Zealand – consider the following:

- New technology and management;

- Access to overseas markets through global distribution channels;

- Increasing the utilisation of resources – like labour and land – that aren't in productive use;

- Offsets the domestic savings gap.

The latter is a major issue for New Zealand. New Zealanders don't save enough. They don't save half enough.

Our resulting savings gap is partly filled by the government saving on the public's behalf through running fiscal surpluses across the economic cycle.

The government, through the implementation of the New Zealand Superannuation Fund is taking steps to remedy our dire savings record so we can approach that of Australia. The Kiwi Saver Scheme is another major step forward that will no doubt be built upon in future.

Not only is fiscal prudence an important fundamental for maintaining the confidence of international investors, it is also a mathematical necessity.

Foreign investors do not lend to us as an act of charity. They do so to make a return. Selling off the family silver results in paying rental to its new owners. And when those new owners collect, we see the net investment result through outflows in the current account.

This "invisible deficit" is actually a very big deal. By my reckoning the deficit on net investment returns runs at about three per cent of GDP. That's roughly $3-4 billion dollars a year more that foreign owners are making from their assets in New Zealand than New Zealanders are making from their assets abroad.

We need to adopt a better model of foreign investment.

We need a model of foreign engagement with, rather than necessarily in, New Zealand. We are looking for foreign companies to do what we cannot do ourselves and seeking to retain the value associated with the contribution that we alone can add. Thereby we "enlarge New Zealand's economic space."

I have already outlined the benefits of foreign ownership. There are of course icon or strategic assets that any government must protect and we are not about to open the vaults of our national treasures to the highest bidder.

For example:

Buying back the rail system
For an export-reliant economy, the systems that transport those products across land to the air and seaports are indispensable. All our networks have a national interest component to them. But it is likely that there will always remain a significant part of our economy that produces bulky goods that require heavy and low cost freighting

Buying a majority stake in Air New Zealand
It was not possible for an export-reliant country to do without an airline to carry a significant share of its high value exports, including services such as tourism and education. Not possible. We intervened. The government, in the interests of the state and of the country, stood in the market and bought a majority stake in Air New Zealand.

We would never wish to foresee a time where forestry or dairy or wool or meat products were held up because a foreign owner could pick and choose who gets to ports when. We have seen what near-failure looks like in the transport sector, and such failure invariably causes crowds, magnified as ever through the media, to plead for state intervention.

This government believes that, in transport, having the safety net constructed in the first place is far, far better than running to catch a rapidly plummeting market failure and having it land on top of you.

We have made clear provision for private sector partnerships in both rail, and roading.

Productivity and Why it Matters

Raising our international competitiveness and our GDP per capita means driving for higher productivity.

As I've mentioned – we have increased participation levels in the labour market but our output could still be improved further with increased levels of capital, technology and skills.

Here's why. Labour productivity is a function of the amount of capital employed per hour worked (the capital labour ratio), and the efficiency with which capital and labour are put together (multifactor productivity). This has been comparable to Australia's but we have lagged badly on the capital-labour ratio.

Productivity is a necessary condition for a sustained increase in national living standards.

And when all of our resources are used, employment is at record levels and capital is running close to capacity, we need to generate more from each unit of production to get the next income lift.

External expansion helps to raise productivity by a combination of getting beyond the limits of a small domestic market and spreading overheads across a larger sales volume, and by opening up high-value market opportunities.

International Connectedness
As I've mentioned, our growth has not been accompanied by a significant increase in the degree of international connectedness.

International connectedness comes from a mix of increased exporting, and increased outward direct investment – our firms establishing themselves offshore, or taking over foreign companies in their markets to establish a foothold there.

I said it earlier. Let me repeat it now. We need more globally competitive firms.

We need firms with the scale and scope to carry both the risks and the costs of innovation and development and firms to capture the benefits of that innovation it before rivals mimic the innovation or buy out the fledging firm before it is able to achieve sustainable scale.

Such firms are just too thin on the ground in New Zealand. Our large firms tend to be producer co-ops or state-owned enterprises, other mid-sized firms tend to be subsidiaries of multi-national parents and other New Zealand firms tend to be owner-operated micro enterprises by world standards.

The reasons for this are complex but include:

- We are small and geographically isolated;

- Our previous approaches to regulation and public policy have not been ideal

- Development of capital markets in New Zealand

- Relatively low capital per workers

- Relatively low private savings

- Impact of external tariff and non-tariff barriers, particularly in agriculture

- New Zealand exchange rate volatility

- Mixed linkages between firms and research organizations

- Low performance of outward foreign direct investment and smart foreign direct investment

With continuing (though currently easing) labour shortages, immigration can also play a part in turning this around by:

- Attracting entrepreneurs and investors to support New Zealand businesses.

- Bringing in talented people who can raise corporate capacity.

- Providing international links and networks.

- Helping to fill acute labour shortages without displacing New Zealand workers.

World Class Infrastructure
Let me now come to the urgency of New Zealand building a world-class infrastructure. The three areas that we want to work on are ICT, energy and transport.

ICT

Our goal to lift New Zealand into the top half of the OECD by 2010 for advanced broadband services and the top quarter by 2015 – is as Minister of Communications, a goal close to my heart.

This government is passionate about ensuring New Zealand develops this critical infrastructure – a key enabler of economic growth.

You will be aware that New Zealand has lagged behind the rest of the world in broadband take up – due to limited competition and investment, comparatively high prices and slow speeds.

We have already set the wheels in motion to lifting the take up of advanced broadband services. Legislation that will see the unbundling of the local loop is in select committee. This legislation aims to ensure increased competition and investment in telecommunications infrastructure.

As previously announced, both the Select Committee and the government are also considering a range of options to further underpin non-discriminatory wholesale and retail markets.

The telecommunications reforms are important but only one part of a much wider government ICT agenda – outlined in the 2005 Digital Strategy and overseen by a joint industry/government Digital Strategy Advisory Group.

The government is working in active partnership with business and the community to:

Boost connectivity and bandwidth through:

- The broadband challenge (urban and rural open access fibre);

- Optimising wireless broadband spectrum;

- Addressing mobile issues through MTR and Commerce Commission consideration;

- Building the Advanced Research Network;

- Developing a proposed government shared network;

- Working towards a rural broadband initiative, following on from Project PROBE.

Stimulate user capability and confidence through:

- The Community Partnership Fund;

- The Digital Horizons ICT Education Strategy;

- BIZ.org Small Business Enterprise ICT support;

- Internet Safety Strategy initiatives like support for Netsafe and the Anti-SPAM bill.

Focusing on critical digital content issues via:

- A digital broadcasting strategy;

- A New Zealand digital content strategy.

So as Minister of ICT, I can assure you that there is a lot of action in the digital space and I believe a real sense of excitement at the commercial opportunities that are opening up.

Let me stress that this Labour-led government is taking a pro-active stance to combat hollowing out.

Events in the last week alone in the ICT sector bear this out:

- On Tuesday, we announced a $2 million grant to the new Geospatial Research Centre being developed around Canterbury University, the Canterbury Development Corporation in partnership with the University of Nottingham.

- Yesterday, Prime Minister Helen Clark announced a US$ 8 million conditional loan to take Right Hemisphere to the global market. Right Hemisphere is a leader in the 3D graphics industry that aims to secure 10 per cent of a billion dollar global market. It is also supported by Sequoia Capital of Silicon Valley, a premier venture capital firm that helped ramp up Google, Apple and Cisco Systems. This project will retain in New Zealand critical research and development and ownership when the alternative was early equity dilution.

Today I am announcing $16 million of partnership grants to the five successful applicants for the Broadband Challenge urban fibre networks project, part of our broader Digital Strategy. The successful projects are all leveraged public-private- sector partnerships and they are all Kiwi owned. They are:

- North Shore City and Vector Communications Ltd ($4,640,625)

- Hamilton City Council ($3,290,625)

- Smartlinx 3 Hutt Valley and Porirua ($2,372,353)

- Nelson Marlborough Inforegion ($1,788,750)

- Canterbury Development Corporation ($4,218,750)

These urban optic fibre networks will all deliver "open access" data transfer above one Gigabyte per second – about 250 times current maximum broadband ADSL download speeds.

Transport

Having a high quality, efficient transport system is essential infrastructure.

It is clear that under investment in transport is constraining our productivity.

Firstly, the processes for allocating investment in transport are being improved to achieve better certainty and value for money from transport spending.

The government has demonstrated its commitment to the development of better transport services – increasing spending on land transport to $13.4 billion over the next five years to guarantee and accelerate New Zealand's largest ever road building programme.

Budget 2006 saw an extra $1.3 billion to guarantee the state highway programme and to speed up work on major projects to ease traffic congestion in Auckland, Wellington, and Christchurch.

Transport spending over the next ten years is set to top $24 billion.

We are also ensuring high-quality investment allocation through consistent and rigorous assessment of transport projects.

Energy

Let's be frank. There are urgent and critical issues around achieving a reliable, efficient energy system. The New Zealand Energy Strategy is a roadmap to address some of our shortcomings.

The main headline action is to address the security of supply issue. The development of the strategy will articulate government leadership, establish priorities and set out necessary policy and institutional action.

Innovative and Productive Workplaces

If productivity improvements drive economic growth, than innovation drives productivity gains and that is what we need to foster.

Innovation is also cumulative. It is deeper and more continuous if it draws on our past knowledge and experiences.

We have a history of pioneering smart ideas and adapting to new surroundings. This is the spirit of innovation that we must harness now.

We are a nation of ideas people and innovators and we are not making full use of one of our number one assets.

We must use increase our use of ICT. We must find new ways to use ICT. We must access new markets. Economies must grow.

Environmental sustainability

So often we view environmental sustainability as a "win/lose" trade off between the economy and the environment. It should not.

Resources that were once seen as non-economic in nature are increasingly seen as possessing significant economic value – for example, wind, air and internationally attractive landscapes.

Maintaining a high quality environment is a non-negotiable part of New Zealand's national identity and competitive advantage. It is a magnet for visitors and investors, and a guard against hollowing out.

The economics of sustainability are widely understood but equally compelling. We need to ensure efficient resource use and to manage future environmental risks, including climate change.

Auckland – a globally competitive city

There is growing recognition from business and local government that greater Auckland needs to develop into the world-class, competitive city that is New Zealand.

This means building better infrastructure, planning for growth and attracting investment.

It also means integrated decision making among the four councils and a single, vision for Auckland.

State Owned Enterprises

To meet the challenge of transforming a small, open economy, our SOE's must play a significant role. Whether a company is crown-owned or not, if it’s innovative, cheer it on. Partner with them rather than fear them. For New Zealand the main commercial threats are out there, not in here. As you can see, this government has expended significant effort into ensuring that citizens are protected from the sharpest forces of “hollowing out” through many significant direct and indirect interventions.

The interdependence between commerce and the national interest was sharply illustrated in July this year when the European Community decided that it would use the opportunity of a court ruling that went against them to stop Fonterra’s butter access.

As Fonterra found, Hon Phil Goff is a politician worth having in your corner. His intervention worked, in the interests of both the country and the companies concerned. Exports are in everybody’s interests, and we will back you.

Conclusion

The government of which I am proud to be a part has lead the longest sustained period of economic growth in New Zealand's history.
It is easier to do business here, according to the World Bank, than any other country on earth.

There are so few unemployed that it is one of the hardest countries in the world to find skilled workers.

In case anyone missed it, GDP per capita has been moving fairly strongly, on a moving average basis, since 2000.

It is more than just sheer good luck. This has been through the consistent development of robust policies in partnership with business and key stakeholders.

The questions that are being debated now are no longer about further economic restructuring, or getting ourselves out of danger, or whether we are on the right economic course or not. No, the course we are on is clear.

The questions instead are far more refined. They are about anticipating success and finding the infrastructures and regulatory frameworks to deliver it: What is the next big market we are going to crack together? Who can we partner with, more adventurously and on greater scale than before?

We know there is a common interest between the government and business.

Let’s ensure that the next time there is a seminar about hollowing out, there are more companies who have taken the opportunity to generate smart, strong engagement with the government, and critically with our export markets.

That is what generates the crucial productivity we need. That is what generates the innovation and creativity we urgently need. And ultimately it is what generates the transformation of a small, smart nation like New Zealand.

And that is New Zealand’s best defense against hollowing out, and it is our best offence for going global.

Thank you

ENDS

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