Achieving Faster Growth for New Zealand

Contents
What this project is about .....
Exports and growth ..............
Trade liberalisation ...........
Trade facilitation ............
Our major export industries ....
Summary .......................
Key points on growth .........

What this project is about

This project is about how to make New Zealanders considerably better off through economic growth.

New Zealand needs to keep its economic growth rates above 4% in order to get back into the top half of the OECD, which groups together the world's most prosperous economies.

The need for sustained economic growth throughout New Zealand is now well and truly up in lights. This is good and where it should be. So now the case for growth has been accepted and picked up almost across the whole political spectrum, the focus must be on practical policy measures which are going to ensure this growth outcome.

This is a subject of vital interest to members of the Chambers of Commerce because it is our businesses that will need to create this growth. The unique perspective which the thirty New Zealand Chambers bring to bear is that of business in local and regional communities. We place a premium on practical business capability enhancement and constructive advocacy on behalf of our members.

Our growth project consists of a number of parts.

First the Chambers have published "Achieving Faster Growth for New Zealand". This booklet discusses economic growth itself Ð why it is important; what causes it; how we are doing in New Zealand; and what will have to happen over the next decade if we are to grow faster. The key points are summarised on the back of this pamphlet.

If you would like a copy of the full booklet please contact your local Chamber of Commerce, or download it from http://www.wgtn-chamber.co.nz.

"Achieving Faster Growth for New Zealand" stops at the point where five main issues have been identified. Regrettably, much of the debate about growth also stops at this point. Political parties and lobby groups throw slogans around but don't get the rubber on the road.

One of the strengths of the Chambers of Commerce is that we bring a practical and pragmatic view to political issues. We want to go beyond just talking about how to get growth, and move to a practical plan to knock some things off over the next ten years that will really contribute. This is the only way to make a difference Ð hard work on a number of fronts over a period of time.

So we are also producing a series of five pamphlets that each cover a main area. They set out what we should be doing now to move our economy along the way to faster growth. Each lays out the agenda for the next couple of years, so they will need to be revisited, revised and updated on a regular basis.

This pamphlet is the second of that series and deals with the critical question of how to lift the performance of our export sector. The first, Innovation: the key to more than doubling our rate of productivity growth, is available from your local Chamber of Commerce, or can also be downloaded from http://www.wgtn-chamber.co.nz.

The remaining booklets (which will be released over the next few months) cover:
- Making sure Auckland is fit to grow 80% over the next decade.
- Increasing the size and basic skills of our work force.
- Holding central and local government to 1% growth p.a. so we can reduce governments' relative share of the economy from 40% to 30% over the next decade.

Exports and Growth

Areas like education and skills training and transport infrastructure are critically important. So are employment and social policies, together with prudent monetary and fiscal management. But the biggest thing we can do to make New Zealand a wealthier place is to do even better in our economic dealings with the rest of the world.

In order to boost our export performance, New Zealand needs overseas markets which are themselves both growing and accessible.

Trade is of course not the only answer. However given our geographic location and small population, trade and investment broadly defined will continue to be the most important source of wealth for our economy.

It is therefore vitally important to prize open markets for New Zealand's exports of goods.

The New Zealand Institute for Economic Research (NZIER), in a paper that attributes much of our relatively poor performance to lack of export growth, has calculated that every 1% of real GDP growth is associated with 1.38% growth in exports. On this basis, our target of 4% p.a. sustained growth implies export growth of about 5.5% p.a. This in turn implies a 70% increase in the decade ahead, or an increase of $22 billion in merchandise trade in today's prices. This is about twice the increase achieved over the last decade.

New Zealand suffers because its main exports are being sold into difficult world markets. Our traditional exports (dairy, meat, wood and pulp) all go to world markets that are growing more slowly than average, and which are protected (and in some cases completely) closed to imports.

We also suffer from being remote from our markets. This remoteness not only impacts on our ability to trade, it also impacts on our ability to gain market knowledge and information on new technologies and our ability to attract finance.

There are a number of things that can be done to increase export growth, for example:
- Continuing work on world trade liberalisation. The Ministry of Agriculture and Forestry estimates "that total gains to New Zealand agriculture since the conclusion of the (Uruguay) Round have already exceeded $1.5 billion, and that the value of the gains is increasing every year";
- Continuing regional and bilateral efforts to free up trade and investment links, particularly where these changes are likely to encourage growth in areas where New Zealand has scale and competitive advantage and world markets are growing;
- Lifting the export performance of our smaller companies by making it easier for them to operate in overseas markets (export facilitation);
- Ensuring our major export industries are able to find new markets and develop higher value products; and
- Improving the competitiveness of our export infrastructure e.g. transport, ports, customs processing, and the like.

If we are to look for practical improvements in our export performance, then they are likely to lie in improving our performance in some or all of these areas.

The main issues surrounding export infrastructure are equally important to the domestic economy and are therefore discussed in our upcoming pamphlet on encouraging Auckland's growth. The pamphlet on innovation discusses lifting skills in small to medium businesses. This includes improving their skills as international traders.
We now focus on the remaining areas.

Trade liberalisation
Trade liberalisation can be a controversial topic. There is a vocal lobby that argues that "globalisation" is leading to the exploitation of poorer countries by richer countries and multinational corporations. Trade leads to exploitation of poor nations and environment degradation, they argue.

The truth is quite the reverse. Trade helps lift economic growth, not just for developed but also for developing nations. This happens because trade allows nations to use their scarce resources more efficiently. As a general proposition, preventing free trade is likely to do more damage than good.

A simple New Zealand example helps make the point. If the South Island decided to refuse to trade its electricity with the North on the basis that the North burnt fossil fuels, the net impact would be more fossil fuels burnt in the North Island, and hydro electricity going to waste in the South. Both Islands would also suffer a drop in their standards of living.

This final point is important. The South Island Ð while seeking to protect its own interests with a trade ban Ð would actually end up making itself worse off.

Therefore New Zealand is still better off with its relatively open economy even if we are missing out on growth opportunities because some of our trading partners won't play ball.

But if we can get other nations to play ball the rewards are high.

Unfortunately for New Zealand most of our exports are primary produce and these traditionally face the highest trade barriers of all. What is more, trade in services (e.g. education, consultancy etc), which represents a significant growth opportunity for New Zealand, is only now being included in free trade agreements. Many informal barriers also stand in the way of this opportunity for growth.

Therefore trade liberalisation is one of the most important of the short-term opportunities to help grow our economy. It will allow us to lift our prices for our traditional exports, and open up markets where we can quickly respond.

However trade liberalisation is not an easy task. In the words of one of our best-known negotiators, it is "not an area for those in search of instant gratification". The harsh reality is that New Zealand is a small player in the global trade stakes and therefore doesn't have much muscle when it comes to negotiating on its own.

Where does this leave us?

We should keep on doing what we are already doing Ð working with like-minded countries through the World Trade Organisation to encourage further world trade liberalisation, and seek out small-group or two-way trade deals with other interested countries.

What more can we do to help make this happen?

First we should ensure that our trade negotiators are well resourced and supported. The value of a small gain in market access is likely to far outweigh what it costs to achieve.

Trade negotiations are an activity that the Government has to lead on. Done well they probably have a higher potential growth pay off than any other Government expenditure on trade facilitation or industry support.

Unfortunately, because they are conducted between Governments, trade negotiations are largely hidden from the public's view. Other, higher profile expenditure programmes are likely to gain support.

Even if we are turned off by terms like WTO, MFN and "multilateral" we need to give our trade negotiators strong support. It is they who are helping to clear away the delays and unnecessary restrictions that stand in the way of our exporters. We should perhaps think of them as our "compliance cost reducers" when it comes to exporting (and perhaps wish we had a similar group fighting compliance costs at home!).

We therefore must make sure that the importance of trade negotiations is not lost sight of when the Government sets its spending priorities. Chambers welcome the extra provision the Government has made for trade negotiations in this year's Budget Ð but more will be required.

Trade liberalisation depends upon public support. There will always be interests that feel threatened by the removal of barriers to trade. We have mentioned interests that believe free trade is bad; others are scared that the removal of trade barriers will cause them economic loss. Fortunately New Zealand's economy is already sufficiently open that few businesses or their employees face a significant risk in this regard.

A number of business organisations have come together to form the Trade Liberalisation Network. Its role is to promote trade liberalisation, and to help dispel some of the myths about its adverse effects. It is housed at the Wellington Regional Chamber of Commerce. TLN is well-equipped to work in with all New Zealand Chambers, from Northland to Southland, in support of trade liberalisation. This cause starts very much at home!

Trade deals also depend on favourable public opinion in other countries. Another strength of the New Zealand Chambers of Commerce is that they are part of a 20, 000 strong international network. There are fellow Chambers in all the countries with which New Zealand is pursuing a bilateral trade deal Ð Chile, Hong Kong, Mexico, not to mention the USA. We can help build a consensus for free trade agreements, and reduce the negative reactions, by building special relationships with those Chambers.

New Zealand Chambers will continue to work with each of the key Chambers in these and other countries, with a view to building mutual understanding of the needs of local businesses, and to help reduce the barriers to trade. In doing this the New Zealand Chambers will also involve the relevant business councils.

This programme will also encourage New Zealand exporters and importers to take opportunities to visit the appropriate Chambers on their trips overseas, to help cement the relationship and intensify visits by delegations from the Chambers to New Zealand.

Trade facilitation
Helping businesses trade internationally is already a major preoccupation for Chambers, New Zealand Trade and Enterprise and other business organisations.

As a consequence there is a large number of trade related services and training programmes for New Zealand companies. Alongside this, the international network of Chambers may be able to be used more effectively to help. Small businesses often lack credibility and contacts in overseas markets. They could therefore benefit greatly from the networks and introductions that Chambers provide.

Helping businesses over this initial hurdle is an important part of building New Zealand's export base. The Chambers in New Zealand will work with their members and also with the main Australian Chambers to develop a service that helps meet this need.

Our major export industries
Dairy, meat and forestry account for nearly 40% of our exports by value. If these sectors cannot increase their exports by 70% in real terms over the next decade it will be very difficult for New Zealand as a whole to achieve this goal.

This increase in export value needs to be driven by increasing the value of what we sell.

As we have noted, all these sectors will benefit particularly from trade liberalisation because primary products face some of the highest barriers. Meat is a good example Ð most is now exported in final form for the supermarkets, and trade restrictions prevent selling higher volumes, so trade liberalisation is likely to be the only way we will significantly increase the value of these exports.

Unlike the meat industry, the dairy industry predominantly exports basic commodities, so there are real opportunities to add value to what it produces. It also plans to continue to achieve significant productivity gains behind the farm gate.

However moving into higher value products and improving productivity will require risk capital, and there are some question marks about the capacity of the dominant player, Fonterra, to source this given its current structure. This is an issue that we will continue to monitor.

Finally the wood processing industry has both greater volumes coming on stream and the opportunity to add more value here in New Zealand.

New Zealand Trade and Enterprise and the forestry industry have recently completed a study of the industry, and what it needs to generate higher growth. The main issues that arise from this study are the same that have come up elsewhere in this series of publications: the need for investment in infrastructure; problems with the Resource Management Act; basic work skills; and access to export markets.

All the barriers facing these industries are of major strategic importance to New Zealand.

They serve to remind us that if we want faster growth and significantly greater well-being for all New Zealanders, we will need to act now. It is too easy to see a future where the trees stay in the ground, we continue to export commodity milk and there is no real growth in our meat exports. If this happens we will be left with modest but unspectacular growth in our exports, and continue to see Australia's standard of living outstripping our own.

Summary
We need to significantly improve our export performance if we are to grow our exports by 70% and achieve a 50% larger economy over the next decade.

Our starting point will be to:
- Support our Government trade negotiators to make sure they have the resources to get the best deals possible for New Zealand;
- Help build New Zealand public support for trade liberalisation by weighing in behind the TLN;
- Build on relationships with Chambers in those countries where New Zealand is seeking bilateral trade deals, and work with them to encourage support for reducing barriers to trade;
- Work with our members and the main Australian Chambers to develop a networking and introduction service for members entering the Australian markets; and
- Keep an eye on the performance of our major export earners to make sure the barriers to their growth are being addressed.

This is only the start of the journey, but by the end of 2003 we should be well on our way. At that point we should review progress and plan our activities for the next few years.

Key points on growth

Economic growth isn’t everything, but without it we won’t be better off

In this series of publications we measure growth by increases in real (i.e. with inflation removed) gross domestic product (i.e. the total value of what is produced in a country). Some weaknesses of using GDP are that many beneficial activities are not recorded as economic activity; economic growth may be occurring at the expense of the environment or our social fabric; and growth in GDP tells us nothing about who is benefiting from this growth. These are all issues that need an eye kept on. However, like most developed countries New Zealand regulates economic activity to ensure these wider factors are taken into account.

A generation ago we had the same standard of living as Australia, now Australia is one third better off

In the mid-1970s both countries had a similar GDP per head. By 2000 Australia’s real GDP per head was one third higher than New Zealand’s. In New Zealand dollars, New Zealand’s GDP per head was $27,000 while Australia’s was $36,100 – about $9,000 per person per year better off.

The benefits of growth extend to the least well off

A single unemployed person in Australia gets $35 per week more in the hand than the same New Zealander. If we were spending at the Australian rate per head on health we would be spending around $12 billion per annum, rather than the $8 billion we currently spend.

As we fall behind things get worse

Quite apart from lower per capita incomes, lower social spending and less money for the least well off, there are longer-term effects of falling behind. We have less to invest in growth; we risk losing our best economic assets – skilled people and good businesses; we risk increasing tensions in our society; and we become less able to cope with our ageing population.

Economic growth comes about because we are more productive

To get higher growth per head of population we can have more people working; we can use more capital (plant, equipment, land); or we can use our resources (people and capital) smarter.

Over the last decade New Zealand has done reasonably well

From 1998 to 2003 New Zealand’s real GDP should grow at an average of 3.3%, amongst the best in the OECD. Over the 1990s employment growth has been among the best in the OECD, and at present unemployment levels are below those of most OECD countries. Both the level of inflation and the instability of prices are now below those of most other countries. The government’s debt has reduced so our gross debt to GDP ratio is one of the lowest in the OECD.

But not well enough – if we want to climb back we need to grow our economy 50% in the next decade

Treasury has estimated we need sustained 4% p.a. real growth to lift our per capita GDP to the middle of the OECD’s by about 2019. This means over the next decade our economy needs to get almost 50% larger.

This creates some important challenges for the decade ahead

- We will need to more than double our productivity growth, so we will need to improve greatly our ability to innovate.

- Exports need to grow 70%, so we need to improve market access and remove barriers to exporting.

- The Auckland economy will need to grow 80%, so we need to make sure it (and all the other regions of our country) are not held back by access to resources and infrastructure.

- We need as many people in the workforce as we can get, so this means lifting basic skills, reducing the numbers on welfare, and using immigration to help replace our ageing population in the workforce.

- We have the opportunity to hold central and local government to 1% growth per annum so we can reduce government’s relative share of the economy from 40% to 30% over the next decade.

We also need to make sure we do not slide back, and build a consensus for growth. To make these happen requires a widespread understanding of what causes growth, support for it, and a willingness to act and, if necessary, make sacrifices to see it happen.

ENDS

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