Wednesday 4 July 2001
Hon Dr Michael Cullen
Address To NZ/Australia Chamber Of Commerce
The Strand, London
The New Zealand Story
I have been asked to introduce this discussion by commenting on why the New Zealand and UK economies seem to be
withstanding the slowdown in the global economy.
It would be presumptuous of me to comment on the reasons for the current performance of the UK economy, so I will stick
to a topic I might know a little about – the New Zealand economy.
Not so today, in fact the economy grew by 2.5 in the 2001 March year, and is forecast to average three percent growth
over the three years after that. Most of this was driven by exports which rose a healthy 6.8 percent over the year.
The recent GDP result was disappointing but also three months out of date. But recent evidence points to an increase of
growth in the next two quarters.
The latest mechanise trade figures show exports are booming, consumer and business confidence are both in positive
territory and a recent survey by the largest manufacturer's association in the South Island shows average export
turnover is up 34 percent on last year.
That in itself doesn’t set the world on fire, but the full story on New Zealand’s economic performance is that the other
key indicators are also moving in the right direction. The unemployment rate is the lowest it has been for nearly
thirteen years. The current account deficit has fallen from 7 percent of GDP to less than five, and it is still falling.
Inflation remains subdued. The government is running an operating surplus, projected at over one percent of GDP this
financial year, rising by roughly half a percent of GDP a year for the years after that.
It is a long time since we had all of the key performance indicators synchronised. In the past we have had growth with
inflation, or growth alongside a deteriorating fiscal position, or growth accompanied by a rising current account
The other novel aspect of this benign outlook is that it is, as the Reserve Bank noted recently, favourably out of sync
with the rest of the world. In the past our performance was often driven by the global economic cycle.
The question is why. There is no simple answer. In part, the macroeconomy is correcting from the imbalances of the
1990s. In the 1990s our growth relied on ever expanding private domestic consumption. That in turn was sustained by
rapidly rising private foreign debt. Inevitably, some of the maturing debt was reinvested in countries other than New
Zealand, so there was pressure on the exchange rate.
A depreciating currency was a stimulus to exporting, and in our case that stimulus coincided with good weather and
strong commodity prices.
We probably also benefited, in this case, from being a small economy. By way of example, tourism was a major beneficiary
of a more competitive exchange rate. But because our slice of the world tourism market is so microscopic,
we could sustain robust inbound tourist flows even when there was a global slowdown because we only had to increase
market share by a barely noticeable amount.
It is also possible that the global slowdown helped maintain a generally stimulatory monetary stance. We will never know
when, if and by how much interest rates would have risen to counteract the inflationary potential of a lower New Zealand
dollar if world demand had remained strong. However, with world demand flat and global interest rates falling, our own
monetary authorities could and did lower interest rates even although the dollar had depreciated, and the stimulus to
the tradeable sector was maintained.
So far, you might read this as saying that our economic performance was largely a result of good luck, or at least of
coincidental and favourable factors beyond the control of the government. I would like to think that there was a not
inconsiderable amount of good management involved as well.
We have a competitive exchange rate and, by recent standards, somewhat lower interest rates.
While a lot of that is driven by external factors government policy has made a difference in two respects. Firstly, when
the government took office we renegotiated the Policy Targets Agreement with the Reserve Bank. I think the Bank would
say that its practice had evolved to the point where the new agreement reflected what it was doing anyway.
So there is now a formal requirement on the Bank to be aware of the effects of its operations on the real economy. I am
more confident now that we will not have a repeat of the circumstances of the late 1980s and 1990s when every so often
the dollar surged and exporters suffered.
I have been accused of being too tight with my fiscal stance, but a tighter fiscal stance allows the Reserve Bank to be
more relaxed about monetary conditions. This has, in no small measure, contributed to the maintenance of an interest and
exchange rate structure that is kind to exporters.
The government can take credit for moving strongly to open up access to foreign markets. We have formed a Closer
Economic Partnership with Singapore, and exports to Singapore are growing strongly. The government is also seeking a
closer economic partnership with the Hong Kong Special Administrative Region. This vital economic entity provides a high
level of complementarity with New Zealand.
We will continue to seek and support wider trading relationships, whether that be a broad-based World Trade Organisation
round or suggestions such as a P5 agreement between New Zealand, Australia, the USA, Chile and Singapore. By signalling
a determination to promote more open access to foreign markets, the government creates an atmosphere in which exporters
are encourage to reinvest short term gains developing longer term profit opportunities.
IN the past, our growth has been stifled by skill shortages. The government has put a lot of effort into getting more
focus into our tertiary education sector. The modern apprenticeship programme was a major advance.
This year’s Budget allocated an extra $56 million over the next four years to create more than 17,000 additional
The government has also announced its tertiary education strategy. The new system will lead to significantly enhanced
coordination and clarity of purpose in the sector. It will point the way towards producing the skills we need, at the
level of quality we must have, and in an efficient and cost-effective manner.
In the meantime, our new immigration targets allow short-term skills shortages to be covered by immigration.
Capital markets in New Zealand are relatively thin. There is not much the government can do about this directly,
although the new superannuation fund and the diversification of existing funds are likely to inject some liquidity into
them. If there is market failure, it is the failure of the market to provide venture capital at the seed and start-up
end of the venture capital spectrum. This has meant that in the past, good ideas have emigrated in order to be turned
into good ventures.
The government is establishing a venture capital fund targeted at these gaps, but does not see itself as being a
long-term player in the venture capital market. Our plan is to forge a partnership with the private sector to deepen
seed and start-up venture capital funding. Once it is standing on its own feet we will be happy to withdraw.
Innovation gets assistance in a number of ways: from more research funding, to the establishment of centres of research
excellence, to the funding of business incubators and through the economic and industry development programme that
operates a number of programmes to develop and commercialise good ideas and boost high growth initiatives.
Trade New Zealand has, according to its clients, facilitated $1.3 billion additional foreign exchange earnings over the
The organisation is building a strong working relationship with Industry New Zealand to promote new overseas business
The government is also funding a major e-commerce initiative to help small and medium sized exporters gain access to the
global economy using the Internet to develop new opportunities. And the promotion of New Zealand education in the
international market place has been boosted though a new nationally coordinated export strategy.
We are giving practical and technical assistance to ASEAN countries in areas like customs, food safety standards,
competition and regulatory policy, trade policy and animal and plant heath procedures to benefit both our exporters and
Events in Europe with foot and mouth have made us acutely aware of the interests of exporters in maintaining the highest
The government has done all it can to maintain and reinforce one of the most rigorous standards regimes in the world,
and has enlisted the support of the whole country in maintaining our deserved reputation.
The overall theme, then, is that the government hasn’t simply ridden on the back of a cyclical upturn, hoping that it
will go on forever. It has taken active steps to prolong the cycle, and initiate the structural transformation that will
have to take place if we are to get away from our unhealthy historical dependence on notorious fickle commodity trade.
As I said, the government is trying to deepen and lengthen the commodity business cycle, while taking a longer term view
of lessening our exposure to and dependence on it. This still leaves open the question of why the last cycle was not as
steep as those that have gone before it.
Part of the answer lies in the strength of the US dollar. While our dollar was depreciating in general,
it was not depreciating evenly, and in some cases was more or less holding its own on the cross rate. This was
especially true of the Australian dollar and to a lesser extent of the Euro.
The result was that there was not the same degree of stimulus to exporting that might have been expected by looking at
the NZ/UD dollar cross.
A second reason was that exporters had been hard hit by the very high exchange rate of the mid-1990s and were paying off
debt before investing, and especially consuming.
The lag has, in hindsight, been something of a blessing. We moved through any tendency by the monetary authorities to
raise interest rates, and the effect of this is now starting to show up in a bit more buoyancy in consumer spending. The
result is that economic growth is broadening out, and that of course reduces the risks of bottlenecks stimulating
I am not sure where the parallels with the UK experience are to be found in all of this, and am happy to leave that
particular line of analysis to you!