New Zealand's economic reform and transformation

Despite New Zealand and China's vast differences in size and economic composition, we are both economies on the move, and we are both positioning ourselves to succeed as the pace of globalisation gathers.

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Speech at the New Zealand Centre, Peking University, 9.00am, Tuesday 25 September 2007


It is a pleasure to join you here. My ministerial colleague, Mr Winston Peters, came here earlier this year to open the New Zealand Centre and it is pleasing to see interest in New Zealand.

Today I would like to talk about New Zealand's economic transformation and innovation agenda.

It is a topic that should make us feel excited about a close economic relationship between our countries.

Despite our vast differences in size and economic composition, we are both economies on the move, and we are both positioning ourselves to succeed as the pace of globalisation gathers.

China, of course, is a focal point for globalisation. With 460 of the world's Fortune 500 companies active in China the transformation here is a spectacular example of globalisation's potential.

When New Zealand looks at the globalised world, our focus is primarily on the Asia-Pacific region. Ten out of our top twenty export markets are Asian countries. Include Australia and the United States in the mix and nearly three quarters of New Zealand's two-way trade is tied up with Asia-Pacific countries which also provide 68 per cent of our tourists.

Our connections with this region are essential for a small, open economy like New Zealand's.

Linking into global markets deepens our exposure to competition and our access to capital. It gives New Zealand a two-way flow of new ideas, fresh skills and leading technology. It provides our businesses with vital opportunities to further diversify their products and services, and establish and build on their presence in an expanding range of export destinations.

Our vision is to thrive in the global economy through a highly skilled, innovative economy capable of competing with smart products that command a premium.

A similar ambition is true of most developed countries. Our near neighbour, Australia, has poured over three billion New Zealand dollars into a five year innovation plan underwriting its information and communications technology excellence. It has attracted more than 840 international companies and $7 billion in new investment.

When I was in Brussels last year I visited the European Commissioner for Enterprise and Industry. He said Europe needed to respond to globalisation by being "the best". Europe couldn't compete for cheap labour, doesn't want to compete for lower industrial standards, and doesn't have an abundance of natural resources.

What is left are brains and knowledge. Fortunately, knowledge is the most valuable resource of all. It is not the resources that matter, but what we do with them. All developed countries are trying to increase their economic wellbeing by applying more knowledge.

In New Zealand, innovation means a lot more than the expression 'hi-tech' brings to mind. It starts in the primary industries that have underpinned our economy for our entire modern history. Productivity in our primary industries has been rising faster than the average of our economy for fifteen years. These are high-tech industries. A simple lamb chop might not look like a tech product, but it contains as much science as the latest mobile phone.

Innovation is improving our productivity. For example, productivity from our dairy herds increased by fifty per cent in the last thirty years. That is, we produce more milk and dairy ingredients from fewer cows. This is solely through technological efficiency of advanced milking systems and nutritional knowledge - no New Zealand dairy cow is given hormones or steroids.

Sustaining this kind of productivity growth across the entire economy, as conditions and markets change, requires continual economic transformation and innovation. Transforming the economy is not a one-off process.

It is worth mentioning this because the process of reforming New Zealand's economy began nearly twenty-five years ago. Back then, our economy was largely based on sending low-value commodity products to Europe. The European market was changing, and we were slow to adapt. Our government used to subsidise our major exports of lamb meat.

Then we reformed our economy and exposed it to price signals that made our producers much more efficient and more responsive. But our levels of innovation and exporting as a percentage of our economy didn't change much, if at all.

Since 1999 the government has taken a much more proactive stance, promoting smart policies that help to transform the economy steadily by investing in knowledge, skills, international connections, the capacity of our economy and the capabilities of individual businesses.

There is plenty of evidence that our increasing global integration is paying dividends. The world prices New Zealand gets for our non-commodity manufactured goods has been rising since the 1990s - that indicates we are getting much better at commanding a premium in offshore markets.

One example that illustrates the way the government can improve innovation and exporting is the involvement of our industry development agency, New Zealand Trade & Enterprise with food company Nice & Natural.

New Zealand Trade & Enterprise started working with it in 2001 when it had a turnover of $6m. This year, it will turnover $50 million. It started out making confectionery, using manual labour and inefficient batch processes.

New Zealand Trade & Enterprise has worked with it through programmes such as Export Education, Export Networks, cluster groups, and many more. It is now a specialist producer of healthy natural products in the rapidly growing snack category. It has a large professional product development team that can produce innovative products such as sugarless chocolate using New Zealand dairy ingredients - and it can move them from concept to shelf in 24 weeks. That is much faster than the standard two years it takes for a multinational.

Its processes are highly productive, capital intensive and automatic. The skill level of the work force has grown accordingly with correspondingly higher real wages being paid.

The main challenge was to raise the capability of the business. Winning export businesses was a snap for it, once it had lifted the capability of the business.

This year the company will export $17 million worth of products - mainly to Australia where it is in every Woolworths and Coles supermarket.

This company has been successful much faster because of smart, active policies to help it innovate and export.

A study by the OECD showed four out of five of our manufacturing and service companies regularly introduce products, services or processes new to the firm. That level leads developed countries. It is double the proportion of innovators in Finland.

The larger problem for New Zealand firms is often our access to international connections.

This is an area where China and New Zealand have a lot to contribute to each other.

When the OECD surveyed China this year it praised investment in R&D, human resources and R&D infrastructure. But it also advised there is a lot more to do to build a full-fledged and mature national innovation system.

In contrast, we have innovators, but we have to work much harder to establish the networks where we can commercialise our innovation.

Take a company like engineering firm NDA. It is not cost effective for it to make low value components that are exported back to New Zealand to be added to larger equipment being manufactured there.

NDA are using the low cost manufacturing operations in China to offset cost competitiveness elsewhere. One contract recently was marketed out of New
Zealand, to a customer in Canada for a client in Peru, sourced out of both New Zealand and China.

Plainly this is an area where the opportunity exists for New Zealand and China to work together. It is another reason why both of our countries could benefit strongly from a closer economic partnership. We can build on example like the New Zealand Wood Centre that has been opened in Shanghai to deepen New Zealand's penetration of international wood markets, and provide China with access to our competitive advantage.

Generating wealth from knowledge requires a vibrant and well-integrated innovation system.

To increase our levels of innovation in New Zealand, we are moving on a number of fronts together.

Our business regulation in ranked second only to Singapore by the World Bank on its measure of the ease of doing business. I am proud that we are not holding back businesses with unnecessary red tape.

Earlier this year the government introduced very significant increases in support for innovation. A tax break was introduced for firms investing in research and development. Another tax reform allows our companies locating in countries like China to pay the local corporate tax rate. That, along with new grants to assist with market development, should encourage more of our companies to seek partnerships here.

We are actively pursuing an agenda to strengthen the fundamental drivers of a balanced, growing economy. Investing in infrastructure is a key plank. In land transport, for example, we have invested in the largest road and rail programme in at least a century. Much of this is focused on Auckland, in an effort to create a world class transport network and elevate Auckland to become a globally competitive city.

A modern economy also needs a competitively priced, reliable and fast broadband service. We acted to unbundle the local loop, and so create opportunities to encourage new investment and more competitive pricing.

And we are also investing heavily in research to drive greater innovation. Research, science and technology are crucial to transforming New Zealand's economy to a high-skill, high-value, globally-connected economy.

We have revitalised skills training and from next year a revamped tertiary sector will ensure graduates' skills are more aligned with the needs of industry.

In addition to being New Zealand's Finance Minister, with responsibility for the economy, I'm the Minister of Tertiary Education - that is precisely because of the strong link between knowledge and our long-term economic performance.

New Zealand wants more researchers, scientists and technicians and more doctoral candidates in our universities.

A central feature of our tertiary education reforms and the innovation agenda we are putting in place is our effort to increase our educational connections. This is an important feature of New Zealand's relationship with China, too. Around twenty-five thousand Chinese students are studying in New Zealand - more than from any other country.

In August this year, I launched New Zealand's strategy for international education for the next five years, the International Education Agenda. It came with extra funding to support and implement its goals.

This strategy goes well beyond the recruitment of international students. It is aimed at building strong, sustainable education relationships and connections internationally.

The New Zealand Centre here is an example. It is a meeting point for New Zealand and China - a place to intellectually explore each other's country for ideas that might be relevant to the needs of our own. It is a place where it is possible that philosophy, creative arts, and cultural values are explored alongside pioneering work in the fields of science, business and technology.

The more connections we have with the world, the more we are enriched as a society by the learning we gather and the opportunities we harvest.

In other words - our connections to the world give us access to better ideas. With four million people out of a world population of over six billion, we have less than 0.1 per cent of the world's population. But let's assume we box far above our weight, and we are far more innovative than average. Then we might say we have one per cent of the world's best ideas. Our connections can still open up access to the other 99 per cent.

Our connections take many forms. Students from other countries help transfer knowledge and talent between countries. The more top international talent we exchange, the more we can all benefit from that talent and knowledge.

There are also long-term less tangible benefits, which international students bring to both our countries - for example, as talent in a tight labour market, as well as potential future advocates in their own countries and internationally.

Alongside the indirect benefits, international education itself contributes strongly to the New Zealand economy. And beyond the economic benefits there are enormous social dividends from our contact with students from other cultures.

It matters to us to share the excellence of the New Zealand education system with the rest of the world, and bring the best from elsewhere to share their knowledge with New Zealand.

The aim of our tertiary education strategy is to build our linkages, and to harness our research as a keystone in the development of a high-value, knowledge-led economy.

As globalisation connects the international economy more and more, rewards will increasingly flow to countries with skills and knowledge. We are positioning through our innovation agenda to play a very strong role in that future.