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New Zealand Executive Government Speech Archive
FRIDAY 10 MAY 1996
ADDRESS BY
RT HON J B BOLGER
PRIME MINISTER OF NEW ZEALAND
IMPERIAL HOTEL, TOKYO
I am delighted to have this opportunity to address representatives of Japan's economic organisations. The enterprises you represent have helped create the world's second largest economy in the space of 50 years. I congratulate you on this extraordinary achievement.
New Zealand, like Japan, has worked in recent years to reform its economy to ensure continued growth and investment. I want to share today some insights into the approach we have taken, and the importance of Japan in that process. Both our nations depend on the global economy. It was once possible to adopt very different approaches towards domestic and international economic policy.
Japan's development since the 1950s, for example, was founded on successfully combining state economic guidance and protection at home, with open competition in external markets. New Zealand, too, pursued that approach; right up to the mid-1980s. But globalisation and interdependence mean that insulating domestic markets is no longer advantageous, or possible. Successful competition in the international market-place depends, increasingly, on competition and efficiency at home.
Competition, open markets and consumer choice have become key ingredients in determining investment and growth. Inevitably, global interdependence also raises questions about the respective roles of government and the private sector. In the early 1980s New Zealand had one of the highest levels of state involvement and control in the OECD. The state owned much of New Zealand's infrastructure. Transport, telecommunications and the energy sector were all dominated by government-owned enterprises.
The Government competed with private enterprise in many sectors; including banking, insurance, hotels, forestry and petrochemicals. These investments were made on the assumption that the Government knew better than private enterprise how to get the best out of these businesses. How wrong this was.
After 50 years of state ownership, most of New Zealand's state owned enterprises were not an asset, but a drain on the taxpayer, and the economy. Profits were generally non-existent. There were constant demands for new injections of government capital, with associated borrowing requirements contributing to higher interest rates and government debt.
And, to an extent that we only later came to realise, the standard of the services delivered to taxpayers was far lower than it should have been. In short we discovered that the state was neither a good shareholder nor a good manager. At the same time, we implemented endless regulations that were a dead weight on the economy. We had high barriers to entry into many sectors. Restrictive labour laws discouraged employers from new hiring.
By 1984, we had a fiscal deficit of nearly nine per cent of GDP, double digit inflation, near zero economic growth, rising unemployment and debt, and a top rate of income tax of 66 per cent. Our economy was very sick, and New Zealand firms - the engine of growth and employment - were uncompetitive. We knew that we had to act. We recognised that New Zealand's long term decline in relative living standards, since the early 1960s, would not halt unless the economy regained international competitiveness.
In turn, that meant we had to have an outward looking domestic policy and low cost-effective infrastructure and services. We also knew that with a population of just three and a half million people, we could not subsidise or protect our way to prosperity. Beginning in the 1980s, successive New Zealand governments systematically eliminated the government interventionism which made rational business decision-making so difficult.
We aimed to create a stable and predictable economic environment that would encourage both domestic and overseas investment, and foster growth. Restrictive regulations and costs were reduced or removed in the productive sectors wherever possible. Taxes were cut, our financial sector was deregulated, and labour law revised to encourage employment and enterprise wage settlements.
Most important of all, the Government stopped trying to decide what services or goods could be supplied to which customers by whom and at what price. We freed our companies, and consumers, to buy the best the world could produce, at world prices. Not surprisingly, our imports from Japan grew as a consequence. The results were dramatic. If I had come to Japan six years ago and said that New Zealand would have:
New Zealand has moved from being one of the most regulated, and poorest performing economies in the OECD, to one of the most liberal and high performing economies in the world. We still have some way to go. But the World Competitiveness Report of 1995 placed New Zealand as the eighth most competitive economy globally, and sixth in the OECD, up from 18th in 1991.
These results were not achieved without cost. During the period of adjustment New Zealand's unemployment figures rose as job numbers in formerly protected sectors fell; and labour demand in competitive sectors grew more slowly. This period was painful, but it was temporary. New Zealand now has one of the lowest unemployment rates in the OECD, with the prospect of a further decline.
And this has happened at a time of rapid growth in our labour supply and a rising trend in real wages as the economy prospers. I would sum up the lessons New Zealand learned as follows. First, protection extended to one economic sector is a cost on all the rest. New Zealand tried to protect its manufacturers, as Japan still tries to protect many of its farmers.
But our uncompetitive industries simply passed on the burden of their inefficiency to consumers and to more competitive sectors. Our manufacturing sector, now almost entirely unprotected, is far stronger than before. Manufacturers learned to make the most of their resources, and compete with the best. They concentrated their efforts and investment into areas of true comparative advantage.
They, and our farmers, are now the last people who want to go back to the old days of protection, reliance on bureaucratic intervention and government hand-outs. Secondly, our experience suggests that delay and indecision are the enemies of effective reform. An incremental approach may sound attractive, but is likely to delay necessary decisions, create distortions and lengthen the adjustment period. Thirdly, reform must be consistent and comprehensive.
Exemptions and exceptions increase the costs on sectors elsewhere in the economy. Protecting some sectors but not others is difficult, involves a political cost, and ultimately undermines public support for reform. Democratic politics requires consultation and consideration of the interests of particular sectors.
But this should not mean that any group has the power to veto changes that are in the national interest, or to demand that its fair share of the national burden be shouldered by others. And fourthly, decisions like these require political courage and a high degree of leadership. While the costs and difficulties of reform are immediate, the benefits will take time to become fully apparent. It is the politician's job to explain the reasons for policy change, and to build a consensus for reform.
That I, and my predecessors as Prime Minister, have been able to do so is a tribute to the good sense and enlightened self interest of New Zealand firms and the New Zealand public. The new, stronger and more successful New Zealand economy that has emerged is not only to our own benefit. It means that we are better placed to contribute as an economic and a political partner in our relationships with Japan and the rest of the international economy.
Strong overseas interest in investment in New Zealand has provided a barometer of our new competitiveness. Many Japanese companies and private investors have invested in New Zealand in recent years, but with the exception of the tourism and forestry sectors most of the attractive investment opportunities New Zealand has provided have been taken up by investors from the United States (notably in telecommunications and rail), Hong Kong, Singapore, Malaysia and others.
I would suggest that investors from these countries have been quicker to realise New Zealand's potential, both as an attractive destination in its own right and as a gateway into the combined Australasian market. We would welcome a greater level of interest by Japanese investors.
New Zealand regards Japan's economic health as being of vital importance to our own future well-being. Japan remains an engine of growth in the Asia-Pacific region, and we welcome recent indications that after several difficult years the Japanese economy is slowly returning to health.
I am happy to say that many commentators and policy-makers who are pondering Japan's economic future have paid New Zealand the compliment of examining our experiences. Over recent years my ministers, officials and I have welcomed a number of Japanese ministers, Diet members, officials and members of the media keen to explore what insights might be gained from New Zealand's experience with economic reform.
It is not my business to offer advice to Japan's leaders. They, and you, are well able to form sensible conclusions that suit Japan's own circumstances. Nevertheless, in an economy of global significance like Japan's, the question is whether Japan still benefits from a cost structure and regulatory regime more onerous than most of its partners and competitors.
The Keidanren itself, in its Vision for 2020, has called for the construction of a "post-regulation" society as one of the first steps in creating a new dynamic economy for Japan in the new century. It has called for a thorough review of regulations, the creation of a financial system under-pinned by market disciplines and small, efficient government structures.
The Keidanren has estimated that deregulation could add 1.5 per cent to Japan's annual economic growth; I am personally inclined to think that this may be a conservative estimate. Ultimately, it is a matter for Japan to determine where and how your economy may best achieve the increased growth and opportunities available from a continued programme of reform.
In most respects Japan already has a fiercely competitive domestic market. It is this home base which allows Japanese firms to compete so successfully internationally. But heavily regulated sectors remain, such as transport, telecommunications, finance and agriculture. In this last sector, for example the prices Japanese consumers pay for dairy products reflect import tariffs of up to 600 per cent.
Such high import tariffs do not of themselves help Japanese farmers modernise their agriculture. Nor do the restrictive import arrangements overseen by the Livestock Industry Promotion Corporation. But such policies do reduce consumer choice, and divert expenditure away from other consumer and savings choices.
Some have felt that change may be more easily implemented in a small country like New Zealand than in a country such as Japan which has 35 times our population. I do not feel that scale is a meaningful part of the equation. While the numbers affected by change in a large economy are greater in absolute terms, change is not about numbers but about systems: setting targets and exercising the discipline and the will to pursue them.
If scale was truly a factor there would be no such thing as an efficient big country or an inefficient small one. Though there is a great disparity in the size of our countries, we both depend heavily on the prosperity of other countries in the region. It was this perception of inter-dependence and complementarity which lay behind the founding of APEC; the Asia Pacific Economic Cooperation process.
APEC is about securing future growth in trade and prosperity in the Asia-Pacific region and beyond. In this both Japan and New Zealand have a real and continuing national interest. Japan has major trading, resource links and investment in the region. Over 70 per cent of New Zealand's trade is with APEC economies. We both have the strongest possible reasons to contribute to the APEC process to the best of our ability, and to encourage others to do the same.
APEC has given us a vision of free and open trade and investment, and target dates to work to. APEC can play an important role in lifting the sights of the global trading system, by encouraging governments to accelerate, deepen and broaden the commitments made in the Uruguay Round of Trade Negotiations. Last year's leaders meeting in Osaka chaired by Japan marked a major milestone in the implementation of the APEC vision. I commend Japan for the leadership it demonstrated as APEC Chair.
We look forward to Japan's continuing support as officials, ministers and leaders meet during this year to work on overall strategy, and on individual action plans. In July, New Zealand will host the APEC trade ministers meeting in Christchurch. This meeting will look to the Singapore World Trade Organisation Ministerial in December. It will also give APEC trade ministers an important opportunity to review the preparation of APEC action plans.
The focus will be on harnessing regional economic dynamism to further enhance the multilateral trading system. For this meeting, as for all APEC meetings, the support of the business community in maintaining the momentum of the process will be critical. While governments can construct frameworks, only private enterprise can build the trading links which will deliver practical benefits - commercial and employment opportunities - to companies, workers and consumers.
And Japan stands to be one of APEC's biggest beneficiaries. Those who still tend to see APEC and the WTO as difficult challenges, rather than opportunities, should bear this in mind. Some people wonder why New Zealand is such a strong supporter of liberalisation, both at home and internationally.
It is perhaps easier for New Zealanders to appreciate the benefits of liberalisation than it is for those who have not been through the restructuring process that we have under-gone. But we are not alone in our belief in the enormous dividends to be gained from domestic reform and fairer and freer global trade. Strong economies provide the foundation for political stability and social progress.
A commitment to liberalisation is a commitment to a shared and prosperous future. Thank you for your attention.
ENDS
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