SPEECH: Institute of Directors

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Source: Labour Party – Press Release/Statement:

Headline: SPEECH: Institute of Directors

LEADING AND MANAGING OUR ECONOMIC FUTURE

David Cunliffe MP, Labour Leader
Speech to the Institute of Directors
15 April 2014, Auckland

It’s a privilege to be speaking here. The Institute of Directors has a proud history of developing New Zealand’s business leadership and your alumni are guiding many of our most vital and innovative companies to great achievements.

As New Zealand’s most senior company directors, your governance role draws on the distinction between strategic leadership, and day to day management.

Of course you want to see your companies well managed.

You expect to see tidy reports, clear deliverables, performance metrics and prudently managed budgets.

But you also know tidily minding the shop while a company is headed down a strategic dead end is not good enough.

I’m sure there were some extremely well managed horse and buggy outfits.

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Encyclopedia Britannica looked good before the rise of the Internet and Wikipedia.

And newspapers once thought they could survive without websites.

Ensuring long-term growth and success requires a bigger vision, the ability to look ahead, to understand not just how to manage in the market as it is now but where it will be. And it takes an understanding of how to shape a business to take advantage and thrive across more than just the next business cycle. In short it takes governance and leadership.

The same imperatives apply even more strongly to countries.

Competent day-to-day management is a given.

Fiscal prudence – balancing the Crown’s operating books across the economic cycle – should also be a given.

It is for Labour. We ran nine fiscal surpluses out of nine last time. We resisted the claim of others for inflationary tax cuts. We paid down the net Crown debt. And we will run a fiscal surplus next year.

That’s okay as far as it goes, but it is not enough.

New Zealand has a massive debt problem – but it is over 80% private and less than 20% public.

So strategic leadership – good governance – is about the big picture.

Simply managing government’s costs won’t change the answer. In fact it may make it worse if cuts made result in the slack being picked up with less efficient private debt.

Such are the perils of managing without clear strategic governance.

Leadership, true governance, is about helping to see that big picture – whether for a company for a country – and working backward from that to the strategic imperatives needed for change today. It includes prudent cost management, but goes far beyond it.

The problem

We need to look past the milk sales and insurance cheques that are inflating the economy, so that when the cheques stop and the commodity prices come back down to earth we will have alternative drivers of sustainable prosperity.

Patting ourselves on the backs when commodity prices go up and tightening our belts when they drop isn’t an economic strategy.

Remaining a commodity price taker, while most of the value is added offshore and owned by others, is a mug’s game. Little wonder that our current account balance represents a serious structural problem – it makes it harder to raise capital for productive investment and it makes our debt more expensive.

When dairy prices fall and insurance cheques run out, then what?

 

The economic upgrade

If New Zealand is to have a prosperous, sustainable economy that supports better jobs and higher incomes, then we need a strategy to achieve that.

We call that strategy the Economic Upgrade.

It has three parts:

  • Investment,
  • Innovation,
  • Industry.

Investment

If we are going to create an economy with better jobs and higher wages, we need to build onshore capital and make sure the incentives are in place to guide it to the right places.

But under the current settings the local capital markets are shamefully thin. Propping up the NZX with energy companies isn’t much help.

Add to that the fact that our national savings rate is dismal, and that we’re not handling our foreign investment particularly well and it becomes clear why there is a significant shortage of capital, especially venture capital to go towards Kiwi businesses.

And that capital shortage is exacerbated by our tax settings which see too much capital finding its way into unproductive housing and land speculation.

It’s clear that we need to upgrade the size and focus of our capital markets if we are to build an economy that we own.

Our approach to doing that is multifaceted. On one side of the equation we will increase the local investment pool available to New Zealand businesses by making Kiwisaver universal, building on the success of Labour’s original scheme, and once in surplus we’ll restart payments to the NZ Super Fund, one of the greatest economic successes of the previous Labour government.

But increasing the investment pool will do nothing to build a resilient economy if that money disappears into speculative property bubbles, which is why we will also introduce a capital gains tax to help shift money from speculative investment to investment in production and innovation.

Foreign direct investment (FDI) should also support long term development of local production, value-adding and export opportunities.

Offshore housing speculation is driving housing prices up and locking Kiwi families out of owning their own homes. Wealth leaves our shores and Kiwis lose out.

Labour will adjust FDI to attract quality investors with credible business cases designed around creating jobs and providing new technology to New Zealand companies.

We welcome foreign investors into our economy but only if they contribute to sustainable and durable growth.

We will not allow non-resident foreigners to purchase residential real estate, or farmland over 5 hectare parcels.

Our changes to Overseas Investment Office (OIO) rules will ensure overseas investors will prioritise access to leading-edge technology and new overseas markets.

We are a small economy with a currency that the IMF says is overvalued. Our exporters are particularly vulnerable to our consistently overvalued and volatile exchange rate. We have long signalled we will review monetary policy to ensure our dollar is more fairly valued to help our exporting business and lower our external balance. My Finance Spokesperson David Parker will be announcing the full details of our monetary policy in the very near future.

Innovation

If we are to transform ourselves from a nation dependant on raw commodities to a nation that can sustain and improve our standard of living in a constantly evolving international economy, we need that second “I”, Innovation.

To be a high-tech, sustainable economy that offers skilled jobs and high wages we need to be at the forefront of global innovation. Innovation is the best way of creating sustainable competitive advantage. Put simply, if we don’t innovate we will not be able to compete.

We have an innovative culture. It’s part of who we are – it’s who we have had to be as a small country at the far end of the world.

But, sadly, New Zealand’s current investment in commercial R&D is well below par in global terms, and we are particularly weak in private R&D

Our R&D spend is currently 1.27% (2012) of GDP, of which only 0.58% is private spending.  Compare that to Denmark, with 3.07% (2010) or Israel at 4.34% (2010).

We need to turn our numbers around, and fast.

By renewing the R&D tax credit and increasing Crown investment in R&D over time, with a focus on co-funding from the private sector, we will turn that boat around.

That is the culture Labour will be encouraging in our research and teaching institutions; unleashing our best minds into partnerships with industry.

Labour also brings a broader concept of innovation to the table.

We must meld our creativity with capital to build small to medium companies which dominate in market niches. We must foster talent to develop innovative products and services that people want to buy, and we must protect our intellectual property.

We will be making further announcements on how a Labour-led Government will encourage small business growth.

Industry

Investment and innovation are the essential frameworks for supporting business and growth and leading the economic upgrade.

But it is also essential that government works alongside businesses. New Zealand can lead in the global economy but we need to recognise that we are competing with far bigger and stronger players than us.

That means we need government to back positive Kiwi businesses, not just leave them to fend for themselves in the international market.

We want to attract industry to New Zealand’s regions by encouraging the kind of value-added, innovative industries we need to turn our regions into engines of growth.

We want to see local economies flourishing because we want good jobs in all our regions. Strong and cohesive communities add strength to the New Zealand economy as a whole.

That’s the rationale behind the first of our economic upgrades – the Forest and Wood Product Economic Upgrade. We announced that policy because more and more of our trees are being exported as raw logs.

In fact raw log exports now make up over half of the exports by volume but only a third by dollars. We’ve waved goodbye to hundreds of millions of dollars of potential profit and increased wages as we’ve watched those raw logs head over the horizon.

The good news is fixing this problem only takes a handful of carefully thought out and targeted measures. Like a pro-wood policy to help drive domestic demand and smooth demand cycles, and a targeted tax incentive to encourage investment in processing plant and machinery.

Over the coming months we’ll be announcing other sector-specific economic upgrades. We believe that it is important that we are very clear about how the next Labour government will support business in its journey from volume to value.

We will work alongside businesses, communities, local governments, iwi, and others to build resilient solutions.

That means a partnership approach, not just imposing solutions from the Beehive.

Sustainable economic development means jointly developing a common vision, well-understood strategy and an engagement structure for each region. 

There is no single template for regional or sector growth. But disengagement achieves nothing. We must work together and ensure all our industries are humming. 

 

Conclusion

Nearly all companies have to make the crucial decision whether to be low-cost operators or differentiators. The choice between low margin high volume production typically requiring low skilled workers with similar low wages, or focusing on developing high value products with strong margins that require skilled, well paid, workers.

It will come as no surprise to you that Labour believes New Zealand will be best served if our economy, on the whole, is tilted to differentiation strategies. Given our small size and remarkable capabilities it is the natural way the economy should evolve.

We’re not talking about some company by company intervention, but about a partnership approach on a sector and region basis, to grow our whole economy and ensure New Zealanders can prosper and thrive.

If we are going to do this, not just for now but for future generations, we need to recognise that it is simply not enough to ride the economic cycles, to shrug our shoulders and claim we can’t change anything.

That’s a vision for New Zealand as a nation of price-takers.

It’s not a vision that I share. In business you make your own luck. It’s no different in government – we need to work smartly and strategically to develop an economy that we own and that works for everyone. And we need to do so alongside business, local government, and communities.

You are among New Zealand’s most experience professional directors.

You understand the difference between managing day to day, and leading your companies to face strategic challenges and secure new opportunities.

New Zealand deserves no less than that same calibre of good governance.

New Zealand needs a new Government.

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