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Speech

The role of the China-New Zealand relationship in raising living standards

Issue date: 
Tuesday, 25 September 2018
Corporate author: 
Document Date: 
Publication category: 
Fiscal year: 
2018/19

Gabriel Makhlouf
Guanghua School of Management, Peking University
Beijing, China
25 September 2018

Introduction

Hello everyone, it is a pleasure to be here.

I have been fortunate to visit China on many occasions. Coming from New Zealand, it is easy to notice the differences between our two countries. We differ in size, in population, in history, in culture, in systems of government. Yet there is so much that we have in common. I am Secretary to the Treasury, the New Zealand Government's lead advisor on economic and financial policy. Some of you are students or faculty of Guanghua School of Management, with a keen interest in economics and commerce. And some of you may have already achieved commercial success yourselves. All of us here want open trade, thriving business, and economic growth. Those things matter for our material wellbeing. But they are only a subset of what contributes to the quality of our lives. I'm sure we share a belief in the importance of good health and education, decent housing, the support of family and friends, a clean natural environment, a safe and peaceful society. We seek that for ourselves and for future generations.

Today I will talk about how New Zealand is focusing on more than just income and GDP growth to raise living standards. The Treasury is leading work on achieving a sustainable improvement in wellbeing through growing human capital, natural capital, social capital, and financial and physical capital. This wellbeing approach is applicable beyond government; it is relevant to businesses that seek both to create profitability in a financial sense and to create wider value for the economy and society. I shall also discuss why international connectedness is crucial for increasing material wellbeing. In particular, the strong relationship between China and New Zealand – whether it be trade, investment, personal connections, or shared interests in international rules-based systems – makes a positive difference to living standards in both of our nations.

Living Standards Framework

The New Zealand Treasury's ambition is to integrate a broader conception of economics and value into the everyday work of public policy. While New Zealand's experience is by no means unique, I believe that we are someway further down the path of turning this theory into reality.

For some years now, the New Zealand Treasury has been developing what we call our Living Standards Framework. More recently, the New Zealand Government has announced its intention that its 2019 Budget will be a 'Wellbeing Budget' that applies and draws on this conceptual framework.

Our Living Standards Framework is based on four capitals which, together, I like to describe as our economic capital.

Starting with natural capital, this refers to all aspects of the natural environment needed to support life and human activity. It includes things like soil, water, plants, animals, as well as minerals and energy resources.

Social capital describes the norms and values that underpin society. It includes things like trust, adherence to the rule of law, cultural identity and the connections between people and communities.

Human capital encompasses people's skills, knowledge and their physical and mental health. These are the things which enable people to participate fully in work, study, recreational activities and society more broadly.

Financial/physical capital includes things like factories, houses, roads, hospitals and financial assets. These are the human-made things involved in commercial and non-commercial activity.

The idea is that this collective economic capital generates flows that enhance individuals' wellbeing now and in the future. So our overarching focus as economic policymakers becomes intergenerational wellbeing, which depends on the sustainable growth and distribution of the four capitals.

Measuring the economy is not like measuring the natural world. Economic relationships are always changing, and so our measurement systems need to adapt.

Therefore, one of the most important tasks we are currently focused on is creating this credible measurement framework. By the end of this year we will have a dashboard of measures that draw together the best available evidence and indicators that paint a picture of the state of intergenerational wellbeing in New Zealand.

The aim is to create a meaningful base of information for policymakers and the public, that can help illuminate two key questions:

  1. What is the current state of our citizens' wellbeing? This needs to take into account a wide range of dimensions that contribute to helping people live the lives they value.
  2. Can the country sustainably generate these flows of wellbeing into the future? This needs to consider the comprehensive economic capital stocks that underpin that wellbeing.

Why the business sector should care about wellbeing frameworks

So why is a focus on wellbeing relevant to the business sector? Two reasons: One, this kind of thinking is not a million miles from the sort of thinking behind the Integrated Reporting (IR) movement that I'm sure many of you are aware of, if not actually practicing. IR is in an early, somewhat experimental, stage of development, like the wellbeing frameworks being developed not just in New Zealand but in other countries too. So, that means that we can all learn from the experience of others who are working in similar areas, whether in the business sector, social enterprises, non-government organisations or the philanthropic sector.

Second, the LSF is intended to support not just the government business of allocating spending through the Budget process, but all the other things that governments do to support wellbeing and which impact on business.

None of this really changes the core functions of government when it comes to providing a supportive environment for business and other private sector activity.

The difference really is that these government activities, in time, will also be informed – so we intend – by a more transparent and evidence-informed approach to governments' choices, taking into account all the wellbeing dimensions and long-run impacts.

Here in China, I'm aware that the Government has reinforced the importance of businesses disclosing their environmental performance alongside financial performance, in what's called 'Green Reporting'. Under China's Measures for the Disclosure of Environmental Information enacted in 2007, there are mandatory reporting requirements for state-owned enterprises, and corporations are strongly encouraged to report on their environmental impact and activities.[1]

I hope the emerging LSF approach we are taking in New Zealand will resonate with the business sector in China, not just because business has a keen interest in the regulatory component of its operating environment, but also because, increasingly, social licence is in some cases just as relevant as regulatory licence as a conditioning factor for strategic planning.

The business sector monitors macroeconomic data for trends in general business conditions and it could do the same for environmental and social conditions. If we all have a joint interest in trends in the various wellbeing dimensions, either because they are becoming relevant for business planning and investment directly, or because one could anticipate or support government action in response to the trends, then the Dashboard or a Chinese equivalent could end up being an asset for everyone, not just for government departments like the Treasury and its particular policy advice purposes.

International connectedness

I would now like to turn attention to what is arguably the key strategic opportunity for increasing prosperity and living standards: international connectedness, or what is commonly called globalisation.

Globalisation is the process by which the world has become increasingly interconnected as a result of increased trade, capital flows, communications and cultural exchange. It has been taking place over many hundreds of years, but has accelerated enormously over the last half-century.

A key word here is 'connectedness'. Using the catch-all term 'globalisation' is convenient but to my mind it doesn't really capture the important nuances of the international flows of trade, capital, people and ideas. I prefer to talk about 'international connectedness'. While I still use 'globalisation' because of its familiarity, 'international connectedness' conveys that countries have choice, and it's a better description of reality.

Globalisation's big effect – the combination of greater and relatively friction-free connectedness – has been to enable the construction of intercontinental value chains and to create a much finer global division of labour. It has led to differentials in wages between high and low-income earners, due to the relative demand for skilled labour. The changes have happened quickly and impacted particular industries and communities significantly. There has been a huge reduction in global poverty: according to World Bank data, back in 1990 there were just under a billion people living in absolute poverty (less than US$1.90 per day in 2011 dollars) in the East Asia and Pacific region, more than the rest of the world's people living in absolute poverty combined. By 2013 that number had fallen to 71 million, a drop of around 93 percent in a single generation.[2]

The advantages of international connectedness are obvious for New Zealand as a small, open economy. For the first time in New Zealand's history, we're part of the fastest growing region in the world, not just here in China but in India, Vietnam, the Philippines, Malaysia, Indonesia and elsewhere in the Asia-Pacific region. From New Zealand's perspective that is enormously important for our international connections, for tourism, for our export education, for our services, for the high quality agricultural commodities that we produce now and the new products and services we will develop in the future.

International connectedness is alive and well in our region and across most of the rest of the world. As you will know, in Asia the debate isn't about closing up; it's about how to grow, how to improve infrastructure (for example, through the Belt and Road Initiative), how to connect with trade partners in the region and beyond and how to enjoy increased prosperity.

We have seen that open economies grow faster than closed economies, and salaries and working conditions are almost always better in businesses that trade than those that do not. The converse is also true. If an economy shuts in on itself, it also shuts down opportunities to raise living standards. And the smaller the economy, the fewer the opportunities to improve those living standards.

The more open an economy is, the more able a country is to specialise in its areas of comparative advantage, which is a country's ability to produce a particular good or service more efficiently than another good or service that is traded with other countries. Mutually beneficial specialisation allows overall economic output to be higher than when countries are closed to trade.

New Zealand has a very small market, so in our case specialising is important. It helps us to overcome the limitations of size and gain economies of scale through access to larger markets. Of course the flow of trade is a critical factor but it's not the only one. The international flow of capital helps bring in financial resources that enable our businesses to grow, as well as enable New Zealanders to pursue opportunities to invest beyond our shores. Flows of people and ideas have the potential to lift the skills of our workforce, raise our productivity, improve our cultural literacy and open up deeper links to overseas markets.

And, fundamentally, being an open economy – an internationally connected economy – makes New Zealand more resilient. The resulting bigger economy is better able to grow in the good times and successfully weather its way through the bad times.

International connectedness is far from a new phenomenon; it goes back thousands of years. The phase of globalisation most familiar to us now is the burgeoning of free trade and investment since the late 1980s. Over this period, China has become the powerhouse in global manufacturing and trade that it is today. Outstanding economic growth accelerated the process of globalisation even further. As trade barriers started coming down, advanced and emerging economies alike also set about liberalising restrictions on international investment. The arrival of the internet and digital technology has added fuel to the growing connectedness.

The outcomes of these changes have been profound. According to the OECD, foreign direct investment flows have been about 2½ percent of world GDP over the last decade; in the early 1980s they were less than a half percent. And back in 1990 the ratio of global trade to world GDP was 30 percent; by 2015 that ratio had doubled to around 60 percent.[3]

In some countries – including in New Zealand – there has undoubtedly been a mood of uncertainty about the value of globalisation and, in fact, the value of free trade. It's important that those of us who support international connectedness and free trade acknowledge and address that mood.

In my view, that mood stems primarily for two reasons:

  1. the impact of change, and;
  2. the lack of a narrative to help the community understand the change, and the benefits that we expect to be delivered.

There are some nations around the world where the rapid growth in global trade, the creation of new value chains and the emergence of new markets and huge pools of relatively inexpensive labour have undoubtedly led to large-scale and relatively rapid economic dislocation. We're not just dealing with the consequences of free trade and greater international connectedness but with the challenge of adapting to change. As Paul Krugman said over twenty years ago now, “technological change, not global competition, is the really important story”.[4] And a world of rapid change is likely to continue to dominate our lives in the foreseeable future.

The truth is the benefits from free trade tend to be diffuse and long-term in nature, but losses are often sharp and very concentrated on particular individuals, firms and regions. Moreover, the people most affected are sometimes those with the least capacity to adjust on their own.

As we aim to take advantage of international connectedness, we must address its challenges. And the most significant challenge is likely to be on jobs from both greater international connectedness and greater digitalisation.

The IMF, WTO and World Bank all stress the need to support the individuals and communities at risk of being left behind by the dislocation of globalisation.[5]

They point to the importance of domestic policies on training, income support, education and other areas to ease the transition for affected people. In the face of uncertainty about the pace and scope of change, it's important that we ensure our policy settings encourage adaptability and resilience. We need to monitor change, continue to focus on building a skilled and resilient workforce, and expect and enable the economy to adapt to change as it happens.

Policy should aim to enable small but frequent adjustments to changes caused by economic forces. As Richard Baldwin of the Graduate Institute of International and Development Studies has said, “One rule for twenty-first century social policies is that they should adhere to the principle of protecting individual workers, not individual jobs.”[6]

It's important that workers – whether in China, New Zealand or elsewhere – have skills that are adaptable and transferable. People need to be able to move from industries that may be affected by technology and competition to those that are growing, taking up new opportunities that technology and greater international connectedness actually creates.

A major concern is the lack of a narrative to help communities understand the changes happening in the world, why they may be experiencing dislocation and change and why greater international connectedness will, in fact, improve their living standards.

Narratives matter. As Robert Shiller has pointed out, “the spread and dynamics of popular narratives, the stories, particularly those of human interest and emotion, and how these change through time”[7] have an impact on the economy.

There's always a narrative, one that may be created by the main actors in a story, intermediaries like the media, or simply by events. Vacuums are quickly filled.

We have not been good at creating a narrative of international connectedness. We have assumed that the benefits are self-evident. Perhaps that's true for some but the evidence indicates that it hasn't been true for everyone.

Right now I think it is particularly pressing to develop a narrative that supports a rules-based international order for the Asia-Pacific region. New Zealand's Prime Minister Rt Hon Jacinda Ardern recently said that “For the past 70 years, the global rules-based system has supported our cultural and economic growth, and significantly reduced the risk of conflict between states. It's important countries do not turn their back on this system.”[8] She is emphasising this message at the United National General Assembly in New York this week and it's a topic I'll come back to later.

NZ-China relationship

Out of all of our international connections, the relationship between New Zealand and China is among the most significant. It is a relationship that goes beyond diplomacy and trade. It's also about the links between people, about investing in our mutual success, and about recognising our shared interests in the world. It's a relationship that lifts the wellbeing and living standards of both nations.

Chinese people first came to New Zealand in large numbers during a gold rush in the 1860s, and there have been established communities of Chinese in New Zealand since at least the 1880s.[9]

It hasn't all been one-way traffic. New Zealander Rewi Alley helped establish the Gung Ho movement in the 1930s and dedicated 60 years of his life to improving the living standards of Chinese workers.

In recent decades, the number of people identifying as Chinese in New Zealand has risen greatly to around 200,000 people now. In 20 years' time, the number of people is projected to reach up to half a million. That would make Chinese the fourth largest ethnic group in New Zealand.[10]

This demographic change prompted the Treasury to seek out Chinese and other Asian New Zealanders' perspectives about what matters for wellbeing, as part of our work on living standards. What came through was an emphasis on social capital and physical and financial capital. There is a strong belief in the value of collectivism, diligence, responsibility, frugality and recognition of hierarchy in relationships. Based on these perspectives, some of the significant wellbeing indicators suggested include social cohesion, cultural recognition, employability and access to government services like health care and language assistance.[11]

About three-quarters of Chinese people living in New Zealand were born in China. At an average age of 30 years they are a young part of New Zealand's population. Migration requirements also mean that they typically have better skills, education and business experience than average. In addition, it is typical for Chinese migrants to New Zealand to travel back to China or to other countries frequently.[12]

What this tells me is that we have tens of thousands of young, smart, business-savvy people with personal ties connecting China to New Zealand. I don't think either of our countries capitalises on this nearly enough. How many firms could benefit from having the insights into the culture and thinking of their overseas markets' customers? Yet we are barely tapping into the people-to-people connections right in front of us. If we did, I believe we would see a boost of two-way investment between China and New Zealand.

As Hon David Parker, New Zealand's Minister for Trade and Export Growth has said, “New Zealand welcomes productive foreign investment when this adds to the economy, and [we are] committed to maintaining New Zealand as an open, outward-looking trading nation.”[13]

As at the end of 2017, the stock of Chinese FDI in New Zealand was almost NZ$8.3 billion. China's broad foreign direct investment in New Zealand straddles primary industries and forestry (30%); infrastructure and utilities (20%); and manufacturing (15%). Chinese investors are the largest foreign investors in New Zealand's primary products exports, waste management, whiteware goods, and tourism infrastructure. Over half of the 25 largest Chinese investors in New Zealand are state owned enterprises including Huawei, Yili and Haier. New Zealand's limited overseas direct investment in China is NZ$2.3 billion mainly concentrated in the dairy and manufacturing sectors.[14] I'm sure you'd agree that there is significant potential for inward and outward direct investment between us to grow.

We already know that doing business with each other contributes to higher living standards in both countries. Ten years ago New Zealand was the first developed country to enter into a free trade agreement with China. Through trade our respective products and services have become part of each other's lives.

Over the last decade, the value of our two-way trade has tripled to reach NZ$27 billion in 2018. In the same period, New Zealand good exports to China have more than quadrupled. As of last year, China has overtaken Australia as New Zealand's largest trading partner, and you are already our largest goods and services export market.[15] We are an ambitious country, but we are prepared to admit that despite excellent growth, New Zealand will not become China's largest trading partner any time soon.

So what do we buy from each other? In what tangible ways does our trade relationship help raise our living standards?

For New Zealanders, China provides much of the machinery we work with, the electronics, steel and plastics we use, the clothing we wear, the furniture we sit on, and even the toys and sports equipment we play with. It added up to nearly NZ$11 billion of goods in 2017.[16] Without trade with China, there is no question that New Zealand's material wellbeing would drop.

For Chinese, you might eat dairy products, meat, seafood, fruit and honey from New Zealand. You could be nourishing your children with New Zealand infant formula, or building your homes with New Zealand wood. You might know someone who studied in New Zealand or even studied there yourself, as China is our largest education market. China is also our second largest tourism market, so perhaps you plan on going to New Zealand on holiday.[17] In fact last year, the leaders of New Zealand and China jointly announced that 2019 would be designated the China-New Zealand Year of Tourism. I suggest you book your tickets now or welcome your New Zealand friends to visit. What these examples show is that China's living standards benefit from the New Zealand trade relationship too.

The trade relationship continues to develop. Our leaders have agreed to upgrade the Free Trade Agreement to further free up trade in goods and services. And this is not the only agreement our countries are working on. The Regional Comprehensive Economic Partnership, or RCEP, is a free trade deal being negotiated by the 10 ASEAN members and Australia, India, Japan and South Korea as well as China and New Zealand. The negotiations started back in 2012 but it's hoped that they will be near to a successful conclusion by the end of this year.

I believe one of the main reasons the China-New Zealand relationship is so close and constructive is because we both recognise the importance of diplomacy. The diplomatic relations we established in 1972 have matured to the point where in addition to our respective embassies in Beijing and Wellington, New Zealand has Consulates in Shanghai, Guangzhou and Chengdu, and China has Consulates in our major cities of Auckland and Christchurch.

Constructive diplomatic ties are important not just because of the bilateral relationship but because we each have interests in the wider Asia-Pacific region.

This year the New Zealand Government has re-set its approach to working with our Pacific neighbours. Primarily, our aim is to support the independence and self-sufficiency of Pacific nations, for example through investing in Pacific projects with long-term benefits and establishing a Strategic International Development Fund. We believe it is in everyone's interest in the region – including New Zealand and China – to encourage sustainable economic development, good governance, respect for sovereignty and the rule of law.

We cannot take these things for granted. As you know, there are geopolitical and economic tensions and challenges in the Asia-Pacific region. An important role that New Zealand can be trusted to play is to act as an honest broker between competing interests. It's a crucial role at a time when the international rules-based trade system is under threat.

What New Zealand strives for is an open, inclusive, and rules-based regional order, and I believe China would support that goal. It's a goal that contributes to higher living standards for both of our countries and the other Asia-Pacific nations.

International rules-based frameworks

Stability, certainty, the rule of law, well-functioning markets and peaceful political processes help to create supportive conditions for investment and employment and ultimately an improvement in wellbeing. And as Daron Acemoglu and James Robinson[18] made clear, strong institutions are also critically important.

In fact, alongside openness and connectedness, strong institutions play a big role in the management of the global economy and a particularly important one for small states such as New Zealand. Global institutions, whether they are international organisations such as the WTO or the IMF or whether they are formal treaties or agreements or frameworks, help to set rules – the 'architecture' – for international connectedness. This architecture 'levels the playing field' for all countries and helps to create a stable and safe environment for business to be conducted or for disputes to be resolved. They also provide a forum for the harmonisation of regulations which make it easier for businesses to access foreign markets.

The path of trade runs smoother when rules are consistent and nations agree to follow them. For that reason, New Zealand's foreign and trade policy supports the components of the international system, such as the WTO, United Nations and international development banks. We want to not only see them reinvigorated, but also improved and strengthened to better manage today's global challenges.

New Zealand has long been a champion of the multilateral rules-based system and we have done very well out of it. For example, New Zealand has been one of the chief beneficiaries of the 1994 General Agreement on Tariffs and Trade (GATT) Uruguay round which began to liberalise trade in agriculture. GATT has been replaced by the World Trade Organisation (WTO). We are a chief beneficiary of the WTO's disputes resolution mechanism. The mechanism is binding and sets parameters for a country to pursue a trade dispute against another over a trade problem. That allows the dispute to be sealed off from the rest of the bilateral relationship.

To give a more recent example, New Zealand was a founding member of the Asian Infrastructure Investment Bank (AIIB) and the first western developed country to join the negotiations to set it up. This signals our strong commitment to the goals of regional development and cooperation in Asia. We retain a strong sense of ownership over the success of the Bank.

The governance arrangements set for the AIIB meet or improve on existing best practice at International Financial Institutions, centred on the need for inclusiveness, openness, transparency and accountability. In addition, the Environmental and Social Framework that has been adopted by the AIIB is considered to be at least on a par with that of other Multi-lateral Development Banks.

Just as New Zealand benefits from participation in the rules-based system, I believe others benefit from our participation. We are a respected advocate for more effective rules to ensure that good standards are achieved, including in areas such as corporate governance, competition policy, responsible business conduct, environmental protection and anti-corruption. These areas support the wellbeing of all nations.

Conclusion

To conclude, New Zealand is pursuing higher living standards by looking beyond just GDP and considering the multiple facets of wellbeing. Green mountains and blue rivers are as good as mountains of gold and silver. Greater international connectedness represents a major strategic opportunity to raise living standards, a fact that is well demonstrated by the China-New Zealand relationship. Our people-to-people connections, our strong trade partnership and our shared interest in international rules-based frameworks all make a positive difference to the wellbeing of Chinese and New Zealanders.

References

Additional references

Last updated: 
Tuesday, 2 October 2018