Labour's Cunliffe on a smaller MED, currency intervention, private involvement in SOEs

By Alex Tarrant

The Labour Party would create a “smaller, slimmer” Ministry of Economic Development (MED) that partnered up more with private sector advisors, Labour’s finance spokesman David Cunliffe said.

Cunliffe was answering questions after speaking at an Institute of Policy Studies seminar, where he attacked the National-led government’s handling of the economy. He said this was highlighted by the move by Standard and Poor’s to put New Zealand’s credit rating on negative outlook on Monday.

The role of the traditional economic development agencies would change under a Labour government, Cunliffe said.

“More MBAs, more PhDs, and [fewer] Bachelors graduates will do the work.”

“We’ll have a smaller, slimmer MED with more partnerships with outside advisors, we’ll have rigorous performance measures, we’ll measure rate of return on investments, we may take more equity stakes,” Cunliffe said.

“We will not have averagely qualified bureaucrats making private sector participants jump through hoops that they find irrelevant and then not measuring the results,” he said.

Earlier in the speech Cunliffe touched upon possible policy measures for Labour heading in to the 2011 election. More detailed policies would come in the new year, he said.

On the currency

Something needed to be done on how New Zealand handled its currency due to changes in the global financial environment, Cunliffe said. The majority of countries now had now moved away from clean floats of their currencies, he said.

“We are particularly small, and we are particularly exposed," he said.

“We are not advocating pegging the dollar and we do accept the need for caution in respect of our currency, but we also agree that the current status quo is killing a lot of manufacturing exporters. And just imagine if we were not sitting on a 30 year spike in agricultural commodity prices, what would Federated Farmers be saying about it then?”

The world was entering a new and difficult part of its history, in which there was essentially a long run relative decline of the [US] economy that housed the world’s reserve currency, Cunliffe said.

“We’ve got the rapid rise of competing economic power blocs in East Asia. The world’s transition to a much more multi-modal, multi-centric global financial system could either be moderately tricky or bloody awful. We hope it will only be moderately tricky, but that’s going to require give and take by both the Chinese administration and the American administration, who seem to be talking past each other in the G20 context.

“To hear it from the American side it’s all about the fact that China is artificially depressing the Yuan. To hear it from the Chinese side it’s all about monetary easing in the US.

“These guys have to get together and work something out or the whole planet will suffer.”

Monetary Policy

Labour would reform the Reserve Bank Act and the Policy Targets Agreement, Cunliffe said.

“We would retain the operational independence of the Reserve Bank and the current 1-3% inflation target, but broaden its objectives to include external balance and growth, including exchange rate conditions for Kiwi exporters,” he said.

“We would broaden the monetary tool set to explicitly include complementary monetary instruments like a counter-cyclical core assets ratio and consideration of an inbound transactions tax.”

'Unleash SOE’s'

Labour would look to better leverage the Crown’s balance sheet in “new and innovative ways,” Cunliffe said.

“We can expand public-private partnerships for new transport infrastructure. The project scale must be right and the PPP benefits must outweigh any increase in cost of capital, but that leaves plenty of scope for win-wins.

“We can unleash State Owned Enterprises to create and grow new subsidiaries with private partners and shareholders, without diluting the taxpayer’s equity, or wholly or partially privatizing the SOE.

“We’ve already seen a huge example of success in the government’s creation of Kiwibank: that investment has increased the value of NZ Post far beyond the value of the initial investment."

'Need bigger, diverse companies'

New Zealand needed more big, diverse companies like Gallagher, Icebreaker, Via Lactia and Fisher and Paykel Healthcare, Cunliffe said.

“We simply cannot expand bulk commodity production enough, or guarantee commodity prices high enough, to lift GDP per capita to the levels we aspire to,” he said.

“But neither should we presume that there is a false choice between our primary endowments and our innovation strengths.”

During the question session, Cunliffe was asked whether government should be picking winners in its quest for bigger companies.

“Clearly we need more large companies. Where do they come from, well we’re going to have to take some medium ones and grow them,” Cunliffe said.

“I’m personally pretty uncomfortable about the government picking company winners at the firm level,” he said.

“I would rather see us create the business environment and systems whereby more companies can do better. I’m not averse to identifying high potential sectors, or intervening to promote opportunities and regions.

“It is a very second best world to drop down from that, to say it’s got to be company X because there [are] all sorts of issues around private property rights and minority shareholders and so forth,” he said.