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Economic Growth - A Regional and National Challenge

Delivered by John Whitehead, Secretary to the Treasury, to the Local Government Chief Executives Forum on 3 June 2005.

Address to Local Government Chief Executives Forum

Good morning.

Firstly I'd like to pass on my appreciation to the Society for the invitation to speak today. One of the reasons for that appreciation is that it gives me the opportunity not only to talk to you, but to hear from you as well.

So, if you pick up on anything you’d like to raise, I hope you’ll feel free to discuss it at the end of the formal part of the talk.

Overview

The overall theme of this forum is “Working in a collaborative environment”.

My aim today is, therefore to give you some context around the economic aspects of that environment – including collaboration between central and local government, and our efforts to lift economic growth.

My focus on economic growth is, I hope, not a surprise to you! As the Government’s lead economic and financial advisor, it’s obviously a subject that the Treasury spends a great deal of time thinking about.

So I’ll start off by giving you some context about our recent growth performance, and what this might mean for New Zealand going forward.

Then I’d like to turn to what, in my opinion, are key areas for collaboration between central and local government over the next three to five years.

Bearing in mind that the highest payoff to collaboration is most likely to be where growth-related pressures are strongest, I’ve selected the two areas that I think are the most relevant. Those areas are transport and regional economic development .

Finally, I’ll turn to the collaboration side more directly and share with you some thoughts about the challenges that lie in wait for us – challenges where I believe there are important gains if we get it more or less right, but equally significant losses – mainly in terms of wasted effort but also in terms of lost opportunity – if we get it wrong.

The key thought I would like to leave with you is this: realising the potential payoff from central and local government collaboration will require us to be realistic about what collaboration is, when we use it, and how we use it.

Our recent growth performance

 

As most of you are probably aware, we recently released our view of how we think the economy is going, and what’s likely to happen in the future, as the Budget Economic and Fiscal Update.

And, looking back over the past six years, it’s a pretty good picture.

Slide 1: GDP growth
Slide 1: GDP growth

The New Zealand economy really took off after the 1997/1998 recession. Since 1999, growth has averaged four percent, well above the OECD average of 2.6 percent. And in the year to December 2004 alone, the economy grew by 4.8 percent.

That growth has been driven by a number of favourable conditions for us: in particular, solid world growth and favourable terms of trade. World prices for our exports, particularly our agricultural exports, have been high, and demand has also been high. Until recently we’ve had a very strong period of net migration, which has helped push along parts of the economy: most obviously, house prices, which have also seen strong rates of increase.

As well as this, a stronger labour market, rising house prices and increased wealth have underpinned increasing consumer confidence.

Slide 2: Labour Force Participation and Unemployment
Slide 2: Labour Force Participation and Unemployment

Our unemployment rate, at 3.9%, is now amongst the lowest in the OECD. And labour force participation – that is, the number of people either in work, or actively seeking work, has also seen a significant increase.

Of course that overall picture can mask the regional variances. But, as you’ll all no doubt be aware, the regional picture has also been a good one.

The National Bank’s most recent regional trends report shows that we’ve seen pretty good growth across all regions recently.

I don’t think anyone is complaining about our recent strong growth performance. But there are some challenges that we face when we go through a strong, sustained period of growth like the one we’ve seen.

What of course happens is that we start running into, what we like to call at the Treasury, “supply-side constraints”. That is, economic growth gobbles up what’s available, and creates further demands for workers and natural resources.

In the most recent Quarterly Survey of Business Opinion, for instance, over half the respondents identified supply factors as the main constraint on any expansion of their business. And more than a quarter said that labour was the main issue.

You’ll all have seen the impacts of this in your regions I’m sure. These include soaring house prices, higher inflation and interest rates, worker and skill shortages and wage pressures, and increasing pressure on local infrastructure like roads and our electricity network. They also include competition for natural resources: I know in Canterbury, for instance, there are some major issues over water use, and how various competing demands for that get balanced.

These are all challenges that both national and local government has been grappling with at different levels, and in different ways.

That’s the picture looking backward. While there are important lessons to be learned from it, it is more important to look forward. And we should probably separate the short-term outlook from the longer-term picture.

In the near future, we’re not predicting that this extremely-strong growth will continue at current levels.

Slide 3: Forecast GDP growth
Slide 3: Forecast GDP growth

In fact, growth actually slowed towards the end of 2004, and we’re forecasting it to slow further – we’re predicting a growth rate of 2.3 percent in the year to March 2006, and 2.5 percent in March 2007. We then think it’s going to rebound to 3.5 percent in the March 2008 year.

That projected slower growth is due to a number of factors: high interest and exchange rates, lower net migration to New Zealand, slower growth in many of our trading partners, and a forecast decline in our terms of trade – that is, we’ll be spending more on imports than we’ll be earning from exports. We are forecasting that unemployment will rise slightly as the economy slows over the next few years.

While that‘s obviously nothing like the growth we’ve been experiencing, we should still take heart from the fact that there was a time, not so long ago, that growth of 2.5 percent would have been seen as a real achievement, especially near the bottom of the cycle.

Slide 4: OECD Per Capita Income
Slide 4: OECD Per Capita Income

And even at the bottom of the cycle we should still be more or less matching the OECD average. That’s heartening when you think of our desire to get back into the top half of the OECD – and as this chart shows, we still have some way to go to achieve that goal.

Which brings me to the longer-term outlook.

Our strong economic performance in recent times has, to a large extent, been the product of increased labour force participation and employment. While there is still some potential to extract further economic growth in this way, in future there will be a number of pressures working against us, such as changing demographics, the impact of technology on health spending and growing competition from overseas.

And long-term, if we want to continue moving New Zealand up the OECD growth ladder, we’ll need to perform better than the OECD average. How can we achieve this?

The answer is threefold – productivity, productivity and productivity.

Slide 5: Labour Productivity
Slide 5: Labour Productivity

This graph provides a comparison of how out productivity performance (highlighted in blue) rates against other members of the OECD. It is a pretty clear picture.

Productivity is about making better use of technology and the resources you currently have, and getting more out of them. The private sector clearly has a critical role to play in increasing labour productivity, but central and local government will need to contribute an Oscar-winning supporting performance as well.

So while some of the national and regional-level pressure we’ve seen may ease back slightly in the short-term, I think we’re still going to be in a world for the foreseeable future where we face the particular challenges brought by a growing economy – like getting the supply of skills we need, managing wage growth, encouraging new investment, keeping our infrastructure ahead of the game, reducing costs of regulation, managing our energy supply in the context of our Kyoto commitment – and all this while maintaining social conditions that support growth.

And I’m sure you’ve all seen the results of this in your particular regions.

Looking ahead: key pressure points for collaboration

Since the focus of the forum is on working collaboratively, I thought it would be useful to touch on two examples of areas where, to further improve our economic performance, I think engagement between central and local government will become increasingly important over the next few years. The first of these areas is transport.

Transport

You will all be aware of the large investments in land transport funding that the government has made in recent years, including an additional $300 million in last month’s Budget.

And. if we were looking for a classic case study of the collaborative challenge that a growing economy can present, the transport system in our largest city would be a good place to start.

It is not rocket science to argue that Auckland’s transport system is critical to its – and therefore to New Zealand’s – economic performance.

As a rough guide, the impact on growth of traffic congestion in Auckland has been estimated in the order of $1 billion per annum, or about 2% of Auckland’s GDP.

For both central and local government, addressing the problem means working on a range of solutions. Simply trying to build our way out of congestion won’t work - although we think we can do better with roading, as the 2003 Auckland transport package shows.

Traditionally when it comes to roading, both central and local government have tended to focus on supply – building more roads to meet ever-increasing demand. Now we are both increasingly thinking about and trialling measures to limit or spread demand.

As a result we are starting to see innovations, such as school travel plans, which have the potential to significantly reduce peak time congestion in places such as Auckland. And these innovations are, as they should be, being developed at a regional level, to meet specific regional needs.

But not all issues can be dealt with at an exclusively regional level.

There is a larger problem – one that has probably been evident to local government longer than it has to us in central government – and this is the sometimes difficult ‘overlap’ between local urban planning and national transport planning.

For central government, this is quite a challenge, with transport located in the Ministry of Transport and other special-purpose agencies, while urban affairs is a relatively new portfolio inside the Ministry for the Environment. There is no arguing that transport drives urban planning (no pun intended) and vice versa. But the problem is that this understanding falls far short of a culture where policy and operations are genuinely informed by both sides. An example is where the planning of state highways or the national rail system meets urban planning.

In my view, an altogether different response is required. We need to be going well beyond central and regional “co-ordination” here: we need to actually collaborate. I will come back to the difference between co-ordination and collaboration later.

To illustrate this issue, it is worth reflecting on the long-running difficulty of getting coherent transport decisions between Auckland and central government, as well as across local authorities in Auckland. As you know, this difficulty was one of the issues behind the Auckland transport package.

Ultimately, it was a lack of genuinely collaborative decision-making across all agencies which led to the creation of the ARTA, and legislation which requires a collaborative working environment, at both central and local levels.

Clearly there is something awkward about the notion of “imposing” collaboration. But such a drastic step perhaps illustrates how important collaboration beyond local boundaries can be in practice, and the consequences of it not happening where it should.

So, in short, the example of Auckland transport shows that, to resolve the issue posed by infrastructure constraints to a growing economy, requires a collaborative approach both locally and nationally.

Regional economic development

The second area where I think that collaboration between central and local government will be increasingly important for economic growth is, perhaps not surprisingly, our economic development efforts focussed at the regional level.

Obviously the Ministry for Economic Development is the key central government player in this area, and my colleague Geoff Dangerfield will be speaking to you shortly. But before he does, let me get in some thoughts from my perspective.

One question that occupies minds at the Treasury – and obviously minds at the Ministry of Economic Development as well – is this: how much does economic development activity at the regional level affect economic growth?

We know that you collectively invest roughly $150 million per annum in this area, and that central government contributes an additional $20 million per annum (not counting local or national transport funding). But unfortunately it’s near impossible to measure how much GDP growth we get from this investment. Instead we have to look to “softer” research both locally and overseas. So here’s a brief snapshot of what we have learned.

First, almost all OECD governments these days are pursuing active regional development policies – and while NZ has been there before, we are a relative latecomer to the policies seen these days. These policies are aimed not just at economic growth, but also at social cohesion and fairness – improved well-being, in short.

Secondly, the nature of these policies has changed fundamentally. Old approaches of direct assistance to struggling enterprises, support for industries in decline, and investment in “Think Big”-type projects have largely been abandoned. Instead, the focus is now on policies that promote efficiency and provide the supportive infrastructure for growth in a sustainable and balanced way, typically manifested as an emphasis on partnerships.

That includes making the most of regional comparative advantages – rather than imposing a one-size fits-all approach across the board. And that means identifying and making the most of distinctive characteristics and resources of regions that can be exploited economically over the long term. The seafood industry in Nelson, or the art deco character of Napier, are two obvious examples.

It also requires us to think about how we build regional capability, by which I mean not only the resources of skills, physical capital and finance in the region, but more particularly from our point of view the institutions, networks and infrastructure that support economic activity.

Optimising policy to suit local conditions is also critical here – we’ve both learned from experience that the plans and programmes that work in one region can’t just be transplanted to another. So in central government we need to be careful not to inadvertently impose our views about what will work in a region. Which means that in the Western Bay of Plenty for example, our programmes need to be supporting the region’s SmartGrowth strategy, not competing with or undermining it. Thirdly, there aren’t any pre-packaged policies or programmes out there ready to be transplanted with any confidence of success – what matters in this area is simply what works. Which means trial and error, taking measured risks, and continual evaluation.

In summary, this means that economic development must be locally driven if it is to be effective, not “top down”. More poetically, what we want are centres of excellence, not cathedrals in the desert. In practice, a fully “bottom up” approach may be too extreme – different regions are at different stages of development, and regional development should always contribute to national goals as well. But “pre-packaged” programmes are not an answer.

Regional and central government collaboration – when and how?

Given this view of what we mean by regional economic development, let’s turn now to collaboration - thinking primarily about collaboration between central and local government.

If you think about the planning environment which supports this activity, it is complex to say the least.

First of all, thinking about active regional development programmes, there is a large number of local economic development strategies – the 2003 survey by Deloittes suggested that around 70% of all local and regional authorities have one.

Then there’s the Government’s Regional Partnerships Programme, overseen by the Ministry for Economic Development and administered by NZ Trade and Enterprise in 26 regions around the country.

Alongside these, however, there is a raft of other local plans: regional growth strategies, regional transport strategies, business location strategies, regional policy statements, district plans – you know these far better than I do.

And, of course, there’s national regulation and policies: the Growth and Innovation Framework, the New Zealand Transport Strategy, National Policy Statements, and not least of all the Resource Management Act – collectively these have a huge impact on local economic development.

It’s stating the obvious to observe that, to work well, these various strategies, plans and policies need to be aligned properly, not working against each other. The task of getting them more or less aligned is enormous. Many of you will have been involved, for example, in revising regional land transport strategies to line them up with the NZ Transport Strategy – I do not underestimate the demands of that task alone.

Clearly, this is not a world where there will ever be a discrete end-point: these plans and strategies will always be living – in a state of continual revision reflecting changes at local as well as national levels. Dealing with such complexity in any linear fashion is practically inconceivable. It demands another, different, way of working – and the key it seems to me is collaboration.

So we need deliberately to identify the critical areas for engagement, and then focus our collective energies on how both national and local government can work collaboratively to define objectives, shape policies and develop joint services.

Just one example of what I mean: at the local level we are clearly facing problems of both skills and labour supply. From the Government’s side, the solution involves tertiary education, industry (that is, employer-based) training, and migration – these at least.

Where I think there is considerable scope for improvement is how we link the key agencies in these areas into local planning processes, including the community outcomes process. We need local tertiary education organisations, the Tertiary Education Commission, Work and Income, industry training organisations and employers – all of these engaged in and driving their planning off your local planning processes. Collaboration at this level strikes me as potentially overcoming the criticism that all of us are not sufficiently responsive to local needs.

However, while collaboration is important in many areas, we also need deliberately to identify and acknowledge areas where we, in practice, exercise separate roles and responsibilities. I’m talking about areas where we need to focus our respective efforts differently to make sure they add most valuable. In these cases, collaboration isn’t necessarily something to strive for.

Let me give an example here.

The Resource Management Act clearly has a major impact on economic development at the local level. And both central and local government clearly have a huge interest in how it works in practice. But does that require collaboration between the two? I think the answer is “no”.

The Resource Management Act is national legislation that sets out our broad objectives for the management of natural and physical resources. It includes a definition of sustainable management that sets out our environmental bottom line. Many powers and functions are effectively delegated to regional and local government. When preparing plans and policy statements, and in determining applications on resource consents, local government enjoys significant autonomy.

National interest is one of many factors that can be taken into account, but does this mean central and local government should collaborate? Obviously national interests are easier to consider if they have been clearly articulated – whether through National Policy Statements, or through national environmental standards. Local government may then test through their community outcomes processes whether special standards are needed in certain areas – as Waitakere City Council is doing currently in seeking special protection for the Waitakere Ranges.

But just because both local and national government has an interest in a policy, regulation or activity, this on its own does not amount to a case for collaboration. In many instances collaboration would actually be inappropriate because of our different statutory roles. For example, for restricted coastal activities, the Minister of Conservation is a consent authority while councils are consent authorities for other resource consent applications unless the Minister for the Environment decides to call an application in, in which case a special board of inquiry would be set up to hear the application.

Certainly we need to take each other’s views into account. And centrally we need to know that whatever is decided at a national level is workable locally, while local councils need to understand fairly precisely what was intended when the law, policy or whatever was decided. This requires effective consultation. It requires effective communication. But it does not necessarily require collaboration.

My point here is to illustrate that we need to dig below the surface to understand where collaborative effort is justified, and why. Unless we do so, we risk wasting effort, and potentially creating a lot of cynicism about the value of collaboration.

Challenges: lifting the bar

That neatly leads me to some issues I think we need to keep in mind when we’re talking about collaboration between national and local government.

What is “collaboration”?

The first of those issues is – what, precisely do we mean by collaboration? And how do we distinguish it from other things that might look a bit like collaboration but aren’t? Let’s think about what collaboration isn’t:

It isn’t a synonym for consultation – and by this I mean proper consultation, where views are genuinely sought from interested groups and genuinely taken into account in reaching decisions.

It also isn’t a synonym for communication – where we seek to inform each other about decisions made, their implications, their rationale, their aims and objectives, and so forth.

It also isn’t a negotiation – where each party is seeking some form of commitment from the other

It isn’t even co-ordination – where we typically look at making sure that our respective services or policies don’t conflict with or duplicate each other, or for that matter have large gaps.

And finally, it isn’t advocacy – where one party is seeking to raise and highlight an issue or a solution with another who is at least thought to have the means to address it.

The danger is that we start to use “collaboration” loosely to mean any or all of these, and arrive at the table with already-different expectations.

What I think the examples of transport and regional economic development illustrate is that “collaboration” in these contexts refers to joint strategic planning, generally leading to an alignment of policies, or a coordinated delivery of services.

It is entered into with a commitment from both sides to “own” the outcome.

The focus is on agreeing what the problem is, what the objectives are, what the desired outcome is, and so forth, based on an acceptance that all parties have an important interest in an issue, and are more or less equally well-placed to contribute to its solution.

For us, as leaders of our organisations and in our sectors, we need to be clear in ourselves about what collaboration is and isn’t, and expect others around us to do the same. This is a clear prerequisite to us realising a payoff to economic growth from collaboration.

Prioritising our effort

My second issue relates to the fact that we simply can’t collaborate in all of the areas where we have interests in common: we will need to prioritise the areas in which central and local government collaborate.

The Local Government Act 2002 ushered in a fundamentally different –expanded – role for local government. Now you all not only can now be interested in outcomes in your communities across the four well-beings (economic, social, environmental and cultural), but you must be interested in them.

So the potential for collaborative engagement between central and local government has, it seems to me, opened up enormously. So much so that there is perhaps a risk of us drowning in it, to the detriment of everything we do.

That means we need to prioritise collaborative effort. And, to do this, we need to be very aware of where collaboration can, and is likely to, add the most value.

As I suggested with the earlier example about the RMA, this means being clear at the outset about our respective roles, responsibilities, interests, and the contributions we can make.

And, if we do that, we’ll find that it isn’t always the case that collaboration is the best tool – it may be that some other form of engagement is just as good, if not better.

Collaboration is a particularly resource-hungry beast – we have to be confident that it will pay off before we start feeding it.

Keep funding separate

My final issue is how we avoid muddling collaboration with something quite different: requests for funding

I know that in local government, you are on the receiving end of demands for funding just as we are in central government. And I know that we have all developed ways – perhaps not perfect – of testing whether the thousands of funding proposals we receive each year warrant a financial contribution from ratepayers or taxpayers.

Of course, funding is necessarily a sovereign, not joint, decision: both central and local government have their respective accountabilities for the funds we are charged with administering.

How does this relate to collaboration? I think it’s fair to say that sometimes at least, a request to collaborate is really a request for funding, just dressed up in new clothes. In my own organisation we are often asked to “collaborate” with a range of groups, when really what they’d like from us is funding. I understand many of you share this experience.

As a result, I think we have both developed something of an aversion to engaging with others, to avoid the thorny question of funding. And we may be missing out or not focussing on the right questions because of this.

The solution, it seems to me, is that broadly speaking, while acknowledging that funding matters, we keep the discussion about who will commit to funding what separate from the collaborative project.

The Auckland and Wellington transport packages are probably good examples of what I mean. Both were preceded by genuinely and appropriate collaborative work beforehand to define transport priorities and objectives, identify options, and estimate what each option would cost. All well and good. This even included scenarios of how much the parties might contribute, how much debt, and what the shortfall might be. Still good.

But in both cases the discussion stopped short of a commitment to provide funding. In both cases it was clear at the outset that this was not within the scope of the work, and that decisions about funding would be taken separately once the collaborative work had given us a clear picture about priorities and options.

In both cases central government made a separate decision to contribute funding to the packages, and in the case of Auckland, local government is still working out its contribution – and no doubt we haven’t heard the last of that issue!

I’m not trying to pretend that funding doesn’t matter or is a separate issue. It does and it isn’t. The reality is that many of the projects on which we collaborate will require funding in order to proceed. Some will get funding, others will not. My point is that, in working collaboratively, we should recognise that reality, park it, go ahead and plan collaboratively, estimate costs collaboratively, develop funding scenarios to test that projects are realistic – all in the full knowledge that actual decisions about funding will generally take place in some other forum.

If we don’t do so, we risk being unduly suspicious if not outright gun-shy at the outset, potentially clouding our judgement about the value of collaborating. There are other pitfalls, but this is one, I think, we can quite easily knock on the head.

Conclusion

My aim today was to set out what I see as some of the opportunities and challenges around collaboration in the broader picture of a growing economy. And I’ve done that by focussing in particular on collaboration between central and local government as it relates to efforts to lift economic growth.

I haven’t attempted to discuss issues around collaboration between local authorities, or for that matter between central government agencies – both of which warrant at least another half hour each.

Underlying these thoughts, my sense is that not only is the potential payoff to collaboration between central and local government greater than many might suspect, it will become an essential part of business-as-usual in some areas.

With that comes a note of caution – that we use it sparingly for the right issues in the right contexts, being realistic about what it can, and cannot, achieve. In short, realising the potentially large payoff from collaboration will require us to be realistic about what collaboration is, when we use it, and how we use it.

And, from my particular perspective, if we can get that right, it can only help us to raise the living standards of New Zealanders through higher economic growth.

I wish you every success at this forum today, and thank you for the opportunity of sharing these thoughts with you. I am happy to take any questions you might have.

ENDS

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