KEY POINTS:
A major divergence in the economy occurred last year, which the Manufacturers and Exporters Association (MEA) refers to as the "two economies problem".
The domestic economy and some manufacturers did well, but others - particularly those with large export sales - saw little return as the currency breached all records, mocking the "Export Year" label.
The Export Year concept had the right intent. Exporting goods and services can provide the foundation for securing a world future for New Zealand, and it is vital that we export more.
Despite the best of intentions, the scheme failed because it generally provided nothing tangible to exporters to compensate for the impact of less than a tenth of a cent adverse change in the dollar.
Nor was it supported by a policy framework that favoured investment in assets, and a lack of concern for exchange rate impact on other policies is also a disincentive when developing export markets.
These settings drove the "two economies" outcome and, due to the strong Kiwi dollar and competition from imports, an increasing number of companies relocated production and jobs to low-cost countries to stay competitive, reduced activity or ceased trading.
This process is on an opposite trajectory than is desirable - our exports are growing slower than our competitors', our trade imbalance is ballooning and the contents of our exports are simplifying.
We have long advocated that our manufacturers be given the same support that their competitors overseas enjoy.
Last year's Budget finally delivered a 15 per cent tax credit for businesses that conduct research and development, starting in the 2008 income year. The change puts us on a par with such policies across the OECD but represents a positive starting point, rather than a case of "job well done".
Each year, the MEA makes presentations around the country asking whether manufacturing matters when building economic growth, and whether we should care if we lose our industrial and exporting base offshore.
The association argues that manufacturing and exporting must be seen more widely as cornerstones of a productive and prosperous economy in the 21st century.
Some claim that, at 15 per cent of GDP (a third of our tradeable export receipts) and employing about 250,000, manufacturing is happy so don't worry. But beneath the surface these numbers tell a different story.
In 1989, manufacturing employed 21 per cent of the workforce. By last year, that number had fallen to 14 per cent and manufacturing was no longer the largest employer in New Zealand. Of our total number of exporters, only 56 have export earnings of more than $75 million, 157 export more than $25m, 592 export more than $5m, while 1965 export more than $500,000.
As activity, skills and capability move offshore, can the primary sector fill the gap? After all, two-thirds of our tradeable exports are primary based, but half of those exports are raw unprocessed primary products and land-use pressures are growing.
If commodities are our future, we will be much poorer, comparatively, than now. In the 1950s, the price for a tonne of exported wool was roughly equal to the price of a car, our meat export receipts equated to 18 times the volume of pharmaceuticals, while 1kg of milk fat equalled 4 per cent of the average wage.
Today, we need to export five tonnes of wool for each car, our meat exports provide only five times the value of our pharmaceuticals and that kilo of milk fat equates to only 1 per cent of the average wage.
From the primary standpoint, New Zealand must work much harder to just stand still, so we need a broader economic solution.
Much of the Government's intervention is ineffective. More than $250m flows to New Zealand Trade and Enterprise but only about $100m finds it way to companies. The difference is soaked up in "delivery" and "due diligence".
The world is too complex to pick a particular activity as a winner before the event. It is better to build an environment and a policy frame- work to support winning behaviour and let the market do the rest.
We have seen a push from those whose focus is on the domestic economy for the Government and the select committee on monetary policy to leave monetary policy alone; policy which has delivered the two economies outcome.
The MEA would like to see the committee recommend changes to specifically target domestic inflation without damaging the export sector and support productive growth.
Tradeables see little inflation compared to the domestic sector, yet the OCR control mechanism is detached from the domestic economy and able to crunch our exporters through the impact of the exchange rate.
Our tax system needs balance and fairness. This does not mean imposing extra taxes, and any tax on capital gains must be compensated by tax reductions elsewhere.
The key issue is balance and fairness. The MEA called for a widely applied capital gains tax last year and will continue to do so.
The MEA will continue to advocate for an end to the "one lever, one target" approach to the economy. We called for further discussion of other measures, such as a mortgage levy and ring fencing of losses on rental property and varying the rate of GST, or even variable compulsory saving rates.
For the sake of the export sector, more stability in our exchange rate must be a target.
Policy settings advocated by the MEA are not radical. Many of our competitors have better targeted taxation systems for R&D and staff training, along with productive asset depreciation and investment incentives to support the development of industrial and exporting sectors.
Ireland, Singapore and Taiwan use a wide range of policies to control inflation, build exports and create wealth, and it is our hope that, this year, New Zealand finally applies these lessons to our economy and makes manufacturing and exporting matter before it is too late.
The MEA was founded by the Canterbury Manufacturers Association and the New Zealand Engineers Federation. The MEA is New Zealand's only sector-focused and independent voice of manufacturers and exporters. Its members make nearly $2 billion in sales and have an export value of about $1b.
* John Walley is the chief executive of the Manufacturers and Exporters Association.
