The Taskforce's Strategy: Comment
22. The taskforce's strategy - protecting and enhancing the sector's existing base and strengths while securing the sector's future through diversified products and new market development – broadly accords with recent work on New Zealand's innovation system and current thinking on industry policy.
23. The process of economic transformation is in part about changing the product mix of an economy, but also requires the adoption of innovative business processes. Each product requires specific capabilities. New product development is typically focused in two areas: improvements in existing products and development of adjacent products which build on existing strengths and capabilities. Hence the most accessible prospects for economic transformation are likely to lie in sectors and activities where we already have strengths.
24. The taskforce's strategy implicitly affirms the key role existing strengths play in providing a platform for transformation. For instance our on-farm and orchard productivity will likely be an important determinant of whether we can produce highly differentiated and branded consumer products as these are often built on platforms created by high volume products. The production of consistent quality and competitively priced raw materials may often be a critical foundation to develop specialist products such as nutraceuticals.2 On a similar theme, Ministers have agreed that the government needs to play a greater facilitative role in diversifying the economy through "developing more upstream and downstream spin-off industries from our strengths, particularly the primary sector and biologically-based industries." [CAB Min (06) 31/2 refers].
25. Work on New Zealand's innovation system commissioned by MED suggests that linkages between resource-based sectors and related downstream processing and upstream inputs deserve much closer attention. Like other small open economies (the Nordic countries, the Netherlands, Australia, Canada), New Zealand's economy rests largely on a low tech industrial structure which offers important innovation and growth opportunities. Although economies such as Finland and Sweden possess high tech industries, they have been developed on (and continue to rest on) major low and medium tech activities of a similar kind to those found in New Zealand. These "low tech" industries are not stagnant or declining - they are characterized by innovation and growth, and offer long term development potential.
26. Such industries offer firstly locational advantages that are difficult to duplicate elsewhere. Secondly they offer potential for linkages into other growing activities. They form the basis of major cluster specialisations.
27. Advancing transformation in New Zealand's food and beverage sector will require identifying where and how innovation can be used to build off existing and emerging capabilities in the sector. Mechanisms to achieve this are discussed later in this paper.
The "increasing pastoral industries output" recommendation
28. The Taskforce recommended that ‘the government and industry should work together through strategic investment in science and improved pasture management to increase output from the pastoral industries by at least 50 per cent by 2016.' This recommendation responds to concerns about a future in which inputs of land, water and labour are likely to be increasingly constrained.
29. As the main recommendation directed at protecting and enhancing the sector's existing base and strengths it requires careful consideration. The government's response should provide the view that the top priority for the sector must be productivity improvements, rather than volume increases per se.3 Maintaining the viability of the sector's existing base through continual productivity improvements is important for economic transformation. Productivity gains will come from on-farm/orchard production, because this is where gains in biological productivity are achieved and where New Zealand has economies of scale and scope. It is also where most of the sustainability and environmental issues lie for New Zealand, such as methane and nitrous oxide emissions, nitrification of water ways and soil sequestration of carbon. Productivity enhancement (more efficient use of inputs per unit of output) may well be a key means to achieve the twin goals of enhanced sustainability and cost competitiveness (see next section).
Environmental sustainability
30. Environmental sustainability is one of the five key themes of the Economic Transformation Agenda. The initial focus is on the three sub-themes of climate change, water and land management. Cabinet agreed that the high level objectives of the theme over the long term include:
- increasing productivity by improving the resource efficiency of production processes;
- minimising economic risk associated with environmental impacts; and
- taking advantage of market opportunities, including building on our clean, green image and developing new high-value products and services that contribute to both environmental and economic development.
31. The taskforce made no specific recommendations on environmental sustainability but the report acknowledges the centrality of environmental concerns to the sector's future. The issues of sustainability, climate change, competitiveness and improving productivity are linked. The goals of increased productivity and improved environmental sustainability need to be addressed in a way that is mutually supportive. For this sector, sustainability is about the sustainable use of natural resources for economic benefit.
32. Climate change and other global commons issues will, particularly in mature markets, increasingly influence market access and consumer acceptability. This is likely to be especially driven by offshore retail chains such as Tesco and Wal-Mart responding to domestic industry pressure and consumer perceptions. New Zealand will need to respond by providing proof of the integrity of its product. This means:
- Providing full information on New Zealand production methods and sustainable management practices where a full life cycle analysis of its production systems shows that its products have associated attributes such as a lower greenhouse gas impact than that of heavily subsidised and less resource efficient competitors; and
- Building on these attributes through mutually supportive productivity and sustainability-enhancing new investment in advanced R&D, technologies and production systems so as to ensure that the risks posed by "carbon labelling" and "food miles" arguments become more of a competitive opportunity than a risk for New Zealand.
33. I am advised, however, that there is growing industry/government consensus regarding the key issues - including sustainability and climate change - impacting on the food and beverage sector's long-run productivity and profitability.
34. The sustainability of primary industries is a central component of the Ministry of Agriculture and Forestry's (MAF) work programme. The productivity objectives of the Pastoral 21 research strategy (discussed later in this paper) also have a strong emphasis on improving sustainability and reducing inputs.
35. With consumer concern over food miles and other sustainability issues increasing rapidly, work programmes currently in train will need to be closely monitored to ensure they are adequate to address the above risks and opportunities. The focus of this effort should include the amount of government investment in on-farm research to lift total factor productivity, to reduce waste and greenhouse gas emissions, improve soil carbon sequestration and, where cost effective, reduce the use of fossil fuels in food processing.
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