August 12, 2007
The Vintner's Luck: March 07 issue
THE VINTNER’S LUCK
How NZ and Australian wines took on the world, and won
It’s not often we get a chance to celebrate international success these days, but as SELWYN PARKER in London discovered, they are seriously devouring the fruit of our vines, there:
Although it was in the depths of winter - January 15-16 to be precise, there was hardly a spare seat at Lord’s cricket ground in London. The event was under cover and it was at the famed Nursery Pavilion End of the ground. The occasion? The annual tasting of the New Zealand vintage when 120 Kiwi vignerons come over to present their creations in the world’s most important export market.
Every wine-exporting country judges its success by its performance in the British market, more specifically by percentage share and by average retail price per bottle. The tasting is both a proud showcase and a nerve-wracking examination for the New Zealand industry as buyers, wine pundits and oenophiles in general swirl, smell, see, sniff, spit and sometimes swallow their way through 600 wines.
How times have changed. Twenty-six years ago, when the British wine establishment was invited to the inaugural tasting of New Zealand wines, it was held in an upstairs room in New Zealand House. Those journalists and members of the trade who bothered to turn up only did so because they were intrigued to learn we produced something other than lamb, wool, butter, kiwifruit and All Blacks. New Zealand wine!
It was almost a contradiction in terms. In the eighties hardly anybody in Britain who wasn’t a New Zealander drank our beer (and still doesn’t), let alone our wine. “Most people came to laugh”, remembers veteran trade representative Philip Atkinson who organised it all. “I had to work extremely hard to get them there.”
The debut of New Zealand wine on the international stage could hardly be described as a glittering occasion. There were less than fifty wines on the table and they were only there by virtue of a mad dash from the airport in a Ford Cortina with a panicking Atkinson at the wheel. They had been freighted over in an RNZAF Hercules that arrived late. Knees knocking, the few New Zealand wine-growers to brave the pundits and retailers had brought over mainly whites, mostly sauvignon blanc and chardonnay, and some reds, mostly cabernet. Their anxiety was understandable. Apart from a few bottles of Cresta Dore and Bakano, labels of the sixties since mercifully buried, no New Zealand wine had ever been brought to Britain.
As it happened, it all worked out surprisingly well. As Margaret Harvey, the former Mt. Roskill girl who has helped pioneer New Zealand wine in Britain, remembers, the message was generally encouraging but blunt. “If you’re going to sell your wine here at all, it will be your whites”, the producers were told. “Your reds are yeech. Don’t show them here again”. The subsequent reviews for the whites were reasonably encouraging and the wine tastings became an annual, if minor, event on the British industry’s calendar. A stake had been put in the ground.
Wine pundits were one thing however, buyers another. Out in the boon docks of the retail trade whose shelves were stacked with European labels, it was hard going. Margaret Harvey had come to Britain as a pharmacist in 1975 but in an act of faith abandoned her profession to establish Fine Wines of New Zealand in 1985 out of her house in Camden Town at a time when the advertising authorities might have taken legal action for the first word in the company’s title. It was a one-woman operation and the owner remembers plodding around the wine clubs, pushing the New Zealand vintage night after night, often not getting home until the early hours.
Others like salesman Richard Goodman were also labouring in this stony vineyard. Representing Cooks and Montana at various times, he took on the supermarkets after the pundits told the growers: “You can’t expect us to write about your wine if we can’t tell readers where to buy it.” He and Atkinson often worked together, knocking on door after door.
“We got thrown out of a few places”, Atkinson remembers.
The message was simple: “You’ve got to stock New Zealand wine. We’ll do anything to get it on your shelves”.
And shelf by shelf, that’s what they did. The breakthrough was a supply contract with nationwide liquor retailer Threshers, which has been a friend of New Zealand wine ever since. The first supermarket to be breached was Waitrose, a chain with a reputation for fine fare, and other retailers gradually followed suit. Today the Kiwi product is found everywhere. Even Berry Bros & Rudd, purveyors of fine wines – French in particular -- for 300 years, started stocking the higher-quality labels a few years back.
Meantime the product was improving all the time. At first more enthusiastic than skilful, winegrowers began to adopt more professional practices under the tutelage of experts such as Australia’s Dr. Richard Smart, a world authority on cold-climate viticulture. They were quick to learn and the result was better trellising, leaf-plucking and spraying among other improvements. In Britain this was noticed as the pundits approved of the more subtle flavours instead of the “aggressive herbaceousness” that characterized the first offerings.
As the High Street came to stock more New Zealand wine, the believers in the government trade office found extra dollars to boost sales. One of the results was the first appearance at the London Wine Trade Fair of 1986, a landmark occasion that was followed by a splendid, celebratory dinner at Methuselah’s in Victoria Street. The dinner was a far cry from the budget tasting of 1981. Instead of a mad dash in a Ford Cortina, all the food and drink as well as the chiefs were flown in by Air New Zealand. Everybody who could be there was: Morton Estate, Delegat’s, Montana among others. One of the best investments ever made for the country, let alone its wine, it woke the industry up to how far the country had come gastronomically and vinously.
“It was a tiny participation at the fair but it was a big dinner”, recalls Atkinson who organised that too. “That made the difference. Suddenly we were real.”
But sales hadn’t taken off. Even a decade ago the Brits hardly deigned to wet their lips with the New Zealand grape. In 1996 the UK grudgingly took NZ$40.6m worth of New Zealand wine, which is barely a drop in this enormous bucket, and much of that was drunk by a hard core of expats and others who had an acquaintance with New Zealand, had tasted our wines and therefore knew better.
However with the groundwork done, the momentum was with New Zealand. From having hardly a foot in the door, sales climbed – rather, rocketed – from that $40.6m to $167m in 2006, an increase of over 400 per cent. Last year overall consumption in the British market fell while the volume of New Zealand wine sold, running against the trend, picked up by four per cent. It’s been an incredible decade envied by all other wine-exporting nations.
At the same time success in the UK market spun off into sales in other markets, like a badge of approval. Last year global volumes topped the magic half billion barrier -- to be precise, $512m -- for the first time. With the help of British distributors, the New Zealand vintage has even cracked the notoriously protectionist European Union. The Dutch drank $10m worth last year ($1.2m ten years ago), Germany $3m (well under a million ten years ago) and Ireland, home of Guinness, over $8m (nowhere near a million). The French, of course, still hardly touch our stuff.
The original pundits were right about the whites. They quickly became the building blocks of this expansion, in particular sauvignon. But nobody ever predicted that New Zealand pinot noir, a difficult wine to produce, would excite the British palate, let alone pinot gris, syrah and the trendy viognier. Sales of pinot noir in particular, the vintage du jour, have almost doubled year on year.
Most galling for rival exporting nations, New Zealand has somehow bagged the high end of the general retail market as consumers fell in love with our diversity of wine-making styles. It became a voyage of discovery for them to sample wines produced over an enormous distance of 1600kms, spanning the latitudes of 36 – 45 degrees. As the official body New Zealand Winegrowers points out, if that 1600kms were in the northern hemisphere it would run from Bordeaux to southern Spain. This huge range of wines is one reason why New Zealand occupies a premium position in the market, one that Australian producers would very much like.
Australia sells a lot more wine into Britain than does New Zealand (over £1bn worth last year). But as one of the bibles of the market, The Drinks Business, pointed out in January, it’s the New Zealand vintage that attracts the higher margins: “Australia’s average bottle price of £4.28 is second in the UK only to New Zealand with a stellar average price of £5.93.” Nobody is exactly sure whether the average price of an Aussie bottle held its own last year, declined or edged up by two pence (as ACNielsen reckons), but it certainly hasn’t done much by comparison with New Zealand wine. In other words, if New Zealand’s wine exporters were cricketers Shane Warne would have been hit all over the park.
The overall strategy is not to let the side down by going for the quick quid. Pioneers and long-time observers of New Zealand wine’s acceptance in Britain and other exports put this down at least partly to the team spirit among producers. “They have a collaborative approach. They want to make the whole New Zealand category,” says Atkinson. He’s watched in amazement as the biggest names in our industry extol the virtues of a rival label whose owner is caught up elsewhere.
Other regions don’t always behave like this. Wine pundits still shudder over the way Californian grower Charles Shaw did nothing for the reputation of his terroir by releasing Two Buck Chuck at giveaway prices to reduce a surplus. And they’re not too sure about one of the big successes of the last two years, the French Red Bicyclette launched by the US giant E&J Gallo, because a. it isn’t French, and b. California has no special claim to cycling. As an advertisement for Californian wine, it likewise did nothing.
Although New Zealand’s prices continue to head in the right direction, even the prestige labels are a long way – perhaps half a century – behind the equivalent French ones. For example, one of the top-priced Kiwi wines at the venerable Berry Bros & Rudd is the 2004 Mountford Estate pinot noir from Waipara at £232 [$650] for a 12-bottle case in bond. Although it’s hardly comparing apples with apples with apples -- or grapes with grapes -- that compares with £9,900 [$27,730] for just eight bottles of the 1967 Chateau d’Yquem sauterne. At the top end, French wines still have snob value.
ACROSS the Channel the attitude of old world producers towards our parvenu wine region remained one of rock-solid superiority throughout most of the nineties. This is understandable because they do, after all, have history on their side. “My family has been tending the vines here for 15 generations”, Monsieur Thomann, a vigneron in the tiny Alsatian village of Ammerschwihr in France, told me a few years ago when I was researching a book there. He said it in a matter-of-fact way but I worked out later that his forebears must have tended the grape in that very village from the 1550s.
He showed off his cellars with their cobwebbed, oval barrels that had survived the bombs and shells of two world wars that had almost destroyed the village and he plied me with books about wine -- its spirituality, mysticism, romance and general place in the history of Alsace and France. Monsieur Thomann was much less interested in the technicalities of viticulture than in the tradition. For him wine-making was almost a branch of the priesthood.
The way he went about his business illustrates the enormous gulf between old and new world producers such as New Zealand. M. Thomann had never considered exporting. “Why should I when I sell everything I produce here?” he asked.
He ran a degustation vente business – selling straight from the cellar. Connoisseurs simply walked in off the street, some having driven hundreds of miles from Belgium, Germany or Switzerland. They pressed a buzzer and sat down for a taste (degustation) and a chat with the man himself about the grape and the wine world in general (his son was the sommelier to the president of France). Thereupon he made his sale (vente), generally by the case load.
But now it’s all changed. New Zealand in common with other new world producers have become officially a threat, New Zealand more for what it represents than for how much it sells. “In this high-growth sector, where wine tends to become an increasingly industrialized and technological product, the dynamics unquestionably favour New World producers,” an authority wrote in French in a landmark article last year in the magazine L’Expansion. “By that I mean North and South America, South Africa, Australia and New Zealand”. While the “old continent” still dominates the market on the basis of claiming three quarters of total production, “its pedestal was breaking up.”
The statistics illustrate what the writer, a student of global wine markets, means. By the end of the eighties, Europe could still claim 96 per cent of all exports and was absolutely top of the heap. Now it’s down to 84 per cent and, if exports between EU countries are excluded, the losses are much more spectacular. That puts the old continent’s share of global markets at 66 per cent. In short, although New Zealand winegrowers can claim only some of the credit, a complacent Europe has been comprehensively thrashed in the higher-margin, British market where in 2005 new world wine sales exceeded those of the old continent for the first time.
That also happened to be the first year New Zealand sold more wine overseas than at home, an alarming fact duly recorded in France too. Producers there cannot believe that New Zealand not only made all that wine but sold it all as well. “Between 2004 and 2005, exports of New Zealand wine went from 31m litres to 51.4m litres, an increase of 60 per cent!” noted Viti-Net, an influential French wine industry website, in mid-2006. It added that the Kiwis vignerons are “focused on quality and the price of their wines is relatively high”.
Despite the stratospheric prices fetched by labels such as Chateau d’Yquem, that’s exactly what the French and Europeans have not been doing. As the EU’s agriculture czarina, Mariann Fischer-Boel, points out, the vineyards are churning out vin ordinaire. “We spend far too much money disposing of surpluses instead of building our quality and competitiveness”, she warned in mid-2006. Consumption was down, new world exports were making “huge inroads” and Europe was “producing too much wine for which there is no market”.
The result of these massive surpluses is that a lot of wine in France is subsidized and practically given away. At a supermarket it’s quite possible to buy a bottle of excellent local wine in Provence for a few dollars. And the wine that is not sold at all is distilled on payment of still further subsidies into something else. The whole system is blatantly protectionist and unfair to exporting nations like New Zealand, and it’s been going on for a long time.
Consider these amazing numbers. Well over 400m euros [$740m] has been spent on the “restructuring programme” for each of the last six years, but without much restructuring being done. In 2005 alone, 790m euros [$1.46bn] was spent on various “market intervention” measures that included subsidies for public and private storage, plus another 31m euros [$57m] for “grubbing-up” useless vineyards. (And still New Zealand beat the Europeans in the British market!)
The last figure says a lot. Although there have long been generous incentives to grub up loss-making vines, producers have shown a declining interest in doing so while pocketing all kinds of subsidies for making unsaleable wine. Back in 1993 for example, the EU spent 400m euros [$739m] on grubbing up, nearly thirteen times more than now.
And it’s going to get worse. In normal times Fischer-Boel, who is trying to reform all this, disposes of a budget of nearly 1.3bn euros [$2.2bn] a year purely to shore up European wine producers. France, whose vineyards account for 30 per cent of the EU total, collects the lion’s share of that. But any day now the czarina will announce new proposals offering even more generous encouragement to reform this deeply discriminatory system. The new plan is to reactivate the moribund grubbing-up scheme. This time there will be 2.4bn euros [$4.43bn] to flatten up to 400,000 hectares. Cynics of EU agricultural reforms may note that 400,000 hectares is not a lot of vineyard out of a total 3.4m hectares devoted to the grape. Moreover the grubbing-up is voluntary.
“This is a great opportunity to put the EU wine sector back at the top where it belongs,” hopes Mrs. Fischer-Boel. “We must not waste it”.
On past performance however, they probably will.
SO WHERE does New Zealand wine go from here? The British market can only get tougher, especially for the newer and smaller vineyards. The biggest supermarket chain, Tesco, is reportedly dropping ten per cent of its wine list from its shelves. Even to get onto a major chain’s shelves at all can require up-front payments of £50,000 [$140,000], which clearly favours the corporate vineyards. As Margaret Harvey says, “it’s one thing to make wine, another to sell it.”
And Europe is fighting back. French producers are developing their own labels instead just supplying others while relaxing restrictive labeling and other regulations. Italy has mounted a campaign to re-launch in Britain. Other regions are following suit – South Africa has managed to hike its margins in Britain and Australia is belatedly dealing with the surplus that has led to sales of low-cost, bulk wine.
There are risks to New Zealand vineyards. For example, at around $5m a year the R&D budget is pathetic by European standards. And now that Kiwi labels have got above the parapet, they could get shot at. New Zealand Winegrowers is concerned that some markets could play rough by introducing protection by another name, for instance by insisting on zero residues.
But that could also point the way forward in a market that’s turning greener by the month. British consumers have started to agitate for sustainability – the “carbon-free footprint” – in their food and drink. According to veterans of the market like Margaret Harvey, who is the only New Zealand-born woman to hold the Master of Wine qualification, sustainably produced wine would certainly make it easier to sell in Britain and beyond. “It’s very exciting,” she enthused. “Everybody should be on the sustainability programme if we want to keep commanding those high prices.”
That would certainly give Kiwi wine an edge that matches its image, similar to the one Australia had a decade or so ago. Over here New Zealand wine is regarded as new and exciting, the product of young and enthusiastic, even iconoclastic, vignerons who dare to play the game differently.
Like the All Blacks, you could say.
July 29, 2007
Keynglish, Part 1
THE JOHN KEY INTERVIEW
They say New Zealand politicians can’t be bought, but tell that to the person who, just before Christmas, shelled out more than $4,000 to have lunch with new National Party leader John Key after a charity auction on the Zillion website. All we can tell you is the mystery buyer wasn’t us. Instead, IAN WISHART caught up with John Key and his deputy Bill English for their most in-depth media interview yet on their vision for New Zealand.
KEY: My view is that this brand is in incredibly strong shape, these are values and principles that go back 70 years. And if you really look at the sort of things that, say, for instance Holyoake was saying and you apply them to what I've been saying in the last three weeks, then I think you'll find there's a pretty strong match there. I think the reason that the party has endured for so long is that those values are very very durable. Now of course individual policies come and go, what worked for Holyoake and others won't necessarily work for me in terms of absolute policies, because the environment is different, but I think one of the aims of that speech is to really spell out that while I've used a slightly softer tone in the last few weeks, than maybe Don did, that fundamentally we are still going in exactly the same direction with values that line up with where we think New Zealand is heading.
INVESTIGATE: It's been an interesting time in politics, particularly since Labour took over in 1999, and I guess the period up to the 2002 election, where it had its vicious electoral defeat was marked, I think, by National still trying to establish what it actually stood for. Is there a danger in the slightly softer tone that the clear delineation between National and Labour won't be kept?
KEY: Well, yeah, look, there are always risks as, in a sense, I don't think beneath the surface, Labour has truly moved towards the centre, and I think the language they want to use and the spin they want to put on things is that they've got a tinge of blue in them, if you like, and they are hunting in the centre ground. Inevitably that's where most New Zealanders inhabit and if we don't try and win that space then by definition, it pushes us out to a much smaller audience. And clearly we want to win the bulk of the party vote come Election 2008. So in a sense, we don't make any apologies for hunting in that ground but I think there will be very different outcomes. Fundamentally, we trust the private sector and we trust New Zealanders to make good judgement calls for themselves and their families, and we don't think Labour does and we think that their response is always one of the sort of Nanny State where Wellington knows best. When you see the results of the last few years, I mean, health is just a classic example, no one can say that Labour hasn't thrown enormous amounts of money at it - they've taken the spending up annually from $6 billion to about $10.5 billion a year, but the results are at best pathetic. And why is that? Well, because they're hiring as many bureaucrats as they are nurses. So I think you'll see a very different approach from us, but one that the public will buy into, and I don't think it's one where they will be intimidated by it. I mean, my view is that if someone is looking for a hip operation or a knee operation, they care about the quality and the timing of that operation; in the end, the hospital that carries it out is probably irrelevant.
INVESTIGATE: I see the suggestion that women in Nelson/Marlborough will be without epidural services, because the government has rundown the health system to that extent, in what is a major provincial city.
KEY: That’s an example of where their priorities are wrong. I think you can argue the same case with Pharmac – I mean, Pharmac’s funding has been static for the last four years, in nominal terms it’s been around half a billion dollars. In the last election campaign our policy was to increase their funding reasonably dramatically, and of course we were going to do that by not rolling out a subsidy in another area, but we thought that was a better allocation of funds. Now, that doesn’t mean it’ll be our policy in 2008 but what it shows is, I think, that we are prepared to tackle – you can’t just look at these incredibly large portfolios and just argue that there’s one solution, throw a bit of money at it and you’ll get the right outcome at the other end. I think you really do have to demand productivity and performance and have the right allocation of resources.
INVESTIGATE: From my own time in Government working for Mike Moore in 1986, one of the key things in that first Lange administration was the perception, the hangover from the Muldoon years, of “bureaucracy capture”, whereupon a lot of the civil servants at the time had been with a National administration for years and were used to dealing with National and were very suspicious of the incoming Labour people. The reverse is now the case, you have bureaucracy capture with Labour – Tamihere touched on it in his interview with Investigate last year about the networks that now exist in the civil service. How seriously do you treat that as a problem?
KEY: I think the winds of political change drift pretty rapidly in Wellington, it’s a world that revolves around the Beehive and Parliament, and my sense of the anecdotal stories and approaches below the radar screen that we’re getting at the moment is that the core bureaucrats in Wellington can sense pretty rapidly a change.
So while, superficially, they may have nailed their colours to Labour’s mast for a while I think they can see that the time of this government is rapidly coming to an end and they’re making pretty clear and overt signals that they want to work with us. Of course, we’ll have to demonstrate through our policies and our people that we’ve got the goods, but I think we very much do.
INVESTIGATE: One of the issues, with the State Sector reform of the 80s, and it’s been a bit of a bugbear for parties in Opposition when they want accountability out of Ministers – is that Ministers now say “well, we can’t touch these civil servants because it’s all independent…” – Is there room for more political control of the senior departments and so forth so that you can get accountability back into the political system?
KEY: Well I think you do need accountability. My guess is that the public will be looking aghast at the Liam Ashley case, and asking why a Labour party in opposition were so quickly calling for heads on the National side when we had Cave Creek, and yet when it comes to Liam Ashley they’ve been pretty quick to accept that they are politically accountable but not responsible, and therefore they don’t intend to do anything about it. So I think the public is entitled to accountability, and across a wide range: accountability even just for value for money – I think New Zealanders know they are paying a hell of a lot in tax, that the government expenditure has increased dramatically and in part that’s putting pressure on inflation in New Zealand, yet coming out the other end is something that even the incoming briefing to ministers confirms – to describe it as “sub-optimal” would be gilding the lily. It’s really a very low level of productivity. Yet every quarter for the last 20 quarters we’ve seen the state sector wages rising faster than the private sector, so there’s a real imbalance here. Government is a big beast now, and we need to have that beast performing if New Zealand’s economic growth and productivity levels are going to get us back into the top half of the OECD.
INVESTIGATE: Well that gets me back to the question about bureaucracy capture, because there is this perception that we have an elected political system, but it has been disconnected legislatively from the civil service that it operates –
KEY: Well I think that’s been a deliberate political ploy by Labour, I think you’ve seen that through the DHBs – that was a level put in place to ensure, again, that they were responsible but directly not accountable. Every time you ask a question they can simply say ‘Well that’s a matter for the DHB, take it up with them’, and when you try and take it up with them you get a blank response. I don’t think any of us should underestimate that Helen Clark is a cunning woman who understands the systems well and has worked them to her best advantage.
INVESTIGATE: So is a Key government likely to be brave enough to figure out some way to bring that accountability back in legislatively so that it can control the public sector?
KEY: We’ll certainly take a look at it. I think it is important when money is spent – and we’re talking about very large sums of money – that people feel there is a process of accountability. It’ll probably never be at the level that every journalist and lobby group would want, but I think nevertheless there are improvements that can be made.
INVESTIGATE: In other words the pendulum has swung too far?
KEY: That’s my sense of it. Like it has in so many things with Labour, it never self corrects until it’s exposed.
INVESTIGATE: If you had to describe the Labour years, and taking the good with the bad, what would you say their biggest achievements are?
KEY: Arguably they’ve been in the social policy area, you know, whether it's banning smoking or changes that they've made in areas like civil unions - I'm not arguing whether they are good or bad, I'm just saying that they've achieved a result. If you look on the other side, economically, while I think they would point to the fact that there’s been reasonably strong levels of economic growth and job creation, I think if you really look at their policies they've just been riding a wave that they did very little to create. And I think when you really look back on the Clark years she won't be remembered for what she's achieved. I think she'll be remembered for the way that she managed her caucus. There's a big difference.
INVESTIGATE: On the flipside of the same coin. What are their biggest weaknesses?
KEY: Well, their weaknesses are, I think, they have very low levels of aspiration. Fundamentally, Michael Cullen and Helen Clark are deeply conservative people who doubt Kiwis ability to really make it on the world stage, so they don't invest in things like infrastructure heavily, because they're just not quite sure whether we'll make it or not. Everything is done incrementally, everything is sort of second-guessed and micro-managed, and my sense of it is that New Zealand is sitting on a huge opportunity, which if it doesn't capture in the next 20 or 30 years, will really set us back, because for the first time in our history we are probably in the fastest growing time zone.
We've got a world around us that’s rapidly going to start buying the kinds of products that we want, but equally we're facing competition that most Kiwis haven't really focused on, coming out of countries like Latin America, for some of our core areas like agriculture and forestry and wine, and ultimately the same thing could be true of tourism. And so I think you've got this sort of interesting world where on the one hand, there is this great opportunity – and the Internet is the same thing: all of a sudden people can tap into a billion people worldwide, have a niche product that they can sell from New Zealand and from their home (which may not necessarily be located in downtown Wellington or Christchurch), so the opportunities are limitless, and the tyranny of distance has been removed. But on the other side of the coin, the competition is coming from people that we are not solely focused on, and it's coming on stream pretty quickly.
So it is not a scenario where New Zealand is doomed if it doesn't get its policies right, but it's a scenario where we don't achieve what we are capable of achieving. I think that would be hugely frustrating for Kiwis, and it's also, I might add, extremely dangerous, because we're sitting on the border of a country which is pretty aggressively focused on building its competitiveness - in the form of Australia - and we're already seeing that: 685 Kiwis leaving a week. We’ve got a brain drain that the OECD is starting to mention as our number one issue, given that it is the highest in the developed world. So I think we really have to worry about those competitive threats and the only way to fix that is to come up with a set of policies under a timeframe, and with a commitment, that are world-class, that do sort of challenge where New Zealand could be if it wants to achieve the kinds of outcomes that it is capable of achieving.
INVESTIGATE: Catch-22 for National: under the new Brash leadership when he came on board, his Orewa 1 speech, catapulted the party back from the political doldrums to the point where it almost won the last election. He touched a nerve quite clearly on this whole issue of race and multiculturalism and everything that went with it. How difficult is it to you as a new leader to keep that support there and yet find a way of navigating a softer line?
KEY: Well I think firstly, that obviously it’s critical that you maintain your core support, and I'd say National's core support is in the mid-30s. I think that's sort of where it sits, and that's probably fundamentally true of Labour - we probably both have core support of around about 30 odd percent. But we had a particularly bad year in 2002, partly because MMP is very cruel to you when you are doing badly because they don't necessarily jump to the centre-left, but they just go off to a party on the centre-right, and we saw that in 2002. The good news is its kind to you when they think you're going to win and you're doing well, you pick up a whole lot of people who vote for a winner even if they are a little unsure. So we obviously need to maintain our core support, which is critically important.
The future of New Zealand is changing and we need to change with it. If we don't, then ultimately there is no long-term future for the National party. Political parties represent the populace if you like, and we need to be part of that. If you really look at the policies, as I've said, fundamentally our policies on race have not changed: we believe absolutely in all New Zealanders being treated equally before the law, we believe in a speedy settlement process of historical claims and we believe in the abolishment of the Maori seats - if there's a change, then it is over the timetabling of when that abolition will take place. It's likely that our first caucus in February will come up with something that will reflect, arguably, a more conciliatory timetable around the abolition of those seats.
So really, in a sense, all I changed is probably the tone. I make no apologies for wanting to talk about the language of development, not the language of grievance. But I do that for a number of reasons: firstly, of course as a political leader I could spend my life absolutely honing in on everything that separates us, and these days we are a pretty multicultural society and there are lots of differences. But equally, I believe that we've got to focus on what unites us and sort of have enough maturity as a country to say ‘there's a lot that binds us together’, and even though there are many voices singing the same song, we've also grown up enough to recognize there are some differences as well.
INVESTIGATE: We are heading into a world that is increasingly turbulent, and I raise the example of Investigate columnist Mark Steyn-
KEY: I know him, yes.
INVESTIGATE: -and Steyn has just published a book called America Alone where he makes a very telling case that, for example, Europe as we know it with its various different European cultures, will effectively cease to exist within one generation because of the huge influx of immigration from overseas. I think Muhammad is now the most popular name for baby boys in Belgium, and I think running at number two in France, so you are getting this huge cultural tidal shift. And that's part of the reason they've had these riots over there. But what he is basically saying is, the world is a very changeable place and the demographics are changing - in the West our birth rates are falling and our populations are becoming older. What does this mean in the next 15 to 20 years for New Zealand?
KEY: I think we know that there will be a changing ethnic mix in New Zealand - most of the forecasting indicates that this is likely for the reasons that you pointed out, that we have a birth rate that is below replacement and unless we want to see our population fall then it is likely there will be some [ethnic] change.
I think our position is slightly different in Europe. Europe's had fairly open immigration for lots of different reasons, New Zealand's been a country largely based on immigration. So I don't think we need to be fearful of that. But I think we should just apply sound tests, which are: it's our country, we should choose who we want to come here and who doesn't come, and in choosing that we should pick people who we think can make a contribution, that can ultimately settle in and become New Zealanders. My sense is that we've achieved that pretty well so far. There's always a process of digestion if you like, but I feel pretty confident we can manage that process.
INVESTIGATE: Is there a need as part of that process increasingly to have some sort of national written constitution so that everyone who is a citizen of New Zealand understands what our basic principles are and we swear allegiance to that?
KEY: A written constitution, not necessarily, but one of the things you've seen in Australia, and I have some sympathy for, is that through the curriculum and through the education system they promote very heavily to young Australians, wherever they come from, a deep understanding of Australia's history, of its natural fauna and flora, all the historical icons of Australia. I think that's something that can be looked at in New Zealand, because I think it is very important that when people come - not that they forget their historical roots - but the thing that will make any country work is not that we have differences, because clearly we will have some, but we also have something that we feel binds us together. What it means to be a New Zealander.
At the moment, I would argue that we are best at expressing that when we are not in New Zealand, when we see each other on the tube in London or we are somewhere else. I think, increasingly, Australia has done quite a good job of that, you've seen this sort outpouring of nationalistic pride on Australia Day, my sense is New Zealand will evolve with the right political leadership to that. In other words, a sort of coming together of what it means to be a New Zealander, and there are certain pathways we can do to help achieve that in a world which, as you say, is likely to have greater immigration as a feeder of its population.
INVESTIGATE: In terms of the rise of yourself and Bill English to leadership, I was reading the blogs for the next few days afterwards, and the reaction from some of the right-wing blogs was, “Oh heck, it's Labour lite!”. What's your reaction to that, have they got reason to be fearful or do you think you'll be able to persuade them and keep them on board for the next couple of years?
KEY: I think we will absolutely keep them on board. Look, there will always be a wide range of views. Again, if you go back to Holyoake, I think, he said if the party agreed with him 60% of the time he was doing pretty well. You are never going to get somebody who is going to agree with absolutely everything you say, and every policy you take as a leader, even as a political party.
So in the end it comes down to a kind of theme, and values and the way you handle the decision-making process. Of course there will be some on the extreme right, who will want to have policies that we are not likely to be advocating, and again some on the extreme left, who will want policies that we are not likely to be advocating.
Again, I make no real apologies for saying I take a relatively pragmatic view of things. In the end I want policies that work, but pragmatism should not be mistaken for not being decisive. I think we proved in the early weeks of the leadership that we are certainly prepared to make decisions, even hard ones, and we will make them pretty rapidly. I think even in my political career in the last 4 1/2 years, I've proven that through things like the tax plan, which was the biggest tax cutting plan that New Zealand has seen in its history. So I don't think people can say that I'm not prepared to make hard decisions or decisions that when I believe in them I'll back them.
INVESTIGATE: Is this a sign of how you will treat your responsibility in government - as Helensville MP, you were personally not worried about civil unions but you had a large amount of lobbying going on in your electorate that suggested the people in your electorate who had voted for you did not want that passed. Still in a conscience vote, you opted to recognize the will of your electorate. Is that something you see as being fundamental to being a politician?
KEY: Yeah, and you can take two views on conscience issues, one is to say that you vote on your own conscience, only what you think matters and to hell with the people that you represent; the other thing you can say is that you operate in the House of Representatives as their representative. I've chosen to take the latter view. Often the latter view coincides with my view, I mean, I voted against the Prostitution Law Reform Bill, because in the end I thought it was bad legislation as much as I got intense lobbying about it. It's not that I'm too gutless to make a decision, because I will certainly make them and I make them all the time, but I kind of feel like the people of Helensville, who put me there, expect me to represent their views in Parliament, and I do. Behind the scenes you'll see me doing that quite aggressively on a number of issues, one or two that I won't bother sharing with you, but I can tell you from a local perspective that it's been slightly different view from views others might have held and I'll strongly advocate for that as well. In those instances, if the party has a different position, then I'll be bound by the party's position as I expect all of my MPs to be. But I'm not afraid to stand up to the people that put me there, and I think any politician that forgets who put them in Parliament will rapidly find themselves on civvy street.
INVESTIGATE: What about citizens initiated referenda on conscience issues, is that something you'd support?
KEY: Yeah, I think there is some room. You can't overdo referendums - where you get to a point where the vote is on everything - because it becomes really difficult. And one of the really difficult parts about referendums as well is that you ask really simplistic questions for what are really complex issues. But, nevertheless, conscience issues are largely about the kind of society that we want, and some things, at a pace that people feel comfortable with. And I don't think there is anything wrong with having that kind of view.
You wouldn't apply it to everything, and there are certainly times when political leadership is required. You can take a simple example, where there are certain things around race for instance, where you couldn't have - even if there was a majority - them inappropriately flexing their muscles on a minority. We are a better society for having politicians and leaders who, in the past, have stood up to that. And you can sort of quote Martin Luther King down. But I think that, in certain instances, there is a place for binding referenda and we should not be afraid to use them.
INVESTIGATE: The Hager book that has attracted so much attention in the media, perhaps undeservedly, the general mutterings continuing behind the scenes would suggest that there were no leaks, that somehow somebody has hacked into National's computer system - is that a concern to you?
KEY: It is a deep concern and I think all New Zealanders should be very concerned if that's the case, because really we are talking about something very sinister, if that's occurred. We are meeting with the police, we need to get to the bottom of it. We know they are taking it very seriously. One of the reasons that we certainly hold the view that it is likely our systems have been either hacked into, or there has been something occurring, is simply the sheer volume of information they have. It is just not credible that it was just a bunch of e-mails that someone left on a plane.
INVESTIGATE: Your deputy Bill English is a conservative Catholic boy, do you believe in God?
KEY: What I have always said to that question in its many iterations, is, look, I have lived my life by Christian principles. I don't go to church, I was never brought up in any major way in a terribly religious household. My mother was Jewish, which under Jewish faith makes me Jewish. I do go to church a hell of a lot with the kids, but I don't want to hold myself out to be something that I'm not. I'm not Bill, I accept that, but I kind of try and live my life as best I can by a set of rules that I think works.
INVESTIGATE: In terms of the votes that you're out to capture by 2008, who are you after, what is your target market?
KEY: It's got to be women. Women are the clear audience - not that they don't like what we've said in the past - I think it is adding on to the message that we've had. So that's the first one, and I think the second is urban liberals and young people. But right across the board, I think there is room for improvement.
Keynglish, Part 2
BILL ENGLISH INTERVIEW
INVESTIGATE: In terms of what you see as the biggest issues for National over the next two years, what would they be?
ENGLISH: As the finance spokesman, the biggest issue for me is taking the economy forward in a way that rewards people who take risks, and shares the benefits and growth with New Zealand families, and it doesn't all end up in the government surplus.
INVESTIGATE: There has been an issue for several years now about the red tape, the compliance costs, and even the negative incentives that go on, how are you looking to tackle some of this?
ENGLISH: Look, I think that's really important, because we’ve gone down the track where the bureaucrats have set out to eliminate every risk. Now, you cannot have economic growth and success in business without risks, so New Zealanders want to work in a team but they want an entrepreneurial, and aspirational culture. And that is gradually being mothballed by continuous unnecessary regulation that is designed to get rid of every risk - and you can't.
INVESTIGATE: You see it not just in the business sector though. With this particular administration, you are seeing that same attitude applied right across the social sector, and protection for everything. Is that a problem overall?
ENGLISH: Yes, it is a problem. It's a problem because of the kind of attitudes it creates. Because if the government says that it's got the answer to everything, and if there's any problem they will fix it, people lose a sense of responsibility and consequences. National's view is, the government is there to underpin what people do, not dominate it.
INVESTIGATE: I asked John Key this, about bureaucracy capture in the civil service. Given that many of the people in senior positions were liberals appointed by the original Lange administration in the 80s, an incoming National government has to deal with that. How do you deal with a civil service that is possibly inimical to what National stands for?
ENGLISH: Well I don't believe all of them are, I mean, this is a public service who want the opportunity to serve the public instead of the Labour Party. I meet civil servants regularly, who are frustrated with the way that Labour thinks that putting together a list of things to do is the same as doing them. And that putting out a strategy to deal with some issue amounts to fixing it. What they want is the chance to be treated with respect, regarded as professionals. They don't want bucketloads more money, because they know that that's leading to a soft spending and low quality government. So I'm reasonably optimistic that the civil service is as tired of the Labour government as everybody else is.
INVESTIGATE: Is there enough accountability in the public service at the moment in your opinion?
ENGLISH: Not at the moment, no. And where there is, it is the wrong sort of accountability - I'll give you an example, this is Labour's definition of accountability: you remember a guy named Kit Richards? He wrote an e-mail the government didn't like. The guy loses his job, and can never be employed in the civil service again, while Labour are in power. Liam Ashley dies, brutally murdered, while he is in the custodial care of the state. No one has resigned, no one is responsible, no one is accountable. And that stinks. So Labour focuses on accountability for meeting Labour's political objectives, and if you get in the way of that you get dealt to. But accountability in the public service? That's long gone.
INVESTIGATE: Looking at the Brash years that followed on from your own leadership of National, why do you think National bottomed out, then bounced back up - what do you see, having had the advantage of being there at the helm, what was the thing that turned it for National?
ENGLISH: When National came out of government, it had a bad dose of low morale. I had some views about where it should go, that amounted to a longer term strategy, and I didn't articulate that very well. They wanted quicker results that got them back in the game and rebuilt the confidence of the party. Don Brash came in as a bit of a punt at the time, he only just got across the line to the leadership, but it turned out the public responded to him better, I think, than most people expected. It also meant that with a small caucus after the 2002 election, once the leadership changed it did settle down, because we stopped arguing about the leadership and got on and did a bit of work. What Brash did was gather up - in the 2002 election a whole lot of centre-right voters knew National didn't have a chance and Prebble and Peters picked a lot of them up, and Peter Dunne, with some pretty simple messages, and Brash gathered them all up. The job now is to extend beyond that group of voters.
INVESTIGATE: Jane Clifton in the Listener called John Key “Helen lite”, there is a perception that by sounding softer that National might abandon some of the ground that it has won. Is there any danger of that happening, or does the party have a cunning plan?
ENGLISH: No, there is no danger of abandoning core positions that have been hard-won and are good for the country. Some of this is just about the man for the times, and I think John Key has had a great start to the leadership because he is seen as the man for the times. Don was suffering a bit, just from being seen as a guy who had outstanding public service in the 90s, but might not be able to carry that through. So we are not going to be abandoning core positions. Look, our view of the world is fundamentally different from Labour's and I don't agree with this “Labour lite” stuff. We have to work within the constraints of MMP, which means you need to have 51% support in the Parliament for what you do - you used to be able to do it on 35%. So, of course, our job is to convince the public that we can manage the politics on their behalf, and at the same time achieve our direction, because increasingly we are moving to wanting a direction that is about aspiration, responsibility, risk-taking, and getting ahead.
INVESTIGATE: Just on the MMP point, you've seen over selective governments the damage that MMP actually does to the minor parties, every time a party enters into a formal coalition with a major one they get eaten. How will that affect politics long-term?
ENGLISH: I think it would be a mistake to judge MMP on what has happened so far to the small parties, because a number of the small parties are personality cults. So there's no particular reason for New Zealand First to exist except Winston Peters, you saw what happened to the Alliance, and then Progressives because that was dominated by one guy, Jim Anderton. United Future are going to find it hard to live past Peter Dunne's life in politics.
Now you are getting the emergence of parties that have a much stronger base, and that is the Greens and the Maori party. They've got a stronger base because they can exist regardless of the leadership - and the Greens have shown that, without Rod Donald they are still polling pretty well. They have learnt from watching all the variations that Clark has put in place, that they can get the right amounts of independence and influence, so I would see MMP in the future reflecting this. Those parties will be much more resilient than the ones who've been at the centre of MMP so far.
INVESTIGATE: One of the things that the Greens and the Maori party have done is to try and steer clear of formal coalitions.
ENGLISH: Yeah, that's one of the lessons! Don't let them swallow you up, and don't spend too much time around the Cabinet table because then you become responsible for everything instead of just your own brand. And the second thing is, that you have to have a strong clear brand that is about issues, not personalities - and that's where Act have a challenge because Act have lost their way on issues, they've become a personality party. And if they stay that way then they might get through a few more elections but they are not a permanent part of the system.
INVESTIGATE: In terms of her Majesty's loyal government, Helen Clark and team, how daunting are they, heading into a potential fourth term, for you and John Key?
ENGLISH: We are not daunted at all. This is a government that has done what it came to do, they are now looking tired and scratchy. I can see the signs, because I've been there, the signs of a fading government. They think the process is much more important than the result, so you just get endless strategies and collaborations and partnerships but no results.
They are getting scratchy and bad tempered and trying to bully the media, the past results of their personal and political judgements are catching up with them. That's what happens to third term governments, and we are not daunted by them at all. They got a long way in the past by talking their own book about what competent political managers they are, but in the end you get judged on results, not political management.
INVESTIGATE: During the Brash years, what would you say are the biggest strengths and weaknesses of National coming out of that time?
ENGLISH: I think the biggest strengths would be the hard work that's gone into building some strong positions with the New Zealand public around lower taxes, around the way government should deal with Maori - we're not going to give those things away. I think also Don's temperament and professionalism had a big impact on how the National party operates, it's a hidden effect, but a very important one. The party became more professional and better at making decisions under Brash. Coming out of it I don't see too many weaknesses really, John and I would be the first to acknowledge that we have a terrific platform of 40 plus percent of solid public support to build on.
INVESTIGATE: The Nicky Hager book, as the dust settles from that, there seems to be a growing suspicion that there was no leak out of National, but instead somebody hacked into the Parliamentary servers and stole your e-mails. What are your views on that?
ENGLISH: Yeah, look, what you are seeing here is years of spying and burglary and theft at the highest levels of New Zealand politics. Watergate was one burglary, this is much more extensive than that. So it is really important that the police focus on getting to the bottom of how all that material came into the hands of Nicky Hager and his book. Hacking is one option, I think theft and burglary is another, and I think the rash of political stories we've had about politicians in the last 12 months indicate that there's been fairly extensive private investigator or other spying activity on senior politicians, and who knows who's next.
INVESTIGATE: I have covered governments for something like 25 years now and in my view this administration would have to rank as one of the most corrupt - at an objective level, just in terms of all the stuff coming up around them - what's your view?
ENGLISH: This is an administration that has corrupted the whole political process. I have seen good, strong, experienced civil servants, reduced to gibbering idiots, because of the arbitrary control and punishment systems run by the government. I have seen all sorts of interest groups who have strong views, and in the past had advocated them aggressively in the public arena, bought off by the current government, with threats and promises. And then we've seen the straight out corrupt use of the taxpayers’ money and Parliamentary privileges, just this year, in the pledge card and Taito Phillip Field. That comes on top of a record that stretches back four or five years - no Prime Minister has been interviewed more often by the police than Helen Clark.
INVESTIGATE: What do you think of Helen as a leader?
ENGLISH: She's a ruthless and clinical leader, she's respected for her political competence, and not loved for anything else, except perhaps in the arts world. She has set a benchmark for MMP management that future governments have to reach for stability, because she has had a stable team. She is focused very much on her own stretching power, and that is shown by the fact that she has failed to renew the Labour Party. She has gone for making sure that her prime ministership is stable and not contested. She hasn't tried to ensure that the Labour Party can keep on governing, and they are about to pay the price for that.
INVESTIGATE: In light of your own political career, do you regret the Brash years in any way?
ENGLISH: No not at all. Politics comes and goes, timing is everything in politics, some of the things I was trying to do were just before their time. But the time is right now. Don Brash added much to the National party that I could not have added, even if I had been more experienced than I was. So, no, I have no regrets. I think we are in great shape now for a long and stable period in government, and that's what we are working to achieve over the next 18 months.
INVESTIGATE: Your relationship with John Key appears to be good, people were speculating that Bill might put ambition before the task at hand but you seem to have a good relationship.
ENGLISH: Yeah, we do. And that's because we think the same way about a lot of political issues, so that helps, we can make decisions quickly, because we are not arguing the point, and I think that's been demonstrated recently. The other reason it works is that we complement each other. John is a terrific marketer, a very appealing media presence, and I've got the experience of government and policy. I think we have a strong professional respect for what each can do it, and that's why it is working so well.
INVESTIGATE: Labour has made such an issue out of social engineering, its social policy programmes and the like, how does National achieve its new focus without being seen to be slipping towards what Labour has made such an issue of?
ENGLISH: Look, I think that's a real challenge. When you look at Labour's track record, the things they really cared about were those things where they were telling other people how to live their lives, and doing their social engineering. On the economy, and their delivery of services to the public, there's been a lot of talk - billions of dollars - but they are not really that focused on it, so they haven't got anywhere. One of National's core principles is freedom, we need to make sure that we don't get sucked along, in the environment that Labour has created, into accepting things that unnecessarily take people's freedom away or that have the government telling people they can't take risks that any consenting adults would think they should be able to take.
INVESTIGATE: On the whole global warming scenario, which I know Nick Smith has done some work on, there is, it appears, emerging with the National a belief that global warming is human caused. Yet there is a lot of scientific argument to the contrary. Is National wedded to the idea that it is human caused? Because if it's not human caused, then there is nothing we can do about it.
ENGLISH: We are open to the science, there's got to be good science, and not hysteria, driving the policy. We've become quite worried that policies are going to be driven by this Armageddon mentality that the world has far too many people and far too much carbon, and it's all going to unwind within the next 20 years. So we want to make sure, we've got an open ear to the science, we don't go along with this idea that Labour do that you're either - what do they say? - Helen Clark calls you a ‘climate change denier’, and it sounds like something out of the Inquisition – ‘how dare you!’. In fact, the science is complex, in our view it has moved in the direction of human causation, if more and better science says that's not the case we are open to it. In the meantime, we do believe that the risks are great enough that we need some insurance.
INVESTIGATE: What about the United Nations report suggesting cattle are a bigger contributor to global warming than cars? I would have thought, if you go back 8000 years, there would be millions more bison, elephants and antelope roaming the planet, than we have cattle now.
ENGLISH: The difficulty with climate change is going to be untangling the political agendas from the real science. It is going to suit a whole lot of people to believe that cars are not as polluting with climate change, because it would be very unpopular to curb people's capacity to drive their cars around. In New Zealand, that is a very dangerous idea, because our biggest single exporter is based entirely on cows, and that's Fonterra. Our job as a political party is to come up with sensible and reasonable policies that don't put our economic growth at risk, that don't put people's freedom to make their own decisions at risk because of some hysteria. That is a real danger, we are going to see Labour casting around trying to rebuild credibility on the environment, and look like a government with some vision, and there's a risk we'll get some pretty stupid policies as a result.
INVESTIGATE: Mark Steyn's new book, America Alone, is warning that the world is about to become a whole lot more unstable as Western civilisation heads into an unprecedented death spiral, caused by falling birth rates, rising abortions and rapidly ageing populations, while Islam is set to take over Europe within a generation. That's a pretty grim picture, if National becomes the government, how do you prepare for that kind of future?
ENGLISH: Demography is destiny, I am absolutely convinced of that. A community that stops breeding, which the Western - particularly European - countries have, is going to get swamped by those who do breed. It's a pretty fundamental fact of life on Earth. And we, in some respects, are not a lot different in New Zealand. There's a couple of points that matter: firstly, societies that can adapt to it I going to do well, and societies that really struggle with the demographic changes are going to be riven with conflict. And we've seen how nasty and brutal as conflicts can be. You've seen it in Iraq, you're seeing it in Africa, you are starting to see signs of it in the Pacific. I'm optimistic about New Zealand, though, because we have had our own reasonably intensive internal debate about history and who belongs where, and actually we have managed it pretty well by any international standard. So I think one of our advantages is going to be our ability to adapt to these demographic changes. The hard bit is going to be sorting out our role in the Pacific, where you've got the Chinese and the Taiwanese competing for influence, you've got ethnic strife in a number of places we hadn't expected before, you've got political instability in the Solomons, Fiji and Tonga. We've got a number of those communities heavily represented in New Zealand, and I don’t think we've got a clue what to do - New Zealanders are so used to having the moral high ground, where we can preach about foreign policy and cultural difference to everyone else, that we're just a bit bemused at the moment about what to do when we actually have to deal with the ugly reality of these issues. National has started already this year, on really trying to get its head around what is going to be quite a different world than the one that National was attached to, which actually ended around about 1985.
INVESTIGATE: One of Steyn's points in his book is that countries like New Zealand and Australia, because of the distance from world trouble spots may end up becoming immigration magnets for cultures fleeing Europe as those societies continue to break down.
ENGLISH: We are going to look a lot more stable, just because we don't have the geographical pressures, we don't have these populations on our borders, but I think that flight won't just be English-speaking for European - it will also include the middle-class of every country from Indonesia through to Zimbabwe. In fact, the arrival of the Zimbabwe migrants here is perhaps the shape of things to come, but they certainly won't be all European or English-speaking. So our ability to adapt to it is still going to be really quite important.
INVESTIGATE: With an incoming National government, is the anything in terms of Labour's - particularly their social agenda - policies that you would tweak?
ENGLISH: It depends what you mean by social agenda. The one thing that you can be sure of is that National is not going to carry on down the road of social engineering. When Labour had got through the prostitution bill and the civil union Bill, in 2005 the public said ‘enough!’ and every politician got that signal. What I find out is that the public are much more worried about the breakdown of fundamental social order, particularly around families, than they are about creating ever more rights and responsibilities that lead to that breakdown.
INVESTIGATE: As education spokesman, you'd be where of the tensions that exist within the education ministry and the teaching profession, whereby a lot of them are what you would call urban liberal Labour supporters and have a particular worldview that they have brought to the education portfolio themselves. Does National have any plans to look long and hard at where some of these things are ingrained in the public service?
ENGLISH: With respect to education, we've got one definite plan about teaching kids how to read, write, and do maths - and that is a private members bill of mine that got drawn last month to set national standards for literacy and numeracy which will focus schools on making sure kids can read and write and do maths, regardless of the political leanings or the educational theories of the people who are teaching them. They'll have a job to do, it will be clear what is, and they'll have to get on and do it. I think there is scope a stronger focus on schools on citizenship and a proper understanding of New Zealand's history. The problem is that too many people in the education establishment believe the same thing at the Labour Party: that the history of New Zealand is the history of the Labour movement, and that is wrong, and that's been one of the things that got us into trouble about Maori issues - that whole left-wing view of history. The third thing that I'm interested in - and these last two are not policy yet - is getting an ethos of enterprise and entrepreneurialism into our schools. Traditionally our state system has been anti-business, and anti-private enterprise, because of the political backgrounds of a lot of the staff. I see some very good things going on in schools now, through things like the Young Enterprise Scheme, but in the future I'd like to see business, in particular, take a really strong interest in their local schools. Get trades and business right into the heart of the education system and show our kids that there is a pathway for aspiration that is about self-reliance, about initiative and about reward for risk. There's not near enough of that in our schools now.
July 25, 2007
The Coming Kiwi $ Crash: Jan 07 issue
THE ART OF YEN: and how New Zealand’s economy may disappear down a Japanese black hole
Financial commentators like Investigate’s own Peter Hensley have been warning for months we’ve been living on borrowed time. Now, as SELWYN PARKER discovers, a ten billion dollar chicken might be coming home to roost and it will hit homeowners and workers alike with eggs that are anything but golden
Mr. Watanabe is a well-paid, middle-ranking executive in a foodstuffs distribution business in Nagoya with a lot of disposable income. Like most of his compatriots and unlike most New Zealanders, he’s a saver who likes to invest some of his money in liquid assets such as bank deposits, Bank of Japan bonds and other conventional instruments. Trouble is, for the last four years, it’s hardly been worth Mr. Watanabe’s while to put his spare cash into his own country’s banks. Interest rates on deposit accounts are low and the Bank of Japan, alone among the big central banks, has paid practically nothing on its bonds. Its governors have their reasons, as we see later, but the Bank of Japan’s zero-rate policy left Mr. Watanabe and millions of other thrifty Japanese with a problem. Namely, how to get a decent return.
A big part of their solution, as NZ finance minister Michael Cullen knows only too well, was to buy New Zealand dollars in what we call uridashi – or ‘bargain basement’– bonds. It’s known as the yen carry trade. By borrowing yen at a paltry rate of around 0.30 per cent and buying kiwis paying around seven per cent, Mr. Watanabe and his fellow retail investors are clocking up a handsome 6.7 per cent return before transaction costs.
Until three years ago, nobody worried too much about uridashi kiwis. Indeed Mr. Cullen and the Reserve Bank welcomed these torrents of yen; all small countries need as much foreign investment as they can get. But as the uridashi flows grew bigger and faster, they prompted well-publicised panic visits to Tokyo to try and stem the torrent. But still it’s kept on coming, like the overflowing water in The Sorcerer’s Apprentice. At November, about NZ$40bn was held in uridashis. It’s nearly all short-term money with a life of one to three years. Over NZ$10bn worth of uridashi bonds are due to be redeemed – effectively cashed in – during 2007.
THESE are uncharted waters. New Zealand has never been in this situation before, and nor has the rest of the world. Reading between the conscientiously objective lines of a central banker, Reserve Bank governor Dr. Alan Bollard and other senior staff are worried. Citing the “high level of ‘cyclical’ liquidity” in our foreign exchange markets, Dr. Bollard explains how delicately balanced is the situation. “Given the reliance on foreign capital [i.e. uridashi kiwis and the related but longer-term eurokiwis], any rapid change in global perceptions of New Zealand’s credit-worthiness would dramatically alter the cost of capital” he warned in November’s financial stability report.
That’s central bank-speak for “there’s a problem out there”.
In short, uridashi bonds are hot money and, when or if they turn, they will likely turn fast with dramatic consequences for New Zealand. As the Reserve Bank points out, just one consequence would be higher interest rates all around on everything from mortgages and credit cards to farm loans and hire purchase. Another would be a sharp fall in the equity markets.
Beyond New Zealand, some even forecast a melt-down as the yen carry trade runs out. “It’s going to be ugly” predicted David Bloom, a currency expert with HSBC bank not normally noted for his gloomy views, earlier this year. Political economist Lyndon LaRouche, who is known for a degree of pessimism, fears the worst, foreseeing “a hit with a magnitude far beyond any individual nation or currency”.
Even sober pundits like Morgan Stanley chief economist Steven Roach see bubbles resulting everywhere from the global, carry-trade borrowing that has blown out prices for assets – that’s, everything from kiwi dollars to commercial property in central London. In the City of London, where many billions of cheap yen have been converted into sterling and other currencies and re-invested in these assets, you can sense the growing nervousness. “Yen carry trades are a risky game”, warns currency market expert John Authers of the Financial Times.
Another small nation has already been through it. Iceland had run short-term rates even higher than New Zealand, up to 10.75 per cent, and been flooded with yen-based speculation on its krona. When credit-rating service Fitch down-graded Iceland’s sovereign debt in March, in part because of concerns about the carry-trade, the money promptly fled. As a result the stock market plunged 20 per cent in a day and the krona collapsed eight per cent in 48 hours.
There’s hardly a single respected authority in The City or in the central banks who doesn’t think the yen carry trade will unwind sometime next year. The question is when, and how violently. The big worry is that nobody knows the size of the yen carry trade and therefore the effects of a collapse are unpredictable. Measured in US dollars, it’s certainly billions and possibly trillions. Most authorities hope for an orderly phase-out but some fear the worst. “The entire global financial system is on the verge of disintegration, as a result of the imminent collapse of the yen carry trade”, predicted the Daily Telegraph, not normally a doom-saying newspaper, back in February.
But let’s get back to Mr. Watanabe and New Zealand.
IT ALL started soon after the millennium, almost imperceptibly. To fire up a chronically flat economy after nearly a decade of deflation, the Bank of Japan, the main culprit, started handing out what was effectively free money. The intention was benign but nobody expected the result. Quick to spot an opportunity in the currency markets, the relatively new breed of investors, the hedge funds or “hedgies” in the trade’s parlance, started borrowing yen at give-away rates and buying up higher-return assets elsewhere. In effect, the Bank of Japan became unofficial lender of first choice to the world.
The hedgies and other big borrowers weren’t however just buying toll-roads, commercial property, ports, airports, commodities such as gold and silver and other normal assets with this cheap money. They also began to purchase and hold as assets great swathes of higher-rate currencies. Foreign-exchange traders, the reef fish of the banking sector, have done this on a daily basis for years, but the actual holding of currencies as an asset class was an alarming new phenomenon for many central bankers.
At first the currency of choice was the greenback in the form of US treasuries – T-bills in the trade. But the “spread”, or margin, on T-bills was only a few basis points and, ever opportunistic, the hedgies looked elsewhere and started gobbling up bonds in high cash-rate countries such as Iceland, Brazil, Australia and New Zealand. The carry trade had reared its head.
About the same time, uridashi investors like Mr. Watanabe entered the scene, often holding only a few thousand dollars individually but collectively adding up to billions.
THE kiwi soon acquired the doubtful accolade of one of the carry-trade currencies of choice, largely because of its high official rate. This is largely driven by New Zealand households’ insatiable appetite for debt but uridashi investors don’t really care about the factors that create high official rates. They are just looking for high-yielding assets in a world of low inflation. By late 2004, about NZ$4bn worth of uridashis had been issued. In general the Reserve Bank still welcomed the foreign investment. After all, Japanese investors had been here before with the samurai bonds of the mid-nineties. And it’s generally good for debt markets to be liquid.
But in 2005 it all started going through the roof. By the middle of the year, the value of uridashis was approaching NZ$8bn. By the end of 2005, it was NZ$10bn. Over August, October and November, more uridashi bonds were issued in kiwis than in any other currency, more even than the mighty greenback and the much more stable Aussie dollar. In October alone, an incredible NZ$2.5bn of uridashis were snapped up, the highest monthly amount on record. Clearly, something was going on; foreigners were hardly buying the kiwi dollar for its long-term prospects and underlying strengths.
It was about now that the Reserve Bank began to worry about the de-stabilizing effect of all this short-term money. By the end of 2005, nearly NZ$45bn of uridashis were outstanding. And half of that was in the hands of Japanese retail investors like Mr. Watanabe, a class of investor prone to sudden changes of mood.
As the Reserve Bank noted with typical understatement: “Given the small size of the New Zealand government securities markets relative to those of the major economies, flows of these magnitudes stand out”. The problem was that all this attention is driving up the kiwi to abnormal levels relative to other currencies.
ACROSS the Tasman, the Reserve Bank of Australia has been tracking a phenomenon that, technically speaking, isn’t meant to happen. As Guy Debelle, head of the RBA’s international department, remarked in November, the carry trade flies in the face of accepted theory. This says that any positive interest differential between two currencies is generally negated by the risk of the currencies moving against each other over the life of the investment. Remember, the carry trade is built around holding the currency, not flicking it on overnight. As Debelle said: “In contrast, those who undertake carry trades do not expect the exchange rate to wipe out the interest differential [and] sometimes they even expect the converse, namely that any exchange rate move will increase the value of the investment”.
The Aussie dollar has survived four years of exposure to the yen carry trade without suffering in general the degree of volatility that has characterized the kiwi. This is partly because uridashis represent a much smaller proportion of the Australian economy than they do in New Zealand. However between April and June of 2006, even Australia got a glimpse of what can happen. That occurred when the Aussie depreciated against the yen. Almost immediately, there was a sharp sell-off of uridashis by nervous Japanese investors.
WHAT makes the kiwi more vulnerable than its big brother across the Tasman is New Zealand’s massive current account deficit, standing at 9.5 per cent of gross domestic product. Even the Reserve Bank calls it “very substantial”. Some of the worst savers in the western world, New Zealand residents have spent – and, admittedly, in some cases invested -- more than they have saved in every single one of the last 33 years. Like any household that has overspent and faces a “funding gap” in finance talk, this hole has to be filled somehow and it’s foreign debt that has done it. By November, New Zealand’s net foreign liabilities stood at around 80 per cent of gdp, a truly alarming number by the standards of conventional economics. And the percentage continues to rise.
As the Reserve Bank and everybody else acknowledges, this puts New Zealand in a precarious position from what is known as “rollover risk”. What if all those uridashis are not refinanced at more or less current rates? An added danger is that a lot of our foreign debt is short-term. “Around half of all New Zealand’s debt liabilities have maturities of less than one year”, noted the Reserve Bank’s financial stability report in November. Right now, there’s an overhang of uridashis looming over the market, with about NZ$10.2bn of uridashis coming due over 2007.
It’s not all bad. About 40 per cent of all that foreign debt is held in New Zealand dollars, which protects the kiwi somewhat against the vagaries of international currency movements. Also, some of the debt has been raised by the overseas-based parent banks of our local institutions and they are skilled at managing down interest rates to competitive levels.
But the important point is we’re in the hands of foreigners. If in the coming months, they take a view that lending to New Zealand is a riskier proposition, we have to expect an abrupt, possibly crippling, rise in domestic interest rates as uridashi investors take fright.
BUT just what factors would conspire to scare Mr. Watanabe? The most important one by far is a change in the policy of the Bank of Japan that would make yen more expensive to borrow, threatening the interest-rate gap between the yen and the kiwi. And it’s already happening. The Bank of Japan has started tightening money, draining out of the system the liquidity that has sustained the carry trade. By some estimates the central bank has sucked up 20 per cent of domestic money supply since March 06 when it first signaled an end to the weak yen. The last thing a yen carry-trader wants is a stronger yen, but ominously the Japanese economy is growing again.
Interest rates are also rising, albeit slowly. In July, the Bank of Japan hiked base rates to 0.25 per cent, the first increase in six years. However as currency market expert John Authers points out, “only a brief pick-up in the yen can inflict nasty losses”.
But there’s a bigger and more menacing picture and it’s called leverage. The yen carry trade is based on it. Mr. Watanabe may be quite happy with his six per cent margin between the yen and the kiwi, but the hedgies aren’t. They “gear up” massive yen borrowings to multiply the interest-rate margin in the search for “alpha” – vastly superior – returns. Assume a hedge fund has US$100m in capital to invest and it borrows US$1bn, giving it a ten-fold increase in available funds. The financial scientists now buy their US$1bn worth of yen at, say, 0.35 per cent and buy kiwis at 7 per cent for a return before charges on swaps and other instruments of 6.65 per cent. Multiply that by ten and you get 66.5 per cent. That’s leverage.
But of course, leverage applies in reverse. When the worm turns, massive gains turn into massive losses. And that also could already be happening, as the relationship between the yen and the greenback shows. This link is a big factor in the carry trade, even for uridashis, simply because so much of it is based on the US dollar.
Since the beginning of 2006, the yen is up 1.9 per cent against the dollar, which erodes much of the carry-trade profit. That makes it hard for hedge fund managers to sleep, especially after the Amaranth hedge fund dropped US$5bn in October by betting wrong against natural gas futures prices.
Similarly, a drop of a percentage point or two in the value of the kiwi would make Mr. Watanabe nervous.
The picture will become clearer for New Zealand from early 2007 when the NZ$10.2bn worth of uridashis are due. That’s when we confront the rollover-risk that so concerns the Reserve Bank. Meantime there are tremors in this increasingly nervous market.
That creaking and grinding sound you hear could be the breaking up of the world’s financial ice floe, with important consequences for over-borrowed, big-spending New Zealanders.
FOOTNOTE: Selwyn Parker is a former senior writer for Metro magazine, now based in London. His last piece for Investigate was on John Hood, the Oxford Vice-Chancellor