agricultural reform in new zealand, alastair jardine

8/9/2019 Agricultural Reform in New Zealand, Alastair Jardine

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Agricultural Reorm in

New Zealand

Alastair Jardine

OccasionalPaper 35


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Agricultural Reorm in New Zealand*

Alastair Jardine

* This paper was written during my internship at the Liberal Institute o the FriedrichNaumann Foundation or Freedom. I would like to thank Dr Detmar Doering and theInstitutes sta or giving me the opportunity to write it. Specic thanks must be given to

Veronica Jacobsen and Grant Scobie, who graciously sent me sources rom New Zealandand explained certain economic concepts; and Peter Bushnell, without whose commentsthis paper would be ar poorer. And nally, thank you to Juliane Reile or all her support.All omissions and errors are o course my own.


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Alastair Jardine is a Political Science graduate o The University o Auckland,New Zealand. He has interned at the New Zealand Business Roundtable and theLiberal Institute o the Friedrich Naumann Foundation. He is currently writing hisMasters in political theory at Auckland University.


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Contents

1. Agriculture in New Zealand 5

1.1 Britains Farm 51.2 Farmers and the State 7

2. Agriculture in the Political-Economy 9

2.1 The Dual Strategy 92.2 Deterioration to 1984 12

3. State Intervention in Agriculture 14

3.1 Aggregate Assistance 143.2 The Interventions 153.3 The Eect o Intervention 18

4. Reorm 21

4.1 The Dual Strategy Abandoned 214.2 Agricultural Reorm 234.3 The Political Reaction 244.4 Hard Times and Immediate Adjustment 264.5 Government Compensation 294.6 Policy Today 30

5. Long Term Changes 31

5.1 Farms and Labour 325.2 Land and Production 325.3 Innovation and Productivity 345.4 Agricultural GDP and Exports 34

6. Lessons 36


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1. Agriculture in New Zealand

The backbone o this colony is the country

- Sir Harry Atkinson, Premier o New Zealand, 1889

1.1 Britains Farm

When Queen Elizabeth II toured New Zealand in 1953 the country wanted toshow o. It was the rst time a reigning monarch had visited, and it sent thecountry into a t o patriotism. Its instructive what kind o New Zealand theorganisers chose to present to her. Art galleries and museums did not eatureon the itinerary. Instead she took in primarily the rural achievements o theormer colony: her train passed through dairy, sheep and ruit country; shetoured a dairy actory and a cannery; and she deigned to attend two agricul-tural shows, seeing the same champion shearer twice. Little o the urban wasexhibited to her majesty it wasnt considered important or iconic. The beau-tiul natural scenery that would in later decades be sold to tourists was passedover. Indeed, it probably wouldnt have occurred to the organisers to eatureanything else: arming captured the heart o New Zealand.

New Zealand was more than one giant arm. About three quarters o the twomillion (now our million) Kiwis o the time lived in urban areas that did in-deed possess museums and art galleries. Yet arming was revered. Part o theexplanation was its large share o the economy: 29 percent o Gross DomesticProduct (GDP) in 1953;1 and nearly 95 percent o tangible exports.2 Urbanitesknew their standard o living then one o the worlds highest owed muchto armers. When armers had a bad year, everyone in the country did. In 1957a all in dairy prices in Britain ramied through armers export earnings and

slapped the governments scal position, prompting it to raise taxes and crackdown on imports.

Perhaps more signicant than this dependence was what the arming sectormeant to the national identity. By 1953 armers had transormed the countryrom large tracts o native bush into a patchwork o pasture and crop land.

1 Farming and ood-processing combined. Ralph Lattimore, Trinh Le, Iris Claus and AdolStroombergen (2009) Economic Progress and Puzzles: Long-Term Structural Change in

the New Zealand Economy, 1953-2006, Wellington: New Zealand Institute o EconomicResearch, iv.

2 Kym Anderson, Ralph Lattimore, Peter Lloyd and Donald MacLaren (2007) Distortions toAgricultural Incentives in Australia and New Zealand, Washington DC: World Bank, 21.


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This is what the original European settlers had wanted: an Arcadia. They hadlet behind what was seen as a Europe sclerotic with entrenched class andmarred by industry. In New Zealand a sureit o developable land oered ree-dom rom both. Consistent with all British colonisation, the indigenous Maori

were expected to acquiesce to the plan.3

The colonists wanted development the transormation o unused natural re-sources into material wealth sucient to sustain a living standard comparableto Europes.4 In principle, any type o production would do. It just happenedthat New Zealand suited agriculture, due to the nature o the land temperateand arable, with a long grass-growing season and the circumstances o thesettlers small in number but with the right arming know-how.

Economists say New Zealand had a comparative advantage in arming. Thismeans agriculture was the most productive thing the small number o settlerscould do, given that they had access to world trade and thus did not have tomake everything they needed themselves. As heirs to scientic revolutions inindustry and agriculture, their labour in agriculture was technically productive.As participants in world trade, it was economical. The introduction o rerige-rated shipping in 1882 sealed their ate. As Hawke and Lattimore (1999) ex-plain, it narrowed the product and market mix and induced the development

o comparative advantages which squeezed the available resource base andaimed it at South-Eastern England. Thenceorth, New Zealand was devotedto producing wool and animal protein (sheepmeat, bee, and dairy products)or the international market.

The economy has diversied since 1882 but New Zealand has remained a smalltrading nation, as its typically described. Historically, exports have fuctuatedaround 30 percent o GDP.5 This has kept the country dependant on world tra-

de and, in turn, dependant on its export industries. For most o the twentiethcentury, due to its large share o exports, that has been short-hand or sayingNew Zealand was dependent on its armers.

3 Hawke and Lattimore explain, the element o race discrimination which New Zealandshared with other countries was that Maori had to live in a European manner mainstreamlie could not accommodate continued adherence to Maori culture where there was anyconfict. Gary Hawke and Ralph Lattimore (1999) Visionaries, Farmers & Markets: AnEconomic History o New Zealand Agriculture, New Zealand Trade Consortium Working

Paper No. 1, 11.4 Ibid., 4.5 Phil Briggs (2003) Looking at the Numbers: A View o New Zealands Economic History,

Wellington: New Zealand Institute o Economic Research, 70.


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1.2 Farmers and the State

New Zealand is amous or the radical reorm period it went through in the1980s and 1990s. Part o the narrative about that era is how interventionist

New Zealand was on the eve o reorm. This is true: trade in manuactures wererestricted; exchange and interest rates were xed; business was heavily regu-lated; and the state sector was large. In the case o agriculture, governmentassistance made up an average o 32 percent o arm GDP between 1980 and1984;6 about 4 percent o total GDP. A casual look at New Zealand agricultureduring this period reveals an industry shot through with state interventions.

Yet that picture is misleading. Historically, New Zealand armers have not con-sumed massive amounts o state assistance, la armers in the United States(US) and Europe. They didnt have to, they were productive. Typically, it wasthe state that used them to und its projects, not the other way around. Theincredible sums o assistance the industry got rom the mid-1970s to the mid-1980s were actually a departure rom the norm.

In this section we prcis the history o arm-state relations. But rst we mustunderline an obvious yet important point: New Zealand agriculture is and al-ways has been based on the private property o tens o thousands o individual

owners who operate their arms in a ree market. Usually this isnt mentionedbecause private arming is common and accepted. It should be emphasised,however, because it is the key to agricultures success. We know or certainthat private property is essential or prosperity.7 We can get an idea o thedierence it made to New Zealand by looking at Uruguay, which began simi-larly but did not distribute its land between large numbers o explicit propertyowners as New Zealand did, and which as a consequence suered the landmonopolies colonial New Zealanders eared but avoided.8

Beore the First World War the states interventions were o two types. In thecolonial period it propelled development: acquiring land rom Maori; attrac-ting immigrants and selling or leasing or giving them land; and then openingit up with state-unded roads and railways. Later, it provided public goodssuch pest and disease control, transport inrastructure, arming research and

6 R.W.M. Johnson (2001) New Zealands Agricultural Reorms and Their InternationalImplications, London: Institute o Economic Aairs, Table 5.

7 Hernando De Soto (2000) The Mystery o Capital: Why Capitalism Triumphs in The Westand Fails Everywhere Else. New York: Basic Books.

8 Jeorge Alvarez and Ennio Bilancini (2008) Agricultural Institutions, Industrialization andGrowth: The Case o New Zealand and Uruguay in 1870-1940.


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education, and overseas market support. In the inter-war period the majordevelopment was the creation o various marketing boards to organise pro-cessing and exports (see 3.2).

Agriculture received state assistance because it was perceived as the countrysvehicle o development. New Zealanders were, and are, quite pragmatic andnon-ideological, and it was considered to be to everyones benet. Inevitably,however, the same pragmatism that permitted giving assistance to agriculturewas eventually used to justiy extracting assistance rom agriculture.

Taris provided government the tool. Introduced in the nineteenth century as asource o revenue, when most public gures were ree-traders, the tari regimeevolved into a policy tool to avour domestic manuacturing.9 By imposing taxes(taris) on certain imported goods the state raised their domestic prices abovethe world level, increasing the protability o their domestic manuacture andthus encouraging the growth such industry and its use o labour.

This had two eects on agriculture rst, by increasing the returns in manu-acturing relative to agriculture, it drew capital and labour rom agriculture intomanuacturing second, by raising domestic prices, it imposed an implicit taxon agriculture through higher priced inputs.10

This strategy existed in some orm rom 1895 to 1984, increasing in magnitu-de ater the election o the First Labour Government in 1935. It helps explainwhy agriculture did not receive substantial state assistance until the 1960s.Theretoore, assistance was small and considered compensation or importprotection.11 In eect, agriculture was a net source o assistance rather than abeneciary. Things changed only when, or various reasons, government ounditsel needing to wring more value rom agriculture than it ever had beore.

9 Hawke and Lattimore (1999), 21.10 Lattimore (1985), 4.11 Ralph Lattimore (2006) Farm Subsidy Reorm Dividends, New Zealand Trade Consortium,

Working Paper No. 45, 124.


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2. Agriculture in the Political-Economy

In this chapter we look at New Zealands political economy between 1938 and

1984. We need to evince the economic approach the state used in this periodto understand why agriculture experienced a surge o assistance in the 1970sand 1980s (Figure 1). Agriculture had always been assisted but never thatmuch, beore or since. The explanation or it lies in the economys deteriora-tion in the 1970s. In the ace o an economic crack up and tumbling terms otrade, the government attempted to use agriculture to boost export earningsand relieve a balance o payments decit.

2.1 The Dual Strateg

The assistance explosion agriculture went through has its origins in the 1930s,when government developed a policy o insulationism in response to the De-pression, War and economic turmoil o the era.12 Insulationism was intendedto increase domestic control o the economy; it included controlling oreignexchange, restricting imports and guaranteeing dairy prices or armers. Thegovernment believed that the prices armers received should be determinedmore by what was needed or a decent income in New Zealand and less by

overseas interests. It managed exports and smoothed prices to approximatethis end.

The control o oreign exchange and the restriction o imports were initiallydesigned to solve a balance o payments crisis. This was a perception that thecountry was spending buying things overseas more than it was earning selling things overseas. These two controls enabled the state to manage whatNew Zealanders bought overseas. Ater the War, when other governments be-

gan abandoning similar controls, New Zealand held on to them. Import sub-stitution, as New Zealands brand o protectionism was known, was popularlyunderstood to remedy unemployment (it did not it simply changed what jobsthere were). Moreover, in the early 1950s the economy boomed and the balanceo payments remained a concern, so there was little incentive to liberalise.13

The government understood that keeping this regime put pressure on the exportsector, because it created inant industries that had to import capital and raw

12 Gary Hawke, Overview o New Zealand Agriculture in L.T. Wallace and Ralph Lattimore,eds. (1987) Rural NZ: What Next?, Christchurch: Lincoln College, 1-2.

13 Lattimore (2006), 126.


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material which would have to be paid or rom the export sectors oreign ex-change earnings. This situation was known as New Zealands oreign exchangeconstraint: a constant pressing o import demand against a limited supply oexport receipts. In order to und the import substitution regime and alleviate

this pressure, the government decided to encourage the export sector.14

This dual strategy was the trade policy component o New Zealands inormalwelare state the state interventions beyond outright welare that shieldedrms and workers rom the ree market.15 A large bureaucracy, an extensivestate sector, compulsory unionism, wage arbitration, business regulation,Keynesian cyclical management and trade policy were all used to orchestratethe economy. Import substitution was popularly considered responsible orachieving New Zealands (measured) ull employment. It was not. Its real e-ect was, as explained above, to shit resources out o agriculture and intomanuacturing; and, o course, to reorient the manuacturing sector towardimport substitutes viz. to make manuacturers produce domestically whattheir customers would otherwise have got abroad. The intention was to aectan economy that suited New Zealanders range o aptitudes and to speed in-dustrial development.16

The problem with import substitution is that although it encourages a diverse

economy, it also makes people poorer. It does this in two ways rst, it blockswhat economists call gains rom trade and second, it weakens the protectedsector by shielding it rom competition. Gains rom trade are the benets youaccrue rom the goods and services you get by trade. Your access to thesegoods rees you rom the labour required to produce or purchase them local-ly, allowing you to use your time or more valuable things. In this sense tradehas an identical eect to technology in that, like labour-saving devices, tradecan save you time and eort.

Consider this re-worked example rom economist David Friedman.17 There weretwo ways to produce cars in New Zealand in the import substituting days. Onewas to manuacture them in a car plant in Auckland; the other was to grow

14 Robin Johnson, Government and the Farmer in Wallace and Lattimore, eds. (1987),19-2.

15 Herman Schwartz (1999) Free Market Experiments in the Laboratory o Democracy: TheLong Decade o Policy Reorm in New Zealand, Australian Journal o Public Administration,

Vol. 58, No. 2, 121-124.16 Hawke (1987), 1-5.17 As related by Steven E. Landsburg (1996) The Armchair Economist: Economics & Everyday

Lie, New York: The Free Press.


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them in Waikato dairy country, amidst the cows. Factory car production iswell known, but the method o getting cars rom cows is not. The trick is togrow tracts o verdant green dairy pasture, the raw material rom which carsare made. You then arm cows on this pasture or slaughter or milk products,

it doesnt matter which. Once you have processed the cows or their meat ordairy products, you package them and ship them to Japan. A ew months laterthe ship comes back ull o Nissans.

O course there is nothing inherently better about either method. But i growingcars is the cheaper option, it doesnt make sense to orce people to buy themrom Auckland car plants. Moreover, to the extent that you do orce them to,you are making armers subsidise manuacturing, by raising the price o arminputs, like cars, above their international price. In eect, what you are doingis banning an immensely liberating labour-saving device rom the economy,imposing more work on people and making them poorer.

The second problem with import substitution is that by banishing cheaper goodsrom the market, domestic rms are discouraged rom adopting the latest im-provements in their industries which, among their unprotected competitors,drive down costs and drive up quality. Again, it is the domestic customers othe protected rms, armers among them, who must bear the cost through

higher priced, lower quality products.

This is what economics teaches. Practically speaking, the dual strategy seemedto work. In 1950 New Zealand ranked eleventh in GDP per capita among OECDcountries.18 Growth was strong through to the 1960s, things were going well.And yet, although incomes were growing, they were growing aster in othercountries. By 1969 New Zealand had slipped to twentieth place.

The problem was the source o the prosperity it wasnt domestic. In the1950s, when New Zealand could have easily abandoned its war-time policies,there was a boom in commodity prices which provided wonderully high termso trade. Terms o trade reer to the relative prices o a countrys exports andimports. I they are high it means exports buy more imports; i they are lowit means exports buy less imports. The very high terms o trade in the ear-ly 1950s were responsible or New Zealands high standard o living at thattime, because it meant the national product bought a great deal o imports.

18 Rankings vary depending on which source is used, but all show a decline. See Peter Mawson(2002) Measuring Economic Growth in New Zealand, New Zealand Treasury, WorkingPaper 02/14.


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Unortunately, this didnt last. From the 1950s to 1980s the terms o tradedeclined due to increases in world-wide agricultural subsidies, protectionismand improvements in arm productivity.19

2.2 Deterioration to 1984

By the 1960s there was a growing realisation that New Zealands growth wasslipping behind other countries. In line with the policy philosophy o the time,the problem was diagnosed as a oreign exchange constraint that was ham-pering growth, particularly in manuacturing.20 The solution ollowed consi-stently: to reduce dependence on imports and solve the problem o spendingtoo much, more import substitution was needed; and in order to pay or it since manuacturers still relied on imported components exports wouldhave to be stimulated too. This would compensate or another problem thatwas becoming apparent that import substitution was imposing high costson armers.

In the 1970s New Zealand experienced a series o terms o trade shocks. Inparticular, in 1973 Britain recipient o 30 percent o New Zealands exports entered the European Economic Community, and the rst OPEC oil shockhit, tripling o the price o oil. Together these shocks caused a tremendous 30

percent all in the terms o trade and the balance o payments to plunge toa decit o 14 percent o GDP.21 This meant that the overseas value o NewZealands production plummeted, causing the price o its consumption romoverseas to skyrocket and, that in the ace o this contraction o economicwherewithal, the country did not cut its spending to match.

Meanwhile, unemployment grew. Negligible until the mid-1970s, it passed 2percent in 1980, extraordinary in a country used to near ull employment.

The National government (1975-1984) took the view that agricultures problemswere temporary, but that the price o oil would remain high indenitely.22 So,in line with its Keynesianism, it planned to stimulate the economy through

19 Tony Rayner The Seeds o Change in Ron Sandrey and Russell Reynolds, eds. (1990)Farming Without Subsidies: New Zealands Recent Experience, Wellington: GovernmentPrinting Oce, 16.

20 Ron Sheppard (1993) New Zealand Agricultural Policy Change: Some Eects, LincolnCollege: Agricultural Economics Research Unit, Discussion Paper 135, 3.

21 Paul Dalziel and Ralph Lattimore (1999) The New Zealand Macroeconomy: A Briefng onThe Reorms, Auckland: Oxord University Press, 17.

22 James Belich (2001) Paradise Reorged: A History o The New Zealanders rom the 1880sto the Year 2000, Auckland: Penguin, 401.


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this temporary downturn and insulate the country rom high oil prices atthe same time.23 First, state spending and borrowing would be expanded andunnelled toward a series o massive construction projects designed to reducethe countrys dependence on oreign oil. This would act to grow the economy

in the Keynesian manner, soaking up unemployment. Second, the balance opayments decit would be addressed with measures designed to increase ag-ricultural production and exports. These would come in two orms: stimulationo arm investment and stabilisation o arm income. The latter was designedto create among armers high expectations or their uture incomes, which thegovernment wagered would be vindicated by an eventual economic recovery.

From the macro-economic point o view, the plan didnt work. We can get anidea o how bad the economy was by looking at the major indicators leadingup to the 1984 election:24

Poor Growth Average annual increase in GDP o 0.6 percent between1975 and 1984, compared to 2 percent in other small OECD countriesHigh Infation Annual infation between 11 and 17 rom 1974 to 1984

Rising Unemploment Unemployment rom less than 1 percent in 1977to 5.7 percent in 1983

Large Debt Budget decit between 2 and 4 percent rom 1964 to 1975,to 9 percent in 1984; serving the public debt took 15 percent o publicexpenditure.

From agricultures point o view, the plan was arguably a success: productionand exports did increase.25 Ater decades o being indirectly taxed by the im-port substitution regime, the yawning gap between alling world prices andthe governments income stabilisation scheme minima channelled huge sums

into the industry, temporarily relieving the implicit tax on exports (see 4.1).The cost, however, was ruinous: agricultural assistance accounted or nearly40 percent o the budget decit in 1985.26 Clearly, something had to change.In 1984, beore the election it was about lose, the National government an-nounced it would end one o its main subsidies to the industry. Under the nextgovernment, much more was to come.

23 Dalziel and Lattimore (1999), 17-18.24 Daniel M. Gouin (2006) Agricultural Sector Adjustment Following Removal o Government

Subsidies in New Zealand. Lincoln University: Agribusiness & Economics Research Unit,Research Report 294.

25 R. Johnson (1987), 19-13.26 Gouin (2006), 12.


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3. State Intervention in Agriculture

In this chapter we look at the panoply o state controls and subventions that had

built up in agriculture by the early 1980s. First, we will look at their aggregateimpact, then the individual policies, and lastly, their eect on the industry.

3.1 Aggregate Assistance

The state can help agriculture in dierent ways with public goods, input sub-sidies, output subsidies, tax breaks and easy loans, and marketing boards. Tomake sense o the combined eect o these policies, economists use the con-cept o the Producer Subsidy Equivalent (PSE), which measures the equivalentsubsidy eect o each policy (except or marketing boards) as a percentage othe value o total arm output.

Figure 1: New Zealand Farm Subsidies

Source: Lattimore (2006)

This long series (Figure 1) illustrates New Zealands history o giving little as-

sistance to armers and the assistance explosion 1970-1990. The rise o thispeak coincides with the deteriorating terms o trade government answeredby pumping agriculture or extra oreign earnings. The decline represents theprogressive removal o assistance rom 1984.


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Figure 2: New Zealand and European Union Farm Subsidies

Source: Allan Rae, Chris Nixon and Ralph Lattimore (2003) Adjustment to Agricultural PolicyReorm: Issues and Lessons rom the New Zealand Experience. International Agricul-tural Policy Reorm and Adjustment Project (IAPRAP)

Figure 2 compares New Zealands PSE with the European Unions (EU). NewZealands PSE reached its apex in 1983 with 35 percent, just matching theEUs o that year.

3.2 The Interentions

There are dierent ways to categorise the interventions. Taking our lead romGouin (2006) we have split them up according to the ollowing policy goals:

investment promotion, income support/input support, and marketing.

Policies designed to promote investment

Beginning in the 1960s and accelerating in the 1970s the government intro-duced a number o schemes to increase investment in arming. They ell intothe categories o outright subsidies, easy loans and tax concessions.

The principal schemes were the Livestock Incentive Scheme (LIS), created in

1976, and the Land Development Encouragement Loan (LDEL) Scheme, in-troduced in 1978. Both were unded through the state-owned Rural Bank,

60

50

40

30

20

10

0

EU

NZ

80 90 2000

%


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which accounted or about 40 percent o the arm mortgage market.27 The LISinstitutionalised the ad hoc practice o encouraging armers to retain stockduring low-price years; but thence had the aim o increasing stock numbers.The scheme oered either a loan o $12 or a $24 tax deduction per stock unit

i certain targets were met.28

I the increase was maintained or at least twoyears, the loan was written o. The LIS operated until 1982 and paid out atotal o $140 million.29

The LDEL replaced earlier schemes to encourage development. Its aim was toturn unimproved land and hill country into pasture. Loans o up to $250 perhectare or a 15 year term were oered, to be used or the initial costs o de-velopment like ertiliser, lime, and drainage. I the development was maintainedto the Rural Banks satisaction, the interest was written o and only hal theprincipal had to be paid. By the time it ended in 1981, the scheme had paidout nearly $150 million in loans.

Additionally, there were various tax concessions available to armers. Theseavoided direct transers rom taxpayers but nonetheless are typically measuredas part o the PSE. Tyler and Lattimore (1990) calculate they reached a maxi-mum value o $168 million in 1986.

Income support and price stabilisation

Historically, price stabilisation was administered by the marketing boards.Price minima were set in advance o the season, and depending on how themarket price moved the boards would either save the surplus o a higher priceor dip into the und to meet the dierence o a lower price. I the boards ellinto decit, they could get low interest nance rom the Reserve Bank (thecentral bank). The idea behind price stabilisation was to obviate the risk o

price fuctuations, which are particular problem in agriculture due to its longproduction processes and the volatility o the market.

As shocks to the terms o trade roiled the market in the 1970s, the govern-ment twice stepped in to help the boards maintain arm incomes. In 1978 itdecided to set up a more permanent instrument to do this, the SupplementaryMinimum Price (SMP) scheme. The governments stake in setting price minimawent beyond smoothing prices; in the context o macro-economic stimulus, it

27 Laurence Tyler and Ralph Lattimore Assistance to Agriculture in Sandrey and Reynolds(1990), 66.

28 Sheppard (1993), 3.29 Gouin (2006), 18.


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wanted to raise the overall level o prices, urther obviating the risks to armersand driving up their expectations about investing at the margin.30 The dangerto the taxpayer was that the government could set the minima too high rela-tive to how ar prices might all, thereby exposing them to a massive bailout

o the agricultural industry. This is exactly what happened. The governmentspoint o view was that the poor commodity prices and terms o trade weretemporary, and that the extra production it was pushing would be vindicatedwhen the market recovered.

SMPs aected sheepmeat most o all. In 1981/82 the world price or sheepmeatell below both the SMP and the Meat Boards foor price. For three seasonsrom 1981 to 1984 the Meat Board compulsorily acquired the sheepmeat pro-duction, paying out armers at the SMP and driving their account into decit.31Between 1982 and 1986 this cost $766 million rom the SMP scheme and over$1 billion rom the stabilisation account.32

The situation was better or wool, bee and dairy. In the same period, woolreceived just $427 million rom SMPs, bee $101 million and dairy nothing atall. Their use o their respective stabilisation accounts was also modest com-pared to sheepmeats.

Subsidising Inputs

Together with government support o product marketing, the subsidisationo arm inputs was the governments traditional and monetarily modest in-tervention into agriculture. Input subsidies increased in the 1970s as part ogovernments general tactic o boosting production. In 1980 the main inputsubsidy was or ertiliser, or which $62 million was spent that year.33 Othersubsidies existed or things like weed control and irrigation.

The marketing boards

New Zealand has a political tradition o creating statutory authorities or thevarious agricultural industries in Wool (1921), Meat (1922), Dairy (1923),Fruit (1926), Hops (1939), Kiwiruit (1977), Pork (1982) and more. They arecalled marketing boards or producer boards, and they exist to control, tovarious extents, what occurs between the arm gate and the customer: they

30 R.W.M. Johnson (2001), 20.31 Gouin (2006), 20.32 Tyler and Lattimore (1990), 72.33 Ibid.


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buy the raw product rom armers, control its quality, grading, processing, pa-ckaging, sale and export; and provide leadership, advice, research and supportservices to producers.

The most important power a board can have is the right to buy and sell itsindustrys products. In 1984 the our main export industry boards Dairy, Meat,Wool, and Apple and Pear all had this power. So too did the domestic boardso Eggs, Wheat and Milk. As said, some boards also had the power to smoothprices, with the Reserve Banks help. By 1984 the Dairy, Meat and Wool boardshad all accumulated debt with the Bank the Dairy and Meat boards by ap-proximately $750 million and $1.3 billion respectively.34

Apart rom the outright debt they accumulated, the eect o marketing boardsis hard to quantiy. Farmers oten hold them in high regard, because they seethem as a pool o infuence with the government and in the market, not tomention as a saety net in bad times.35 The original boards were created duringa period o low prices that were attributed to the malign infuence o middle-men and overseas interests, and came rom a staunch belie that a statutoryorganisation would improve returns.36 Analysts, on the other hand, tend toview marketing boards as plain monopolists, subject to the same problem asall monopolistic power namely that the market-entry barriers which eect it

reduce the monopolists incentive to improve its services and lower its prices.In practical terms, it means that better ways o marketing cannot be tried; theboards singular views hold sway over its outlawed competitors.37

3.3 The Eect o Interention

The upshot o these interventions was that the price environment in whicharmers worked was distorted. In terms o specic agricultural policy, the in-

terventions generally lowered the prices armers paid or inputs like ertiliserand raised the prices they received or their goods like sheepmeat and bee.This was o course designed to have armers produce more despite the nega-tive eects o other state interventions like import substitution and restrictivelabour laws. Although the interventions worked in as much as they raised

34 Ibid., 68.35 Lattimore (2006), 128-129.36 Rodolo M. Nayga and Allan N. Rae (1993) New Zealands Statutory Marketing Boards:

Their History and Some Recent Developments, Journal o Food Distribution Research, Vol.23, No. 1: 94-100.

37 Veronica Jacobsen and Grant Scobie (1995) Statutory Power and Agricultural Marketing:The New Zealand Experience, Agenda, Vol. 2, No. 1: 73-80.


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production and sustained incomes, real costs were incurred the simple mo-netary price o eecting it and the fow-on consequences o misallocation andentrepreneurial disincentive.

The Ministry o Agriculture and Forestrys (MAF) expenditure gives a summaryview o the taxpayers burden.38 Beore 1970 MAF expenditure was less than$20 million per annum. By 1984 it had reached nearly $800 million, and by1987 had peaked at more than $1.700 billion, the year government wrote osome marketing board debt. These gures represent 13 and 25 percent o ag-ricultural GDP in their respective years.

Misallocation reers to how resources are shited away rom their ree-marketuses. Because ree prices generally allocate resources well, it is a general prin-ciple in economics that interering with the price mechanism, as it is called,will result in things like over-production and under-production. Sheepmeat, orexample, was the most heavily assisted product in the period were talking aboutand suered, as a result, the worst distortion. From 1983 to 1986, it averageda PSE o 82 percent.39 This created too many sheep and non-saleable surpluseso sheepmeat. The number o sheep peaked at 70 million in 1983 and declinedby 10 million over the ollowing six years as assistance was removed. 40

This overproduction represents not only a waste o sheepmeat but also the lostopportunity to use those resources consumed in its production or somethingelse what economists call the opportunity cost. Producing extra sheepmeatmeans producing less o what people value more than sheepmeat: alternativecommodities like dairy and bee, or instance.

We can presume, especially in light o the structural changes which ollowedits removal, that assistance created a great deal o this kind o over-produc-

tion and its corollary under-production. The over-use o marginal land is anexample. Another is that, together with the tax eect o import substitution,assistance discouraged diversity and product development in the industry. Far-mers concentrated too much on traditional sheepmeat, wool, bee and dairy,and added little value to them, because those were the products assistance

38 Gouin (2006), 16-17.

39 Tyler and Lattimore (1990), Table 4.2.40 Rae, A., Nixon, C., Lattimore, R. (2003) Adjustment to Agricultural Policy Reorm: Issues

and Lessons rom the New Zealand Experience, International Agricultural Policy Reormand Adjustment Project (IAPRAP), 3.


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targeted41 and because the anti-export bias drove them toward their stron-gest advantages.42

Farmers also suered rom a disincentive in entrepreneurialism and eciency.

In a similar manner to manuacturers under import substitution, armers underassistance suered a lack o incentive to lower costs, increase productivity andinnovate. The level o productivity growth during the era o high subsidies waslow and, as we shall see, high aterwards (see 4.3).

This is an especially important point in regards to the common complaint againstlow and unair world commodity prices. While its true that world prices o-ten refect unair assistance to oreign armers, its also true that, historically,commodity prices always all due to increased productivity. Correcting pri-ces to neutralise the eect o oreign subsidies will not alter this act priceswould still all in a purely competitive market. The only way grapple with thisproblem is to keep up with oreign armers productivity; and the best methodto achieve that is to have an unassisted industry (see 5.3).

An irony should be noted. One o the rationales or the dual strategy was thatit protected the economy rom world market fuctuations: import substitutionwas partly autarkic in aim; export assistance partly a remedy or the decline

o the terms o trade. But by retarding the size o the tradables sector, 43 itprobably made the country more vulnerable to fuctuations. Since the dualstrategy was abandoned, New Zealands exports have broadened and it hasbecome less vulnerable to fuctuations in the terms o trade.44

41 Vangelis Vitalis (2008) Case Study 4: Domestic Reorm, Trade, Innovation and Growth in

New Zealands Agricultural Sector. OECD Journal: General Papers, 209.42 Anderson et al (2007), 2.43 Ibid., 6.44 Lattimore et al (2009), iv-v.


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4. Reform

New Zealands agricultural reorms were part o a larger wave o reorms that

swept the country rom 1984 to 1993.45

They can only be noted here: theycovered economic, constitutional and social matters. A simple way to describethe economic reorms is to say that they ended the inormal welare state wedescribed earlier the web o interventions that had shielded rms and wor-kers rom the market or 40 years. The dual strategy weve described was anintegral part o this system and was, as a result, at the ront line o reorm.

The 1984 election ousted the conservative National party and ushered in thecentre-let Labour party. Nationals government ended ignominiously with arun on the New Zealand dollar, epitomising or many its senseless economicmanagement. During the interregnum Labour devalued the dollar 20 percent,beginning a government o dramatic economic restructuring. Finance and ex-change market controls were removed, export assistance was ended, tariswere lowered and input controls abolished. Many state assets were sold oor directed to run on a prot. The Reserve Bank was told to target infationindependent o government.

Labour governed until 1990. The ollowing National government added anaddendum o social spending cuts and the liberalisation o the labour market,bringing the reorm period to an end in 1993 (though it governed till 1999).

4.1 The Dual Strateg Abandoned

A number o things put agriculture at the top o Labours list o sectors toreorm. To begin with, the sc was suering a large decit and, with armers

consuming about 40 percent o it, cutting their assistance was an obvious move.The previous National government had presaged this by announcing the endo the SMP scheme, in realisation o its unaordability and the act that theterms o trade showed no sign o improving, as they had hoped. Moreover, theassistance was irritating New Zealands trading partners, who were threate-ning trade retaliation. Indeed, the assistance armers got can be interpreted

45 For its economic history Dalziel and Lattimore (1999) and its newer editions arerecommended. Raymond Miller, ed. (1997) New Zealand Politics in Transition. Auckland:Oxord Uni, Press covers the periods politics well.


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in terms o a scal competition with the US, EU and Japan.46 Figure 2 showshow New Zealands PSE o 35 percent in 1983 was extraordinary or it butcommonplace or the EU. In this light, it may have been simply untenable orNew Zealand to articially maintain armer incomes.

As important as these scal reasons were, they would have justied a retrench-ment under National, had it remained in power. What set Labour apart andallowed it to end export assistance denitively was that it decided to end theimport substitution regime which was its primary justication.

Since the War successive governments had continued import substitution aspart o their employment strategy. It was understood that it caused problemsbut the basic policy thinking o the time was that these were simply a priceto be paid or providing New Zealanders with this type o society.47 Its cost toarmers was straightorward protection raised prices, arm inputs included.Less well understood was that import substitution engendered New Zealandschronic oreign exchange constraint. The implicit tax on exporters decreasedtheir earnings and thus the countrys oreign exchange supplies, thereby over-valuing the nominal exchange rate and stimulating imports. Additionally, im-port substitution introduced inant industries that needed capital goods andraw materials to establish themselves, exacerbating the demand or imports.

The idea that import controls somehow remedied the problem o spending toomuch was bogus they caused the problem in the rst place. It was simplyan eect o import substitution that had to be treated with the other prongo the strategy, assistance to exporters.

Figure 3 illustrates the eect o the dual strategy. Manuacturings nominalrate o assistance describes the states eort to substitute domestic productionor imports. Agricultural and non-agricultural tradables nominal rates o assi-

stance describe the eort to assist exporters. The Relative Rate o Assistance(RRA) measures the anti-export bias in these nominal rates.

The assistance explosion shown in Figures 1 and 2 is rendered here by thenominal rates; but note the RRA: it shows how this explosion only just com-pensated exporters or the eects o assistance to non-tradables. One can seehow the RRA declined rom the mid-1980s as export assistance was cut more

46 John Gibson, Jimmye Hillman, Timothy Josling, Ralph Lattimore and Dorothy Stumme

(1992) Agricultural and Trade Deregulation in New Zealand: Lessons or Europe and theCAP, Presented to The European Agricultural Economic Association Conerence, Lisbon1992.

47 Hawke and Lattimore (1999), 24.


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and more quickly than manuacturing assistance, then rose, approaching neu-trality, as the taris which protected manuacturing came down.

Figure 3: New Zealands Nominal Rates o Assistance to Manuacturing,

all Non-Agricultural Tradables, all Agricultural Tradables, and the RelatieRate o Assistance

Source: Anderson et al (2007)

By simultaneously ending import substitution and export assistance, Labourwas able to excise agriculture rom the political economy. It eliminated the

cause o chronic balance o payments problems and greatly reduced importprotectionism, removing the basis or the governments elt need to intervene inagriculture or the sake o equity and the manuacturing sectors livelihood.

4.2 Agricultural Reorm

In the ollowing sections we track the reorms and their results in agriculturerom 1984 through an adjustment phase to 1991, to post-assistance normality.The next chapter covers the industrys long term changes.

As said, National began the reorms by ending the SMP scheme. They also startedcharging the marketing boards market rates or their Reserve Bank accounts.

-30

-20

-10

0

10

20

30

40

50

60

-5591

59

196-

046

196-

569

47-0791 19

7-

579

198-

084

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9-

094

-

5991

99

200-

030

Relative rate of Assistance, RRAc

All Agricultural tradables

Non-Food Manufacture

All Non-Agricultural tradables


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Later, under Labour, stabilisation and the accounts were phased out entirely.The Meat and Dairy Boards had much o their debt written o.

Labours 1984 Budget announced the abolition o the policies designed to pro-

mote investment, the LIS, LDES and other concessionary loans. Various inputsubsidies, such as or ertiliser, were terminated. In 1985 armers taxationconcessions were stopped.48 The government directed MAF to start charging orsome o its services like animal health inspection, in line with the user-paysprinciple it was implementing across the public service. The Rural Bank was rstinstructed to commercialise itsel; then in 1989 was privatised completely.

The deregulation o the marketing boards was uneven. In the 1980s threeboards oriented toward the domestic market were deregulated the Wheat, Eggand Milk Boards. Writing in 1990, Sandrey averred that although the debatecontinues over the appropriate structure or export oriented commodities, thepolicy debate about domestic industries is eectively over.49 It was generallyaccepted that these boards resulted in a wealth transer rom consumers toproducers, as they let the producers cartelise the market; although not every-one agreed. Shortly beore being abolished, the Egg Board remonstrated thatthey reject totally, claims that market orces will or could result in a balan-cing o supply and demand.50

Labour actually created a new marketing board with an export monopoly atthis time, the Kiwiruit Board (subsequently privatised in 2000). Reorm o theother boards came later, in the 1990s, as government rescinded the monopolyexport rights o the Meat and Apple & Pear Boards, and abolished the DairyBoard entirely in 2001. Fonterra, the private successor to the Dairy Board, re-mains in the hands o producers, collectively owned in shares by 95 percento New Zealands dairy armers. Its the countrys largest company and is re-

sponsible or a third o the international dairy trade;51

although this is a smallpercentage o world production.

4.3 The Political Reaction

In New Zealand, National is the party o armers and Labour is the party o theurban working and middle classes. In the 1940s, the National party helped buyits uture leader a arm in his constituency. Labour was never like that it was

48 Tyler and Lattimore (1990).49 Ron Sandrey Deregulation: Selected Case Studies in Sandrey and Reynolds (1990), 115.50 Ibid., 123.51 Fonterra Website: http://www.onterra.com (accessed: November 2009).


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and is disconnected rom armers, electorally and ideologically. Along with anumber o other actors,52 this meant Labour was in better position than Na-tional to remove assistance. When they did, armers were utterly astonished;they hoped government would resile rom the change, but it didnt. A number

o actors helped seal the reorm.

First, because it was well known that agricultural assistance was primarily in-tended as compensation or import protection, when the government simul-taneously got rid o both, they were seen to be giving armers a air deal. 53The government was taking away their subsidies but giving them lower inputprices. Indeed, in the 1960s armers had almost agreed such a deal, but hadreneged and got compensatory assistance instead.

Second, the reorms were consistent with the arm communitys economicliberalism and, as such, dicult or armers to argue against.54 Farmers hadbut to plead that other sectors o the economy be treated the same, so thatthe giving part o the governments give-and-take deal would be genuinelyimplemented. Government had some credibility in this regard since the ree-ing o imports had been underway or some time (Figure 3). In particular, thegovernment had just signed a ree trade deal with Australia, which includedall ood and agricultural products. As Lattimore (2006) says, armers could

be more condent this time that the economic reorms would go to the hearto the problem.55

Still, armers were upset. The proximate cause o the assistance explosion hadbeen the collapse o the terms o trade, accompanied by low world agricultu-ral commodity prices. Farmers were now completely exposed to this still-poorsituation. In 1986 their anger culminated in a massive march on Parliament

52 Briefy, these include: the global political shit to the right (e.g. Thatcher, Reagan)represented in New Zealand by a coterie o economic liberals in the parliamentary partiesand the bureaucracy; the act that non-liberals in Labour tended to consider the economya technical problem to be xed as opposed to the real agenda o identity politics, socialspending and oreign policy independence (see Colin James The Policy Revolution in Miller,ed. (1997) New Zealand Politics in Transition); and the act that the post-war approachappeared discredited by the last government. Those who opposed the veritable end oinormal welare couldnt yet readily answer the liberals arguments. That came later withthe rise o the Third Way o Clinton, Blair and, in New Zealand, Helen Clark whichregrouped the mainstream let in the 1990s ater the collapse o old social-democracyand the rise o the New Right.

53 Lattimore (2006), 128.54 J R Fairweather (1989) Some Recent Changes in Rural Society in New Zealand, Lincoln

College: Agribusiness and Economics Research Unit, Discussion Paper 124, 14.55 Lattimore (2006), 128.


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o about one third o the arming population.56 This popular action didnttranslate eectively into political action, though, since the community wasdivided. The armers union, the Federated Farmers o New Zealand, ociallysupported the reorms, though it was internally divided on the issue and criti-

cal o its implementation.57

The community was weaker on this issue than itspast strength would suggest.

Popular, primarily non-ideological opposition would have worked better onNational. Labour was immune to it because their support was urban, not ru-ral. This suggests that it was the policy debate which was decisive and that,thereore, armers were hamstrung in their opposition because some armersand their own union agreed in essential terms with the government.

4.4 Hard Times and Immediate Adjustment

Farmers have a number o legitimate worries about arming without subsi-dies. The most basic is that it will lead to permanently lower incomes and thesectors decline. This has not been the case in New Zealand. Though pricesand incomes ell initially, they eventually recovered and, in the case o dairyarmers, exceeded their old level.

It should be noted that although the loss o assistance was painul or NewZealands armers, this pain was not the markets ault. It was, rather, the aulto the state that had led them into error in the rst place. It was the state thatcreated an environment o unreal prices which had ensured armers would actagainst their real interests by over-producing certain stock, developing margi-nal land and making imprudent investments. The loss o state aid was a returnto reality: market prices indicated the real cost o their inputs and the realdemands o their customers, not the price akery o political interests.

We can get an idea o the eect o reorm by looking at the PSE. In 1983 itwas 35 percent. By 1987 it was 13, and by 1994 it was 2. On the ace o itthats a cut o about a third o the value o arm output in 10 years. Yet, asRae et al (2003) say:

56 A.B. Walker and B. Bell (1993) Aspects o New Zealands Experience in Agricultural ReormSince 1984, MAF Technical Paper, Ch. 4.

57 Paul Cloke (1989) State Deregulation and New Zealands Agricultural Sector, SociologiaRuralis, Vol. XXIX-1, 40.


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[The] removal o assistance payments equivalent to 35 % o output o valuemight be expected to have an equivalent impact on arm protability. Ho-wever, in New Zealands, this has not been the case. Such an interpretationo the PSE assumes other things do not change [] armers and others in

the ood system reacted rationally to the withdrawal o subsidies. (Originalemphasis)

In the rst year ater the reorms, world commodity prices or wool, sheep-meat and dairy recovered. Unortunately, a poor macro-economic environmentundermined the boon. Once foated in 1985, the dollar surprised everyone byappreciating, decreasing returns. Price infation remained high, exceeding 18percent in 1986; coming down only ater the Reserve Bank started targetinginfation in 1989. Servicing debt became ar more expensive as interest ratesstayed in the teens until 1990. All together, the eect was to depress real armincome to the lowest level in years (Figure 4). Sheep and bee armers incomeell by 60 percent in 1986; dairy amers by 25 percent.58

Farmland prices ell too. Measured rom 1981, they declined to about 80 per-cent o their previous level in 1984. This was likely a world-wide phenome-non.59 During the adjustment phase they ell urther, by about 50 percent insheep country in Canterbury and Marlborough or example which had got

the most assistance, and by about 20 percent in dairying areas as in Tara-naki which had got less (Figure 5). For many armers the all in land valuewas incidental, since they had not increased borrowing as land value rose inearlier years. It was more painul or new armers and those who had whollyswallowed the governments investment bait.

58 Lattimore (2006), 130.59 Rae et al (2003), 6.


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Figure 4: New Zealand Farmers Real Incomes


Farmers coped by cutting costs, increasing revenue and restructuring debt.60Unpaid work increased as employees were laid o and the burden o arm workshited to the amily. O-arm employment increased and arms were used ornon-traditional sources o revenue, like tourism and accommodation (arm-stays). The use o ertiliser was cut in hal, with no big all in productivity;possible due to its residual eect. Repairs and maintenance were delayed, in-vestment put o. Some land was sold o as liestyle blocks, some was takenout o production, and some was leased to other businesses.

60 Lattimore (2006), 130.

Index

1980

=

100


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Figure 5: New Zealand Real Farmland PricesDefated by urban residential prices

Source: Rae et al (2003)

4.5 Goernment Compensation

When it decided to cut assistance, the government estimated that about 20percent o armers would lose their arms. As it happened, only about 5 per-cent let the land between 1985 and 1989, not signicantly more than thenormal rate.61 This happier outcome was partly due to the governments tran-sition programmes, which were designed to keep viable arms in operation,

rather than have them go bankrupt rom the speed at which government cutassistance. The most signicant action o this type was the governments de-cision to not deregulate the big marketing boards and to write-o much otheir debt. The boards were well respected by armers, and it was a canny moveto retain them in a nancially viable orm so they could provide leadership inthe adjustment period.62

For those individual armers who ound themselves in nancial strie, the go-vernment oered help with debt and special social welare payments. As no-

61 Ibid., 140.62 Ibid., 128-129.


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ted, armland prices dived during the reorms while interest rates rose, makingdebt a particular problem. In 1986 the government introduced two schemesto address this.63 For those armers with the Rural Bank, the government o-ered to write o a part o their debt in return or their paying market interest

rates on the rest. Applicants had to show that they were not in a position tomeet their nancial obligations and that their arms were commercially via-ble at post-assistance prices. Farmers whose main creditor was not the RuralBank could apply or a subsidy o their operating expenses rom the Bank onthe same criteria.

O the 77,000 arms in New Zealand at the time, 8100 were involved in theschemes. Some were declined or being too well o, while others were declinedbecause they couldnt prove their uture viability. Its estimated that in total$289 million was written o, representing about 33 percent o the originaldebt to the Rural Bank.64

During the adjustment phase, it became apparent that armers with marginalarms were not being adequately protected by the states existing social wel-are provisions. To correct this government oered grants or those in nancial

jeopardy that would cover a minimum cost o living. This operated rom 1986to 1989.65 In 1988 an exit package was introduced to help those who would

have to leave arming altogether. They were oered $45,000 to leave theirarm with all their possessions and a car. Across the whole country, about 350amilies let arming during this period.66

4.6 Polic Toda

The reorm period changed the way government approached the economy.Broadly speaking, its aim was to level the playing eld among the industries

o the economy: the state would no longer pick winners with its avours;the market would instead determine where resources went. This was mostlyachieved in agriculture. The attitude o governments now is largely hands ocompared to the assistance other armers get in the OECD (Figure 6).

63 Gouin (2006), 26.64 R.W.M. Johnson, W.R. Schroder and N.W. Taylor (1989) Deregulation and the New Zealand

Agricultural Sector: A Review. Review o Marketing and Agricultural Economics, Vol. 57:47-71.

65 Rae et al (2003), 9.66 Gouin (2006), 27.


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Figure 6: Producer Subsid Euialent and General Serices in Agriculturein New Zealand and the OECD, Aerage o 2004-04

Source: Agriculture and Agri-ood Canada, New Zealand Agriculture Policy Review

State action in agriculture is now limited to the ollowing areas: the provisiono public goods like research, education, advice, and animal inspection (with

recovered costs where possible); the continued support o a number o mar-keting boards, or example in the wool industry; international market supportand advocacy; and the provision o emergency aid in the event o disasterslike droughts, foods and earthquakes.

5. Long Term Changes

New Zealand armers were plunged into a ree-market quench in the 1980s:political infuence over prices was greatly reduced and the sector exposed tounobscured prot and loss signals. The main eect o this was to make ar-mers more responsive and more capable obeingresponsive to the market.This means resources have fowed out o the relatively less protable sheeparming industry and into dairy, deer, orestry, horticulture and viticulture. Italso means that the lower trade barriers have greatly reduced the implicit tax

agriculture used to labour under, and that as a result o this and an enhancedprot motive, innovation, productivity and incomes have all improved. Overall,the sector has grown so much that it actually increased its total share o GDP,

New Zealand OECD

Percentofadjusted

valueofproduction

30

25

20

15

10

5

0

PSE

General

Services

PSE

General

Services


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rom 5.7 percent in 1987 to 7.6 in 2002 (Figure 8). This indicates just howsuppressed the sector was under the old political economy.

The conditions during adjustment were less than ideal. As weve seen, in the

1980s government engendered high rates o interest, exchange and price in-fation. Although agriculture was promised the elimination o the import sub-stitution regime, protection was reduced much more slowly than agriculturesassistance. However, by the 1990s things were improving: interest rates andprice infation and trade barriers declined, and armers beneted rom labourmarket liberalisation. The sectors innovations and improved productivity star-ted have an eect.

5.1 Farms and Labour67

Farming as such has not been radically changed by reorm it remains a a-mily-centred industry, with over hal o the labour orce made up o worker-owners. The total number o arms has decreased, rom around 77,000 in 1984to 66,000 in 2006, partly due to the amalgamation o arms. There are nowewer but larger dairy and sheep arms, and more but smaller arms in horti-culture, viticulture and deer arming.

The arm labour orce has declined in size but greatly increased in productivity.In the 1970s it stood at 109,000 Full Time Equivalents, in 1983, at the heighto assistance, it was 127,000, and in 2004 it was 102,000. From 1984 to 2003,labour productivity improved 84 percent.

5.2 Land and Production68

The biggest change since the reorms has been the move rom sheep to dairy,

and the growth o the deer, orestry, horticulture and the wine industries. Totalpastoral land has declined rom 14 million hectares in 1983 when assistancewas designed to make armers develop marginal land into pasture to 12 mil-lion in 2004. Part o this would have been converted into other agriculturalland, such as orestry, which has grown by 350,000 hectares since 1984, andhorticulture, which has grown rom 87,000 to 121,000 hectares.

67 Drawn rom Lattimore (2006) and Vitalis (2008).68 Drawn rom Lattimore (2006), Vitalis (2008), Rae et al (2003) and Gouin (2006).


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Sheep and Bee

Assistance obscured the relative unprotability o sheep arming. Since the re-orms sheep numbers have allen rom 70 million to 40 million in 2004, while

productivity has increased. Lambing percentages and average carcase weights,or example, have both increased 25 percent in the period. Due to value im-provements like this, export revenues rom the smaller fock exceed those othe old. The number o bee cows seems to have been relatively unaectedby the end o assistance, remaining steady since the 1980s. Their productivityhas increased, however.

Dairy

For dairy, reorm revealed its relative protability. The national herd o dairycows has grown rom 2.3 million to 5.3 million in the twenty years since reormand there has been a 75 percent increase in dairy production. Dairy arms havedeclined in number but grown in size. Again, their stock is more productive; thequality o milk solids produced per dairy cow has increased 20 percent.

Deer arming

The deer industry has grown rom virtually nothing in 1984 to having 2 milliondeer o annual production worth $100 million. Deer arming is a remarkablesuccess story or New Zealand, which was the rst country to really arm deer.In the 1970s there was little idea o how to do it; the commercial industry wasbased on hunting (or which New Zealanders invented the method o captu-ring wild deer by helicopter). People had to work out how to handle deer, toreproduce them and design acilities appropriate to their nature. New Zealandnow has the largest deer arm industry in the world.

Horticulture and Viticulture

In 1984 the ruit, vegetable and wine industries were small and domesticallyocused; prime examples o how assistance starved the smaller, less establis-hed industries o resources. As said, horticulture has since increased its use oland. Its exports have grown rom (USD) $140 million in 1984 to $827 millionin 2004.

The New Zealand wine industry has been transormed since the assistanceyears. Protected rom oreign competition, it used to produce ortied wineor uninterested New Zealanders. Ater a number o industry-specic reorms,


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including a removal o its protection, the industry has changed into a producero quality export wines to 74 countries, targeting particularly the high-endBritish market. Its exports have gone rom being worth under (USD) $10 mil-lion in 1984 to approximately $730 million in 2009.

5.3 Innoation and Productiit

Because armers are typically so exposed to oreign competition, they have tokeep up with the latest agricultural technologies and techniques. It increasesarm productivity, thence output and income. This is why assistance targetedinvestment. When armers lost that aid, investment duly ell machinery im-ports, or example, declined. Reorm introduced its own incentive, however:prot. By the 1990s machinery imports had picked up. Since then the sec-tor has hungrily absorbed oreign technology and new techniques in animalprocessing, genetics, sotware, machinery, agri-tourism and the biochemicalbusiness.69 This is the great benet o the international agricultural industry:armers do not have to invent everything themselves; they can adopt the se-crets o other amers success.

The result can be seen in the increase in labour productivity already menti-oned. The best indication is the increase in Total Factor Productivity (TFP),

which measures the growth o output not accounted or by growth o inputs viz. the value added to the production process by better technology andtechniques. In Figure 7 we can see how the TFP was low and stagnant duringthe period o high assistance, and picked up aterwards in the ace o strongerprot incentives. This is the main source o the income and arm price reco-veries seen in Figures 4 and 5.

5.4 Agricultural GDP and Eports

In the late 1960s the arming sector alone comprised 14 percent o total GDP.That share ell, as it should have, as the economy grew, so that by 1987 it was5.7 percent.70 One o the remarkable results o reorm was that the sector grewso much in the 1990s that its share o GDP held steady, and briefy increasedin the early 2000s (Figure 8). Note in Figure 8 that there has been a large in-crease in the value added category. This reers to secondary ood processing,one o the big winners o reorm. Its the nature o arming that adding valueto the raw material is dicult; processing is one o the ew ways it can be

69 Vitalis (2008), 203.70 Lattimore (2006), 132.


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done. Its increase represents industry developments such as specialised milkproducts and the evolution o sheepmeat rom exporting plain sheep carcassesto exporting ner packaged cuts.71

A similar story can be told with exports. In the 1960s agriculture still repre-sented over 90 percent o total exports, alling to 60 percent in 1986. 72 Thereorms have, again, halted the declining trend they held steady at 55 per-cent in 2005.

Figure 7: New Zealand Agriculture Total Factor Productiit


71 Vitalis (2008), 206.72 Lattimore (2006), 134.


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Figure 8: New Zealand Agricultural Sector GDP

Source: Rae et al (2003)

6. Lessons

New Zealands agricultural reorms oer a number o lessons or other coun-

tries. Perhaps the most obvious is that armers can prosper without substantialstate assistance. Indeed, this is not so much a lesson o the reorms as it is othe entire history o New Zealand agriculture, or which substantive assistancewas historically extra-ordinary. Not only were armers usually unassisted, theywere implicitly taxed by the non-tradables sector. And yet agriculture had sucha strong comparative advantage that it grew despite this carrying this yoke.As Lattimore (1985) relates, it created the impression in the minds o NewZealands policymakers that no matter what you did to the agricultural sector,or the extent it was exploited to promote so-called development, the indus-

try would keep on growing. The nal indignity o this political exploitationwas that the states compensation or it considering the misallocations andstagnant productivity it caused did more harm than good.

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

87

97

08

18

28

38

48

58

68

78

88

98

09

19

29

39

49

59

69

79

89

99

0002

1002

NZ$million

0.0

2.0

4.0

6.0

8.0

10.0

12.0

gross output int. purchases value added share of GDP

%o

ftotalGDP


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More specically, New Zealands experience suggests the ollowing points.

1. Farmers and the rest o the agricultural sector have the ability to changein reaction to the loss o assistance.73 In the short term they can cut costs

and make extra money; in the long term they can diversiy production andadopt technology and techniques to improve productivity. Although theadjustment phase is painul, its transitory. Over time, prots will recover andasset prices will change to refect uture returns. Macroeconomic stabilityhelps, but ultimately it is not the primary actor that will improve incomes.Long term, that role can only be lled by prot-driven increases o armproductivity.

2. Farmers do not bear all the costs o adjustment to a certain extent costsare spread through the markets armers participate in.74 For instance, onereason there were ewer mortgagee sales among armers than expectedwas because the sector-wide all in land prices meant that it was moreprotable or the banks to ease armers through the crisis than bankruptthem.

3. It helps i other areas o the economy are reormed too. For New Zealandarmers the most important other reorm was the end o import-substitution,

because it lowered input costs in the ace o alling revenue.75 The govern-ment was thus seen to be treating armers airly and equally. Other reorms,such as labour market reorm, helped as well. Without them armers couldnot have responded as fexibly as they did.

4. Government can smooth the transition to post-assistance arming by o-ering compensation.76 In New Zealand this mainly took the orm o debtwrite-os, granted to armers who could show their arms were viable in

the post-assistance environment.

73 Rae et al (2003), 11.74 R.W.M. Johnson (2001), 37.75 Anderson et al (2007), 21.76 Rae et al (2003), 11.


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