R.W.M. Johnson and A.N. Rae, Centre for Agricultural Policy Studies Massey University New Zealand(1)
In this paper we discuss the role of bilateral commercial exchanges in furthering the idea of mutual cooperation and collaboration underlying the objectives of the Pacific Economic Cooperation Conference. This component of international adjustment appears to be neglected in recent discussions of multilateral negotiation and positive adjustment in the GATT and the OECD.
Bilateral exchanges can involve transfers of capital, technology, knowledge and skills. Such exchanges can take place through the market place but can also be supplemented or driven by foreign aid. Mutual benefits can arise through increased growth and productivity, employment, and specialisation, and provide the potential to help overcome economic and political impediments to change. The aim of this paper is to explore such bilateral, private sector exchanges using New Zealand case material to identify possible areas of further study in line with PECC task force objectives.
Positive adjustment policies are those that facilitate structural adaptation to shifts in demand and relative prices, to technological progress, and to changing comparative advantage (OECD 1983a).
Impediments to such an adaptation process are sometimes observed such as quantity or quality imbalances between labour and capital released from declining industries and those demanded in growth sectors, and difficulties experienced in transferring labour and capital between sectors and regions. Lags are also introduced into the adjustment process through, for example, the time required to re-train labour for new employment opportunities. Sometimes impediments to change can be traced to other government policies, such as inflexible wages or generous welfare benefits. Adjustment pressures can also give rise to powerful political groupings whose objectives include the creation of impediments to change.
Positive adjustment policies are those designed to overcome, or at least reduce, the above kinds of impediments. Where resistances are produced by other policies of government then the case for government action is clear. Otherwise, one school of thought is that the most efficient approach to adjustment is to allow markets to work, i.e. a non-interventionist approach. This, however, ignores the often powerful political aspects of adjustment, and the possibility that even free markets might produce distorted signals. The latter occurs, for example, when the costs of adjustment differ depending upon whether they are calculated by the affected individual or society as a whole. Such private and social costs could well differ in the case of an individual retraining for new employment, or a producer contemplating the scrapping of a particular capital asset. The free-market approach also ignores the possibility that in agriculture there may well be non-economic goals worth pursuing, such as income parity, food security and balanced population growth.
In light of the above, the objectives of positive adjustment policies can be identified as being (Greenaway 1983):
(a) to lower the social and transitional costs of change;
(b) to redistribute the private costs from the directly affected factors towards consumers in general; and
(c) to make change more politically acceptable by clarifying the extent and distribution of the resultant benefits.
Policy instruments that could be put in place to achieve the above objectives include adjustment assistance grants to labour to improve geographical and occupational mobility, or subsidisation of job search costs; assistance to specific firms or industries to encourage capital mobility or Research and Development activity; and various regional development assistances. Also, the pursuit of growth in the economy is a powerful factor in making adjustment more acceptable and lowering the costs of change.
In summary, adjustment policy should be based on assistance measures that are temporary and integrally linked to action to phase out obsolete capacity and to re-establish financially viable enterprises.
Labour market policy should encourage flexibility and should not subsidise employment that locks labour into declining sectors. Regional policies should emphasise general measures to develop viable industries, through providing infrastructure and fiscal incentives, rather than simply bailing out enterprises in financial difficulty.
lf labour and other resources are kept too long in comparatively inefficient activities, the short-term benefits will increasingly be out-weighed by the longer term disadvantages. An economy may become less productive, less competitive in international markets, less innovative, more inflation-prone and extremely costly to taxpayers and consumers. Positive adjustment policies are an essential element in an overall strategy to restore the conditions for sustained non-inflationary growth and higher employment (OECD, 1983a).
It is important to ensure that agricultural policies, no less than other policies, are designed to achieve their social, economic and political objectives at a minimum cost to the consumer and taxpayer without neglecting the legitimate interests of the agricultural producers while also ensuring overall food security (OECD, 1983b; 1983c). But national policies which distort domestic resource allocation may also distort international resource allocation and reduce the benefits accruing to countries which have a comparative advantage in production. As a result world income is reduced by such policies. Further to the direct effects on international resource allocation and international trade in agricultural products resulting from higher self-sufficiency levels which the policies induce, world markets tend to become residual markets. As such they tend to become very sensitive to relatively small changes in demand and supply; that is, domestic stability is often achieved at the expense of international stability.
Recently the OECD has proposed that countries should agree on multilateral, multicommodity phased reduction of domestic assistance to agriculture so as to improve welfare in both importing and exporting countries (OECD 1987a). In reviewing the market impacts of reducing assistance to agriculture, this report concludes that agricultural trade problems have their origin in domestic policies that shield producers from world market signals and which are incompatible with the upward trend in agricultural productivity and the low growth in food demand in member countries. Policies, whose principal although not exclusive purpose is to improve the level and stability of the standard of living of farmers have raised the supply of output beyond market requirements. Restrictions on imports and encouragement of exports have often distorted trade flows and increased pressure on, and the instability of, world prices. Compensatory or retaliatory measures have tended to increase.
The report lays considerable stress on the growing integration of the world agricultural system. In this respect, changes of policy in one country for one commodity can have effects of varying intensity on producers and consumers both at home and in other regions. Changes in one commodity can affect the position of other commodities. It is these linkages between countries and between commodities which lead to the conclusion that a coordinated multilateral, multi-commodity approach to policy reform would bring significant benefits to all member countries.
In its summary and conclusions, the report stresses the multiple objectives inherent in agricultural policy. There is a need to reduce market distortions arising from imbalanced assistance programmes. There is a need to make the agricultural sector more flexible and more responsive to world market signals. There is a need to reduce the budgetary cost to the economy of agricultural assistance, and there is a need to reduce the disparity of assistance between producers and to improve international relations in agriculture.
As countries liberalise their international trade policies, changes in the pattern of production and resource use inevitably follow. The previous sections indicated that such changes are not without their costs, and that specific policies can be put in place to reduce and/or re-distribute these costs of adjustment.
There may be a case for the encouragement of international private sector exchanges to complement the kinds of adjustment policies briefly mentioned in the previous sections. Specifically, such exchanges refer to direct investment and other activities of foreign firms that, for various reasons, assist domestic adjustment. Foreign investment that hastens domestic economic growth will likely reduce the costs of adjustment, for example through the creation of new production and employment opportunities. Likewise, foreign investment that provides the means of enhancing the competitiveness of domestic agricultural sectors or enlarging domestic market opportunities reduces the need to adjust to a liberalised trading environment, and hence reduces adjustment costs. Importantly, it will also help overcome political resistances to trade liberalisation.(2)
In such cases, foreign aid assistance can contribute to such improvements, as well as private transfers.There may well be direct and indirect means of improving resource use in the agricultural sector through foreign investment. Such indirect measures would include market development activities undertaken by foreigners, product promotion activities, resource and development activities and training programmes - all of which enlarge the market range, or the efficiency of systems available to local producers, and therefore contribute to the achievement of adjustment objectives. At the same time, however, foreign investors may not be completely altruistic and may well require adequate compensation for their trouble. In all these activities, however, it is clear that there are mutual benefits to domestic producers and traders from joint activities in developing markets.
Mutual cooperation in the Pacific region could therefore be based on both multilateral and bilateral action to improve production efficiency and eventually trade. In this paper, only bilateral action is discussed in detail. Individual countries would need to continue to review agricultural protection policies in view of the advantages and disadvantages of lower self—sufficiency and greater trade in livestock and grain products. These agricultural policies are likely to include elements creating barriers to trade in livestock and grain products, and also elements creating barriers to the freer flow of international investment and technical knowledge. The overall objective of positive adjustment lies in improving the economic
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efficiency of the agricultural sector so that it contributes the maximum to economic growth in individual countries and achieves appropriate levels of specialisation within an international trade framework. This kind of analysis suggests that freer markets for traded goods, capital flows, and technology transfer plus appropriate aid assistance would all contribute to an improvement in economic welfare in the member countries of the PECC.The focus of the remainder of the paper is on New Zealand private and parastatal investment activities in the Pacific Basin, as a case study of mutual cooperation through off—shore investment and exchange. It is hoped this will help open up wider discussion of the cooperation issues that might be involved. The discussion is confined to trading activities in second countries which involve off—shore investment by NZ trading entities. Trade arrangements conducted on a pure agency basis are not discussed as these are deemed to fall outside the definition of bilateral off-shore investment.4
3. The material reported in this section was collected in a series of interviews with the major marketing boards and twenty export companies. Some of these companies did not undertake off—shore investment on their own, and a complete census of exporting companies with Pacific interests was not undertaken. As a result, information on a number of case studies of overseas investment activity in the livestock and grains products area, covering some 92 projects in individual countries, was assembled.
4. It is accepted that other countries at the Workshop might have bigger and more widespread bilateral trading and marketing relationships that exhibit other features of the collaboration thesis. These could be the subject of futhur discussion at the Workshop.
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The organisation of trade in livestock products and grain in New Zealand is partly carried out on a parastatal basis and partly by private companies. Among the parastatal organisations there are different levels of monopoly and control over marketing of products.
The NZ Dairy Board has sole control of overseas marketing of dairy products and hence is concerned with the development of markets throughout the Pacific area. It has a widespread and intensive investment in market facilities and joint ventures in most of the countries represented at the workshop.
The NZ Meat Board is not a trading agency, though it used its powers in this respect in the period 1980-85 to trade in sheepmeats in the region. Nevertheless, the Meat Board provides services to private traders by way of negotiations with second countries, by promotion activities, and by coordinating collective marketing arrangements in certain countries, where individual commodity traders are reluctant to invest on their own.
The NZ Wool Board is also an advisory and promotion agency which organises marketing of wool through the national auction system, engages in the international promotion of wool, and undertakes research. While the Board has powers to provide price support for wool, and may buy and sell wool for this purpose, it does not generally trade in wool in international markets. With the exception of dairy products, most of the trade in meat, meat by-products, wool and grains, is organised and carried out by private sector companies in New Zealand.
The following sections describe New Zealand private investment activities with particular reference to their spill-over benefits to domestic producers and consumers in host countries. Parastatal Investment in Pacific Markets The NZ Dairy Board is the largest and most active parastatal agency in market development in New Zealand. It currently has 24 identifiable investment projects in South East Asia, North Asia, North America and the Pacific. It also has major interests in South America. The Board has a strategy to increase its involvement directly in the market
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place and to pursue this by active acquisition of outlets. The strategy involves reducing dependence on bulk standard commodities, and increasingly tailoring products for specific customers and end users including branded consumer products in appropriate markets.
The Board has a joint venture in Japan to develop the cheese trade, and has developed a varietal cheese especially for the Japanese market. A second joint venture in Japan is concerned with marketing NZ milk proteins and edible fats. In Indonesia the Board has minority shareholdings in two milk food companies, which manufacture a wide range of milk products for the local market. In this case, Indonesian law prevented direct foreign involvement until recently, and now local supplies of fresh milk can be supplemented by re-constituted milk from New Zealand. The Board has shares in companies concerned with marketing milk products in Malaysia, Singapore, Philippines, Papua New Guinea and Hong Kong. From Hong Kong the Board has developed relationships with the Chinese state trading agency for fats and oils which include a programme of technical assistance.
In the USA, the Board has taken over two major importers of cheese, taken a share in a snack food company and taken a major interest in a protein technology company. In South America, the Board has acquired majority interests in two companies manufacturing and marketing dairy products.
The activities of the NZ Meat Board are rather different to those of the NZ Dairy Board. The Board is engaged in joint ventures and subsidiary trading in North Asia, and in trading and promotion activities in North America. In an essentially commodity market situation in North Asia the Board has set up a wholly owned subsidiary company to market mutton and frozen lamb in Japan, Taiwan, Hong Kong and China. This company has two joint ventures for processing mutton; one in Korea and one in China; both of these operate on an re-export basis. Another joint venture has been established in Japan to develop and promote further processed lamb products and this company also processes NZ products within Japan.
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In the United States and Canada the Meat Board (and its NZ partners) have a wholly owned subsidiary for the marketing of frozen lamb. In addition to these activities, the NZ industry contributes to the activities of the Canadian Beef Promotion Council, the United States Beef Promotion Board, and (in the past) the United States Lamb Promotion Committee.
The NZ Wool Board contributes to the International Wool Secretariat (IWS) for world-wide promotion of natural wool and its end uses. In the absence of the IWS in China until recently, the Board has encouraged consumption of NZ wool through a technical cooperation protocol with the state textile corporation. These activities include a pilot processing plant, staff training and scientific interchanges. The Board also has a programme of underwriting new market initiatives by the private sector.
New Zealand has a wide network of business agencies throughout the Pacific region concerned with the build—up of trade in livestock products and grains. Some firms have well established subsidiaries in the Pacific Basin area or belong to long established British or multi- national trading companies. In recent years, the major companies have entered into share or joint venture arrangements in different countries, either to secure outlets for products, to arrange further processing facilities, or to arrange use of New Zealand raw materials and technology, and to widen their profit base. A wide range of animal—based products are traded including wool, yarn and carpets; beef, mutton and lamb, chilled and frozen and both at the wholesale level and in finished consumer packs; by—products such as casein, tallow, casings, wet blue hides, skins, leather, meat meal and pharmaceuticals; and refrigerated products such as ice cream and prepared meals.
ll It is characteristic that the major companies concerned are large and trade globally. They behave like multi-nationals and are interested in market development, finished products rather than commodities, and the international transfer of capital and technology. Some smaller companies have somewhat less diverse and global interests, but still exhibit aggressive development characteristics in those markets in which they are interested.
It should be made clear that commercial considerations are paramount in selecting agents, establishing subsidiaries or entering into joint ventures. Investment in a foreign market has to be judged in terms of the longer-run benefits from establishing a positive presence.
Developing these relationships may take a number of years. It should also be clear that such investment is not always a first- choice activity of the firm; the survey encountered many cases where tariffs or prohibitions prevented commercial development, but where joint venture investment was welcome. From the commercial point of view, foreign investment is concerned with the expansion of trade and the accretion of profits - the benefits to domestic development objectives have to be derived from an analysis of particular spill- overs created by the original investment. Governments in some host countries allow the entry of foreign investment on these terms. In countries where there are no restrictions on capital movements, a relatively high level of foreign ownership of productive assets has been established for a long period. Such investment is commonly associated with multi-national firms on a large scale, but the review of New Zealand experience shows smaller or medium sized firms also engage in foreign investment. With a history of controls over capital movements, New Zealand has been a recipient country rather than an off-shore investor up until recently. However, reforms in the New Zealand financial market have now permitted a greatly accelerated programme of off-shore development to emerge. The NZ Dairy Board, and the major meat export companies are examples of this.
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A major spin-off for host countries from market development and promotion derives from the generic promotion of agricultural products. These activities widen the market base and enlarge the opportunities for domestic producers and importers alike. Generic promotion is typical of all commodity products where standardisation and uniformity is common. It is in this context that the New Zealand Meat Board supports the Beef Promotion Council in Canada and (through import levies) the Beef Promotion Board in the United States. In the past the Meat Board has also supported the activities of the Lamb Promotion Coordinating Committee in the United States.
The New Zealand Wool Board supports the activities of the International Wool Secretariat, which is essentially concerned with the generic promotion of wool. The IWS has branches or local offices in the USA, Canada, Japan, Taiwan and Hong Kong. However, not all of these countries have indigenous wool growing industries.
As agricultural products become more differentiated in consumer markets, the use of brand names in promotion is more likely. It would appear that brand promotion limits the general scope of generic promotion and hence reduces the spill—overs into domestic industry. In the United States, the New Zealand owned marketing company promotes "NZ Lamb" in general, but individual companies have franchises to promote "Wellington Select" or "Weddel" consumer packs. From the New Zealand point of view, commercial advantage would require that "NZ beef" "NZ lamb" and "NZ lambskins" are identifiable products and that a certain guarantee of quality is associated with such a broad branding policy. In this sense, some of the generic promotion benefits to domestic producers would be lost.
In the case of "McDonalds" there is a universally recognised brand or franchise for finished meals. Most countries appear to welcome their arrival. ln this case, the granting of the franchise encourages increased domestic consumption and possibly imports of beef, potatoes and dairy products or substitutes.
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Investment in joint ventures in host countries brings benefits in the form of access to raw materials, new technologies, and training opportunities. Direct benefits result for locally employed labour and other inputs. In some cases, arrangements are included for re-export of products, and arranging market disposal. In a number of cases, joint venture arrangements were entered into by New Zealand companies because the host country either prohibited imports of the product concerned or had rules against foreign ownership. In these countries, broad domestic development objectives probably dictate the direction of foreign investment. There is a danger in these cases that less efficient industries could grow up behind such protective barriers.
In China, joint venture arrangements are entered into through the respective state trading organisations. In one case, the Chinese partners have invested in a wool scouring plant in New Zealand to gain access to modern technology as well as to raw material. In some countries, joint ventures enjoy tax holiday provisions and may qualify for exemption from customs and import duties on capital items. One New Zealand company has a majority interest in a factory in Hong Kong for finishing leathers for the Asian market. The advantages lies in labour costs and proximity to markets.
These joint venture arrangements appear to be more common in developing countries than in industrial countries. This is the case where shortages of foreign exchange, lack of modern technologies, and lack of skills dominate country development objectives. New Zealand does have joint ventures in Japan, for example, where the emphasis is more on gaining access to raw materials than on technology and capital. In the United States, New Zealand has a particular concern to see that carpet technology using natural wool is kept up to date through sharing costs of such programmes.
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It was suggested earlier in this paper that international investment in a country's agricultural sector can assist in making that sector more competitive and hence contribute to positive adjustment. One type of international investment is concessional assistance given in the form of foreign aid. Any review of structural adjustment in domestic agriculture in the region should therefore include reference to the adjustment impacts of foreign aid - this aspect of assistance is not generally stressed in the foreign aid literature. The following discussion is largely based on New Zealand's official development assistance programme.
In 1986/87 (March years) New Zealand disbursed NZ$118.5 million on assistance to developing countries, most of which was bilateral assistance ($84m) and assistance for shipping in the South Pacific region ($12m). The principal purpose of bilateral development assistance is to help promote the economic and social development of the recipient countries by expanding their capabilities to raise the living standards of their peoples. Emphasis is placed on the development of productivity through livestock and pasture improvement programmes, assistance with crops, and the development of forestry, fishing and energy resources. This transfer of expertise to developing countries is supplemented by the provision of study and training awards. The Government has stated that development assistance is to be directed primarily to the island states of the South Pacific in the light of their specific requirements. The second area of concentration is South East Asia, with particular reference to the countries belonging to ASEAN.
At the First Workshop, the ASEAN countries expressed their desire for cooperation and assistance in developing their livestock and feed industries. Foreign investment in these industries does not appear to have high priority, though in some countries poultry development has proceeded rapidly with outside capital. There is clearly a need to study further the respective roles of private and public investment in
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domestic agricultural industries, with special emphasis on the value of direct foreign investment. It may well be that official assistance investment crowds out foreign private investment. On the other hand, private investment by New Zealand in feed milling activities has been successful in at least four countries, and other country experiences would add significantly to the sum total of foreign private investment in livestock industries in the region. The proposed study of comparative advantage of livestock and feed enterprises in the ASEAN region may also assist in determining the respective roles of direct foreign investment and official assistance investment.
Further study is also required of assistance programmes from the point of view of structural adjustment. lt has to be asked whether such programmes allow resource use changes to be accomplished and whether introduced technology effectively raises productivity in the sector concerned? These questions are not pursued further at this stage but they do open up areas for further relevant investigation. To the extent that some countries have social objectives that require excess labour to be employed somewhere in the economy, such efficiency goals may not be the most appropriate basis of policy determination in some circumstances. The development of the livestock and feed grain sector may therefore follow different strategies from those which lead to greater international specialisation of livestock production.
This paper has reiterated some of the structural adjustment issues of relevance to domestic agricultural policies. While it appears that there can be first-best and second-best solutions to excessive protectionism in agriculture — these second-best solutions are identified as direct foreign investment and foreign aid — it is argued that the latter activities can also be viewed as useful complements to those adjustment instruments used to facilitate the first-best (liberalisation) solution.
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The paper sets out a brief review 0f New Zealand direct foreign investment in the livestock and grains area. There is a wide range of equity arrangements involved in these investments varying from fully- owned subsidiaries to joint ventures, trade agreements, protocols and franchise arrangements. Most of these developments are relatively recent in New Zealand experience, though some arrangements survive from earlier British connections.
lt is suggested that the New Zealand experience offers a reasonable cross-section of the general experience of direct foreign investment (DET) in the study area. Members of the Workshop might wish to see this aspect of the study enlarged from their own experiences. In this connection, the OECD has recently observed (OECD 1987b) that direct foreign investment is normally less than 10% of total investment in most developing countries, hence DFI is not a major driving force for increased investment and growth. It's particular role in agricultural development could be further investigated. The paper has explored the spill-over effects of New Zealand's DFT in host countries. The areas identified include generic promotion, brand promotion, technology transfer, supply relationships and training opportunities. These areas are not necessarily the prime objectives of the initial investments but they generally follow on from the kind of activities undertaken. ln some cases, government regulation in the host country requires certain kinds of investment arrangement which includes specific provision for these spill—overs to occur. ln other cases, there are no restraints on DFT and mutual benefit only flows from commercial realities. The wide range of equity instruments available may well be of most interest to potential host countries. It is clear that joint ventures give both partners equal (or by arrangement) shares in an investment and the secondary spill-over effects are guaranteed as a result. Host countries need to develop policies for DFI that would assist growth and efficiency rather than further agricultural protectionism. Would the Workshop wish to make further study of these issues?
17 In a brief review of New Zealand foreign aid, it was observed that concessional assistance might crowd out commercial arrangements for bilateral investment. Nevertheless, concessional investment could be strategically placed to enhance growth and efficiency of developing agricultural sectors. In New Zealand`s case such investment and technological assistance is normally in the livestock development area, and may or may not be competitive with products exported by New Zealand. Perhaps the ASEAN comparative advantage study could assist in clarifying these issues? In the wider investment and technology framework, the Workshop may wish to review international barriers to investment and information flows.5 These barriers could well prevent greater domestic and international specialisation. Freer markets for traded goods, capital flows, and technology transfers could all contribute to an improvement in economic welfare of the member countries. The Workshop may wish to pursue the wider implications of structural adjustment. The aim of adjustment policy is to lower the social cost, redistribute the private cost and make change more politically acceptable. There may be a need to study the transitional costs of bringing about change and the transfer of private costs of adjustment away from the factors directly concerned towards consumers in general. Greater transparency of adjustment measures could make them more politically acceptable, if the benefits of change are clearer to the agents concerned. It may well be that there are other measures of promoting mutual cooperation between countries than reviewed in this paper. Should the current negotiations in the GATT be discussed in this context? Are there reciprocal agreements between countries which remove protection barriers in a non—discriminatory way and promote international
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18 specialisation and trade? Are there particular strategies that developing countries should adopt to maximise their rate of growth, raise the efficiency of their agricultural sectors, and move toward more-market solutions to their problems? Are there cases where more- market solutions are not appropriate in the livestock and grains sector in Pacific Basin countries? The Workshop may wish to discuss the direction of further work in the light of these points.
Greenaway, David (1983), International Trade Policy : From Tariffs to the New Protectionism, MacMillan, London.
OECD (1983a) Positive Adustment Policies : Managing Structural Change, Paris.
OECD (1983b), The Implications of Different Means of Agricultural Income Support, Paris.
OECD (1983c), Positive Adjustment Policies in the Dairy Sector, Paris.
OECD (1987a), National Policies and Agricultural Trade, Paris.
OECD (1987b), "Recent Trends in International Direct Investment", The OECD Observer No. 146, pp. 32-35, June/July.
Pacific Economic Cooperation (1986), A Report of the PECC on Private Direct Foreign Investment, Bangkok, 3-5 April.