In general, the economic progress of the livestock/feed economy in New Zealand cannot be separated from trends in the rest of the economy. This is particularly so in terms of policies for the control of inflation and costs, policies for import protection and tariffs and policies for the adjustment of the exchange rate of the New Zealand dollar. The more detailed description of agricultural/livestock policies must be viewed against this macro-policy background.
(Johnson, 1986, p.24)
Key Words: Balance of Payments, Exchange Rates, Monetary and Fiscal Policy, Real Exchange Rates, Performance
The nature of agricultural policies in New Zealand in recent years has come in for a good bit of flak from more market and efficiency-oriented commentators recently. A recent book in the subject is engagingly entitled "Farming Without Subsidies" (Sandrey and Reynolds, 1990) (S & R hereafter) although most of the discussions and conclusions are about macro-economic policy. This paper is thus concerned with this relationship between macro and micro economic policy and the guidance such an analysis provides for future policy direction.
In the post-war period, the economy went through a series of balance of payments crises which usually ended up in a tightening of import restrictions and availability of foreign exchange. The export sector was totally dominated by agricultural exports and foreign exchange earnings fluctuated with variations in world commodity demand. Imports of capital and consumer goods were rationed by both quantitative import restrictions and the availability of foreign exchange. Internal trade cycles were set in motion by changes in export earnings which lead to delayed
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responses in import demand often well after the means of paying for increased imports had disappeared. Adherence to fIxed exchange rate policies meant that there were no compensating rationing devices for foreign exchange and indeed the Reserve Bank sold and controlled all foreign exchange dealing within New Zealand. A good summary of these problems and the attitud~s of the period can be found in the report of the World Bank on New Zealand in 1968 (World Bank, 1968), and further analysis by the Centre for Agricultural Policy Studies, Massey University (Maughan, 1978).
In the 1960s the policy response to this situation was to focus on greater growth of exports and to broaden the export base. A number of incentive policies for agriculture date from the Agricultural Development Conference of 1963 and a broader approach to manufacturing exports dates from an Industrial Development Conference in 1961 (S & R, p.65). Policy advisors apparently were unsuccessful or unable to get changes made in the foreign exchange mechanisms at the time, although successive Governments felt quite able to make unilateral shifts in the value of the New Zealand dollar when it suited them.
In the 1970s there was an acceleration of the degree of assistance to agriculture as growth prospects faltered from time to time and additional costs accumulated, especially after the oil crisis in 1974. Policies for agriculture in the 1970s were justifIed on investment arguments related to growth and security of incomes rather than in terms of compensatory assistance. With the advent of SMPs in 1978, it was more clearly recognised that the policy was a one-sided devaluation of the New Zealand dollar, although for the first few years, the settings used had little impact on farm gate prices.
In 1979, a more realistic approach emerged with the Government agreeing to pegging the exchange rate to an index of foreign price relativities. A small devaluation was used to launch the new policy and the Reserve Bank adjusted the rate on a weekly basis and derived the consequential cross-rates. This policy lasted until 1982 when a wage and price freeze was instituted to tackle the inbuilt inflationary trends which resulted from a continuously devaluing currency, among other things. Clearly, when internal prices were rising faster than foreign prices, the price relativity indicator kept forcing the value of the New Zealand dollar down and if the factors causing internal inflation were not properly understood and controlled, then the pegged exchange rate policy was also unsustainable.
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Dual policies of industrial development date from the election of the fIrst Labour Government in 1936. DiversifIcation of the then agricultural economy was to be achieved by the development of local processing and assembly plants behind a barrier of import protection. It was inherent in this policy that costs to the exporting sector would rise substantially. Federated Farmers fought the issue for many years and were particularly vociferous on the local assembly of radios and televisions, not to mention farm machinery, gumboots and transport prices. The Australian paradigm that the export sector should be compensated in some way for these cost excesses was not commonly discussed in the New Zealand policy framework. The extra cost to society was understood well enough but the political support for a fully-employed welfare oriented economy plus the recurrent balance of payments crises prevented any realistic development of alternative policy until the late 1970s. Certainly in the 1960s, the National Development Conference and the Government rejected a remit to transfer emphasis from quantitative restrictions to a tariff basis.
The compensation paradigm was introduced into the discussion in the early 1980s when detailed research work on rates of protection started to reveal the extent of assistance to both agriculture and manufacturing. It was also this work which clarifIed that assistance tended to be uneven in its application and some industries and products received much more than others. The main argument for agricultural assistance in the 1960s and 1970s was export-led growth including stability of incomes, steady investment and prospects of the pay-back.
It can be recognised that this policy approach to agriculture was a second-best option, but even this has to be qualifIed by the immense reluctance of Government to consider what economists thought was fIrst-best, namely the removal of all physical import restrictions and the progressive reduction of tariffs down to almost zero. I believe that the period was more characterised by compensation for an over-valued exchange rate than for tariff compensation (S & R, p.17)
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Professor Raynor raises but does not discuss the policy framework with regard to the international terms of trade for agriculture. He says of the 1970s that agriculture became the target of extensive production-promoting assistance, effectively obscuring both the declining terms of trade for agriculture and the rising real interest rates around the globe (S & R, p.1). Most policy makers at the time were well aware of the commodity terms of trade and its trends. Tl:te question which was always raised was what are the alternatives. Perhaps New Zealand policy advisors had too much faith in the theory of comparative advantage for their own good, but the policy decision always was to go on doing what we were good at. The fundamental decision to diversify the export base was taken in the early 1960s and this bore good fruit in later years.
The additions to the producer board stabilisation schemes in the mid 1970s can also be viewed in this light (S & R, Ch 5). It was recognised that commodity prices had been through several cycles in the post-war period and in some cases the return to normality was always at a lower point in real terms. Nevertheless, it was thought worthwhile to institute schemes of buffer stocks and funds for all the main commodities on the basis that Reserve Bank borrowings and accumulated funds could eventually be paid back. Given earlier problems with the stabilisation funds, not to mention overseas commodity schemes like tin and coffee, it would probably have been better to have paid everything out to the producers and encouraged them to make the necessary savings. However, the Treasury attitude to the Income Equalisation Scheme and private saving was always very half-hearted and the necessary encouragement for individual management of risk and savings has been long delayed, or inadequately researched. Beside great political support for producer boards and stabilisation, there is also great farmer belief and faith in the collective arrangements we have for agricultural marketing in New Zealand, and hence some of the collective savings schemes have not been jettisoned to this day.
The analysis of the effects of assistance for agriculture also tends to emphasise the negative effects rather than the positive effects (S & R, p.166). An econometric model of the pastoral sector is used to estimate production out-turns under with and without assistance scenarios. It is concluded that livestock numbers would have fallen only marginally while cattle numbers would have risen at the expense of sheep. There is thus a hidden cost of assistance in terms of the value of beef production foregone. This conclusion rests on the assumption that the analyst knows what the long-term trend in commodity prices would be. When one is framing policy one does not have
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this advantage. Other econometric models for the same period show greater positive responses at the export level, though the trends are the same (Johnson, 1986, pp.32-34).
At the end of the day, it is the performance of the agricultural sector which counts the most. Performance will be measured by the real contribution of agriculture to growth of GDP, whether by exporting or local production. Given the surplus for export, the fundamental conditions for continued agricultural production and expansion will be the international competitiveness of the sector. I fmd the discussion of this topic in S & R welcome (see pp. 2, 51-52, 279-286), though there appear to be inconsistencies in their presentation (on p.2 an appreciation of the real exchange rate is measured by an increase in the index, while on p.52 and on p.282 it is measured by a decrease in the index!)
Remember that the real exchange rate is a price index measuring the ratio of foreign prices (in this case the CPI) to local domestic prices. The ratio can therefore be affected by changes in foreign consumer prices, changes in the nominal exchange rate and changes in local prices (inflation rate). Let us look at S & R's index for the period 1965-1989 (see Graph I). This index is like the terms of trade; a fall in the index makes a country worse off and vice versa.
It is clear the mix of policies since 1965 has maintained the real exchange rate at a roughly constant level for the last 25 years. Remember that nominal exchange rates were fixed or pegged up to 1982, but discrete adjustments were made from time to time. It is then clear that internal costs were influential in the middle 1970s in lowering the real exchange rate and hence reducing the competitiveness of the country in this period. In 1976 foreign prices rose, helped by a devaluation in 1975. A period of stability then followed until the election devaluation of 1984, and competitiveness was artificially increased.
Since 1984, the nominal exchange rate has become the dominating influence; as the dollar was floated and the TWI has been maintained by monetary policies, there has been a steady appreciation in the real exchange rate since 1984, and the country's competitiveness has declined. In 1988/89 some relaxation of monetary policy enabled a small depreciation of the nominal rate to take place and with a lower rate of inflation the
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competitiveness index rose slightly. According to this evidence and other charts (S & R, pp.281-283) current levels of competitiveness are still below the long-run average.
In this analysis it is assumed that domestic prices are synonymous with farm input price trends, though more precise price measures for the non-tradeable sector are available. Also, trends in commodity prices trend downwards compared with overseas consumer pnces.
This discussion also ignores trends in inter-sectoral productivity which can have an influence on survival at a given level of competitiveness (Johnson, 1988).
Returning to the analysis of the macro-parameters affecting agriculture, it is clear that the vital components are exchange rate policy, monetary policy and fiscal policy. These policies influence or direct changes in the domestic price level, particularly in the non-tradeable sectors. Major social and political considerations enter into the mix of policies and sometimes it seems that the fall-out for agriculture is incidental. This appears to be somewhat different from the balmy days of export-led growth when a certain detachment was possible from widespread wage claims and featherbedding practices, countenanced by Governments of the day.
Given the remarkable stability of the real rate of exchange in the long term, it does not appear that it is very important which popular economic paradigm one follows. If anything, the period since 1984 appears to be less stable than the period before and therefore less certain for producers. This has ramifications for producers' attitudes to risk management, and for official policies for the producer boards and other intermediary agents who manage and absorb the continuing changes in exchange rates as well as fluctuations arising out of commodity markets.
The current economic paradigm needs to be examined on whether it delivers economic growth to society as well as some of its more readily stated objectives like zero inflation and enhanced efficiency. Considerations of world demand and comparative advantage may not favour all current products or export sectors. But all methods and sectors which can contribute to real growth of output need to be re-examined to see if some impediment to growth is unidentified within the market-led
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framework currently favoured. I would be in favour of any policy which more readily identified where we are heading and what our prospects are. Current policy positions seem to leave it all to chance.
This paper has turned into a review of the Policy Services' book in spite of the best of intentions to be unaffected by it. It is clear I agree with the macro-policy stance taken in the book, but, am really quite unhappy with the interpretation of micro-economic events in the past. As I say at the beginning, one cannot interpret these micro-policies without reference to the macro-framework in which they were formulated. The authors of the book have too much concern for the outward "image" of the policies they describe and too little appreciation of the economic and social environment of the period concerned. It is a significant contribution to the study of agricultural economics in New Zealand, and is to be recommended on this score. However, the real book on the place of agriculture in the total economy in the years ahead has yet to be written.
Johnson R W M "Livestock and Feed Policy in New Zealand: 1975 to the Present" Agricultural Discussion Paper No.8, Centre for Agricultural Policy Studies, Massey University, 1986
Johnson R W M "Domestic Competitiveness: Measuring the Real Rate of Exchange for Pastoral Output" New Zealand Association of Economists, February 1988.
Maughan C W "New Zealand Development: The Problem of Imports and Exports". Agricultural Policy Paper No.1, Department of Agricultural Economics and Farm Management, Massey University, October 1978.
Sandrey R; Reynolds R "Farming Without Subsidies" G P Books, Wellington 1990
World Bank "The World Bank Report on the New Zealand Economy", Government Printer, Wellington 1968