Foreword

New Zealand presents a case study of a country moving from a highly regulated economy to one of the most deregulated in the Western World. New Zealand's experiences are of wide interest.

This booklet presents a popular summary of agricultural reform in New Zealand, and is likely to be of considerable interest to people who wish to quickly gain insight into New Zealand's experiences of the last ten years.

Chapter 1: The Regulatory Environment Affecting New Zealand Agriculture Prior to 1984

Introduction

This chapter describes where New Zealand was prior to 1984, and discusses why the situation was not sustainable and the inevitability of change.

This chapter briefly reviews how New Zealand became one of the most regulated economies in the Western World by 1984.

Agricultural Production Drove the New Zealand Economy

By the 1950s New Zealand was one of the richest countries in the world on a per capita basis through the sale of agricultural commodities to the British market. This market was the result of immigration to New Zealand by British people in the second half of the 19th century. These pioneers cut down forests to grow crops and establish pasture for the grazing of sheep, beef and dairy cattle. The British market absorbed all the produce New Zealand could send, with guaranteed access at good prices. Britain supplied much of the investment for developing processing industries for agricultural products, for meat in particular. To protect New Zealand farmers and obtain better prices, the government legislated for Producer and marketing boards. These boards had wide powers and dominated the production and marketing of primary products.

Under this sheltered environment farming flourished and New Zealand built a high standard of living without the need to face up to international market prices or competition.

Manufacturing was Needed for Employment

To provide jobs for a growing population governments progressively introduced protection for a small manufacturing base, arguing that manufacturing industry could only develop if protected from international competition. The government introduced controls (import quotas) for manufactured goods, and this eventually led to the introduction of price regulations (tariffs) as well.

New Zealand government undertook a huge capital works programme, developing the country, and providing employment. The government built roads, houses, schools, hospitals, power stations, telecommunications, etc., and planted forestry. The size of bureaucracy required to administer the regulations and policies grew in size.

At this time New Zealand was also able to progressively develop a social welfare system funded on the high standard of living of most New Zealanders. People had access to high standards of education and health services. Unemployment was virtually unknown.

Unfortunately these policies led to an inefficient manufacturing base that was uncompetitive internationally. It also led to a large government bureaucracy that both made more of the decisions normally made by individuals and businesses, and provided many of the services needed in society.

The Policy Mix

Successive governments placed a high emphasis on a full employment economy. With markets for agricultural produce were guaranteed, government policy was aimed at increasing primary production for export. These exports funded the imports that New Zealanders required in increasing volumes, while the manufacturing base grew behind quota restrictions and price control.

As specific problems arose, government fixed them in an ad hoc way without considering the wider economic implications. Industry became less efficient, and government controls became more pervasive throughout the economy. This increased costs to agriculture as the outputs of many of the protected industries and services were inputs to agriculture. The policy response was to promote increased volumes of agricultural exports to finance the ever growing demands of the domestic economy.

The United Kingdom Joins the European Community and New Zealand Loses a Guaranteed Market

In 1974 the United Kingdom joined the European Community. This marked a major turning point for the New Zealand economy as New Zealand lost its unrestricted guaranteed access to the British market for agricultural commodities. Exporters were, for the first time, exposed to international competition. As access to the British market was progressively reduced, exporters were forced to look for alternative markets. These markets did not provide the same returns as the British market.

The policy response was again to encourage farmers to increase production. Farm inputs were subsidised, particularly for finance, fertiliser and transport. Price support schemes were developed to stabilise incomes, providing a more certain environment for farmers to increase production. These policies believed necessary to ensure an incentive to increase production, and also to compensate farmers for increased costs caused by the protection of the domestic economy.

Borrowing to Maintain a Standard of Living

To sustain the standard of living that New Zealanders had become used to during the 1950s and early 1960s, the government began a programme of borrowing on international markets. Borrowing was needed to finance not only the increasing cost of government administration, but also to meet the deficit on the external account as well. This borrowing was used largely to sustain consumption rather than for investment for further growth of the economy. A fixed exchange rate policy masked the impact the controls were having on the economy. An over-valued exchange rate disguised the real size of external borrowing until the point that drastic action had to be taken.

By 1984 the Situation was not Sustainable

By 1984 New Zealand had a highly protected manufacturing base that was very inefficient. The exporting sector, based on agriculture, was heavily subsidised to maintain output, and to compensate for the high cost structure brought about by local protection.

Administering the growing web of controls and regulations meant the government sector had risen to a large proportion of Gross Domestic Product. This not only had a cost in the sense that government revenue had to be raised to pay civil servants, but it also imposed a cost on business of heavy bureaucratic requirements.

At that stage, the government supplied many of the goods and services that could be provided by the private sector. This "crowded out" any private sector initiatives which could not compete with government. A welfare mentality developed where it was expected that the State would provide a remedy for any adverse situation. This pervaded the economy, draining innovation and entrepreneurial spirit. Key decisions were made by the government. People in business concentrated their efforts on avoiding taxation and taking advantage of government's schemes, rather than thinking about business development and planning.

Why This Was Not Sustainable

Under the highly regulated economy New Zealand achieved very low economic growth.

Agriculture, still the key export sector, was heavily subsidised. The increased output was in some cases worth less than the cost of production and processing. For example, about 40% of sheep farmers' income was paid by government. While lamb production increased, the cost of producing the lambs was more than 65% above the international market price.

High domestic inflation and declining terms of trade were rapidly reducing New Zealand's international competitiveness.

Because of the disguised price signals, resource allocation was not directed into the most profitable areas. Effort was often centred on government programmes which were often tax driven

The government had taken a large gamble on rising real energy prices and invested heavily in large scale energy and steel projects that produced poor returns. As they had been financed by international debt, the current account deficit increased.

Too much of the economy was directed into government administration that was bureaucratic and inefficient, contributing to the high level of internal and external debt.

Eventually the cost of the policies became so great that New Zealand's international lenders would no longer extend credit. The high standard of living enjoyed by New Zealanders could not be sustained. By 1984 there was wide acceptance that a change in direction was required.

Key Lessons from New Zealand's Experience
  • New Zealand government wasn't able to make good business decisions.
  • Zealand wasn't able to use domestic regulations and protection to insulate itself from the international economy.
  • forces eventually became too strong to resist and the change was forced on New Zealand.

Previous Page TOC Next Page

Contact for Enquiries

Rural Affairs Coordinator
Sector Performance Policy
MAF Policy
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND

Phone: +64 4 894 0675
Fax: +64 4 4 894 0745
Contact this person

 
Print this page Print this page