Miracle Down Under: How New Zealand Farmers Prosper without Subsidies or Protection

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In the past two decades, New Zealand farmers have moved from anenvironment in which we were subsidized and the government dictatedthe type of agricultural goods produced to one in which we farmwithout subsidies. The clear focus for us now is on the consumer.That is the real reason we are in business: to serve the consumer,not the government.

One advantage for New Zealand is that we are a small country. Wecan be experimental and help other people understand our progressbecause of the smaller scale of the New Zealand economy.

"Fortress New Zealand"

Let me take you back in history to the 1950s, when there wereworldwide food shortages after World War II. New Zealand was anagricultural nation, feeding the United Kingdom, and had thesecond-highest per-capita income in the world. We were incrediblyrich. The government was dominated by farmers. Almost all thecabinet ministers were farmers. Farmers had it made.

What did we do? We were our own worst enemy. We went to thegovernment and said, "Prices fluctuate, the climate affects us, wethink you should step in and help regulate what we earn, to takeaway fluctuations in our income." And the government, being full offarmers, said, "Yep, that's good. We'll help you." So we set upmarketing boards and other structures that put constraints on thefarming community. They either limited or expanded production, andthey controlled the price depending on what the government andoften farmer-controlled boards thought was best for farming.

Protection and control of the farming sector were bad enough,but New Zealand is also a small country, and the government eventhen did not believe the future of New Zealand was in agriculture.We needed to start creating industry in New Zealand that wouldemploy people elsewhere. So the government started imposing importtariffs and quotas on nearly everything, including cars andtelevisions. The aim was to increase the prices of imports and makemanufacturing in New Zealand competitive. New Zealand became"Fortress New Zealand."

We locked out the foreign competition, we "protected" jobs, andwe had virtually no unemployment in New Zealand right up to the1970s. We were rich enough, because of the agricultural income thatwas coming in, to be able to sustain the jobs. But the tradebarriers we imposed on ourselves during that time built inunnecessary costs within the New Zealand economy.

Shock, Crisis, and Reform

Then we experienced two major economic shocks. The first was in1973 when Britain entered the European Union. Suddenly, the marketthat used to take much of what we produced was no longer open to somany of our exports. The second was the oil shocks. Basically, wehad this lovely little fortress in New Zealand, a top-down pricingmentality that ignored market forces, and--what do youknow--inflation started to get out of control. But we also had acontrolled society, in which interest rates and seeminglyeverything was controlled in New Zealand.

Finally, after 10 years, New Zealand experienced both fiscal andfinancial crises in 1984. There was no more money for thegovernment to spend, and the government had run up huge deficitsand borrowed a lot of money from overseas to try to keep the wheelsof the New Zealand economy turning. Thankfully, the FederatedFarmers of New Zealand realized that continually going to thegovernment for more handouts wasn't working. We were becomingincreasingly uncompetitive in the world markets. We needed tochange, so we said to the government, "Strip out our subsidies, butwe want you to reform the rest of the New Zealand economy aswell."

The government made the reforms, but painfully for farmers itwas a left-leaning government that made the transition. Thegovernment reformed agriculture first because the farmers hadtraditionally never voted for them anyway. The rest of the economytook six years to be fully liberalized. We now live in one of themost open and unregulated economies in the world.[1] Other than a few tariffs onshoes and some clothing, we are completely open at the border foreverything. Before 1984, if you were well-off, you could avoid thetariffs. If you wanted to buy a car or a television, you simplytook a holiday overseas and brought it back with you to NewZealand. Now you can buy anything anywhere in New Zealand fromanywhere in the world. And it's fantastic.

Satisfying the Consumer, Using Land Wisely

The major development for the New Zealand agricultural sectorwas that, after enduring the pain of that long transition,responsibility for farming returned to the farmer. So thegovernment was no longer involved in our lives. The key issue thatwe had to grapple with very quickly was that there was only onecomponent important to farm income, and that was satisfying theconsumer. We used to satisfy government officials in what theywanted. We had 70 million sheep and another 50 million lambs, ofwhich the meat industry rendered, in one year, six million lambsinto blood and bone (a fertilizer product) because nobody wantedthem. In the worst days of the post-deregulation period, in adrought in the Canterbury region of New Zealand, farmers weregetting only $6 a lamb. Now we actually focus on the consumer.Processors now pass on clear market signals and give farmers higherreturns. The farmer now provides exactly what the consumer wants inthe most cost-effective manner. Now, by meeting marketspecifications, we get between $60 and $100 a lamb depending on thetime of year the lamb is supplied.

The other positive result of the reform process was that farmersbegan to better fit their agricultural production to the type ofland that they farmed. If you don't have a really good fit with thetype of land you are on, your resources are used inefficiently, andthen you can't get your costs low enough to be competitive. NewZealand has reduced the number of sheep from 70 million down to 40million,[2]but we produce roughly the same amount of sheep meat.[3] We increased ourdairy herd from roughly 3 million cows to now more than 5 millionin response to the market demand for protein products.[4] We've seen a hugediversification of land use in the last 20 years. In the good olddays, people just would not have believed what farmers were capableof when everybody just wanted us to produce another lamb.

Farmers have continued to diversify, to change, and to acceptthat we not only need access to markets and consumers, but we alsoneed an incredibly competitive internal economy. We need to be ableto adjust our cost structures quickly to deal with the volatilityof climate, product price, and, in a small country like NewZealand, the exchange rate. But we are happy to accept these risksand uncertainty because by facing these risks we make far betterdecisions. And we're not blaming anyone else; we only have to relyon ourselves to get on with the job.

Rising Farm Productivity and Output

The New Zealand farm sector before 1984 had a productivityincrease of 1 percent a year. Since the reform, it's been nearly 4percent per year.[5] We're performing better than any other part ofthe New Zealand economy. The agriculture sector in New Zealand hasactually grown as a percentage of our GDP, from slightly more than14 percent of GDP in 1986-87 to 16.6 percent in 1999-2000.[6] This is almostunheard of in any other developed country. So we're actuallyplaying our part and more for New Zealand.

Agricultural trade is incredibly important for New Zealandbecause it's what we do well. We rely upon exports from ourbiological industries to pay for imported goods from around theworld that we have no advantage in producing ourselves.

However, we face lots of criticism. Our competitors criticizethe size of our trade in dairy products compared with that of theU.S. or European dairy industries. On the other hand, New Zealandlooks at the bigger picture. We look at the total trade betweencountries, as opposed to sector by sector.

Since the transition period, New Zealand's move toward acompletely open economy has created nearly 450,000 jobs onnet.[7] For asmall country of 4 million people, that's a lot of jobs, and we'restill creating more. Many myths abound about trade being bad forjobs, but we've found the exact opposite to be true. The reality isthat trade is good for jobs.

A liberal trading environment not only encourages investment,but it also enables countries to produce to their comparativeadvantage and trade to their strengths. This leads to a moreefficient use of resources and creates more wealth and jobs.

Overcoming the "Fear Factor"

The New Zealand experience brings two key messages to the worldtrading environment. The first is that producers must focus on theconsumer. The reason we want liberalization in trade is so that wecan talk directly to consumers in individual countries. We want tobe able to tailor our products specifically to the market in eachcountry. It's not just about world trade in the abstract; it'sabout reaching out to each country's individual consumers andsupplying them with what they want.

I recently attended the World Farmers Congress of theInternational Federation of Agricultural Producers. A continualtheme I heard was "Exports are good, imports are bad," and that"When you liberalize world trade, it's a race to the bottom." Well,in New Zealand we are in a race to the top. But every time we raceto the top, a bureaucrat somewhere else in the world tries tosquash us. The classic example is Europe, where we exported"spreadable" butter. Because it didn't meet the specifications ofthe regulators as butter, they prevented it from entering Europe,even though the demand from the consumer was strong. We were addingvalue, creating a better product, and meeting what the consumerwanted, but a bureaucrat said, "Ah, but it's not butter, because itis too soft." These are the types of issues we have to deal with inglobal negotiations.

The second message from the New Zealand experience is that weuse our resources well. We've put our resources where they are mostefficiently used. For sustainability, we want the world to use itsresources well. Agriculture plays a huge part in that process. Itmakes no sense for farmers in Europe and the United States toproduce sugar at three or four times the world price when you canmore efficiently produce it in many tropical countries around theworld.[8] Thetropical countries can produce sugar at a fraction of the cost andwith much more efficient use of world resources. Our vision is fora dual outcome--to liberalize trade and to make better use of theworld's resources as each country produces to its comparativeadvantage.

In New Zealand, we went through the same fear factors that Ihear from other farmers in the developed countries. People said,"We can't do it. We're not going to produce any more milk. We'reall going to go broke. The government hates us." Once you getthrough all that--and I firmly believe that the developedcountries' farmers can--farmers will start to focus on what theycan do. They will focus on what's good in their region. Americanand European farmers have a wonderful advantage that we don't havein New Zealand: their customers are in their backyards. Theircustomers are not 12,000 miles away from a little country in themiddle of the South Pacific. They do not have to transporteverything great distances before they reach a consumer.

Producers must move beyond thinking that they can't produce forthe wide range of consumer demands. They must look for theopportunities that exist both in their own backyards as well asbeyond their borders. Fear of change often runs rampant, but onceyou are farming in accord with your comparative advantage, itbecomes possible to adapt your production system to suit consumerneeds and adjust production costs accordingly.

A good example of this is the New Zealand wine industry. NewZealanders are quite good at producing wine, but we still importmore wine than we export. New Zealand consumers like to havechoice, and we are willing to give our consumers that choice. Webelieve it is better for the farming community, better for the NewZealand economy, and ultimately better for the world.

Conclusion

I recognize that our vision is bold, but we'd like the Americansand others to be ambitious in the Doha Development Round of WTOtrade negotiations. We're practical. We accept that there isprobably going to be a need for a reasonably long transition periodas people move toward an open market, but this is an opportunitythat the world really needs to seize. We need to be forwardthinking on trade liberalization. Based on the experience of theUruguay Round and even this round, negotiating these agreementstakes a long time. The opportunities don't come very often. I hopewe can turn that opportunity into reality.


[1] NewZealand's economy now ranks as the third-freest in the world,behind only Hong Kong and Singapore, according to James Gwartneyand Robert Lawson, Economic Freedom of the World: 2004 AnnualReport (Vancouver, B.C.: Fraser Institute, 2004), p. 11.

[2] NewZealand farmers owned 39.6 million sheep as of June 30, 2002,according to the New Zealand Ministry of Agriculture and Forestry,"Agriculture Production Survey," June 30, 2004, www.maf.govt.nz/statistics/primaryindustries/livestock/sheep/02-sheep-age-fs.xls.There were 69.7 million sheep as of June 30, 1984, according to thePolicy Information Group, New Zealand's Ministry of Agriculture andForestry, www.maf.govt.nz/statistics/primaryindustries/livestock/sheep/sheep.htm.

[3] NewZealand produced 113,000 tons, bone-in (2002-2003), compared to130,000 tons, bone-in (1985-1986), according to the New ZealandMinistry of Agriculture and Forestry, Game Industry Board, TheEconomic Service, available through Meat and Wool Innovation Ltd.,www.woolpro.co.nz/economicservice/quickstats.html.

[4]NewZealand farmers owned 5.1 million dairy cattle as of June 30, 2003,compared to 3.2 million dairy cattle as of June 30, 1984, accordingto the Policy Information Group, Ministry of Agriculture andForestry, www.maf.govt.nz/statistics/primaryindustries/livestock/dairy/dairy.htm.

[5] See RogerKerr, "A Vision For Agriculture," Address, New Zealand BusinessRoundtable, Wairarapa Agricultural Seminar, July 19, 2001; andFederated Farmers of New Zealand, "Life After Subsidies: The NewZealand Farming Experience 15 Years Later," August 2002, pp. 1-2.Productivity estimates are from Lawrence and Diewert's TreasuryWorking Paper 99/5, "Measuring New Zealand's Productivity," March1995, www.treasury.govt.nz/workingpapers/1999/99-5.asp.

[6] Thisstatistic, measuring both agricultural production and downstreamprocessing, is from the Federated Farmers of New Zealand, "LifeAfter Subsidies: The New Zealand Farming Experience 15 YearsLater," August 2002, p. 1, and Rob Davison, "AgriculturalProductivity," Vetscript, May 2003. When downstreamactivities are not included in a measure of the agriculture sector,agriculture comprised approximately 4 percent of New Zealand GDP in1985, and just over 7 percent in 2001. In "OECD National AccountsVolume 2," the OECD calculates New Zealand's agriculture sector as6.4% of total GDP in 1986 and 8.3% of total GDP in 2000 based oncurrent prices, and 7.3% of GDP in 1986 compared to 8.3% of GDP in2000 based on constant prices. See also New Zealand Treasury, "NewZealand Economic & Financial Overview 2002," and Robert A.Buckle, David Haugh, and Peter Thomson, "Treasury Working Paper01/33: Calm after the Storm?: Supply-side contributions to NewZealand's GDP volatility decline," 2001, Figure 5.

[7] PhilBriggs, "Looking at the numbers: a view of New Zealand's economichistory," The New Zealand Institute of Economic Research,www.nzier.org.nz/SITE_Default/SITE_Publications/research_monographs.asp#2.And, Statistics New Zealand, "Household Labour Force Survey," March2003, June 2003, September 2003, and December 2003.

[8] OxfamInternational, "Dumping on the World: How EU Sugar Policies HurtPoor Countries," Oxfam Briefing Paper 61, March 2004, p. 7.