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22 October 2018

Liberalising agriculture: lessons from New Zealand

by Barney Trimble, IFT Researcher

In 1984, the newly elected Labour Party of New Zealand, led by Prime Minister David Lange, enacted a series a series of free market reforms designed to reenergise the country’s staggering economy. GDP had fallen by 5% since 1981, accompanied by rising inflation and unemployment. Key amongst the reforms was the removal of subsidies to farmers. With agriculture being the country’s largest industry and accounting for one in eight jobs, this was considered a political and economic risk. However, we can see today that it was a huge success: agriculture’s share of the nation’s GDP has increased, while productivity and diversity in the industry has soared. It is clear that there are lessons to be learnt for other nations.

The need for action was growing due to the spiralling cost and increased ineffectiveness of the subsidies. In the 1960s, the grants and subsidies received by the agriculture industry made up only 3% of farm income. By 1983, nearly 40% of sheep and beef farmers’ gross income came from subsidies and grants from the government, including concessionary livestock valuation schemes, fertiliser subsidies, loans at below-market rates, and incentives for land development. This amounted to 4% of the nation’s GDP. It led to wasteful overproduction, particularly of lamb, with farmers spurred on by the promise of additional income. The flooding of the market that followed led to lower prices and, ironically, lower incomes, which preceded an increase in subsidies. This overproduction led to the government turning six million tonnes of sheep meat into fertiliser in 1983 due to the lack of a market for it. The model was unsustainable.

Despite the clear need for action to be taken, there were concerns that the total removal of subsidies would prove too much. Initial predictions foresaw up to 16% of farmers losing their jobs. The largest rural sector protest in New Zealand’s history marched on parliament in 1986, despite the Federated Farmers support of the wider reform process. Indeed the suddenness of the reforms led to some farmers moving onto social security as farm profitability halved. There were also tragic reports of an increase in rural suicide rates. It was evident that the government had failed to prepare enough short-term support for those on the margins to help facilitate the transition - a vitally important lesson that we will come back to.

Once the dust of the reforms had settled, the industry proved to have weathered the storm with the promise of a brighter future ahead. The fear of mass unemployment proved unfounded, with only 1% of farmers leaving the industry. Most sold their farms to other farmers. By 1990, land values, commodity prices, and farm profitability had all either stabilised or were increasing. The industry had only been able to achieve this after going through substantial restructuring. These led to the aforementioned initial problems, but left the economy in a stronger position. Farming practices adapted to the new circumstances in a myriad of ways. Farms became more diverse, more efficient, and more competitive. This allowed them to maximise profits while being better equipped to survive substantial shifts in the market.

The diversification happened due to the need to react to market pressures rather than subsidy criteria. Cattle numbers rose by 35% between 1984 and 2003, while the previously-heavily subsidised sheep industry has seen the national flock shorn from 70 million in the mid-80s to 27 million in 2017. Meanwhile, the New Zealand horticulture industry saw massive expansion. Horticulture export revenue has grown more than ten-fold since 1985 and now makes up 10.3% of New Zealand’s total merchandise exports. Even more astonishingly, the wine industry has boomed with exports rising from $NZ18 million in 1990 to $NZ1.7 billion in 2018. This reduced the risk attached to overreliance on sheep and not only rebalanced the agriculture industry, but also provided New Zealand with a more balanced economy.

This diversification was spurred on by the need to become more efficient. With the removal of subsidies towards working on less productive and economical land, farmers focused their attentions towards making more from less. Non-critical resources were sold, while farmers sought to reduce operating costs. This also meant maximising the potential of the land and using it in the most effective way possible, not simply for whatever offered the greatest subsidies. This led to a spike in productivity: the average growth in productivity across agriculture rose from 1.8% per annum between 1972 and 1984 to 4% per annum between 1985 and 1998.

This has helped the farms become more competitive. Reduced operating costs have helped New Zealand products to compete against subsidised products from other countries. However, the real game changer was the push to make more appealing products. By focusing on what the market wanted rather than what was subsidised, the industry was able to pivot towards new opportunities. This was most starkly realised in the wine industry. The cut in subsidies occurred at the same time that New Zealand’s wine industry was gaining recognition across the globe. The expansion from 6,000 hectares of wine grapes being grown in 1984 to over 35,000 hectares in 2017 was enabled by the encouragement to diversify.

Overall the reforms were an astonishing success. There are no calls for the reintroduction of subsidies, from either farmers or non-farmers. Farmers prefer being able to get on with their business without government interference and feel a greater sense of pride by not relying on hand-outs; non-farmers benefit from lower food prices and a serious reduction in their tax burden. Today, government assistance to the industry accounts for less than one percent of producers’ income, well below the OECD average of 16%, with the majority of that coming from the $NZ30 million a year that goes towards research and development. The end of the subsidies even had unexpected positive environmental benefits. Marginal land that had been farmed solely to qualify for subsidies was reforested while fertiliser and pesticide use plummeted.

For New Zealand, there can be no doubt that liberalisation reversed the nation’s economic slump and ensured a more prosperous future. Between 1980 and 1984, the nation’s GDP had shrunk from $22.5 billion to $22.3 billion; by 1990, it was $45.7 billion. It would seem natural that other nations would wish to take similar steps to improve their economy.

The greatest reason why the reforms succeeded is because of the time given to allow them to succeed. The agriculture industry was given space and time to adapt to the new model. The collapse in land prices led some farmers to having no equity in their properties. However, they were not forced off the land because financiers realised they would get the best value out of the land by letting the farmers remain as tenants. This, alongside governmental support with regards to debt restructuring, allowed farmers to make the necessary adaptations with minimised financial pressure – but there are of course improvements that can be learned from this experience. Likewise the reforms were given time to show their value, thanks to cross-party agreement. The Labour Party governed for six years following the reforms, but the National Party, encouraged by the rise in the pro-free-market New Zealand Party, maintained the policies upon assuming power in 1990. This allowed for the positive elements to come into effect and was only possible because of the consensus across the political spectrum. Had a party opposed to the reforms taken power, the reforms could have been reversed before they had time to bear fruit, leaving only bad memories of the initial shock.

An important factor to take into account is the negative short-term impacts. The harsh realities that hit a small portion of the industry were a reminder of the need to take precautions when enacting such radical measures. It must be considered how the impact of the reforms, both positive and negative, would have changed if they had been more gradual. While the principle of the reforms is to lessen government interference - with the subsidies having been the government’s doing, the responsibility lay upon them to oversee a smooth corrective period.

Notwithstanding these lessons, New Zealand’s story shows us that, if managed correctly, the elimination of market-distorting subsidies can lead to a healthier, more efficient, diverse, and innovative agricultural sector.

Sources:

Ministry for Primary Industries (2017) New Zealand Agriculture: A policy perspective.

https://www.mpi.govt.nz/dmsdocument/27282/loggedIn

Drew, A. (2007). New Zealand’s productivity performance and prospects. Reserve Bank of New Zealand, Bulletin, 70(1).

https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Bulletins/2007/2007mar70-1drew.pdf

Sayre, L (2003) Farming without subsidies? Some lessons from New Zealand, Rodale Institute.

http://www.newfarm.org/features/0303/newzealand_subsidies.shtml

St Clair, T (2002) VIEWPOINT – Farming without subsidies – a better way. Why New Zealand agriculture is a world leader, Politico website.

https://www.politico.eu/article/viewpoint-farming-without-subsidies-a-better-way-why-new-zealand-agriculture-is-a-world-leader/

Vitalis, V (2006) ‘Subsidy Reform in the New Zealand Agricultural Sector’ in Subsidy Reform and Sustainable Development, pg 57.

https://www.cbd.int/financial/fiscalenviron/several-subsidiesreform-oecd.pdf

Cover image attribution: Mariano Mantel (Flicker)



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