Some More Equal Than Others

Listener 15 February, 1986.

Keywords: Growth & Innovation; Regulation & Taxation;

The incoming Labour Government inherited an extraordinary array of government “assistance” to industry. Very often, however, assistance to one industry is to the detriment of another.

A good example of this was observed by Des O’Dea when he recently investigated the withdrawal of import licensing on strong beers in 1980 (see NZIER Research Paper No 31). Australian canned beer flooded into the market, and for a while New Zealand producers felt themselves under severe threat.

One of the reasons for the Australian success was that their beer was cheaper. O’Dea found that a major cause of this was that New Zealand brewers had to pay more for their cans than the Australians, and because of protection (i.e. assistance) to the canning industry the local beer producers could not get the cheaper Australian can. The Australians were in effect smuggling in their cheap cans, wrapped around beer. The assistance given to one industry -canning undermined another -brewing.

The Labour Government understood this interdependence in an economy and concluded, I think rightly, that the existing assistance measures were not as effective as they appeared. Accordingly, it has been dramatically withdrawing assistance. This withdrawal can be rather painful, so the principle of “equal pain” was adopted. In particular it was intended that assistance would be withdrawn from agriculture and manufacturing at roughly the same rate.

Because of interdependence, the assistance to manufacturing through tariffs and import licensing was to the detriment of agriculture. Just as the brewers faced a cost excess from the protection to the cans they had to use, farmers faced a cost excess from having to purchase local manufactures. As assistance was withdrawn from manufacturers, the farmers would benefit from lower cost excess

Thus the level of the cost excesses the farmers faced became an important component in devising the “equal pain” strategy. The casual reader of the Syntec report on protection ( see this column, February 1, 1986) might conclude that those excesses are as high as 30 percent, representing an additional cost of around $40,000 per farm. The implication is that the dramatic (but phased) reductions in protection of manufacturing which started with CER and were speeded up by the Labour Government would be of immense value to farmers. Accordingly, the farm sector conceded major reductions in its assistance, with the expectation of benefit from the reductions in manufacturing assistance.

These benefits have not appeared, nor are they likely to, for the simple reason that the Syntec report numbers are not correct. Despite the $100,000 cost of the report the Syntec team did not measure the cost excesses. It merely assumed them. Somehow or other these assumptions got treated as though they were serious statistical estimates, and were incorporated in the policy-makers’ thinking.

We now have a serious statistical estimate of the farm excess-cost estimate. It comes from the Research Project on Planning, which has a “general equilibrium model” of the New Zealand economy that includes the interdependencies between agriculture and manufacturing and the rest of the economy.*

It is therefore able to answer the question: what would happen if border protection was removed, and sectors, wage rates, the exchange rate and so on were to adjust? From this the model estimates that the cost excess on farm inputs is only 3.6 percent, much lower than the Syntec assumptions.

The conclusion is that while protection on manufacturing raises farm costs, the increase is small. Conversely, reductions in manufacturing protection will give only small benefits to farmers. With hindsight the result is not surprising. Over the years farmers have successfully lobbied against the worst protection in terms of their cost excesses. What remains does not affect them unduly.

Thus the “equal pain” policies were founded on faulty advice deriving from research. It is not the failure of research economists; they were barely consulted. Rather it was the failure to carry out the research and then for the non-research economists to treat vague assumptions as gospel. This is not the only recent occasion of such policy failure.

* Economic Contribution of Agriculture to the New Zealand Economy Under a Range of Assumptions, BERL Report 1985.

Footnote for Listener 23 May 1998

While it may be good political rhetoric, Commerce Minister John Luxton’s statement that motor vehicle tariffs cost annually consumers and businesses $180,000 per job is economically absurd. There is a well established economic theory of the costs of protection, based on the additional resources required to make the product in New Zealand, rather than import it from overseas. No reputable economist would describe the tariff revenue as the costs of the protection.

The revenue is not a cost to the economy at all, but a transfer. When the tariff is abolished, following the closure of all the car assembly plants, government revenue will be cut by $300m a year. Either the government has to raise the revenue from other source, or it has to cut back spending. The minister may be of the opinion that the nation’s highest priority is to reduce the price of new cars by $300m a year, although education the environment, health, and law and order spending surely have higher public priorities. If Mr Luxton is so solicitous over the interests of the motorist, he might argue for cutting the tax on petrol which goes into the consolidated fund. We are told that cannot be cut (or used to build roads) because of the fiscal situation. Why can it stand a $300m cutting of tariff revenue?