Listener 1 February, 1986.

Keywords: Growth & Innovation; Regulation & Taxation;

The study called The Structure of Industry Assistance in New Zealand: An Exploratory Analysis and known as the Syntec Report (Treasury, $10) cost the taxpayer around $100,000. That seems a good reason to write about it.

In 1983 Syntec Economic Services, a Melbourne-based group, was commissioned by four government departments to investigate the structure of industry assistance in New Zealand. The proposal was based on a well-founded part of economic theory, developed mainly by Australians, called “effective rates of protection”, or ERP.

The initial idea of ERP was to measure the benefit to a producer of a tariff on output, after allowing for the effects of tariffs on inputs. Thus, a manufacturer of chocolate might benefit by protection from overseas competitors by a 30 per cent tariff (say) on imports, but suffer from the additional costs of a 20 percent tariff (say) on cocoa and sugar. The ERP was a means of calculating the net benefit of these two effects.

The next step was to add the effects of import Quotas which might benefit or disadvantage the producer if they are applied to what is sold or what is used. Over the years a number of New Zealanders have worked in this area, including Peter Elkan, Valmai Elley, Des O’Dea and Bryan Philpott.

In the New Zealand context there have been numerous other forms of advantages and disadvantages imposed by government on industry. They have included indirect taxes, subsidies, export performance tax incentives, supplementary minimum prices -the: list seems endless. A number of New Zealand economists have attempted to incorporate these in their measures, most notably those in the Ministry of Agriculture and Fisheries and some forestry economists. But the Syntec group was commissioned to provide a comprehensive measure.

This measure was called the “effective rate of assistance” or ERA, because it was intended that all forms of government intervention would be incorporated in it. In practice the intervention is so pervasive that only some of the total could be included, but they are probably the most important ones.

The international literature frequently describes the ERP and related approaches as “discredited”. In my opinion this is an overly harsh judgment, but the criticism needs to be explained. The problem is that any assistance to a firm affects the firm’s behaviour in terms of what it produces, how it produces, what . it charges and what it pays. At the same time the government revenue and spending may be affected. The overall effect of all the assistance is to change dramatically the activities in the economy. However, the ERP and the ERA measures almost totally ignore these changes.

Practically, what this means is that ERAs all show that every industry is a net gainer from government assistance. The casual view might be that every firm’s success is the result of Treasury’s wisdom and benevolence. Treasury economists would be the first to deny this, because ERAs do not measure what it seems they measure. It even seems likely that the ranking is not meaningful -the highest industry according to the ERA measure does not receive the greatest degree of government support, nor does the industry with the lowest ERA receive the least assistance.

What the study failed to do was allow for the full interdependence in the economy, an understanding of which is vital for good analysis. Because it uses a partial framework rather than a general equilibrium one, the report provides no useful new insights that might lead to better policies.

At this point the reader may ask why the government bothered to spend $100,000 of taxpayers’ money. Noting that this sum is much greater than is usual for economic research, the reader may mutter that it is the economic policymaker’s equivalent of “Think Big”.

This, however, would be to miss the point of the exercise. One must walk before one can run. The reason why it is wrong totally to discredit the partial. equilibrium approach is that it is a first step towards a comprehensive analysis. The Syntec team readily acknowledged this. The report’s last sentence suggests that “it could be better to allocate additional resources to the estimation of the general equilibrium effects of assistance”.

Unfortunately the government did not continue with the research programme. This means that much of the effort has been wasted, a bit like the waste if you only Quarter-complete a wooden building. Even more disastrously. the misuse of the content of the report led to what was probably the first economic policy mistake by the incoming Labour Government. I will write about that in the next column of 15 February.