People have long talked about “getting the government out of agriculture.” The idea has attracted added attention in recent years as the Congress and administration have sought ways to reduce federal budget deficits. The Bush administration’s proposal under the GA TT is to eliminate agricultural trade restrictions and government price supports that distort agricultural trade. Many U.S. farmers favor eliminating government farm programs. For example, 35% of farmers participating in a 21-state survey in 1989, and 42% of the Indiana Farmers included in this survey, favored gradually eliminating commodity programs, including set asides, price supports, deficiency payments and government storage programs (Guither, Jones, Martin and Spitze).

Discussion is one thing, but few governments in developed countries have ever eliminated major farm price support programs. An exception is the small country (3.3 million people) of New Zealand. The author was privileged to spend a year recently in New Zealand teaching and watching what happened when New Zealand’s government got out of agriculture. Observations about New Zealand’s noteworthy experience with unilateral elimination of government farm programs appear in this article.

Beginning in mid-1984, New Zealand’s newly elected Labour Government launched an ambitious economic liberalization program (dubbed “Rogernomics”) which stripped the country’s farmers of almost all government support. Essentially all that remained of government help to farmers in 1989 was assistance relating to inspection and grading, animal health services, research, extension and certain residual interest rate subsidies. Even research and extension were placed partly under a “user-pays” regime.

In this article, the following questions are considered: What circumstances led to these changes in agricultural policies and other economic reforms? How were the agricultural policy reforms implemented? How did the reforms affect the economic well-being of farmers and agribusinesses? What lessons emerge for policymakers in other countries from New Zealand’s experience with agricultural policy reforms?

Circumstances That Produced The Economic Reforms

Prior to mid-1984, New Zealand had one of the most regulated and distorted economies outside communist countries. Wage and price controls, foreign exchange controls, import licenses, high tariffs, export subsidies all shielded, regulated or supported the economy. In agriculture, which is dominated by pastoral farming (sheep, dairy and beef), horticulture crops, wheat and barley, government assistance included support for price stabilization programs run by producer boards, fertilizer subsidies, supplementary minimum prices (floor prices for livestock producers), export subsidies, extensive support for research and extension, and state ownership of the Rural Bank, the main supplier of subsidized farm credit.

Why were reforms adopted? Many New Zealanders were dissatisfied with the lackluster performance of the country’s economy prior to the mid-1980s. Growth in Gross Domestic Product (GDP) per capita in New Zealand was only 15% of the average of all Organization for Economic Cooperation and Development (OECD) countries during 1974 to 84, while the country’s inflation rate was 50% higher than the average for all OECD countries during this period (Spencer and Carey). Government interventions had produced a government fiscal deficit equal to 9.3% of New Zealand’s GDP in 1984 and a foreign debt per capita which exceeded that for Brazil (Wilkinson). Many thought such deficit and debt figures were unsustainable. For agriculture in 1984, the direct subsidies, support services, revenue foregone and in­direct energy subsidies totaled NZ $1.1 billion (1.1 billion New Zealand $= .5 billion U.S.$), 3.2% of GDP and about one-third of the total government deficit (Rayner). Farmers themselves recognized that budget outlays of that size for agriculture could not continue. Mr. Brian Chamberlin, President of Federated Farmers, New Zealand’s largest farm organization, put it this way, “Three million people cannot afford to go on subsidizing 70 million sheep” (The Economist). Thus, when New Zealand’s Labour Party unseated the National Party in elections held in mid-1984, the country was ready for change. In this environment, Roger Douglas, Labour’s strong-willed finance minister, was able to spearhead reductions in government intervention in New Zealand’s economy, and thus the name “Rogernomics” for the reforms. The segment of the economy least touched by Rogernomics was the labor market (Walker).

Implementing Ag Policy Reforms

The agricultural policy reforms were implemented quickly (during 1985-87) as part of a basket of reforms for financial markets, foreign exchange markets, tariffs, import licensing, taxes, and those related to partial deregulation of labor markets. Bundling of reforms made it easier for the government to implement them. Since many people experienced pain during the reforms, no group could legitimately claim it had been singled out for unfair treatment. Moreover, interest groups – especially those in New Zealand that were unaccustomed to fighting reforms across a broad front – were not able to effectively oppose the reform measures. Hence, the reform blitzkrieg unfolded much as the finance minister wanted.

Rather than striving for optimal sequencing which would have called for early, major reform of labor markets, Douglas capitalized on targets of opportunity, recognizing in particular that the political cost of confronting unions with demands for major labor market reform would have been too great for the Labour Party. While neglect of labor reforms has created problems (bottlenecks and rigidities) for New Zealand’s economy, it is hard to knock Douglas’ strategies since he produced more reforms in four years than other countries achieve over a period of decades.

Some limited transitional payments were made to help farmers and producer boards adjust to freer markets. Government payments for supplementary minimum prices to farmers were reduced from NZ$346 million in 1984, to NZ$215 million, NZ$65 million and zero in 1985, 1986 and 1987, respectively (MAFCorp 1989). In 1986-87, the government repaid New Zealand’s Reserve Bank for debts of the Producers’ Meat Board, totaling about NZ$1.0 billion, and debts incurred by the Dairy Board, totaling about NZ$600 million (Johnson). The boards had incurred these debts partly as a result of price stabilization schemes they operated. In preparation for its sale, the government wrote down debts of the Rural Bank by NZ$1.0 billion. It does not appear that the payments represented compensation approximating the net present value of the subsidies received by farmers, producer boards or the Rural Bank. Rather, they seem to be mainly figures arrived at through political negotiations, which the government hoped would help the recipients to adjust successfully.

New Zealand’s government used a device called the Rural Bank mortgage discounting scheme to help financially strapped farmers during the early years of the reforms. This device allowed the government to provide limited help to farmers while continuing to extricate itself from the business of providing subsidized farm credit. Under this scheme the present value of the concessional interest benefits was subtracted from the farmer’s outstanding loan balance while simultaneously raising the interest rates on the adjusted loan to the market rate. While the scheme did not directly improve the cash flow position of farmers who qualified for the plan, it increased farmers’ equity and facilitated debt restructuring. Commercial lenders had incentives to refinance some of these higher equity loans under terms which reduced farmers’ payments.

The government permitted the Dairy Board and the Apple and Pear Marketing Board to retain some privileges under the new regime–principally the statutory right to serve as monopoly exporters. Apparently, this concession was made because officials bought producers’ arguments that individual exporters of dairy products, apples and pears would be weak, ineffective sellers in foreign markets and because the concession involved no budget outlays.
While New Zealand’s government provided nontrivial amounts of adjustment help to producer boards, the farmers were weaned pretty much “cold turkey” from subsidies. In the case of the Rural Bank, the billion-dollar loan write down made it possible for the government to sell the organization as a going concern and probably eliminated the need for a bailout of the type received by the U.S. Farm Credit System in the late 1980s. Moreover, New Zealand’s government further protected itself from losses by selling the Rural Bank to the financially strong Fletcher-Challenge organization — a multinational corporation with assets ofNZ$10.2 billion in 1988 — rather than accepting the bids of a financially weaker producer group.

Impact on Farmers and Agribusinesses

New Zealand’s farmers felt a profit squeeze as a result of the agricultural policy and other economic reforms and, a tight money policy that accompanied the reforms. These developments reduced output in parts of the farm economy and the sales of agribusinesses serving farmers. As noted below, sheep stock units declined by about 10% between 1983/84 (pre-reform) and 1988/89 (MAFCorp 1989).

Item Percent Change 1983/84 to 1988/89
Sheep stock units – 9.9%
Beef stock units + 7.3
Dairy stock units + 2.5
Total pastoral stock units – 2.6

Sheep slaughter declined by about 30% from 1983/84 to 1988/89, substantially more than stock units. This contributed to excess capacity in livestock processing plants and forced restructuring in that industry. Beef slaughter increased by about 3% and milk production remained approximately constant over the 1983/84 to 1988/89 period (MAFCorp 1987, 1989). This pattern of output meant that cattle and milk producers were unable to take full advantage of the strong international prices for beef and manufactured dairy products in 1988/89. The Labour Government has been frequently chided about this point by the opposition National Party.

The real income of New Zealand’s sheep and beef farmers fell by about 13% from 1984 to 1988/89 (MAFCorp 1989). Prices received by New Zealand’s manufacturing milk producers varied sharply during the last half of the 1980s. The real payout to producers for manufacturing milk by the New Zealand Dairy Board declined by 40% from 1984/85 to 1986/87 before returning to 1984/85 levels in 1989/90 (New Zealand Dairy Board). Reflecting these changes and others, the contribution of agriculture to New Zealand’s GDP declined from 7.0% in 1984 to about 5.8% in 1988/89 (MAFCorp 1989).

Thus, five years into the reforms, farming had become moderately smaller component of New Zealand’s economy, and sheep producers, in particular, had suffered reductions in income. For a majority of farmers, the agricultural policy and other economic reforms were manageable. But a farm financial crisis much like the one that surfaced in the U.S. in the mid-1980s emerged in New Zealand. Symptoms of the crunch included a 60% drop in the real value of farmland from 1980 to 1989, an increase to 25% in the percent of farmers experiencing severe financial stress (MAFCorp 1989), and an increase in the percent of the Rural Bank’s loans in arrears from 4% in 1984/85 to almost 12% in 1988/89 (Rural Bank). The latter figure is similar to the percent of farm loans in arrears in parts of the mid-western U.S. during 1986-87.

High interest rates contributed mightily to this situation. Reflecting the Reserve Bank’s restrictive monetary policies, New Zealand’s nominal short-term interest rates (measured by the 90-day commercial bill rate) peaked at 26% to 27% in 1985 and again in 1987, before falling to about 14% in 1989 (Bank of New Zealand.) Record high real interest rates, which surfaced during the times of peak nominal rates, re-emerged during the last half of 1988 and 1989 as nominal rates failed to fall as much as inflation. The removal of subsidies, high real interest rates, and the strong exchange rates associated with the high interest rates left some New Zealand farmers who had purchased land and other production items on credit in the 1970s and 1980s with heavy and, in some cases, unmanageable debt burdens. Interest expenses became the largest expenditure item by a large margin for New Zealand sheep and beef farmers during 1986-89. Farmers adjusted by reducing expenditures for fertilizer, repairs and maintenance with predictable effects on agribusinesses serving them.

Farm and agribusiness finance companies also experienced difficult times. Farm lenders saw their businesses contract because New Zealand’s farmers, like those in the U.S. during the recent farming downturn, paid off loans and borrowed less. In addition, the lenders received new competition from Australia’s Primary Industry Bank which entered the New Zealand market and from New Zealand lenders who previously did little farm lending.

However, a survey conducted by the author in New Zealand indicated that many agribusinesses adjusted effectively to the agricultural policy and other economic reforms. Firms that were well positioned going into the reforms fared particularly well. This group included dairy cooperatives that had produced for international markets since the 1930s, subsidiaries of multinational firms that had rationalized operations under the direction of parent corporations, and others that had begun to rationalize prior to mid-1984 because they recognized the government’s subsidies for agriculture were unsustainable.

Managers–particularly exporters–complained that the lack of labor market reforms prevented wage differentials from reflecting productivity differentials and kept their costs from being fully competitive. But, the results of the survey suggest that, on balance, the agricultural policy and other economic reforms produced the favorable results predicted by proponents of the reforms.

Lessons

The following lessons emerge from New Zealand’s experience with agricultural policy and other economic reforms.

1. New Zealand’s Labour government was able to implement sweeping agricultural policy reforms successfully because the reforms were included in a bigger package of economic reforms.
2. Like the United States, New Zealand has inflexible monetary and fiscal policies, and almost all inflation fighting is carried out with monetary policies. Tight money policies used by New Zealand’s Reserve Bank drove interest rates and exchange rates up, making the reforms more painful to farmers and agribusinesses than under more balanced monetary-fiscal policies.
3. Agribusinesses generally found the reforms to be manageable. Agribusinesses that were well positioned to deal with reforms and those gaining early mover advantages fared best.
4. A discounting scheme similar to that used by New Zealand’s Rural Bank in 1986-87 might be employed by the USDA to encourage the most credit-worthy Farmers Home Administration borrowers to “graduate” to unsubsidized credit.
5. No apparent damage to the efficiency of the firms has resulted from the decision by New Zealand’s government to allow the two marketing boards to retain monopoly exporting privileges. Indeed, the Dairy and Apple and Pear Marketing Boards have emerged as innovative, showcase agribusinesses.
6. Although New Zealand’s economic reforms were sweeping, credible, and implemented with dispatch, there is unfinished business. The government’s failure to complete labor reforms has created bottlenecks that prevent benefits from other economic reforms from being fully realized.

It may be impossible, of course, for big countries such as the United States to adopt sweeping reforms of the type im­plemented in New Zealand. Indeed, efforts of the Reagan administration in the early 1980s to put in place more “market-oriented” agricultural policies ran aground partly because the task was unmanageable and opponents were able to effectively mobilize opposition to the reforms (Stockman). Nonetheless, New Zealand’s experiment-­warts and all–shows that agricultural policy reforms, which largely took the government out of agriculture, were implemented successfully in this small, developed country.

Moreover, certain lessons learned in New Zealand may have broad applicability, even for countries that undertake more modest reforms. Many New Zealanders who have lived through the reforms suggest the impact of economic liberalization can be described with the same words Mark Twain used to describe Wagner’s music: “It’s not as bad as it sounds.”

 

---

References

Bank of New Zealand. “Economic Indicators.” Wellington, New Zealand, December 1989. “New Zealand’s Economy: Learning to Fly.” The Economist Newspaper Lid., London: Nov. 21, 1987: pp.25-28.

Guither, H.D., B.F. Jones, M.A. Martin, and R.G.F. Spitze. “U.S. Farmers’ Preference for Agricultural and Food Policy in the 1990s.” N.C. Reg. Res. Pub/. 321, November 1989.

Johnson, R. “Government and the Farmer.” Rural New Zealand—What’s Next? Discussion Paper No.109, Lincoln College, Canterbury, New Zealand: Agribusiness & Economics Research Unit, 1987.

MAFCorp. “Situation and Outlook for New Zealand Agriculture.” Ministry of Agriculture and Fisheries, Wellington, New Zealand, April 1987

MAFCorp. “Situation and Outlook for New Zealand Agriculture.” Ministry of Agriculture and Fisheries, Wellington, New Zealand, April 1989

New Zealand Dairy Board. “Financial Report 1989.” Wellington, New Zealand, 1989.

Rayner, T. “Regulation.” Rural New Zealand–What Next! Discussion Paper No.109, Lincoln College, Canterbury, New Zealand: Agribusiness & Economics Research Unit, 1987.

Rural Bank. “Annual Report 1989.” Wellington, New Zealand, 1989.

Spencer, G., and D. Carey. “Financial Policy Reform.” Rogernomics-­Reshaping New Zealand’s Economy, Auckland, New Zealand: GP Books, 1989

Stockman, D.A. The Triumph of Politics–Why the Reagan Revolution Failed. New York, Harper & Row, 1986.

Wilkinson, B. “Fiscal Policy and Government Expenditure Reforms.” Rogernomics–Reshaping New Zealand’s Economy, Auckland, New Zealand: GP Books, 1989.