TCS Daily

Kiwi Fruit for America

By Kristyn Birrell - May 23, 2007 12:00 AM

Once upon a time, in a country way, way down under, the government dismantled its system of agricultural subsidies and supports. Initially, cries of outrage and disbelief were heard from farmers all across the land.

For more than 20 years, farm assistance had steadily increased, peaking at 33 percent of total farm output (about double the level of assistance in the U.S. today). Then, with one swift and decisive decree, all subsidies were eliminated.

The transition period, which lasted about 6 years, was not easy, but it was less painful than expected. The government predicted a 10 percent failure rate, but only 1 percent of farms went of business. Government assistance during the transition period was limited to one-off "exit grants" for those leaving their farms, financial advice, and the same social welfare income support afforded to all citizens.

The fortune of farmers now depended on their ability to meet consumers'

demands. Overproduction no longer occurred. One year, under the subsidy regime, six million lambs were rendered into fertilizer because no one wanted them; sheep farming had been the crown prince of the subsidy king. Without subsidies farmers were forced to diversify and produce those goods that were most sought after in the marketplace. Sheep stock decreased, while the number of dairy cows increased. Over time, the agricultural sector diversified into not only new crops and livestock, but also rural tourism.

Production decisions, though, were constrained by the type of land being farmed. In order to be competitive, farmers had to keep costs down and this meant using resources efficiently. Subsidies for fertilizer had resulted in its wasteful application. Without subsidies, fertilizer use decreased, water quality increased, and yields were not affected. Additionally, farmers fit their production to the land. Marginal land, which was only farmed to receive subsidies, went out of production and reverted to native bush.

Competition also drove innovation, and farm productivity improved substantially. Labor productivity nearly doubled, and land productivity increased 85 percent. Lamb carcass weights rose 34 percent, and the quantity of milk solids produced per dairy cow increased by more than 30 percent.

Annual productivity gains before reform were about 1.5 percent. For the first 9 years after reform, they averaged 6 percent -- higher than any other sector in the country's economy.

Many had worried that the end of subsidies would destroy agriculture in the country, yet the agricultural sector grew as a percentage of GDP. Today approximately 90 percent of farm output is exported, making up more than 55 percent of total merchandise exports. Productivity gains have allowed farmers to remain competitive in a world market where they compete with farmers in subsidized countries. Real farm incomes have recovered, and in some sectors income is even higher than it was under subsidies.

Instead of disappearing into the mists, the country's farm sector became known throughout the world for high-quality, innovative, and efficient agricultural practices. After the initial failures, farm numbers held constant, and the amount of land in agriculture fell only slightly as marginal land went out of production. Decreases in farm employment have been offset by increases in employment in rural tourism. Thus, the percentage of the population living in rural areas remains virtually unchanged. Real land values, which initially plummeted, have recovered and surpassed their pre-reform level.

Over time, nearly all embraced the idea of a market-driven agricultural sector. Farmers learned not only how to survive, but to thrive in a subsidy-free world. Common sentiment now is that subsidy elimination was "the best thing that ever happened to farming."

A prosperous farm sector without government subsidies? Sounds too good to be true...sounds like a fairy tale. It's not. In 1985, New Zealand permanently eliminated 30 different agricultural production subsidies and export incentives. Over the past 20 years, as New Zealand's farms flourished without assistance, the opportunity cost to American consumers and taxpayers of U.S. farm programs has totaled more than $1.7 trillion. With the 2007 Farm Bill, our government has the opportunity to make much needed reforms to farm policy. We could do worse than look to New Zealand's policy tale for guidance. Like any good fairy tale there is more to take away from their experience than just the story.

Kristyn Birrell is the Publications & Program Coordinator at the Foundation for Research on Economics and the Environment (FREE), based in Bozeman, Mont.



Cause and effect...
Fun article and with a great message regarding too much government.

That said, however, there is an implication here that the only significant change in New Zealand agriculture since 1985 was the removal of farm subsidies. Of course, the science of agriculture itself has been pushing forward at a breathless pace.

"Lamb carcass weights rose 34 percent, and the quantity of milk solids produced per dairy cow increased by more than 30 percent."

This was not caused be the removal of subsidies. This was caused by improvements in livestock, ranching practices and dairy methods. Similar numbers were achieved all over the world during that same period. There is no relationship at all between butterfat content and the removal of milk subsidies.

According to the article the New Zealand government's efforts to prop up agriculture artificially were disproportionate and led to certain stupidities. Of course, when stupidities are stopped lots of things get better.

Agricultural programs in the United States are, many times, wasteful and misguided. But they serve a national security agenda and should be managed to deliver maximum results. Such programs will not be generally eliminated, here.

You might have that reversed...
I'll give you the opportunity to correct your statement: "The grossly limited extent corporations are involved in such planning..." before I tell you that you are completely wrong.

But let me go ahead and tell you why.

Corporate Annual Plans are extraordinarily precise. And these Plans are adjusted according to actual results twice during the year after the 1st Q and after the 2nd Q (April Update and August Update) with companies on a calendar fiscal year.

Standard costs, projected unit sales by line item, extended dollar sales by average price...material, labor, overhead. Operations, marketing and finance. Currencies for overseas operations. Hedged currency projections. Tax plans. Low tax, margin captures within offshore entities. On and on.

All of this is planned very precisely, those numbers are signed up to by managers with P&L responsibility. Everything is measured, reported and agonized over.

Stupidity, however, is a separate phenomenon. The process (of deciding) to do stupid things is independent of the process to execute the tasks involved.

People tend to focus on the central planning processes of the Soviet Union as its major limitation when Communist economics attempted to compete with financial capitalism. The idea was that such a large bureaucracy was too slow moving and out of touch with the realities of the factory floor to respond to opportunities or crises.

This is probably wrong. For certain, it is too simplistic. Lots of large, far flung and complex operations are well managed and tightly coordinated.

The Soviet military was able to maintain a world class, highly disciplined organization for decades without interruption and without the serious incidents one might imagine to have been possible. The Soviet Union was very high maintenance. The Russians are well rid of it.

I think we under-estimate the quality of Soviet task execution and we overstate the negative impact of their central planning routine.

I think the Soviets were simply working very hard with an economic paradigm that was unable to compete against financial capitalism. Without the magic of money and banking, socialist economics could not give the Soviet government the same robust tax base that we enjoy.

When we were saying those mean things about Communism (during the 1960's and the 1970's) the Soviet Union was a worthy and dangerous competitor during the Cold War. They were our rivals in many technical and most industrial arenas. Even today, their scientists and mathematicians are among the best in the world.

We looked for fundamental weaknesses in operational areas we thought we excelled at. Central planning seemed to stand out and this "mistake" became a popular notion. However, I am not so sure central planning was actually much of a problem for them.

Our economists never really questioned the fundamental theory of socialism because many of our economists have believed all along in some such directly managed economy. Where their models would deliver better results than by letting market forces work things out.

Troy, do you think that the Communists would have done better and, perhaps, might have won the Cold War if they had decentralized their planning routines? Do you think that with proper execution socialist economics could be superior to financial capitalism?

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