Subsidies Down, Productivity Up: NZ Agriculture (again)

The Institute of Economic Affairs, a United Kingdom think tank, has published a discussion paper, Liberating Farming from the CAP.  Its main purpose is to explain the need for Europe to reduce subsidies for agriculture under the Common Agriculture Policy (CAP) in order to raise productivity and innovation.  It reports that the annual cost of the CAP is set to rise from its current €55billion (about NZ$87 billion) to €63billion (NZ$100 billion) by 2020.

While reduced CAP subsidies would certainly help make New Zealand exports more competitive in the short term, the article is also a reminder that such a move would surely force major changes in European agriculture further out.  Indeed, at pp 18-19 the paper uses the removal of agriculture subsidies in New Zealand in the 1980s to illustrate how dramatic the structural changes can be.

The graph below (not from the IEA paper) illustrates just how dynamic New Zealand agriculture has been since 1985 in terms of multifactor productivity growth, both relative to the overall growth rate in Statistics New Zealand’s measured sector (4.5 percent pa vs 1.7 percent pa) and in a ‘before and after sense’ (4.5 percent pa vs 1.3 percent pa between 1978-1985 and 1985-2006).  Note however, that the 1978-1985 period is considered by Statistics New Zealand to be less than two complete cycles, so there is an ‘apples vs oranges’ aspect to the ‘before and after’ comparison.