Economics Brash’s Foot and Mouth Full

Murray Sherwin knows thing or two about economics and about farming. He was, after all, deputy governor of the Reserve Bank before taking up his current post as director general of the Ministry of Agriculture and Forestry. We may also suppose he retains cordial relationship with National MP Don Brash, who was governor in Sherwin’s Reserve Bank days. It is probably also reasonable to assume that Dr Brash respects the opinions of his former deputy.

But whatever the nature of the influence, biosecurity ranked among the top 10 concerns listed by Brash, now National’s finance spokesman, in the economic discussion paper he published late in February. Improving biosecurity systems wouldn’t enhance the country’s growth rate, he acknowledged, but it would go long way to reducing the risk of sudden and large fall in our living standards as result of breach. Therefore, future National government will be committed to significantly strengthening the country’s biosecurity defences.

The paper was issued to encourage feedback and discussion as part of National’s policy formulation process. It calls for improvements to the education system, immigration policy and export market access; it advocates reform of the benefit system; it is critical of the burden of the current tax system and compliance costs on business; and it calls for infrastructure, particularly roading and electricity generation, to be substantially improved. It also proposes review of the Crown’s balance sheet and limit to the size of government to ensure the goal of longer-term growth.

Some, if not all, of these issues would rank in most politicians top 10. Biosecurity, however, might not.

This was Brash’s point. “One area of policy which successive governments have given insufficient attention to in recent years is the need to protect New Zealand from the accidental or intentional introduction of dangerous pests and animal diseases,” he said. Moreover, he thought urban New Zealanders had too little understanding of how vulnerable our standard of living is to breach of our relatively disease-free status.

Brash contended we have been under-spending on the systems which can reduce the risk of such breach. Agreed, recent improvements have reduced the risk of introducing pest or animal disease through our major airports, “but there are still substantial risks in the relatively sparse scrutiny of cargoes entering New Zealand by sea, and of passengers entering New Zealand through smaller airports”, he said.

A few weeks previously, Sherwin had talked briefly to Federated Farmers about trade negotiations and animal welfare before devoting the rest of lengthy address to the country’s biosecurity capability and how New Zealand would respond to an outbreak of foot and mouth disease.

To better understand what an FMD outbreak might mean for New Zealand, he said MAF had teamed up with the economic modellers at the Reserve Bank and the Treasury, fed in some fairly crude estimates of the impact of an outbreak on export values, and traced the impacts on broader range of macro-economic variables. The results were incorporated in memorandum that went to the Department of the Prime Minister and Cabinet. They also provided some of the substance for Dr Brash’s policy-shaping considerations.

The study amounted to scenario analysis of the likely macroeconomic impacts of limited foot and mouth disease outbreak in New Zealand. Two-thirds of the country’s export trade would be at risk for at least four to five months and the models showed economic impacts cumulating to reduction in GDP of around eight percent after two years.

Because of lower government revenue, increased expenditure and the drop in GDP, the Government’s net debt-to-GDP ratio by 2009/10 would jump from around 12 percent (projected in the absence of FMD) to around 25 percent (after FMD). In other words, this would undo the past 15 years of progress in lowering the Government’s net debt ratio. There would also be significant impacts on unemployment and on the financial health of some companies and communities as well as on farmers’ incomes.

The scenario generating these results is at the optimistic end of the possibilities, in terms of the speed with which the outbreak is contained and the speed with which market access is regained for our farm products. Even so, as Sherwin drummed home, “it generates… profound economic shock for the nation. It is certainly enough to demand the attention of policy makers in many government agencies as we think about both the implications for wider economic management, for biosecurity capability, and for the response measures that must be in place.”

It seems his former boss took the message on board.

Bob Edlin is regular contributor to Management.

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