ECONOMICS: One + one = three

No, don’t use the figures from Statistics New Zealand when measuring agriculture’s contribution to GDP, your columnist was urged by the executive director of Meat and Wool New Zealand’s Economic Service, Rob Davison. They are limited to measuring on-farm production. You should work out the value added to the milk, meat, wool and what-have-you beyond the farm gate.
The official statistics show agriculture contributes around five percent of the country’s total GDP. Doing it Davison’s way, the figure rises to 17 percent.
His argument in favour of the bigger number is simple: if you unplugged the on-farm bit of the agriculture sector from the economy, there would be no place for the stainless steel fabrication industry that builds plant for the dairy industry, or the dairy and meat processing factories (all counted as “manufacturing” in the official statistics). Nor would there be fertiliser industry or top-dressing industry or transport operators to take stock to the processors and finished goods from the processors to the ports, or rural service companies like PGG Wrightson, farm accountants, farm lawyers, farm scientists… And so on.
Davison is staunch champion of the agricultural economy: as much of it as he can statistically embrace by using input and output numbers. He wants the value-added components recognised to demonstrate to the public – and to policy-makers – the reality that agriculture accounts for almost 20 percent of our economy.
He also likes to trumpet about the way agriculture has thrived since deregulation of the country’s economy began with the Lange government’s budget in November 1984. By 1986/87 most of the support to agriculture had gone with only some remnants left on fast removal track.
In 1990/91 the total agricultural sector, including on-farm, the input supply sectors and the downstream processing, transport and marketing sectors, contributed 13.5 percent to GDP. From 1990/91 to 2004/05 GDP for the whole economy grew by 57 percent from $79.59 billion to $125.3 billion. From 1990/91 to 2002/03 total agriculture grew faster, contributing 17 percent of GDP.
Thus agriculture grew 98 percent in GDP terms while the rest of the economy grew 51 percent. In part, this production boost resulted from improvement in downstream processing.
There have been land use changes, too, from sheep and beef to higher-value dairy production on some land, plus significantly improved levels of animal productivity.
How to measure the agricultural sector was tackled in recent report from ABN AMRO Craigs on rural servicing company PGG Wrightson. The authors of the report foresee improved profitability for the company, based on their belief an agricultural upturn will be fuelled by increased global commodity prices. These are likely to be sustained, particularly in the dairy and beef industries. Hence the ABN AMRO Craigs analysts say there are “plausible reasons to believe the outlook for New Zealand’s agricultural sector is set to improve”.
Citing Statistics New Zealand data, the report says the primary sector in New Zealand directly contributes eight percent to GDP, more than double the OECD average. More specifically, it refers to calculations showing the agricultural sector’s direct contribution to GDP varies between five percent and six percent depending on seasonal conditions.
Agriculture also forms the base of great deal of other economic activity and generates the largest share of the country’s foreign-currency earnings, the ABN AMRO Craigs report points out. Taking into account primary processing, the sector’s contribution to the national economy rises to around 10 percent of GDP. Including on-farm production, the input-supply sectors and downstream processing, transport and marketing sectors, agriculture’s contribution approaches 17 percent of GDP.
But economists – as we all know – are not easily persuaded to agree on anything much, and so it is with measuring agriculture’s contribution to GDP. Economic consultant Brian Easton contends that if you measure the agricultural sector as Rob Davison has done, then every other sector is entitled to do the same thing. Thus “manufacturing” can include its gross inputs (including those from farms) as well as the sectors it nurtures further along the economic food chain (like transport). This would greatly enlarge its contribution to GDP from the measure used by the government statistician. The construction industry – and all the others – would be entitled to do the same.
Before we knew what was what, we would have GDP roughly 400 percent bigger than it is now, Easton contends.
Another thing: when one sector insists it is bigger than the measurements show, by implication the others should be smaller. And while farmers like to think they are the backbone of the economy, because without them there would be no further processing beyond the farm gate, Fonterra or meat-plant workers could argue the same thing. Without them, there would be no meat or dairy industries. Both points of view overlook the importance of inter-dependencies and cooperation in the whole of an economy.

Bob Edlin is regular contributor to Management.

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