Economics : Taking an Economic Gamble

Some news media early in August were highlighting optimistic Ministry of Agriculture and Forestry expectations that post-drought farming recovery would give boost to the economy. It would contribute to 2.3 percent real growth in gross domestic product in 2009/10, followed by bigger bounce in 2011, when “real GDP growth is forecast to rebound to around three percent year, with exports boosted by falling exchange rate”. In coming years, agricultural sector income was forecast to improve thanks to dairy gross revenue remaining strong, recovery in farm-gate meat prices, depreciating exchange rate and falling interest rates keeping lid on interest payments.
A few weeks later, the media were highlighting somewhat more cautious slab from Bank of New Zealand analysis. Expectations that agriculture will be saviour are not entirely unfounded, as commodity prices remained well-supported, the BNZ said. But there would be “some constraints”. Drought earlier this year had forced many sheep and beef farmers to cull breeding stock, resulting in sharp drop in lamb numbers predicted this spring. Poor growing conditions in recent weeks had compounded this; hence there was “very real risk” not only that lamb numbers would be sharply lower this season, but that weights would be down too.
Dairy farmers would fare better, producing five percent more milk this year, according to the BNZ forecasters. But this would do little more than offset the production losses from meat farmers. “And while the higher relative weighting of dairy farming compared to its meat counterpart might be sufficient to tilt the balance in favour of net positive result, the overall outcome won’t be sufficient to set the broader economy alight.”
While several uncertainties shroud all economic forecasts, there can be no doubting the importance of the country’s agricultural and horticultural industries. Their combined output contributes more than half of New Zealand’s total export earnings. Productivity growth is impressive, too. Between 1990 and 2004 growth in agriculture, horticulture, forestry and related industries averaged productivity growth of 2.8 percent year, compared to 1.1 percent in other manufacturing industries. From 1986 to 2002 the contribution of agribusiness to New Zealand’s economy rose from 14.2 percent to an estimated 16.5 percent of GDP.
Agriculture Minister Jim Anderton rightly said at the launch of Horticulture New Zealand late last year: “Our primary production industries hold the key to New Zealand’s ambition to be in the top half of OECD nations.”
Climatic factors, accordingly, are important to our economic well-being. The drought helped to shrink our GDP growth, and heavy rainfall across much of the country more recently – including flooding in areas along the east coast of the South Island – severely hampered grass growth.
Attempts to tinker with the climate (by curbing the emissions credited with causing climate warming, for example) will affect our economic well-being too.
One line of attack on emissions is being spearheaded by Rajendra Pachauri, chairman of the UN Intergovernmental Panel on Climate Change (and vegetarian), who says cutting back on red meat will curb global warming. Even having one meat-free day week will help cut greenhouse-gas emissions and other environmental problems – including habitat destruction – associated with rearing cattle and other livestock, he said. “In terms of immediacy of action and the feasibility of bringing about reductions in short period of time, it clearly is the most attractive opportunity.”
The United Nations Food and Agriculture Organization estimates meat production accounts for nearly one-fifth of global greenhouse-gas emissions.
In this country, the Clark Government has been keen to handicap primary exporters for climate-change reasons. It hastened to enact the Emission Trading Scheme Bill, even though details of the trading scheme it will introduce were still being worked on as legislators were debating the issues, and it included pastoral agriculture, even though no solutions are available for farmers to be able to reduce emissions.
As NZ Herald economics writer Brian Fallow explained, an emissions trading scheme that puts price on emissions of greenhouse gases will have economy-wide effects on inflation and growth as well as on the Government’s finances. How big those effects will be depends on the price of “carbon” (or tradeable rights to emit) and that is unknown. wide range of figures has been bandied about by the experts.
True, majority of the country’s emissions arise from export sectors, and agriculture is the source of almost half of them. Moreover, the scheme is designed to heavily protect farmers for the next several years. But there is no agreement on whether the effects of the trading scheme will be good or bad. In short, we are taking huge gamble with our economic future.

Bob Edlin is leading economic commentator and NZ Management’s regular economics columnist.

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