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Monday, June 04, 2007

Kiwis Fruitful

One reason economists have such diverse opinions on policy is that numerically, it's often really tough to verify or disprove theories in the real world. For example, are tax cuts beneficial? I've done analyses in the past, and I can kind of see that past tax cuts have been beneficial overall, but not with any statistical confidence. That's because the tax cuts generally aren't that big and the effects are overwhelmed by other factors. In other words, there are just too many variables and too much noise to really discern anything.

Every once in awhile, some policy change somewhere will have such stark and clear results, that even though there still might not be any statistically significant conclusions that can be derived from that single data point, it seems pretty obvious that the policy makers are on the right track. One example of such a policy is New Zealand's elimination of farm subsidies. Let's start with the conclusion:

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...

Here is some of the background:

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. [...]

Wow! There's more too, please read the whole thing. It's rare to have such a clear example of how letting markets do their thing helps everybody, even the group previously being subsidized.

1 comment:

Howard said...

Yes, I saw that article. It is amazing how well freedom works. Any society with a culture and institutions that support honest dealing along with private property, freedom of exchange and freedom of contract will benefit by eliminating subsidies.