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New Zealand: New Zealand Agriculture Profile 2012

2012/03/21

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New Zealand Agriculture Profile 2012

Productivity growth is a key determinant of rising living standards. The agricultural sector has been an important contributor to the overall growth of productivity in New Zealand. The average rate of multifactor productivity growth in agriculture from 1926-27 to 2000-01 was 1.8%. We find evidence that this rate has been increasing especially since the reforms of the 1980s. This paper estimates the contribution that R&D has made to agricultural productivity. It develops a theoretical framework based on the stock of knowledge available to producers. This model incorporates foreign stocks of knowledge and the spill-in effect for New Zealand. The estimation allows for extended lag effects of research spending on productivity. We find that foreign knowledge is consistently an important factor in explaining the growth of productivity. It appears that the agricultural sector relies heavily on drawing on the foreign stock of knowledge generated off-shore. The contribution of domestic knowledge generated by New Zealand’s investment in R&D is less clear cut. However, there is typically a significant positive relation between domestic knowledge and the growth of productivity. We find a wide range of estimates of the return to domestic R&D. The results are sensitive to the type of model used and the specification of the variables. Based on our preferred model we estimate that investment in domestic R&D has generated an annual rate of return of 17%. The results underscore the importance of foreign knowledge in a small open economy. The very existence of foreign knowledge may be a necessary condition for achieving productivity growth in a small open economy. However in no way could it be argued that this was sufficient. Having a domestic capability that can receive and process the spill-ins from foreign knowledge is vital to capturing the benefits. The challenge is to be able to isolate those effects from aggregate data for the agricultural sector. In that task we claim only modest success.
 
Agricultural R&D
The institutional arrangements for the public funding of R&D in New Zealand have evolved over the last two decades. Up until the early 1980s, the majority of research funds were allocated to the former Department of Scientific and Industrial Research and the Ministry of Agriculture through the standard process of parliamentary appropriations. After a series of changes the current system of funding emerged in which a significant part of the public sector funding for R&D is channelled through a series of state-owned research institutes. These institutes and universities submit competitive bids to the Foundation for Research, Science and Technology, which through a process of pair review allocates the public funding according to priorities established by the government based on the policy advice of the Ministry of Research, Science and Technology.
Figure 1 shows the level of public spending on agricultural R&D in New Zealand compared to in Australia over the period 1975 to 2001, as a percentage of agricultural GDP. Australia has invested a higher percentage than New Zealand throughout the sample period, with a high in 1983 of 5.9%. Since then the trend has been one of declining public R&D intensity in Australia, although from 2002 to 2003 there was an increase from 2.9% to 3.8%.
New Zealand’s level of public R&D spending as a percentage of agricultural GDP has remained relatively steady over this period, at a level of 1.6% in 1975 and 1.3% in 2001.
 
Productivity Growth
The primary sector continues to play an important role in the New Zealand economy. It directly contributed $8 billion (to the year ended March 2005 in 95/96 prices), or 6.6%, to the country’s real GDP. Of this, the agricultural sector contributed 77% to the primary sector, or approximately $6 billion (95/96 prices) to whole economy real GDP.
Primary sector average annual growth for the period 1988-2004 has been similar in New Zealand to that in Australia (see Table 2 below). The agricultural sector has also shown a similar growth experience over this period for both countries, with average annual GDP growth of 2.5% in New Zealand and 2.8% in Australia.
In Australia, the primary sector contributed 3.4% of total GDP (to the year ended June 2004 in 2002/03 prices), with the agricultural sector accounting for 93% of the total primary sector.
While the overall rate of growth of the primary sector in New Zealand has matched that of the economy as a whole, the productivity performance of the primary sector in New Zealand has been impressive. The primary sector had one of the highest average annual growth rates of labour productivity over the period 1988 to 2004 (with only the Transport and communications and the Electricity, gas and water sectors achieving higher growth). This labour productivity performance was sourced equally from capital deepening and multifactor productivity growth, based on a growth accounting decomposition.
While the primary sector had one of the highest average annual labour productivity growth rates amongst industries in New Zealand (at 3.0%), this was still markedly less than primary sector labour productivity growth in Australia, which averaged 4.1% between 1988 and 2004.
We can also contrast the overall multifactor productivity growth for the primary sector of New Zealand and Australia. In New Zealand, multifactor productivity in the primary sector (comprising agriculture, forestry, hunting and fishing) grew at an annual average rate of 1.5% from 1988 to 2004 (see Table 3). In contrast, the comparable rate of growth in multifactor productivity in the Australian primary sector was 3.8% (Productivity Commission 2005). It is worth noting that this higher multifactor productivity growth in the primary sector was accompanied by a higher public R&D intensity in Australian agriculture.
Unfortunately, hours data is not available for the agricultural sector in New Zealand alone. Instead we have constructed a multifactor productivity series using employment numbers back to 1926-27.  From 1988 to 2001 multifactor productivity in the agricultural sector grew by 1.3%, compared with multifactor productivity growth for the whole business sector of 1.4%. Over our entire sample period, average multifactor productivity growth in the agricultural sector has increased. Between 1927 and 1956, annual MFP growth averaged 1%, increasing to an average of 2.2% between 1957 and 1983. From 1984 onwards MFP growth further increased to an annual average rate of 2.6%.