EXAMPLES OF AND CONDITIONS FOR MAJOR POLICY REFORM

New Zealand.
After a brief period of heavy subsidisation of agriculture in the 1970s, New Zealand began the virtual elimination of all farm subsidies in 1984, as part of a general and far-reaching economic reform package (see, e.g. Johnson, New Zealand's Agricultural Reforms and their International Implications, undated). This farm policy reform is frequently cited as the major example of a developed country being able to remove its farm support system, in spite of the apparently overwhelming preservationist forces so evident elsewhere in the developed world (with the exception of Australia). See, also, refs.

How did this happen?  The Right Hon. Simon Upton (ex. Minister in the NZ government, and renowned international environmentalist, chair of OECD Round Table on Sustainable Development) offered the following summary at a recent OECD workshop on Environmentally Harmful Subsidies (Nov. 2003).

Upton suggested that there were seven key lessons from the NZ experience (though not, then, in this order);
  1. Changed Social Perceptions: Subsidies had become an embarassment, both logically and rhetorically indefensible. In short, New Zealand could no longer afford them.  It had become generally recognised that the system had to be changed, even by the opposition parties.  Opposition to reform had evolved from outright rejection to determination of how to do it, rather than why it should be done.  The debate had changed from defence of vested interests and the preservation of myths and mantras to challenges to the logic of support and assistance policies.  "Farming as the backbone of the economy and society" no longer seen as necessarily requiring subsidised support - if it really is the backbone, why on earth does it need support?  If it needs support, what sort of future does it have as a backbone?
  2. Political willingness to oppose vested interests:  Reform was not led by the vested interests and their staff or supporters.  NZ reforms were instituted by a left-wing, reformist and predominantly urban party (of which Upton was not a member). The reformers did not owe the recipients of the policy support rents anything, and could afford to do without their votes, and challenge their presumptions and assertions, building on and re-inforcing the changing nature of the debate reflecting the changed social perceptions.
  3. Undermine Support Attributes: As a major part of the political (and social) challenge to the established order, the debate has to point out and emphasise the downsides and damages that support generates - environmental damage (especially soil erosion of vulnerable hillsides etc.) played a (small) part in the NZ debate (see point 7 below).
  4. Confidence in Abilities to Change and Adapt. Arguably much easier to achieve in a small country with a history of change and adaptation (at least amongst the settlers), this confidence in the ability of the supported sector to adapt, adjust, survive and even prosper without the support is essential to any reform process.  The relatively short history of substantial support, and consequent memories of the resiliance of the industry prior to support may have helped here, though these memories could also have provided for some resistance.
  5. Freedom to react and adjust:  NZ farmers had previously been able to persuade local governments to outlaw sub-division of farm land, on the grounds that such sub-division was an inefficient use of a valuable resource. However, once farming is unsupported, this prevention severely tied the hands of many farmers wishing to re-organise and re-structure their businesses and assets. The farming lobby quickly reversed their position on sub-division, alllowing them more freedom to respond appropriately to their new conditions.
  6. Adjustment Assistance:  Only when the previous pre-conditions for reform are in place should attention be turned to the provision of limited transitional arrangements.  In NZ, these were minimalist: the government owned rural bank wrote off 20% of farm debt as a one-off payment; limited social security payments (for 2 years or so) were provided to the otherwise destitute; plenty of advice on adjustment was provided. In short, the implementation of the reform has to make it abundantly clear that the reform is happening and is not reversible. Long drawn out transition periods and abundant transition support can easily be captured by the resistance, and even turned to the re-instatement of support, albeit under a different guise. The messsage is that, once reform has been agreed, it is preferable to do it as quickly as possible, making sure that people have the capacity to adjust (through adjustment of capital valuations and associated pension funds), so that people can plan their adaptations with certainty about future policy conditions.
  7. A Crisis helps: and may even be necessary for fundamental reform.  In the NZ case, the crisis was in public funding.  With a budget defict running at close to 10% of GDP, and with farm support as a major element of government spending, the crisis was both real and entirely relevant to the reform of farm policy. In addition, it was also the case that NZ faced a significant environmental crisis from the over-intensification of vulnerable land resources, though this concern did not feature in then policy reform debate. Timing can be critical - NZ was favoured during this reform by a rise in international timber prices, which encouraged the release of marginaal land back to trees.
During discussion of this presentation, Simon was asked how important leadership (from specific people, such as Commissioner Fischler) was - answer a little diplomatic, but the clear sense was that reform needs at least one champion, with the power and position to drive the process forward.  Simon was also asked about the importance of ideas and concepts. The prior discussion of the effects of policy and of likely conditions following reform were considered to be important.

Ewa Rabinowicz (Sweden) noted that the Swedish reforms (also radical in removing market based support and replacing this with payments for less favoured areas and farms delivering identifiable environmental and cultural benefits) followed the same course with the same pre-conditions, with the single exception that there was no identifiable crisis precipitating the Swedish reform.

Tasos Hanniotis (Chef du Cabinet, DGVI, Franz Fischler's right hand man) also gave a presentation on the recent EU reforms, and noted that a similar set of conditions also applies to these reforms, again not obviously driven by any identifiable crisis - with many commentators asking why there was a need for further reform at this point.  The traditional pressures forcing CAP reform:
were not present in any substantial form in this case.  In this case, the combined incidence of:
all helped to underpin the reform debate and eventual agreement.   In short, the gradual build-up of a set of pressures in the same direction all conspired to produce a fairly radical reform.

Commenting on the EU's CAP and the environment recently (at the Round Table meeting in Cozumel, Sept. 2003), Upton (op cit.) made the following points:

References:
  1. Scrimgeour, F.G. & Pasour, E.C., Jr., A public choice perspective on agricultural policy reform, Am. J. Ag. Econ., 78, 1, 1996;
  2. Am. J. Ag. Econ., 76, 5, 1994 (for a series of articles and a discussion of farm policy reform).
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Back to Welfare Analysis of policy reform notes.