Frontier Centre: Brian, can you explain why farm subsidies ultimately don’t work?
Brian Chamberlin: I can certainly explain why they don’t work. The main reason they don’t work is that they do not deliver to the people they are aimed at. They simply get factored into the cost of farming and the effect of them is very quickly lost.
FC: Do you mean they get capitalized into costs and the price of land and inputs simply goes up?
BC: Both of those things.
FC: If you have to subsidize, is there a better way to subsidize?
BC: I don’t think there is any good way of subsidizing but some ways are not as bad as others. If government decides that it wants a certain number of people living in rural areas it has to do it in a way that doesn’t distort the production and the marketing of crops or animals. So, they have to be aimed at people and projects not at either input or output in the farming industry.
FC: So, if a policy encourages more production that gets dumped onto the market you have lower prices?
FC: So, you never get ahead.
BC: Well, it’s probably worse than that – you go backwards – not going ahead.
FC: Is this what will happen with the new U.S. farm bill?
BC: It could well happen. Most people say that you have some subsidies to preserve family farming. There has been a huge loss of people in the U.S. farming industry over the years but have subsidies helped? I’ll give you an example the U.S. sheep industry a few years ago was close to 50 million sheep and they actually absolutely poured money into it. They put high tariffs on to try and block imports into their country and yet they are down to, I think, less than 8 million sheep and it’s still going down. It is absolutely crazy because the conditions for farming sheep in some areas of the States are quite favourable but the subsidies haven’t saved it and will not save it.
FC: Is the U.S. farm bill going to hurt NZ?
BC: We hope it won’t but we feel that it will by it becoming more product related than it was previously. We think it is likely to encourage production, especially in the dairy industry, possibly in the beef industry and any production increase that is not based on a market requirement will depress prices. So, we are very worried about it from that point.
FC: What is the short answer to why are they doing it?
BC: Probably to win an election! Control of the Senate – I think it is very political; it makes no economic sense whatsoever.
FC: Is there anything at all positive in that bill?
BC: They still say it can be amended in line with a satisfactory WTO (World Trade Organization) settlement. I think that makes it even more important for the rest of us to work incredibly hard at achieving a WTO settlement which tightens up the rules. The Uruguay round agreement has largely been honoured in the breach because there has been so many boxes that you can put your subsidies into and claim they are non-trade-distorting when they really are. So, I think if we could tighten that aspect of it up – that would be great progress.
FC: So why did NZ farmers want better economic policy in general versus more subsidies?
BC: In a small country there is no way that you will ever compete against the big countries in a subsidy war. They simply have much bigger treasuries than we have got, so that is the practical implication. I think the second reason is that subsidies are a spectacular failure and protectionism is a spectacular failure. If you look, just for example, at the Canadian supply managed industries which are marketed to the public on the grounds that they protect family farming. In the Canadian dairy industry, where supply management was introduced in 1970-71, there were 123,000 dairy farmers. Now there are approximately only 20,000 dairy farmers. I think in the chicken industry the reduction in numbers has even been more spectacular and the industry is in very few hands at this point.
In Europe, where money has been poured into farming through the common agriculture policy for 30 years and where protection is the cornerstone of common agriculture policy, the migration to the cities has actually gone at a faster rate than it has in NZ where we have no subsidies at all.
FC:You mention how subsidies tend to be captured by other groups. We can see that with organized labour in Canada. Not coincidentally, the strikes at our shipping ports happen at certain times of the year. Any comment on that?
BC: Well, in regard to the port, certainly over the years in NZ labour extracted a very high rent for what they were providing on the ports because each port was, more or less, a monopoly. If a product didn’t go over the port it didn’t get exported so the labour unions were able to increase their influence to the point where a person who worked on the wharfs received double the national average wage for working half the time of the average national worker. When that was exposed, everyone could see that it simply wasn’t fair or realistic and the ports have been reformed. One of the things you can do is get more competition into the port system so they have to compete against each other for the product and you will find in most circumstances the workers also want to compete for the product so they work harder and you don’t necessarily have to bring their wages down but you can get more productivity from them.
FC: NZ’s ports were privatized and deregulated?
BC: Yes, they were sold off. As private companies the number of containers per hours that were shifted across these ports, I think, at least doubled – it may have been better than that. Another example was the privatization of our railway and we haven’t got a very big or good system in NZ but before privatization it had 20,000 people working for it – after privatization it had 5,000 and the 5,000 are actually shifting more goods than the 20,000. People then say, isn’t that bad – that’s causing unemployment? Perhaps initially some people do lose their jobs but what it does it put more money into other people’s pockets. When people spend that that creates new jobs. Our unemployment rate is on the low side by Western world standards at about 6%.
FC: After the subsidies were pulled in the late eighties, how many farms were lost – wasn’t a massive disruption expected?
BC: We had the potential to have a massive disruption but the commercial organizations, the financiers and the farmers involved – after some initially standoff and stand over tactics – got down to resolving it. The Prime Minister predicted that 8,000 of our farmers or 20% of the commercial farmers would lose their properties. In practice, I think it was 800 or thereabouts – nobody knows the exact figure — but it was a very small percentage, some of who would have gone anyway.
FC: What about productivity after the subsidies ended?
BC: In the last ten years or so, productivity on our farms has gone up at the rate of 4% per year on average whereas in the rest of the economy the productivity growth has only been 1% so there has been spectacular productivity on our farms.
FC: Is the farm sector actually doing better than the urban sector?
BC: I think it is starting to – we always said when we had the subsidies that if we had a more open and better managed economy, we would never, ever had needed them in the first place. While on the face of it, farmers were getting subsidized because they were getting direct payments, really they were getting rather poor compensation for a managed and, may I say, a very badly managed economy. Now, when costs lie where they fall and where people are rewarded more accurately for what they do, farming is shining through as a very strong industry.
FC: You oppose deficit financing and yet there are people in Canada who think that deficit financing will create some economic activity, etc. Why did the federated farmers oppose deficit financing?
BC: I suppose we really just to the textbooks to try and find out what the cause of inflation was and you still have a few people in Canada who think deficit financing is a good thing they must really be in the minority as far as orthodox economists are concerned. I can understand the idea of wanting to do it for one or two years but to do it for twenty years on end is an absolute recipe for disaster.
FC: Let’s talk a little bit about the Cairns group, the loose alliance of countries who are pushing agricultural free trade, and Canada’s awkward position in it. Your thoughts?
BC: Canada’s awkward position – I think it is our awkward position – because of what Canada is doing on market access. The Cairns group wants to make very substantial progress in three areas, that is, price distortion, internal support and export subsidies are an absolute “no – no”. We must have better market access and Canada hasn’t signed up to the market access part of the Cairns group policy.
FC: Because of supply management?
BC: Yeah, Canada really thinks it can get other people to open up their markets and retain supply management or protection of supply management at the same time. I just don’t think that is attainable – or possible.
FC: What’s the potential downside for Canada?
BC: Well, I think you can already see the downside in that it is one of the things that is slowing negotiations down and deliberations down. For all Canadian agriculture it is, in my view, stopping your opportunities to get to trade liberalization more quickly. That’s the major downside. Another downside is one where people who are getting the support have got a mindset that thinks it is going to continue forever. They might be very wrong because this round of trade negotiations has been known as the development round because the developing countries – many of whom now are WTO members – want a better deal than they have had up until now. One of the things that they are going for is market access so Canada can’t have one rule for one product and another rule for all the others.
FC: So, does Canada risk being on its own – out on a limb?
BC: I believe it does, yes.
FC: What are the risks for us?
BC: Well, that’s for Canadians to judge but I think the risks are that we proved in the Uruguay round that we need to match strength with strength. Look at the size of the United States, look at the size of all the European Union countries together and more of them joining all the time. Then look at the Cairns group. I am sure that we wouldn’t have had an agricultural settlement in the last round if it hadn’t been for the Cairns group. This group is also growing so if you have got four groups, because of the developing country group as well, comprising the majority of WTO members, I think it would be impossible to negotiate a favourable position for your country on its own.
FC: Supply management, of course, in Canada is really an issue of regional politics. Do you care to comment?
BC: I look at Canada and see where all the people are. I understand partly the Quebec issue and the other people in politics desperate for Quebec not to succeed and I think it is felt that with the number of dairy farmers in Quebec that that would just throw some more coals on the fire as it were if a government did do away with the supply managed dairy industry. Also in Eastern Canada there are people who have done very well out of the policy. It is completely understandable that they want to retain a scheme that is making them wealthy. There are two points I would like to make about that. First of all, it is really being paid for by Canadian consumers. Second, the rest of Canadian agriculture, particularly here in the west, is largely paying for it. Canada’s absolute hanging on to that and not bargaining it for anything else, means that those people who would gain from liberalization and a reduction of subsidies out here in the West – the pork farmers, the grain farmers and the beet farmers – they are the losers.
FC: In NZ, the major farm commodities were legislated to operate under a system of single-desk marketing. This has ended. Why is that?
BC: I think the dairy industry, for example, just thought they could do better commercially, that’s really the short answer. In the apple industry it was somewhat more controversial but, again, they had to get a commercial ownership structure into the industry and they did. The only area where we still have the single-desk is the Kiwi fruit – outside, in Australia, you will see that they have also gone a long way to commercializing their industry too. From a tactical point of view we might have gone to single-desk on dairy too early, purely from a tactical point of view because the U.S. really cannot stand single-selling organizations. Now, single-buying organizations are even worse and we if we want to get rid of single sellers then we have to get rid of single buyers. But as far as the U.S. was concerned, NZ had absolutely nothing to bargain with except that single-desk and I think we might have been able to wring something out of them but, the NZ dairy board sought deregulation for commercial purposes and I think you make all your decisions…
FC: Larger markets, more opportunity?
BC: Yes, and better management in NZ, a faster movement back up the chain, if you like, to the farmers, telling them to produce the right things and for companies to produce the right things. I think it makes marketing more coordinated and, therefore, we can eliminate some of the costs that were there in our system. So, most of the things you do when you are running an economy – you don’t do them to make someone else happy, sometimes you do them to strike a bargain that is of overall benefit but, in our case, going away from all subsidies and now going away from the single-desk, the decision has been made because it is good for NZ. Sure we know we have to do it to make agreements with other countries but, overall, we do it because it benefits us.
FC: Was there any type of adjustment compensation?
BC: In our circumstance, it wasn’t required. In fact, people thought it was actually going to improve the payout not make it worse. As for the people coming into the industry, the entry cost may be somewhat higher immediately because they will now have to buy shares in the new enterprise if they want to – they may choose to supply, if they are in the right areas, a couple of companies who have stayed out or they may even choose to start up their own venture.
FC: Some observers in Canada have, for example, looked at what replaced the NZ Dairy Board and say it is really still a single-desk model. How would you respond to that? It there a difference between the new model and the Canadian model?
BC: Well, the massive difference is that there are no import restrictions in NZ, whereas the Canadian model needs restrictions to work. Canada would have a very viable diary industry without supply management. You would have a very good dairy industry still without it and well-rewarded farmers but the difference between the Canadian and the NZ situation is that there are no import barriers into NZ and there are very high barriers as far as Canada is concerned at this point.
FC: So, in effect, moving away from the single-desk in Canada would mean that we would have much more value-added activity happening in poultry and dairy, for example, in Western Canada and more jobs.
BC: You are obviously going to retain most of you liquid milk market because you are very competitive with the United States. In fact out West you would probably export milk, not import it. But also, I think, the dairy industry or some of the dairy industry would move west where your stocks of high quality feed are …
FC: Poultry and eggs probably?
BC: Yeah, perhaps even more than dairy but I think there would be a movement West in both industries.
FC: Do you have more or less people today in agriculture in NZ?
BC: I think we have more than we had certainly at our low point.
FC: Are the salaries or returns going up or down?
BC: They are definitely going up. In fact, there was an article in a newspaper in NZ recently that suggested that agriculture is the place to be if you want a good job and not only a rewarding and challenging job so far as the enjoyment factor but it was also predicted that the salaries will at least equal equivalent city jobs.
FC: Some Canadians would say that NZ, of course, has year round growing conditions which are ideal to agriculture. You are also very close to the ports and cheap water transport whereas here in Manitoba we are far from the ports. How do you respond to that?
BC: Well, there are a couple of issues here — in NZ the conditions are favourable for some agricultural products so we concentrate of the things that we are good at producing. We could grow bananas in NZ but they would be very expensive bananas. We could grow sugar beets but it would be very expensive sugar. We have a pork industry – a small one – but we could have a bigger one but it would be very expensive and would be uncompetitive internationally so we buy some of yours. If someone else is better at producing something than we are and they can get into our market and hit us up, we buy it from them. Alternatively, we produce what we are good at. I look at Canada and think it is very good at producing a number of things, grains, pork, beef and dairy – good product, some of the best cows in the World. The one thing you have got that we haven’t got is a couple of hundred million people – you don’t have to send it to ports you just have to put it on the train on the track and send it across the border. What an opportunity!
FC: Critics of the so-called “good news” story of NZ agriculture thriving without farm subsidies say that the prosperity and booming export demand has more to do with a major currency devaluation than other factors. Your response?
BC: It is fair to say that the low value of the NZ dollar has been helpful to the export sector for the last 2 years, but it is not the only reason the farming industry has done well. A low inflation rate, and consequently low costs, is just as important. As I said in a number of my speeches in Canada, we are now entering more challenging times, as the value of the NZ dollar increases, competition from other countries’ subsidized exports becomes more vigorous, and as interest rates increase in NZ. There is, however, absolutely no call for farming to be subsidized. Farmers know that such action would not do them any good, and they are concentrating on improving the management of their businesses. The main thrust of the farmer’s organization will be aimed at making sure that the NZ Government manages the economy properly and continues to negotiate for a fairer system of international trade in agricultural products.
FC: This is the last question and it is not agriculture-related. It’s on the topic of electoral reform. NZ switched to a different voting system a few years ago. You now have a voting system based on a system of proportional representation…
BC: It is the German system – mixed member proportional representation.
FC: There are some people in Canada who suggest the new NZ voting model is much more democratic. Do you think there would be advantages or disadvantages for Canada in going to a MMP model?
BC: I would think long and hard about it before I went there. I wouldn’t say I was a supporter but I used to think, well, it could be more democratic than the system we’ve got because under “first past the post’ there is no doubt that you can dominate a country with 40% of the popular vote which you can’t do under MMP. So, theoretically, to be in government you have to get at least 50% of the people behind you and no coalition. But, in my experience so far, I reckon that it is less democratic because in two elections we have had two minor parties who have held the balance of power, bargaining so hard to get their policies adopted by the major party in the potential coalition that you have got the policies that only 5% of the people voted for actually getting carried through. Especially as far as our Green Party in NZ is concerned it is not part of a coalition at the moment but it votes with the government and the Alliance as well which is very different from your Alliance, it is an alliance on the Left, it’s blown apart but they had a big say when, in total, only 10% of the people voted for these minorities and it really has its problems.
FC: So the risk is that it would empower fringe parties that are not representative of the general population?
FC: Thank you.