Introduction

The primary sector, which for the purposes of this paper spans agriculture (red meat and wool, dairy farming and horticulture), fishing, forestry and mining, has been the basis of New Zealand’s economy since the arrival of Europeans in the eighteenth century. The nature of primary sector activity has evolved from extractive activities with little further processing – whaling, sealing and mineral extraction by early European visitors and settlers, and the hunting of seals and native birds by Māori before them (King, 2003) – to a more sustainable use of natural resources.

The primary sector has been a key part of New Zealand’s growth story for a long time, and continues to contribute today.

Despite considerable economy-wide diversification of production through the twentieth century, the primary sector’s climate-based comparative advantage ensures that it still plays an important role today. The primary sector directly contributes $8.4 billion (1995/96 prices), or 6.8%, to the country’s Gross Domestic Product (GDP). If the primary sector’s backward and forward links to the rest of the economy are included as well,[1] the contribution grows to around 17% of GDP (Edlin, 2004, using data from the Meat and Wool Economic Service) and two-thirds of New Zealand’s merchandise exports. The primary sector is well integrated with other parts of the economy, such as tourism and recreation.

Where will the primary sector go in the future?

This paper seeks to better understand the contribution that the primary sector makes to New Zealand’s economic growth. It does this by quantifying the growth of the sector over time, considering what has underpinned this growth, looking ahead to the opportunities and the risks for the sector’s future growth, and considering the lessons for policy makers in encouraging the sector’s growth in the future. This analysis is undertaken at a high level in the body of the paper, with more detail at a sub-sectoral level included in Annexes One (historical performance) and Two (prospects for growth).

In examining the primary sector’s growth performance, it is useful to bear in mind the fundamentals that underpin growth more generally. The existence of strong property rights, clear price signals and an institutional environment that allows agents to exchange goods and services are all critical ingredients to achieving growth (Rozelle and Swinnen, 2004). The extent to which these pillars of growth have shifted over time in New Zealand will have had an impact on the country’s growth performance.

The Primary Sector’s Growth Performance

This section considers the performance of the primary sector relative to the rest of the economy over recent years. It begins by summarising key policy trends with respect to the primary sector, and provides information on commodity price and exchange rate movements. It then presents data on the primary sector’s output growth performance and summarises research into the sector’s productivity performance.

Key Policy Directions

New Zealand’s production and export base in the late nineteenth century and early-to-mid-twentieth century was dominated by primary produce: meat, butter and wool. These were exported mainly to the United Kingdom. The export receipts paid for imports such as manufactures, intermediate inputs, consumer goods and oil. This left the economy vulnerable to changes in weather, commodity prices and the purchasing arrangements of those who bought our products.

Our economic base used to be pretty narrow, and steps were taken to diversify and expand production.

Recognising this, particularly from the 1960s onwards, the government encouraged the expansion and diversification of export products and markets, through a range of financial and non-financial incentives and direct government involvement in production.[2] The government also took steps to insulate the economy from external shocks. Exporters were protected from price fluctuations by government-backed minimum prices. Attempts were made to reduce the economy’s reliance on imports, through increasing levels of import regulation and the development of natural gas resources.

Despite receiving considerable government assistance through mechanisms such as minimum prices, land development grants and direct subsidies, assistance given to other parts of the economy meant that the primary sector faced overall negative rates of assistance.[3]

This broad approach became increasingly costly and unsustainable. The 1980s and 1990s saw substantial economic reform, providing greater exposure to signals from international markets about the value of our exports, and sharper incentives to produce what world consumers wanted. The New Zealand dollar was floated, much of the distortionary government assistance to industry was removed, producer board arrangements were reformed and government’s role in production was reduced. These reforms paved the way for considerable land use changes in response to changing international market conditions.

Changes have been made to get clearer signals to producers, and to manage resources sustainably.

Another significant policy theme from the 1980s onwards was a greater recognition of the need to manage resources in a sustainable way. The government legislated for a sustainable management approach in specific areas – such as the fishing sector from the mid-1980s – and more generally through the Resource Management Act in the early 1990s.

These policy trends have had an effect on the output performance of the primary sector, both overall and in terms of its composition.