5 Conclusions
The economy-wide effects of industry policies can be as important as the direct effects of the policy that cause them, and in some cases they are unexpected. Unexpected results that are contrary to the aim of the policy are particularly important, and advance knowledge of those effects may change whether the policy is implemented. This paper has used CGE modelling to help determine the economy-wide effects of a selection of industry policies.
An important part of determining the effects of a policy, glossed over in this paper, is accurately linking the policy intervention to the size of the shock that will be modelled. Without this consideration in the work preparing for the modelling, any results of the modelling cannot usefully be linked back to the policy intended to cause them. This applies to any type of modelling including the CGE modelling studied here.
The interaction of these policies with the wider economy can be significant. For example, although there might be a large increase in demand for New Zealand's exports, competition for resources such as labour to meet that demand combined with high price elasticities in international markets mean the effect of that increase in demand is heavily muted.
Each industry policy studied also had both predictable and unexpected effects on the wider economy. Increased export demand increased export prices and caused the exchange rate to appreciate, but it also resulted in the balance of trade deteriorating. Increased productivity had a bigger effect when it occurred in bigger sectors (agriculture rather than manufacturing), but the imports used by the sector were as important as the level of value-added provided by the sector. A BERD subsidy has a generally positive effect on the whole economy, but a few sectors with high value-added but no direct R&D productivity benefits are negatively impacted by the increased cost of factors of production. Improving international freight efficiency has an overall positive effect on the New Zealand economy, with the best effect when routes to and from New Zealand (but not elsewhere) improve; however it is the lowest value-added sectors that benefit most, and many higher value-added sectors suffer.
While a variety of results have been given in this paper, they are still a selection of the most interesting aspects of the results for each scenario. The raw results contain a much richer array of information that can be analysed and interpreted to learn more about the economy-wide effects of a possible policy. However, it is important when doing this to know enough about the modelling and the underlying economics to understand the real-world situations where the results are relevant. The model's assumptions are tailored to each situation and the results do not always have general applications. For example, a simulation undertaken in boom times when there is almost full employment would be constructed differently than if there were a recession and consequent slack in the labour market. To interpret the results and get the best value from a CGE model requires opening the black box to gain some understanding of how the model works.
