Wednesday, 29 July 2015

Are NZ First really as xenophobic and economically illiterate as this makes them sound?

An article at tells us that English concedes NZ farms better off in NZ ownership - NZ First. The article states,
The government has finally admitted its folly over foreign ownership of New Zealand’s farms, says New Zealand First.

"When questioned in Parliament yesterday, Finance Minister Bill English first parroted the government line that Landcorp buying Crafar farms is not an obvious advantage to Landcorp or the New Zealand economy," says Spokesperson for Primary Industries Richard Prosser.

"However, Mr English then confirmed what farmers know but the government would not admit, until yesterday. He compared foreign corporate ownership of NZ farms to a fashion trend that came and went, but then revealed his own view that the ‘New Zealand owner-operator model - those who live it and love it - tend to be the only ones who can make money out of NZ farmland’.
First, a little knowledge of economics would suggest that the fact that the owner-operator model, normally a family-owned model, tend to be the ones to make money out of framing should not surprise anyone.

In New Zealand, and most other places, it is obvious that family-based firms still dominate in agriculture. Which is odd if you compare agriculture with, say, manufacturing, investor-owned firms predominate in manufacturing, So why not farming?

The short answer given by Allen and Lueck (1998) and Allen and Lueck (2002) is "nature". They argue that farms operate in unique circumstances defined by nature, in particular seasonality. This is the main feature that distinguishes farm organisation from industrial organisation. For farmers a season is a distinct period of the year during which a given activity is optimally undertaken.

This is key to understanding the why the incentives generated within agriculture favour family farms. The two basic issues are opportunities for hired workers to shirk due to random production shocks from nature and the limits on the gains from specialisation and the timing problems caused by seasonality. The trade-off between effect work incentives and gains from specialisation help determine the costs and benefits of different farm organisational types.

The family farm model provides the best work incentives since the owner is the sole recipient of the benefits, but this model misses some benefits due to specialisation. This follows from the fact that the farmer must engage in numerous different tasks during each stage of production, and in addition, numerous production stages throughout the year.

On the other hand, large factory-style corporate farms gain from a specialised labour force and lower cost of capital, but suffer from bad worker incentives since hired workers, not being one of the owners, have an increased incentive to shirk.

To some degree all firms are governed by the trade-off between gains from specialisation and work incentives. For the case of farming it is the unique, large impact of nature that biases it towards family operations.

An obvious, but key, feature of agriculture is that it involves a living, growing product. In the case of livestock, for example, you have breeding, husbandry, feeding and slaughter. Such a cycle is largely governed by nature. In principle there is no reason that a different farmer could not own each stage. But timing difficulties between stages result in high costs of engaging in market transactions. Such timing issues are particularly severe in farming because the inventories of the intermediate goods cannot be held given the living nature of the product.

There are a number of factors, such as the number of crop cycles, the length of the production stages and the number of tasks within a stage, which also influence wage labour incentives. When cycles are few, stages are short, random shocks are large and the tasks are few, there is little to gain from specialisation and labour is especially costly to monitor. Thus family farms.

If these issues can be overcome, that is, if farmers can mitigate seasonality and random shocks to output, farm organisation starts to look much like that in the rest of the economy. Under such conditions farm organisation will gravitate towards factory process and develop the large-scale corporate forms of other sectors of the economy. But thus far this hasn't happened.

Given the nature of farming, corporate ownership, be it local or foreign, isn't yet the most efficient form of ownership and thus it hasn't penetrated agriculture to the degree it has in other sectors of the economy.

So farms being in family ownership is simply a result of the economics of farming. It is the fact that the owner-operator model is the most efficient that is important here, not the nationality of the owner.

The economics of farming will give the result that most farms are in New Zealand hands, since family-owned business are most likely New Zealand owned business. There is no need for any xenophobic ownership restrictions to keep farms in New Zealand hands, the market will achieve this.

Also putting restrictions on ownership can prevent foreign investment in the situations where it is needed.

The Voxy article continues,
"Ownership of New Zealand property, be it residential or farmland, needs to be restricted to New Zealand citizens and permanent residents only, the end," says Mr Prosser.
Such restrictions are not need since as noted above when local ownership is efficient you get it, and there are times when you want foreign ownership. The point is that New Zealand gains the most when you get assets into the hands of those you value them most, who will use them most efficiently, and the restrictions on ownership can prevent this.

  • Allen, Douglas W. and Dean Lueck (1998). "The Nature of the Farm", Journal of Law and Economics, 41: 343-86.
  • Allen, Douglas W. and Dean Lueck (2002). The Nature of the Farm: Contracts, Risk, and Organization in Agriculture, Cambridge Mass.: The MIT Press.

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