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V 113V FILE COPY No. :11138 Type: (PUB) Report N Title: THE WORLD BANK REPORT ON THE Author: WORLD BANK 0 Room: Dept.:

Public Disclosure Authorized Ext.: OLD PUBLICATION JUNE 1968

THIE WORLD BANK REPORT

ON THE NEW ZEALAND ECONOMY Public Disclosure Authorized I-968 Public Disclosure Authorized Public Disclosure Authorized

JUNE 1968

B1.4

THE WORLD BANK REPORT ON THE NEW ZEALAND ECONOMY i 968

Presented to the House of Representatives by Leave

BY AUTHORITY: R. E. OWEN, GOVERNMENT PRINTER, WELLINGTON, NEW ZEALAND-1968

3 B.4

FOREWORD OVER recent years it has -become increasingly evident that the rate of growth possible in the New Zealand economy is dependent to a large degree on the level of foreign exchange that can 'be earned from our exports. The outlook for some of our major export products and the problems being encountered in itraditional markets for our agricultural exports underlines the importance of increasing the level of manufactured exports and improving the general efficiency of New Zealand industry. With this view in mind the Government decided that an independent survey of the New Zealand economy would be helpful. As a consequence -the Government invited the World Bank to send a team of experts 'to look at the New Zealand economy with particullar reference to future economic 'policy and development strategy. Special attention was requested to be given to industrial development, diversification of production -and exports, and problems related to production and marketing of New Zealand's agricultural commodities. The prospects of the tourist 'industry were also to be investigated. New Zealand was particularly fortunate in the team of experts chosen by the Bank to carry out this survey. Every member was highly qualified in his particular field and had the 'benefit of wide international experience. During its visit to New Zealand 'the World Bank team held discussions with members of each political party, industrialists, economists, senior departmental officers, and others. The report itself is a most valuable document. It contains a lucid account of the fundamental problems facing New Zealand and proposes ways in which these problems might be overcome. The scope of the report is far reaching and warrants careful study and wide public discussion on its implications. Although 'the report contains a number of policy recommendations that the team 'believed would help to solve many of our economic problems the Government is under no obligation to implement any of the proposals outlined. Many of the suggestions in the report are still to be considered 'by Government and no action will be taken unless 'the Gov- ernment is fully convinced, after consultation with relevant parties, that any particular proposal is in the best interests of 'the community as a whole. It will 'be evident 'to all who study this report that its recommendations are wide ranging and implementation of them would have major ramifications throughout the whole economy. The timing of the World Bank report has also proved to be most appropriate. Early this year 'the Government set up the iNational Development Conference to review New Zealand's resources and the present and future pattern of economic development. The comprehen- sive report by 'the World Bank should prove to 'be a valuable background document for 'the various committees and working parties of the National Development Conference.

28 June 1968. Minister of Finance. I*

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

MEDIUM-TERM ECONOMIC POLICY AND DEVELOPMENT STRATEGY OF NEW ZEALAND

1968 B.4 6

Prior to November 21, 1967

Currency Unit New Zealand Dollar (NZ $) US $ 1 NZ $ 0.719 US $ 1 million = NZ $ 719,194 NZ$1 US$ 1.39 NZ$ 1 million = US$ 1,390,450 These rates are applied throughout this report. On November 21, 1967, the new rate was established as follows:

Currency Unit New Zealand Dollar (NZ $) US $ NZ $ 0.892 NZ$ I US$ 1.12 The New Zealand fiscal year starting April 1 and ending March 31 is used in this Report unless otherwise stated.

This report was prepared by a Mission which visited New Zealand in August 1967, consisting of Messrs. David Kochav (Chief), Jack Baranson, Dieter Elz and Wolfgang Kaupisch. Miss Penny Davis prepared the regression analysis of imports and GDP, and helped with the statistical work. A preliminary draft was discussed by the Chief of the Mission with the New Zealand authorities, during the brief visit in December 1967. 7 BA4

TABLE OF CONTENTS

Page BASIC DATA ...... 10

MAP ...... 12

PART 1: MAIN REPORT

SUMMARY AND CONCLUSIONS ...... 13...... I. INTRODUCTION ...... 16 II. THE IMMEDIATE PROBLEM ...... 16

III. THE FUNDAMENTAL PROBLEM ...... 20

IV. OUTLOOK FOR BALANCE OF PAYMENTS ...... 24 Basic Assumptions ...... 24 Trade Projections ...... 25 Invisibles the ...... 27 Financing of the Deficit ...... 29 Measures to Improve Balance of Payments 30 V. STRATEGY OF INDUSTRIAL DEVELOPMENT 31 Present Characteristics ...... 31 Reorientation of Industrial Policy 33 Automotive Industry ...... 36 Iron and Steel Industry ...... 40 Pulp and Papef Industry ...... 42

VI. IMPORT RESTRICTIONS, PROTECTION TO DOMESTIC 44 INDUSTRIES AND RESOURCE ALLOCATION Effects of Import Restrictions ...... 44 Protection for Infant Industries ...... 45

VII. THE DEVELOPMENT OF TOURISM ...... 48 Present Situation ...... 48 Prospects for Expansion ...... 49

VIII. INTERNATIONAL TRADE RELATIONS ...... 51 Relations with the United Kingdom ...... 51 Relations with Other Countries ...... 52

IX. INSTRUMENTS FOR ECONOMIC POLICY FORMULATION AND 54 PLANNING Present Weaknesses ...... 54 Reorganization of Planning ...... 54

ANNEX I-Projections of GDP and Imports in 1972/73 58

ANNEX II-The Criterion of Domestic Costs of Foreign 61 Exchange B.4 8

PART 2: STATISTICAL DATA

LIST OF. TABLES Table No. EXTERNAL DEBT- External Public Debt Outstanding, as of June 30, 1967 66 Estimated Contractual Service Payments ...... 67

GENERAL STATISTICS- Population, Labor Force and Migration ...... 70 Labor Market ...... 70 Distribution of Labor Force ...... 71 Prices -and Wages ...... 72

NATIONAL ACCOUNTS AND PRODUCTION- Gross National Product ...... 73 Sector Contributions to Gross Domestic Product ...... 74 Composition and Source of Investment ...... 75 Gross Capital Investment by Sectors ...... 76 Building Activity ...... 77

PUBLIC FINANCE- Central Government Finances ...... 78 Central Government Works and Capital Program ...... 79

EXTERNAL TRADE- Principal Exports ...... 80 Exports by Principal Countries ...... 81 Significance of the U.K. Market for Major Export 82 Commodities Export Price Indices ...... 82 Imports by Commodity Classes ...... 83 Imports. by Principal Countries ...... 84

BALANCE OF PAYMENTS- Balance of Payments, 1950/51-1965/66 ...... 85 Foreign Exchange Reserves ...... 87 External Loans Raised Since 1950 ...... 87 Alternative Balance of Payments Projection, 1972/73 88 Pastoral Export Projection ...... 89 Non-Pastoral Export Projection ...... 90. Import Projection ...... 92 Transportation Projection ...... 93 Travel Projection ...... 94 9 B.4

LIST OF TABLEs-continued Table No. Balance of Payments-continued International Investment Income Projection ...... 95 Overseas Direct Investment Income (debit) Projection 96 Government Transactions Projection ...... 98 Miscellaneous (incl. Insurance) Projection ...... 99 Unilateral Transfers Projection ...... 100 Long-Term Private Capital Inflow Projection ...... 101 Government Overseas Borrowing and Repayments Projec- 103 tion, 1972/73 Government Exchange Credits, IMF Drawings, and Repay- 104 ments Projections, 1972/73 Total Net Borrowing by Government and Central Bank 105 Projection, 1972/73

INDUSTRIAL PRODUCTION- Automotive Industry...... 106 Vehicle Imports into New Zealand ...... 106 Comparative Scale of Production for Automotive Firms in 107 Selected Countries Passenger Vehicle Assembly by Firm and Model ...... 108 Cost Increases of Successive Stages of Vehicle Production in 109 Selected Latin American Countries

PART 3: PROSPECTS FOR AGRICULTURAL COMMODITIES

Page

SUMMARY AND CONCLUSIONS ...... 110 I. WOOL ...... 113 The International Market for Wool ...... 113 The New Zealand Wool Situation ...... 118 Research and Promotion 125 II. MUTTON AND LAMB ...... 126 III. DAIRy PRODUCTS ...... 132 The World Situation ...... 132 The New Zealand Situation ...... 134 IV. BEEF AND VEAL ...... 139 V. RETURNS ON INVESTMENTS IN VARIOUS TYPES OF FARMS 144

ANNEX-Statistical Tables ...... 146 ,B.4 10

BASIC DATA

Area (two main islands only) 102,000 square miles

Population-March 1967 2.73 million Estimated annual growth rate, 1961/66 1.8%

Gross National Product-March 1966/67 NZ $ 3,937 million Per capita NZ-$ 1,442.1 Annual real growth rate: 1954/55-1966/67 4.3% 1960/61-1966/67 4.8% 1965/66-1966/67 4.5%

Sector Origin of GDP at FactorCost-March 1964/65 Agriculture, Forestry, Fishing 17% Manufacturing, Mining, Power 42% Construction 5% All Services 35%

March Year Percentage of GDP at Current Prices 1965/66 1960/61-1965/66 Private consumption 63 63 Public consumption 13 13 Gross investment 27 25 Gross domestic savings 22 22 Exports, f.o.b. 20 21 Imports, f.o.b. 19 19 Government taxation revenue 24- 24 March Year Resource Gap 1965/66 1960/61-1965/66 As a percentage of gross investment 18 11 June 1967 Change Over Money and Credit (NZ $ Mil.) June 1966 Total money supply 776 -4.0% Total bank lending 872 8.0%

Price Increases-1960-1966 2.7% p.a.

June Year 1966/67 Average Rate of Change External Trade (NZ $ million) 1961/62-1966/67 1965/66-1966/67 Exports, f.o.b. 725.5 4.5% -5.0% of which: Wool (24%) 173.9 -3.5% -25.0% Meat (28%) 204.7 7.9% 4.1% Dairy products (28%) 205.0 7.0% 4.9% Imports, c.d.v. 721.5 7.3% -1.0% 11 B..4

March 1966/67 Balance of Payments (NZ $ million) Exports, f.o.b. 781.9 Imports, f.o.b. -719.4 Net invisibles -232.4 Balance on current account -169.9

InternationalReserve Position As a percentage of imports, June 1966/67 25% IMF position, October 30, 1967 (US $ million) Quota 157 Drawings 144 of which: Compensatory drawings 29' Gross fund position 81 Credit tranche-standby 42 Credit tranche-other 39i June 30, t967 External Public Debt (US $ million)i Total debt outstanding 675.8 Net of undisbursed 633 . Debt service ratio, 1965-1966 (service payments as a percentage of goods and services) 5-6% o 2 -I-~~~~~~~~~~~~~~~~~~~~~,>

/~~~~. ~ _ 44~ ~ ~ o 13 B.4

Part i: Main Report

SUMMARY AND CONCLUSIONS

The Present Situation 1. During the last two years New Zealand has been undergoing a difficult period characterized by a large deficit on current account, which amounted to about NZ$135 million (US$189 million) in the year ending October 19671. The increased deficit is due mainly to a reduction in export earnings 'from wool, which forms some 25-30 percent of exports. The decline in wool prices has been in part the result of a general slowdown in demand in industrial countries, but the main cause seems to lie in a shift towards a greater use of synthetic fibres, particularly in carpet production for which New Zealand crossbred wool is specially suited. 2. The recent period of balance of payments difficulties was preceded by a boom, resulting from increased export earnings combined with expansionary fiscal and budgetary policies. This led to a sharp rise in imports, instead of reserves being set aside for rainy days. Following the large increase in the current account deficit, the Government took fiscal and budgetary measures to contain inflationary pressures and thereby to reduce imports. It also engaged in large-scale external borrowing, on both long and short terms. 3. Following the 14.3 percent devaluation of the British pound, New Zealand went somewhat further and devalued her dollar by 19.45 percent. The effects of the recent devaluation on New Zealand's balance. of payments cannot as yet be confidently assessed. It appears, however, to have strengthened her competitive position towards Australia and other countries which have not devalued, especially with respect to non-agricultural commodities. The Basic Problem 4. The present balance of payments difficulties reflects the basic weakness of New Zealand: she is a high-income country over-dependent on exports of a small number of primary commodities. These exports have generally done well in the past, in spite of cyclical fluctuations. But they are now facing prospects of a long-term price downturn, wool because of a replacement by synthetics, and dairy products because of a danger of losing the preferential market of the United Kingdom. This would occur if the United Kingdom as well as Denmark and Ireland join the EEC, since an extended EEC is likely to have large surpluses of butter.

lAIl New Zealand dollar figures throughout the report refer to pre-devaluation rates. R.4 14

5. The Government has recognized the need for diversification and has encouraged industrial development in order to provide employment as well as to replace imports. However, insufficient attention has been paid in the past to cost considerations. Sheltered by the quantitative restrictions on imports, which have been maintained since the 1930's to safeguard the balance of payments, but which have in fact been serving also as a protectionist instrument, most iridustries operate at high costs and on a small scale. Thus, a large part of New Zealand's capital and labor resources is tied up in production of a wide range of goods, manufactured to supply the domestic market. While industry has been the largest sector in terms of employment, it has rhade a'n iiisufficient contribution to export earnings or to net imports savings. The Prime Minister in his statement announcing devaluation, emphasized the need to introduce structural changes in order to improve the use of resources and to make industry more competitive. The devaluation could' indeed be conducive to the introduction of measures to that effect.

Medium-Term Economic Policy and Development Strategy 6. Only if the industrial sector becomes internationally competitive can the dependence of the balance of payments on a few agricultural commodities be reduced. To accomplish this, manufacturing must selec- tively concentrate on those products which can be produced at competitive prices. In some branches this can be done by processing domestic primary products. In others it can be accomplished by taking advantage of the technological potential embodied in her highly educated population. To- gether with favourable climatic conditions, technology has played an important role in making New Zealand agriculture one of the most advanced in the world. On the other hand, because of the sheltering of industry from external competition, this potential has not been fully realized as a primary factor in industrial development. 7. The most important single measure which can help make New Zealand manufacturing internationally competitive is its gradual exposure to competition from imports. This requires a removal of quantitative import restrictions and a reliance on tariffs as the major instrument of protection for infant industries. Such tariff protection should be given only for a temporary period, and the rates should not exceed a maximum percentage level and should be gradually reduced. 8. Well-defined criteria should also be established by the Government for priorities of development in the major sectors in order to encourage those activities in which Ncw Zealand has a comparative advantage. An appropriate indicator of the comparative advantage could be the domestic costs per unit of foreign exchange saved by imports substitution or earned by exports. The introduction of incentives based on such criteria, as well as the removal of quantitative import restrictions, would lead to the establishment of competitive industries in the future. The most difficult task, however, is to make existing industries more competitive. Such in-dustries should eventually be subject to the same criteria, although they could he given a grace period for a gradual readjustment. 9. A detailed scheme needs to be prepared for such a shift from quantitative restrictions to tariff protection and for a restructurina of existing industries. A scheme of this tvpe could best be prepared 15 B1A4 by special working parties of officials, who should suggest a quantitative framework for tariffs. Then the Government could consult with existing industries on the necessary adjustments to the new system. Furthermore, within the framework of the new system the Tariff and Development Board should be strengthened in order to be able to review a large number of industries in a reasonably short period. 10. With respect co agricultural commodities, the most promising prospects at present are for meat exports, particularly for beef, the production of which should be further encouraged. In the long-run, wool prices are likely to be lower than in the pre-1966 period, which may tend to slow down expansion in the supply of lamb as well. Dairy products are likely to face increasing marketing difficulties, especially if Britain joins the EEC. In any case, efforts shoud continue to be made to establish permanent markets for dairy products in Japan and other Asian markets. 11. Regardless of the outcome of the present United Kingdom efforts to join the EEC, New Zealand should intensify her trade relations across the Tasman Sea and the 'Pacific Ocean. New initiatives on the highest political level in both New Zealand and Australia are now needed to overcome their protectioni$t policies, in order to make the New Zealand - Australia Free Trade Agreement an effective trade expansion instrument. The need for additional markets for agricultural commodities and for more efficient industrial development call for closer ties, in particular with Japan and the U.S. 12. New Zealand is presently lacking effective instrurnents for analysis and advice on long-termn economic policy and developrnent strategy. She should strengthen the existing planning unit in the Treasury and set up small units for sectoral planning in the. other appropriate departments. One of the major weaknesses in New Zealand marketing has been in the projection of commodity trends. A trade analysis unit should be established to give the New Zealand Government and the marketing boards an instrument for systematic analysis of trends in export commodities and for advice on marketing and trade policy. 13. If recent trends continue. New Zealand is likely to face a continuous Large deficit on current account, which by 1972/73 mnight require public borrowing of between NZ$100 ro NZ$150 million a year. The major constraint on New Zealand's external borrowing is not likely to be her debt servicing capacity. Her debt service ratio at present is about 5 percent of exports of goods and services, and should remain comfortable in the future. Nevertheless, with the supply of external public capital so limited, a high-income country like New Zealand cannot expect to be permitted to borrow large amounts of capital during a lengthy period. A reorientation of the industrial policy and an improved marketing policy for agricultural commodities, geared more to changes in international demand, could gradually lead to a reduction in the deficit. In spite of 'her high standard of living, New- Zealand would have a claim for external public borrowing to help finance an effective diversification program. However, the decision to undertake and carry out such a program depends on the political will and determination of New Zealand herself, ii,4 16

I. INTRODUCTION 1. This report has been written by an Economic Advisory Mission which visited New Zealand in August 1967. The functions of this Mission, defined in the Terms of Reference, were as follows: '1.... The major purpose of the Mission at the request of the New Zealand Government, is to be availaeble for consultations on the long-term strategly for economic policy and development. 2. The Mission will pay special attention to policy and programs related to industrial development, which could hopefully lead to diversification of production and exports of New Zealand. 3. The ,Mission wili discuss the .implications for New Zealand of the possibility of Britain joining the EEC, especially with respect to production and marketing of New Zealand's agricultural commodities. 4. The Mission will also be available for discussion's of other economic .and financial implications on New Zealand related to the above matters. In particular the Mission will discuss with the' appropriate representatives of the New Zealand Government the problem of obtaining the necessary inflow of long-term capital funds to finance development." Following a later request by the New Zealand Government, the Mission also attempted to generally ascertain "whether expansion of the tourist industry should be regarded as a useful avenue for development." 2.Thus, the Mission concentrated mainly on some major long-term economic prdblems facing New Zealand. The present report is designed to cover the Mission's major conclusions and suggestions, primarily for the use of the New Zealand Government. An assessment of 'the ecbnomic prospe6ts of,New Zealand for the Bank has been considered only as a secondary function. For that reason, the Mission yestricted the description of the state of the economy to the minimum, assuming it would be well known to many prospective readers of this report.

II. THE IMMEDIATE PROBLEM 3. New Zealand is presently faced with serious economic difficulties, ,reflected most strongly in a large deficit on current account. In the years ending October 1966 and '1967, the current account deficit1 amounted to NZ$82 million and NZ$136 million respectively (Table 1). A deficit -of that level is-several times higher than in the 'three preceding years. Only in two years, 1959/60 and 1960/61, out of the last 15 has the deficit been of a similar magnitude.

'As defined in the data of overseas exchange transactions of the Reserve Bank, which differ from the customary definitions uised in the balance nf payments series, shown in Table 20, Volume II. 17 B.4 Table 1-NEW ZEALAND: OVERSEAS EXCHANGE TRANSACTIONS, 1962/63-1966/67 (NZ$ Millions)

Fiscal Years Years Ending

1962/63 1963/64 11964/65 1 1965/66 1 1966/67 Oct. 1966 Oct. 1967

Current Account- Export Receipts 650.8 730.4 768.6 774.1 795.8 824.6 734.6 ImportPayments 521.6 627.6 657.0 742.4 722.4 739.6 687.6 Trade Balance +129.2 +102.8 +111.6 +31.7 +73.4 +85.0 +47.0 Invisibles (net) -114.8 -118.5 -136.0 -149.3 -180.1 -166.9 |-182.7

Current Account Balance '- + 14.4| -15.7 -24.4 -117.6 -106.7 -81.9 -135.7 Capital Account- Private and Local Bodies (net) .. +12.3 +7.3 + 5.0 -2.3 -1.2 -0.7 +4.7 Official (net) .. +31.8 -2.3 + 7.1 +72.7 +113.0 +96.8 +146.2 Capital Account Balance'- +44.1 +5.0 +12.1 +70.4 +111.8 +96.1 +150.9 Surplusordeficit' +58.5 -10.8 -12.3 -47.2 +5.1 +14.2 +15.2

'Totals may not balance due to rounding. Source: Reserve Bank of New Zealand and Department of Statistics, Economic and FinancialStattics, November 1967.

4. The deficit on current account assumed worrying proportions as early as 1965/66, when exports were still increasing. The problem became more difficult in 1966/67, when export earnings declined. This decline was the result of a down-turn in wool prices toward the end of 1966 (Table 17, Volume II), which was followed by a withholding of some wool supplies from international markets by New Zealand in expectation of an upturn in prices. On the other hand, the earnings of other major export commodities, butter, meat and cheese, continued to increase through 1966/67. 5. In the three-year period between 1962/63 and 1965/66 merchandise imports increased by over NZ$200 million. In addition, net payments on invisibles, especially on investments income payments, travel and transportation, tended to increase at a fairly rapid rate (Table 20, Volume II). This steep increase in imports in that period was chiefly the result of a sharp rise in domestic demand, financed in part by the growth of export earnings and in part 'by an expansionary budgetary policy. National expenditures during this period increased at an annual rate of about 8 percent (Table 7, Volume II), twice the rate of long-term growth of GDP in real terms. Such a high rate of increase in domestic demand is an indication of excessive strain on resources. The sharp increase in imports was also associated with a steep rise in investments, which to some extent led to an expansion of production. B.4 18

6. Developments in recent years basically followed a pattern typical and rather familiar in New Zealand. A considerable rise in export earnings since 1962/63 greatly increased the incomes of farmers and other factors related to export industries. At the same time, the Govern- ment maintained fiscal and budgetary policies which resulted in a rapid increase in public consumption and investments, as well as in private expenditures. The inflationary pressures were the result of a number of factors-an expansion of social services, large-scale subsidies for investments in housing and consumption, and the desire to maintain a high level of employment, which in fact meant a continuous situation of over-full 'employment. National expenditures, measured by GDP growth at current prices, were allowed to grow at a rate almost identical with export earnings, as can be seen 'from Chart' I. Ini fact, a regression analysis made by the Mission shows a "correlation coefficient" as high as 92 percent between export earnings and GDP in current prices. Thus, the Government did, little to introduce anticyclical policies which could prevent excessive demand and in turn result in some accumulation of exchange reserves as a cushion against a fall in export earnings. . 7.-The mounting deficit on current account was financed by an increase in public borrowing'from.various sources, including short-term -credits and- drawings from the IMF. As wool prices declined and the external financing difficulties increased, the Government was forced to take corrective measures, introduced in February and May 1967. Indirect taxes were raised, certain. subsidies ion agricultural commodities sold to local consumers were abolished, the growth of public sector expenditures were slowed down and credit ceilings reduced., These resulted.in some unemployment (about 8,000 persons or less than one percent of the labor force), which had been unknown in New Zealand since the 1930's, and in a slowing down of GDP growth. Present indications tend to show a considerable .reduction in the 'level of imports and signs of a more positiye attitude by' labor and rmanagerment toward the need t6 raise productivity. 8. In November 1967, following the devaluation of the pound sterling, the New Zealand dollar was devalued. With a change of 19.4 percent the New Zealand dollar has now been brought on par with the Austra- lian 'dollar. The devaluation will certainly 'improve. the competitive position of 'New Zealand's exports, especially in non,British markets, and is also expected to further ease the demand for imports. In a statement, announcing the devaluation, the Prime Minister strongly emphasized the need to continue tight fiscal and monetary policies and to prevent increases in wages, so that the improvemcnt in New Zealand's compctitiv~e. position will not be er6ded. It is of course too early to make 'any quantitative projection -of the effects of devaluation. In the Mission's view, it is of paramount importance that the devaluation be followed by further measures designed to strengthen the structure of the New 7.e;1and economv. as discussed in the followina chaofer. NEW ZEALAND: PERCENTAGE CHANGE OF GDP AND EXPORTS OVER PREVIOUS YEAR 20% , __ , +"80Yo CURRENT PRICES

+15% . 60%

+10% +40%

+5% _..20%

0 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0

EXPORTS (RIGHT SCALE-.

-10% , , 1954 1955 ,L ,I -40% 1956 1957 1958 1959 1960 1961 1962 ,963 1964 1965 1966 FISCAL YEARS ENDINGMARCH 31

IBRD-3561 B.4 20

IIL THE FUNDAMENTAL PROBLEM 9. The Mission's basic contention is that New Zealand faces not merely a problem of how to cope successfully with the immediate difficulties described in the preceding chapter, but that the balance of payments situation is to a considerable extent a symptom of a fundamental and structural problem. The crux of the fundamental problem is that the economic well-being of New Zealand is still too narrowly dependent on a- few export commodities. Among the high income countries, New Zealand has perhaps the highest concentration of exports, in terms of the small number of commodities as well as of export markets. Wocsl, meat ,and dairy products account for: over 80 percent of exports, and the United Kingdom purchases about half of all New Zealand's exports. Because of this concentration export earnings have been subject to considerable fluctuation in the past: Presently, New Zealand seems to be facing a long-term decline in export earnings for these commodities, which may result in a large balance of payments deficit and thus endanger her growth and well-being. 10. A detailed discussion of the prospects of the major export commodities is contained in Volume III. In brief, prices of wbol are riot likely in the long-run to return to the pre-1966/ 6 7 level, because of the relative strength of competing synthetics. Dairy products, especially butter, could meet serious marketing problems, if and when Britain joins the Common Market. If past trends of industrial development continue, the prospects for a rapid increase of !non-pastoral exports are far from encouraging. 11. The need to strengthen the base of the New Zealand economy by diversification of production has long been recognized 'bythe Government, which actively encoutaged industrial development. The main- orienta- tion of such developmrent was not to diversification of exports, but to processing of a wide range of products for the small size domestic market with little regard to considerations of cost and comparative advantage. An evaluation of industrial developmnent is discussed in some detail in Chapter V. However, a few comments on the balance of payments effects are appropriate at this point. 12. If cyclical fluctuations in 'the volume of, imports are disregarded, the ratio of imports to GDP has not shown a declining trend over the years. This can be seen in Chart II and in the results of a regression analysis made by the Mission and briefly described in Annex I. The trend of the ratio of imports to GDP, both at constant! 1954/55 prices, has remained at a level of approximately 20.6 percent over the last 13 years. 13. The industrialisation policy oriented mainly towards the protected home market has created employment opportunities and additional income, but has led to little net savings in imports or to growth in exports. With higher living standards and a larger import bill, New Zealand has remained most vulnerable to changes in prices of a few export commodities. A considerable part of capital and labor resources are thus tied up in activities which have made an insufficient contribution to the removal of the balance of payments as a constraint on future growth. In this respect a good deal of industrial development in the past represents a misallocation of resources. * NEW ZEALAND: PERCENTAGE CHANGE OF GDP AND IMPORTS OVER PREVIOUS YEAR +10% , , , , _ , _ ._ , , +40% CONSTANT PRICES, 19;55=100 _GDP

+5% <\i/0 t +20%

0 ~ ~~ ~ ~~ ~ ~ ~ ~ ~ ~~~~~~______0 % o' lwl ~~~~IMPORTSI (WTSCALE-4 -S% t -20% *15# .. , +60% CURRENt PRIC'ES

+10% \40%

I ~ ~~~~~ LEFGTSCALEI) S

-5% +20% UPON

-5% ~~I I__-01 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 FISCAL YEARSENDING MARCH 31 IBORD-3562 - B.A 22

14. If New Zealand continues to develop on the same lines as in the past, she is likely to face serious balance of payments difficulties, which could then become a major constraint on the future growth of production and employment. Such a danger is strongly indicated by medium-term balance of payments projections prepared by the.Treasury, wh-ich are discussed in some detail in Chapter IV. These. projections, as. revised by the Mission, show that the New Zealand Government might have to borrow from external sources between NZ$100 to NZ$130 million a yeatr by 1972/73. A high-income country such as New Zealand cannot expect to borrow continuously such massive amounts of external capital. 15.'If the long-term prospects for exports of her primary commodities are not encouraging, what options are then open to New Zealand? One possibility would be to sacrifice growth for balance of payrnents improvement. This could be done by pursuing deflationary policies for a lengthy period in order to reduce the level of imports. It has even been suggested to the Mission that New Zealand might prefer to settle for lower growth rather than change her long prevailing social and economic attitudes. Whether all traditional social benefits could be maintained in a situation of very slowY growti and less than full;employment is open to question. However, in the Mission's view, policies which would lead to very low growth rates for a length' period are not acceptab]e. The arguments against such a policy are based not only on the fanmiliar grounds of the losses involved in economic well-being, but in the case of New Zealand, also on th'e nouTishment of the prevail- ling feelings of remoteness from the mainstream of world progress, wihich may increase the country's brain drain. In fact,; to maintain her traditional position as *one of. the- more economically and socially advanced countries, New Zealand will have to grow at a rate not much slower than Australia and Western Europe, and in the Mission's view, at a rate not much less than 2 percent a year per; capita. In brief, the objective of economic policy in New Zealand should be to encourage reasonable growth Without upsetting the balance of payments. 16. The above comments should not be construed as a 'case against anv contractory'measures to help overcome the immediate difficulties. Indeed, any adjustment of the economy and reorientation: in development policy could be carried out only in a disinflationary environment. However, deflationary policy would be advisable only. for a limited period, during wh'ich the economy 'could be 'readjusted toward a long- term development strategy. 17. There is nothing wrong in. a high ratio of irmports to GDP or in the constancy of that ratio per se.' As a matter of fact, for a small country not richly endowed with natural resources, New Zealand is doing well to be participating so extensively' in international trade and 'maintaining a high rate of exports and imports to GDP. However, to finance a growing .volume of irnports, exports mu'st grow at a sufficiently rapid rate in order to avoid too large a deficit. The limited number of both the present export commodities and the present export markets are not likely to continue to provide a sufficient level of earnings to finance an increasing import bill. Thus the real choice facing New Zealand is not between policies that pursue export expansion versus those favouring import substitution, but between economically efficient versus inefficient 23 B.4

production. If production is carried out at competitive prices, it will contribute towards a. balance of payments improvement, either through :export diversification or,through net imports savings. In that case, the balance of payments will not be a constraint to continued growth of the economy. 18. New Zealand's present situation is similar to that which faced Nobray, Denmark and Ireland' in the past. These countries were also heavily. -dependent on exports of agricultural commodities, but they managed to diversify.,their exports by building up competitive industries, and thereby reducing this dependence. Like New Zealand, all three countries have a small domestic market and limited mineral resources which can be profitably processed for export. Nevertheless, they still introduced appropriate policies designed to encourage competitive industries. Denmark has liberalized trade by eliminating quantitative import restrictions and' replacing them with relatively low tariffs, has supported increased industrial investment and productivity, and has expanded her 'markets by actively participating in EFTA. Norway too -has consistently *pursued a liberal trade policy by permitting only moderate tariff protection to domestic industries, has enlarged her market by joining EFTA, has encouraged foreign participation through cooperative agreements between enterprises, and has emphasized development of industries with a 'high labor 'skill content. Ireland has stimulated the inflow of foreign capital and know-how through grants and tax exemptions, has provided advisory services for industrial diversification, and 'has attempted to widen her markets as well as 'to liberalize trade through 'the Free Trade Agreement with Britain and the gradual relaxation of import restrictions'. 19. On the ,hole,such conscientious efforts 'by Norway, Denmark and Ireland to reduce their dependence on agricultural exports have proven successful. From' 1958 to 1965, the growth of industrial exports in all three countries greatly exceeded their agricultural exports. During this period the agricultural exports of all three countries grew at 6 percent per year while, the industrial exports of Denmark, Irelanid and Norway increased' annually by 13 percent, 18.5 percent, and 12 percent respectively. This difference in the growth of industrial and agricultural exports is also reflected in the changes in each country's composition of exports: In'1958, 66 percent of Denmark's exports were agricultural commodities and 32 percent were industrial goods, but by 1965 only 55 percent were agricultural and 42 percent were industrial. The same was true in Ireland, where the' percentage of agricultural exports had fallen from 74 in 1958 to 64 in 1965 and the percentage of industrial exports had risen from 14 to 26. Norway too strengthened her export position with industrial exports, including minor exports of unwrought metals, 57 .percent of the total in 1958 and 66 percent in 1965 and agricultural expoits, including exports of fish and fish products, 37 perceht of the total in 1958 and 28 percent in 1965. 20. New Zealand's industries have one major disadvantage compared to the above countries: she is located far from any large markets, and theref6re has hither freight c6sts than the others. This disadvantage is often cited 'in New Zealand as a justification for establishing industries to serve the protected domestic market. The disadvantage of high freight ~costs rnust' be 'duly recognized because it certainly affects the B; 4 24

structure of industries. It favours' export industries with relatively low-freight costs, and gives a natural advantage to domestic industries producing bulky products with high freight costs by raising the c.i.f price of competing imports. However, the disadvantage of high freight costs cannot be overcome by creating high-cost domestic industries, and cannot serve as a justification-for undue protection of such industries. 21. The improvement in. the use of New Zealand resources calls for a development strategy much more selective than in the past. It should direct capital and human-,resources only to those activities which could make a significant contribution to an increase of exports or to import substitution at competitive prices. Certain suggestions 'to that effect are made in Volume 11) and Chapter V of Volume I, which deal with agricultural and industrial development respectively. Basically, this strategy requires greater emphasis on industries oriented towards exports or towards import substitution at competitive prices, making use of New Zealand's technological potential. Industries producing mainly for the domestic market would have to be exposed to import competition, and 'their economic viability proven under market conditions. The latter would undoubtedly require a restructuring of several existing industries. The above principles should be expressed in clear criteria, based on priorities according to the costs of domestic resources per net earnings of foreign exchange or their net savings (see paragraph 65). 22. Such a reorientation -is certainly not an easy task and it wvould require a, trying period of adjustment. Perhaps the most difficult facet would be the necessary changes in existing industries, many of which, in the Mission's view, are high cost and economically inefficient. While the adjustment period may be painful, the Mission considers the above reorientation the only sound policy'which, barring an unexpected sustained upturn in pastoral exports, could in the ]ong-run attain both objectives of balance of payments,improvements and economic growth.

IV. OUTLOOK FOR BALANCE OF PAYMENTS Basic Assumptions 23. The balance df payments is the Achilles' heel of the New Zealand economy. If the balance of paynients could be reasonably managed, perhaps most policy makers in New Zealand would be quite happy to carry on their past policies. It is; therefore, imperative to examine some basic trends'which New Zealand is likely to face in'the future. A focal point for such an examination will be projections prepared prior to devaluation by the Treasury for 1972/73 ('Table 23, Volume IH). At the present time, it is not clear whether' these projections will have to be revised in terms of foreign exchange receipts and expenditures dud to devaluation. 24. Such projections are most often 'subject to serious misinter- 'pretation's. Thus it is noit superflucois 'to repekt some well-known comments 'on their nature and purpose. The purpose of'these projections is definitely not to make'predictibns, since these are subject to extreme uricertainties. Errors may be especially big for such items as the current account deficit or 'public financing requirements, since these are only 25 B.4 small residuals of much larger figures which cannot be forecast with any degree df accuracy. For instance, in the case of New Zealand an error of only 10 percent in export earnings, other things being equal, could result in a 100 percent error in the current account deficit. The figures discussed in these projections are merely quantitative indications of likely trends. The purpose df such projections is to locate those strategic factors which are likely to be of major importance in future development and which could be changed by policy measures. In brief, such a projection is not meant to be a "crystal gazing" exercise, but iather to serve as a basis for a discussion on policy measures. 25. The year 1972/73 has been chosen merely to indicate likely trends in the medium-term, disregarding cyclical ups and downs. Thus, no special significance should be attached to this particular year, which is' just a point on a trend line. 26. The projections prepared by the Treasury for 1972/73 are generally based on an extrapolation of past trends. Only for a few lesser items, such as receipts from tourism, does the projection assume a significant departure from past policies. These projections specifically do not take into account changes in export receipts as a result of the possible entry of the United Kingdom into the Common Market.

Trade Projections 27. For most items, especially for invisibles, the Mission generally accepts the Treasury's projections. With respect to export estimates, the Mission suggests a lower projection for wool, but feels that 'the projections 'for 'other conimodities are generally reasonable and consistent with the basic assumptions. The prospects for 'agricultural exports, as seen by the Mission, are discussed in some detail in Volume IHL. With respect to non-pastoral exports, the Treasury projects a doubling of exports of forest products and a relatively minor increase in other exports. The Mission's projection for total exports amounts to NZ$965 million for 1972/73, some NZ$35 million less than the Treasury projection. 28. A critical factor is the level of imports. The Treasury has made four alternative projections, based on a 3 percent or 4 percent GDP growth rate and a 21 percent or 19.5 percent ratio of imports to GDP (Table 26, Volume II). In the Mission's view, a GDP growth rate of 3 percent, or about 1 percent per capita, might be sustained for a year or two as a result df contradictory policies. However, for a medium-term such as five years average growth of 1 percent per capita a year seems to the Mission too low to be accepted as a realistic target. The alternative of 4 percent overall GDP growth, which means a 2 percent per capita growth, is considered by the Mission to be reasonable as a basis for a medium-term balance of payments projection. This growth rate is slightly less than the 4.2 percent average during the last 13-year period and considerably lower than the 6 percent average of 'the last three years. 29. To gain a better impression of the ratio of total 'imports to; GDP (hereafter referred to as the "import ratio"), the Mission ran a regression on the 1 3 -year period 1953/54-1965/66. The trend of the import ratio, calculated from 1954/55 prices of GDP and imports, appears to be approximately 20.6 percent. The figures seem to show a significant relationship between changes in GDP and imports at fixed prices, for B.4 26. which the "correlation coefficient" is 0.63. Although there have been some changes in relative prices of GDP and imports, they do not seem- to have greatly affected the import ratio, since the "correlation coefficient" of GDP and imports both at current prices is 0.66, only slightly higher than the fixed price. Unfortunately a lorig-term series of imports classified by economic end-use -is unavailable. Thus, the Mission has been unable to determine to what extent this stability. of the ratio of total imports to GDP conceals ,a rnajor change in import composition. from consumer. items to 'investmnent goods. Nevertheless, GDP growth ,in real' terms seems to have been the major factor affecting imports (see Annex I). 30. Apart from the overall GDP growth rate, the future level of imports will probably also be affected by the composition of GDP, especially by changes in investment composition. A proper forecast of import requirements would have to take into account such changes. It is hoped that such a forecast would be made by the New Zealand planning unit. 31. Because of the incomplete nature of the present import data) the Mission believes it. prudent to assume a range for the ratio of imports to GDP for the next five years. As a preliminary and very rough estimate, 20.6 percent and 19.5 percent seem reasonable as the upper and lower. limits to this range of the future import ratio. The former has been extrapolated from the past trend by the Mission. It is somewhat lower than the Treasury's higher alternative of 21 percent, which is an average of the last five years, and the ratio of' 22.6 percent, which prevailed in 1965/66. Nevertheless, when the present deflationary policy is also taken into consideration, the Mission feels 20.6 percent is reasonable as an estimate of the upper limit to the import ratio. The latter, 19.5 percent, is the lower alternative of the Treasury. In the Mission's view, such a ratio is reasonable as a lower limit to the range, because in two years, 1959/60 and 1962/63, out of the past 13, the ratio was lower than 19.5 percent. In both years the ratio was reduced by a combination of monetary and fiscal policies and a reduction in the issuance. of import licences. However, these policies were short-lived and after a brief period the import ratio rose. Thus, in the Mission's view, in order to maintain an import ratio of 19.5 percent for a lengthy period, either the present deflationary policies would. have to be prolonged or there would have to be a major change in policies affecting industrial development. With this qualification, the Mission feels that 10.5 percent is acceptable as a rough indication of the lower limit of the import ratio over the next five years. 32. International prices of New Zealand's imports are likely to rise somewhat and the Treasury assumed a 1 perceht increase for the whole period, 1965/66-1972/73. This rate is tentatively accepted, although it is undoubtedly on the low side. 33. On the assumptions of a growth rate of GDP of 4 percent annually, a ratio of imports' to GDP ranging between 19.5 percent and 20.6 percent, and a 1 percent increase in import prices, the Mission feels that New Zealand's import bill might range between NZ$840 to NZ$885 million by 1972/73. Combined with the projected exports, as revised by the Mission, this results in trade surplus of NZ$80 to NZ$125 miilion by 1972/73 (Table 2). 27. B..4

Invisibles 34. In contrast to a surplus on trade, New Zealand has consistently shown a large net deficit on invisibles. The Mission concurs with the Treasury's assumption that this situation is unlikely to change in the future, for the following reasons. 35. Transportation expenditures are estimated to increase at the growth rate of external trade, unless freight costs change. The expected expansion of trade, at fixed shipping costs, might increase net payments for transportation to some NZ$63 million by 1972/73, as based on the Treasury's assumptions concerning transportation projections and the Mission's revision of export and import projections. (Table 27, Volume II). Table 2-Illustrative Balance of Payments Projection 1972/73 (NZ$ million) 1965/66 1972/73 Actual Projection' Exports- Pastoral 670.1 845 Non-Pastoral 60.4 100 Re-exports 16.7 20

Total Exports 747.2 965 2 Imports -718.8 -840 to -8852 Trade Balance 28.4 125 to 80 Net Invisibles- Transport -60.0 -63 Travel -27.5 -40 Investment Income -59.4 -123 Government Transactions -17.7 -32 Miscellaneous (including insurance) -28.4 -45 Unilateral Transfers -22.6 -34 Total Net Invisibles -215.7 -337 Balance on Current Account -187.4 -212 to -257 Net Private Capital 81.0 100 Net Public Financing Requirements -106.4 -112 to -157

Source: New Zealand Treasury Department. IThe 1972/73 projection is expressed in NZ$ pre-devaluation in order to be compatible with the 1965/66 data. 2The export and import projections as revised by the Mission are rounded to the closest NZ$5 million. Imports are assumed to range between a ratio of imports to GDP of 19.5 percent to 20.6 percent.

36. The Mission is aware of suggestions that payments on transportation could be reduced by building up shipping lines owned by New Zealand companies. However, in the Mission's view, investments in B.4 28 merchant ships for international trade are unlikely to be economical' for New Zealand. There are two basic characteristics of large-scale shipping operations-they are very capital intensive and employ mainly non- skilled labor. In both respects, New Zealand has little, if any comparative advantage. She has very limited domestic capital that could be invested in ships, and would 'have to increase sharply her external borrowing to finance such an investment. Also, wages for New Zealand non-skilled labor are likely to be higher than on ships of many other maritime nations. Therefore, such shipping lines are most likely to be unprofitable, because any apparent balance of payments savings would probably be smaller than the balance of payments costs of the shipping facilities and capital servicing. 37. Net travel payments are expected by the Treasury to continue to rise, but -at, a rate. slower than in the past. On the debit side, payments for overseas travel 'by New Zealanders are projected to grow from NZ$41 million in 1965/66 to NZ$70 mnillion in 1972/73, which means a deceleration from the past rate of increase (Table 28, Volume II). Some slowdown might be achieved as a result of a slower rise in general income. 38. The treasury projection also estimates a large increase in tourism receipts from NZ$13.5 million in 1965/66 to NZ$30 million in 1972/73.' The Mission's 'brief comments on the development of tourism are discussed in Chapter VII. The Mission considers the above increase to be feasible, but it will require a more concerted effort than presently envisaged, in both planning and executing the development program. Only on the assumption that such a program for tourism will be prepared and put into effect without delay can the Mission accept the Treasury's projection on tourist receipts. 39. Investment income payments of the private sector are determined by the volume of private overseas investments in New Zealand and their rate of return, while those of the public sector depend on the size of the public external debt and its average interest rates. The Treasury's projection shows a steep increase on the debit side, doubling the net payments from 1965/66 to 1972/73 (Table 29, Volume II). Income of overseas companies operating in New Zealand might be expected to grow generally in line with overall economic activity, as expressed by GDP in current prices. Since the expected containment of inflationary pressure will slow down GDP rise in current prices, the Mission considers the Treasury projection somewhat excessive, and suggests a slightly- lower figure (Table 29, Volume II). 40. The Treasury's projection of investment income payments on Government transactions assumes a steep increase in the external public debt and an average interest rate of 7 'rcentfor additional new borrowing. In view of the prospects of a considerable increase in the current account deficit, these assumptions seem reasonable. Similarly,

'Both figures are in balance of payments terns, which because of differences in definitions are considerably different from figures compiled by the New Zealand Tourist Department. 29 B.4

there is no basis to question the Treasury's projections on receipts on New Zealand's private and public investments, which offset a minor part of the payments to be made. 41. Other invisibles, such as Government transactions, miscellaneous (including insurance) and unilateral transfers, are projected by the Treasury to increase at about the same rate as in the past. The Mission sees no reason to depart from this forecast (Tables 30, 31, 32, Volume II).

Financing of the Deficit 42. The above items amount to a large increase in net payments on invisibles as well as a considerable increase in the current account deficit. A part of this increase can be expected to be financed by the growth of reinvested earnings of overseas companies, expressed in the balance of payments as a private capital inflow. But net public financing requirements still might be expected to rise from the unusually high level of NZ$106 million in 1965/66 to an even higher level of between NZ$112 to NZ$157 million by 1972/73 (Table 2). 43. New Zealand has incurred considerable debts to the B.I.S., the Reserve Bank of Australia, and the I.M.F. in the past year or so and their repayment will impose a further burden on the balance of payments over the next few years. Moreover, the reserves are now low and there is a need to restore them to more comfortable levels. These considerations should be taken into account in assessing the size of both the balance of payments gap and the required finance in the coming years. 44. In the Mission's view, a gap of the above magnitude for any length of time greatly exceeds what New Zealand could expect to borrow. The question of the size of the net public financing gap for which New Zealand could realistically plan is a difficult one, and depends a good deal on expected developments in major international capital markets. It is almost impossible to foresee the degree of New Zealand's future accessibility to the New York or the London capital markets, since this depends to a large extent on such notorious uncertainties as the balance of payments situation of the United States and the United Kingdom. However, following some discussions with financial authorities in the United Kingdom in August 1967, the iMission feels that New Zealand could 'borrow in London and the European bond market NZ$30 to NZ$40 million a year, net of redemptions, as long as present basic market conditions prevail. Since in the next few years the European bond market will probably expand at a fairly rapid pace, New Zealand might increase its net borrowing in the above markets to approximately NZ$50 million a year. Unless the U.S. balance of payments situation greatly improves, it seems questionable that New Zealand could expect to increase her borrowing in the New York market much above the level of her redemptions in that market. 45. The limiting factor on New Zealand's public borrowing in the next few years is not likely to be her creditworthiness. Fortunately, New Zealand has an excellent external debt record. The ratio of debt service payments to exports of goods and invisibles was about 5 percent in 1966, and even though this ratio is likely to increase due to the B..4 30' higher level of borrbwihg and, the rise in average interest rates in coming years, it, would 'still:rio't be. excessive: The primary limiting factor will probably be the de facto restrictions on exports of capital in major financial centers. 46. New Zealand could perhaps somewhat increase her external financing through suppliers credits, although this method would be suitable only for the purchase of equipment and capital goods. Even if a more vigorous search could make additional medium-term credit available, New Zealand should not compromise her wise long-standing policy of purchasing in the lowest priced market. 47. In conclusion, the Mission foresees the serious prospect of a 'large- scale financing gap for a rather lengthy period. It is worth stressing'that the above balance of. payments projection is not. based on extremely pessimistic assumptions, since it considers none of the changes which may occur. if the' United. Kingdom' joins the Common Market without reasonable safeguards for 'New Zealand's butter exports, or if inflationary pressures resume in New Zealand. In the Mission's view, the medium- term outlook for the balance of payments is a strong indication that the. economy of New Zealand faces a structural. problem, not merely a cyclical one. Measures to Improve Balance of Payments 48. If the above outlook is basically accepted, the major qucstion of future economic policy is: What can New Zealand do in order to achieve a basic improvement in her balance of payments, especially in trade? 49. First, a warning should be voiced against the illusion that a balance of payments deficit can be reduced.by increasing administrative restrictions on imports or on invisibles, such as overseas travel expenditures. The past record indicates, in. the 'Mission's view, that such restrictions have resulted in litle net savings of foreign exchange. On the other hand, they have introduced serious distortions into the economy through the misallocation of resources in uneconomic domestic production. It. may be feasible to save some foreign exchange for a year or two with restrictions, but in the long-run such savings would only be minor at best and would probably result in further distortions, leading to even more serious difficulties in the future. 50.Consequently, in the Minsion's view, the medium- and'long-term balance of payments policy should be geared' to the following main objectives: a) To increase non-pastoral exports at a considerably higher rate than implied in the Treasury. projection. b) To produce import substitutes at competitive prices. c) To increase the net inflow of private capital. The measures required to attain the first two objectives have already been summarized in paragraph 21, are discussed in some detail in other parts of the report, and need not be repeated here. 51. New Zealand should make additional efforts to increase the inflow of private capital, especially of direct investment. At present the flow of such investments consists mostly of reinvested earnings of existing' 31 B.. overseas companies with a very small inflow of new private direct investments. There are many objective obstacles to an attempt to increase such investments, both domestic and external. These can be overcome bnly by an active policy of encouragement and offers of adequate incentives to overseas investments. It is not only the balance of payments requirements which make such efforts to attract foreign private capital necessary, but the basic need to reconstruct industry as well. The technical ability and the marketing outlets, which appropriate overseas participation can offer, are essential factors in a reorientation toward export markets or in the exposure to competition with imports. Such participation would undoubtedly lead to an eventual increase of investment income payments, but the indirect benefits to the balance of payments of increased exports or of real import savings should not be neglected. 52. The Mission recommends that an expert with experience in attracting foreign private investment be appointed to look into existing incentives as well as disincentives for overseas private investments and to make detailed and specific recommendations for any additional incentives which seem to be required to attract such capital. 53. In the formulation and implementation of the above policies, there is admittedly an important time element. Even if serious efforts are made to formulate and introduce the required measures, only after a number of years would the effects be felt on the balance of payments. Thus, New Zealand is likely to undergo a period of adjustment, in which she may face additional balance of payments difficulties as well as social and political domestic pressures. In the 'Mission's view, if New Zealand would shIow a readiness to formulate and adopt such policies, geared to a basic improvement in her balance of payments, she would have a strong case for borrowing from public sources to help her bridge the adjustment period, as well as for development capital to help finance a genuine diversification program.

V. STRATEGY OF INDUSTRIAL DEVELOPMENT 'Present Characteristics 54. Manufacturing is ,the largest of the non-service sectors. It employs more workers and prdvides a larger part of GDP than agriculture. Moreover, the annual growth rate of manufacturing output, averaging in constant prices over 8 percent in the years 1958 to 1964, has been much faster than the 3.3 percent annual growth in agricultural output. About 20 percent of all manufacturing consists of direct processing of farm products, another 14 percent consists of domestic forest products. The remainder is widely distributed among the other sectors, including textiles, building materials, metal industries and chemicals. 55. The major feature of New Zealand's industry is its orientation toward the domestic market. The main exceptions are the processing 6f butter, cheese and meat, technically classified as manufacturing, and the production of pulp and newsprint, all of which are largely exported. Apart from these ploducts, industry provides only 1, percent of total exports, and only 4 percent of industrial production is being exported. B..4 32

The domestic market orientation of New Zealahd industry is to a large extent the result of quantitative restrictions on imports. These have been maintained since the 1930's primarily for balance of payments reasons, but in fact they have acted as a shelter and hothouse for local industries. Under such protection, a wide variety of industries have been established, many operating on a small-scale and at high costs. 56. The Government has actively encouraged industrial development, regarding it as a major provider of employrment and foreign exchange savings. The belief that -domestic production, regardless of costs, saves foreign exchange has been and still is widespread. Few attempts have been made by the Government to identify those factors, such as advanced technology, in which New Zealand could have a comparative advantage, and then to search for methods which use these factors' as a basis for industrial development. 57: Furthermore, neither th6 general labor situation nor the wage structure in New Zealand have helped -to reduce production costs. Sined there is such a great demand' for labor in industry and since little premium is -placed on efforts to gain skills or raise productivity, the wages fot unskilled workers are relatively high in New Zealand. Thus thos'e industries which have a large component of unskilled labor often produce af high cost. 58. By its very nature New Zealand's system of quantitative import restrictions, discussed in some detail in Chapter VI, makes it difficult to compare the costs of domestic industrial production with international standards. However, a number of studies show the following results for certain industrial branches: 1) ex-factory prices of final domestic products often exceed c.i.f prices of imported goods by 50 percent or more; 2) in terms of value-added, domestic production costs sometimes exceed international costs by 100 percent or more; 3) wide variations of "excess costs" exist among industries and products.' 59. The Mission was not able to make detailed studies of specific industries and their cost structures. But it did briefly review a number of industries through interviews and such cost data as were available. The automotive industry, the main characteristics of which are described in paragraphs 73 to 82 below, is one example of production of a wide variety of goods on a small scale and at high cost. Similar patterns can undoubtedly be found in other industries in New Zealand. 60. The steel plant presently being built, which is discussed briefly in paragraphs 83 to 91 below, illustrates a case of import substitution which, if spread over a wide range of products in small quantities in order to supply local requirements, could well raise costs. The alternative is to concentrate production on a larger scale partly on products which are domestically used in large quantities and partly on specialized products which could be exported.

Ip. Hampton, "The Degree of Protection Accorded by Import Licensing. to New Zealand Manufatturing Industry", Publication No. 12- 1965- Agricultural Economics Research Unit, Lincoln College. See also P. Hamer, "Comparative Productivity Estimates in Six .Selected New Zealand Industries During 1959/60", Australian and New Zealand Institute of Economic Research, 1965. 33 B.4

61. Moreover, the latest official document, the Report of -the Tariff and Development Board published in 1963, which discusses the Govern- ment's basic approach to industrial policy, concludes with a list of 16 criteria so broad and general that they can hardly serve as adequate guidelines for industrial development.' In practice, there are very few industrial projects which could not qualify on one criterion or another. 62. In recent years, the Government has placed more emphasis on comparative costs as one of the major criteria for industrial development. Nevertheless, the continuation of quantitative import restrictions and Government encouragement of expansion in industries which are clearly noncompetitive indicate that there is still insufficient recognition of the factors which influence costs, and that the concept of import replacement, regardless of the costs, is still holding the upper hand in Government policy.

Reorientation of Industrial Policy 63. In the Mission's view, the time has come for a reorientation of New Zealand's industrial policy. Even if New Zealand were not faced with the prospects of balance of payments difficulties, such a revision would still be necessary in order to make better use of her capital and labor resources. The balance of payments outlook only makes such a reorientation more pressing and imperative. 64. The major guideline for industrial development should be concentration on those products which can be manufactured at competitive costs and which make use of those factors in which New Zealand has a comparative advantage. In some fields, this can be done by processing domestic primary products, especially in agriculture and forestry. Even in these fields processing should be done in forms which can be most profitably marketed abroad. This would require managers who are able to make the best use of domestic resources by applying know-how and dynamic marketing techniques. An example of an industry based on the use of domestic primary products in combination with an export-oriented managennient, is the pulp and paper industry, the characteristics of which are summarized in paragraphs 92 to 95. In other fields, industry should be based on the use of advanced technology, which is potentially embodied in the generally high level of education in New Zealand. Since the wages of skilled labor in New Zealand are low relative to other industrialized countries, New Zealand has a potential advantage in those industries which are based primarily on advanced technology. 65. In order to secure an economically efficient use of resources, it is necessary for New Zealand to isolate those products in which she has a comparative advantage. In New Zealand comparative advantage cannot be expressed as the financial return on capital in different industrial activities, since there are several limitations on foreign exchange transactions and the exchange rate, even after devaluation, may still not be conducive to sufficient industrial export expansion. The comparative advantage of the New Zealand economy in various economic activities can be expressed by the criterion df domestic costs

IReport to the Minister of Industries and Commerce on "Criteria for Industrial Development", New Zealand-Tariff and Development Board, June 1963. 2 B.4 34 of foreign exchange saved by imports sulbstitution or earned by exports, on a net basis. This concept, which is briefly reviewed here, is discussed in some detail in Annex lI to this volume. It is as follows: If by producing commodity a the economy can save or earn one unit of foreign exchange at a lower cost of New Zealand dollars than by producing commodity b, then more resources should be drawn into the production of commodity a. For example, if an imported vehicle costs US$2,000 c.i.f. and if the value added of such a vehicle assembled in New Zealand is 40 percent, then the direct cost of imports involved is US$1,200,. while the net savings on imports amount to US$800. If the domestic costs of production are NZ$1,600, then each U.S. dollar of imports saved requires the use of domestic resources worth two New Zealand dollars. Thus if an alternative use can be found for such resources at which a net U.S. dollar earned in exports or saved by import replacement can be produced at a cost of NZ$1.5, then the economy would clearly gain by such a transfer of resources. Data on the domestic cost of foreign exchange saved or earned can help the, Government rank the various products according to their comparative a'dvantage. In order to make private firms act on the basis of this criterion of the amount of foreign exchange earned or saved rather than on the financial return to capital, the Government has not only to recognize the proper ranking 'of plants, but also to introduce incentives or disincentives accordingly. Such incentives can be given in the form of budgetary subsidies, or development loans at concessionary rates, or protective tariffs on imports. The .same criterion should be applied not only to the manufacturing sector, but also to.the other sectors which influence the balance of payments, particularly agriculture and tourism. 66. The most important. measure for the reorientation of industrial development is the exposure of domestic industries to import competition. Suggestions on ways to achieve this are discussed in some detail in Chapter VI. 67. The present projections of the Treasury indicate a small growth of industrial exports, apart from forest products, which* are expected to increase from about NZ$13 million in 1965/66 to NZ$26 million in 1972/73 (Table 25, Volume II). This projected growth trend is totally inadequate. If the present slow-down in the growth of domestic demand continues, manufacturers probably would tend to intensify efforts to increase exports. In addition, should exposure to 'import competition occur, several industries would be forced to raise their productivity. This process would undoubtedly help to increase industrial exports, especially if average costs are reduced by larger-scale production in existing plants. The recent devaluation too should increase the export capabilities of New Zealand industries, especially in those countries' which have not devalued. In addition, the Government's decision to retain -the special tax concessions for industrial exports forms a further incentive. 68. There is no reason why New Zealand should not use its human potential in indust.ry to the same advantage that it has in farming. It is the concentration of agriculture on. competition in international markets which encouraged the application of high level know-how and 35 B.4 technical innovation, supported by excellent research institutions, which together with favorable climatic conditions have made New Zealand agriculture one of the most advanced in the world. If industry were exposed to international competition and if the Government would specifically encourage industries based on advanced technology, then the potential skills embodied in a well-educated population couild gradually be realized in industry. Once the Government gives increasing support to industrial development in technologically advanced fields, then universities, research institutes and technical schools would undoubtedly try to strengthen training facilities in these fields. The Government, within the limits of its financial support for higher learning institutions, could then give priority to such facilities, if required. Furthermore, research expenditures within industrial plants could be given fiscal incentives by the Government, and particularly important cases could even be given direct financial support. Such efforts to develop science-based industries could help to reduce the "brain-drain" of engineers and managerial skill from New Zealand, which is due in part to the 'lack of attractive economic opportunities in the country.

69. The Mission also generally agrees with the attitude expressed in the report of the Taxation Commission with respect to the disincentives involved in the present high income tax rates for the medium range of income. A revision of the tax structure on the lines suggested by the Commission, which would reduce income tax rates in the medium income range and raise indirect taxes, could indeed be a much needed incentive to raising the level of skills and management in New Zealand industry. 70. The reorientation of industry will also require closer collabo- ration with international firns. Attempts should be made to integrate the production of New Zealand firms with that of larger international firm-ls either by subcontracting or other means. The Government should also not hesitate to encourage foreign financial participation in domestic industry, especially from those companies which can offer technical know-how and marketing outlets. In particular, efforts should be made to increase cooperation with industrial companies in Australia, Japan and the United States (see Chapter VIII). 71. The existing relationship between the Government and industry should also be revised. The present system of import licensing necessarily involves Government intervention in the production of individual firms. In practice, the classic system of "past record," on which an administrative licensing system is generally based, favors old and established firms and penalizes new and dynamic ones. The licensing system should gradually be replaced by a general set of rules based on clear and well- known criteria for protection and for other incentives or disincentives as discussed earlier and in the following chapter. The introduction of a new system would be facilitated by the establishment of an industrial planning unit of economists and engineers which could be set up in the Department of Industries and Commerce. 72. A reorientation of industrial development is likely to require appropriate long-term financing facilities, not only to establish new industries, but also to help reconstruct existing ones. However, the 2* B..4 36

Mission has not been able to obtain sufficient information in respect to the adequacy of supply of equity and loan capital for the legitimate requirements of industry. Nevertheless, the process of reviewing the strategy of industrial development should also include a review of the capital market's role in private iridustrial financing and the effectiveness of the small Development Finance Corporation and other institutions in the supplying of necessary equity and loan capital for industry.

Automotive Industry' 73. New Zealland has one of the highest vehicle densities (average cars per person) in the world, in line with its high per capita income. As a percentage of factory production, the automotive industry in 1964/65 accounted for 4.3 percent of the value added and 1.9 percent of the labor force. Another 2 percent is probably engaged in automotive supplier industries. In the period 1951 to 1965, value added increased at an average annual Fate of abbut 12 percent, While labor input has grown by 5.7 percent, due in part to increased mechanization and automation in production techniques and in part to an increase in the average number of employees per plant (Table 37, Volume II).

74. Vehicles are manufactured in New Zealand under a system of protection and import control, designed to save foreign exchange and encourage domestic assembly of vehicles and parts manufactured. The tariff schedule, shown in the following table, favors the import of vehicles in a knocked-down form (c.k.d. packs) and gives preferences to vehicles and parts of Commonwealth origin. In practice, the system of import licensing and foreign exchange controls provides absolute protection fTom imported vehicles (see paragraph 79 on "no-remittance" purchases). Each firm is awarded an exchange quota, based upon previous' production performance, which strictly limits the number of vehicles that can be manufactured and sold.

Tariff Rates on Imports of. Vehicles Commonwealth Most-Favored (Largely U.K. and Australia) Nation c.k.d. packs 6j% 45% Built-up vehicles 20% 55%

75: Prior to 1940, nearly two-thirds of the vehicles supplied to the New Zealand market were assembled locally and the rest were imported. The value added, composed 'mainly of labor and paint, was small. Subsequently, local- industries began supplying tires, batteries, radiators and interior trim. Prior to 1961, it was assumed that the granting of a fixed amount of foreign exchange, based upon production volume in the previous period, was a sufficient incentive to increase domestic content, since the greater the usage of domestic components, the less the exchange cost per vehicle and the more vehicles or packs a firm could

'This section and the two 'following it contain a more detailed description of -some specific industries which were referred to briefly in the previous discussion on the industrial sector. 37 B.4

import. In effect, this scheme rewarded firms by allowing them percentage increases in total import allocations for increases in domestic procurement. Another bonus incentive scheme introduced in 1961 was designed to even further increase domestic content and encourage foreign exchange savings. Under this scheme, a firm assembling 3,000 c.k.d. packs, representing no more than 60 percent of total factory cost for the unit, would receive a 15 percent increase in its import licenses, or the equivalent of 450 additional c.k.d. packs. In practice, the scheme proved to be unrealistic, since it allowed no price increases and thereby failed to take into account the substantial increases in production costs associated with advances in domestic content. 76. In March 1965 a revised motor vehicles manufacturing scheme was issued covering local assembly of c.k.d. packs in batches of 300 to 600 units. In preparing the list of parts required to be produced domestically, account was taken of the foreign exchange costs of imported parts or the so-called "deletion allowance". The scheme also stipulated that the price structure of the retail product was not to exceed that of the imported built-up vehicles.' This was an unrealistic stipulation, in view of the increased cost of domestic production, as analyzed below. Manufacturing schemes had to be accompanied by full details on items deleted, deletion allowances by overseas suppliers, the cost of local product, and sources of local procurement. The paperwork alone connected with licensing ten firms manufacturing nearly 50 models has been a formidable task. One particular bone of contention between the Government and individual firms has been disagreement over what in fact constitutes "factory costs," which is difficult to define and even more difficult to administer. 77. By 1961, domestic content had reached an average of just over 30 percent. Under the bonus scheme, average domestic content increased to 40 percent by mid-1963 after such items as spark plugs, ignition coils and wiring systems had been added. Under the March 1965 incentive scheme, the Government requested that vehicle manufacturers add additional "hang-on" items, such as driveshafts, wheels, and carburetors. These items are much more complicated from a technical standpoint and involve substantial incremental investment, especially for the volume and diversification of parts required. Domestic content reported by individual firms in 1967 ranged between a low of 32 percent and a high of 48 percent, averaging about 40 percent, the same as existed in 1963. In July 1967, in response to the worsening balance of payments position, the Ministry of Industries and Commerce issued a letter to the automotive industry calling for further increases of domestic content to 50 percent. 78. A vehicle which would cost NZ$2,000 c.i.f. may cost about NZ$3,200 when produced domestically. The 60 percent is however only the nominal excess cost. At domestic content of 40 percent, the net savings of imports are about NZ$800. If it costs NZ$2,000 in domestic resources to save NZ$800 worth of imports, the ratio of domestic to international costs in vehicle production is about 250 percent on a net basis.

'The regulation did not apply to manufacturing operations that had been previously authorized. B.4 38

79. Diseconomies of small-scale production are a 'basic source of high costs. The entire automotive industry in New Zealand assembled approximately 59,000 passenger cars and 13,000' trucks and other commercial vehicles in 1965/66 (Table 38, Volume II). Seven firms .accounted for about 80 percent of vehicle assembly volume, or an ayerage of 8,000 vehicles per firm, which is small-scale production by international standards (Table .39, Volume II). In all,. there are at least 10 firms, operating 17 plants, turning out 40 to 50 different passenger car models (Table 40, Volume II). The proliferation of models and brands is aggravated 'by so-called "no-remittance" purchases. Under present Government regulations, purchasers with foreign exchange assets may place an order 'for the assembly and delivery of any model or make: One-third of General Motors sales in 1966/67 were in this category. Other countries, including Australia and South Africa, have recognized the constraints imposed by low: volimie' markets and have adopted measures designed to limit the number of 'brands and 'models. 80. At low production volumes, costs fise as a function of domestic content. This tendency is uinmistakeable in other non-industrial countries with national production volumes two and three times that of New Zealand. Judging by the experience of -Argentina, where the domestic cost ratio is somewhat mbre favorable thin that of New Zealand,. the increase of domestic content from 40 percent to 50 percent may cost around 300 percent of the marginal savings of imporfs. Chart III shows what New Zealand may expect in terms of cost increases -at successive stages of manufacture.' The data used to plot. the cuives in Chart III is contained in Table 41,, Vol. II, which was -prepared as part of a draft study by the World Bank on the Automotive Industry in Developing Economies. These cost increases may. be considered minimal since they are for production runs of 20,000 to .30,000, 'as compared to under 10,000 in New Zealand (Table' 41, Vol. II). Total national production and average volume per firm is also relatively lower in New Zealand (Table 39, Vol. II). 81. In addition to small-scale. production, there are other factors which have contributed to the 'high vehicle production costs in New Zealand. Turnover among workers has. been high. Equipment is usually employed-only at one shift, because of negative.work rules and labor attitudes towards working' overtime . or on night-shifts. There . are frequent changes in the value of import licences is'sued for unassembled cars following balance of payments difficulties. All of these factors have tended to disrupt continuous levels of production and to raise costs. 82. The alternative to further, import substitution 'is specialization 'in selective components and parts .for export to manufacturing, affiliates ,in nearby countries. Eventually, it m'ay be feasible to reduce the number 'of models and brands.assembled locally and to roll back domestic content to a level where the cost premium is well below 60 percent.

]The chart and the text compares production costs for passenger-cars in New Zealand with light trucks in Latin America: Cost' structures in these two categories of vehicles are quite similar. 39 B.4

CHART III

COST COMPARISONS AS A FUNCTION OF DOMESTIC CONTENT. LIGHT TRUCKS 280 r-- r -I 1---

260

240

2 ARGENTINA_ -

200 O 26 z t-

NWZEALAND P OECTED

",OF I~~~~~~~~~~~~~~~~~~~~~~~~ULY.1967 160----- MEXICO E C

14Notionsl Coott m 1955 BRAZILEconDopt,1

120:

O 1010 30 140 5O 60 70180 90 100 A- I EasidySOa,rd Pou,j En dMO

NATIONAL CONTENT PER CENT)

6 9 3 6 7 EcU, pt,IBPOD- O B.4 40

Iron and Steel Industry 83. About 10 percent of the iron and steel consumed in New Zealand in 1966 was produced domestically, largely by Pacific Steel Limited, and the remainder was imported from the United Kingdom, Australia and Japan. Presently, Pacific Steel supplies about 66,000 tons of merchant products, or close to 40 percent of the New Zealand market for this line of products. Pacific Steel's production is based on local scrap processed in an electric furnace and, at that level of market coverage, is quite competitive with imports, because only those sections are rolled which permit long and efficient production runs in the rolling mill. Import substitution is apparently achieved at costs competitive with c.i.f. prices for comparable imports. 84. Under the present steel expansion program, New Zealand plans to produce about 75 percent of the value of its required iron and steel demand by 1978. The actual and proposed levels of production are as follows: (NZ $ million) Domestic Total Imports Production Production 1966...... 60 6 66 1978...... 22 68 90- Production 'by the New Zealand Steel Company, whose plant is presently under construction, is planned to expand in four stages with the production tonnage and range of products as follows:

Stage I Stage II Stage III Sta IV Product 1970 1975 1978 1983 (Tons) (Tons) (Tons) (Tons)

Billets ...... 130,000 150,000 180,000 211,000 Hot-roDed strip .. .. , .. 28,700 40,300 Cold-rolled strip ...... 60,600 111,000 141,900 Galvanized sheet .. .. 70,000 72,700 86,800 100,800 Welded pipe ...... 22,200 23,200 24,200 Tinplate ...... 13,300 16,700 Sections and rails ...... 70,000

Total .. .. 200,000 305,500 443,000 604,900

Source: Ministry of Industries and Commerce, Special Report. According to a Government report, New Zealand will be saving about half of its foreign exchange requirements by 1971, as based on a c.i.f. sales value estimated at NZ$20.4 million. The domestic production program projects foreign exchange savings of NZ$40 million by 1978 and NZ$60 million by 1983 in Stage IV of the production plan. 85. New Zealand Steel made an agreement with the Government, assuring sales on the domestic market for as much as the company can supply in any agreed type of steel product. This assurance is subject "to the company selling its products into wholesalers' stores at New Zealand- wide prices not higher than the simple average of the prices of like products imported or importable from Australian and United Kingdom sources delivered to ports customarily serviced by overseas shipping increased by an allowance equal to the weighted average cost of delivering steel into wholesalers' stores, excluding products imported or importable .41 B.4 at dumped prices."I The company has thus undertaken to sell at prices comparable to c.i.f. prices of imported steel, although the provision to exclude dumping is subject to interpretation. In some cases, dumping has 'been said to mean that export prices of a product are lower than its domestic prices, a situation which is quite possible in the future market for steel. In the Mission's view, such an interpretation shouild not be accepted and "dumped" prices should be defined only as export prices prevailing during a temporary period (see para. 106). 86. During Stage I the production of billets by New Zealand Steel will be based on the reduction in a rotary kiln of iron sands to sponge iron and finishing in electric furnaces. The billets will be rolled into merchant products by Pacific Steel, in which New Zealand Steel has a 40 percent share. The galvanised sheet will be produced from imported cold-rolled steel strip. Eventually, New Zealand Steel -hopes to produce both hot- rolled and cold-rolled steel strip itself. Alloys and heavy structural steel will continue to be imported. 87. With the establishment of New Zealand Steel, billet availability from both Pacific Steel and New Zealand Steel will reach in 1970 about 200,000 tons a year for rolling into merchant products such as angles, tees, bars, rods, channels and girders. Assuming a scrap loss during rolling of 15 percent (under Pacific Steel's efficient operation it might well be less), 200,000 tons of ,billets correspond to 170,000 tons of finished products annually. Total demand for finislhed products is projected to be 172,000 tons in 1970.2 The total domestic market in merchant products would thus have to be supplied, if steelmaking capacity at both plants is to be fully utilized. This would mean that a great variety of steel products would be domestically produced. In the albsence of standardi- zation (an important prerequisite for the establishment of an economiic steel industry anywhere) 'there are hundreds of various shapes, sizes and specifications of intermediate products in use in New Zealand.3 For many of these products only a few hundred tons per year are used. Rolling such small quantities involves a considerable increase in costs because of the down time during roll changes. This demonstrates the danger iniherent in import substitution achieved by production on a relatively small-scale, which necessarily involves a rise in production costs. 88. A detailed rolling program based on the demand forecast prepared by New Zealand's steel consultants would show what profiles could. profitably be produced in Pacific Steel's rolling mill. The Mission did. not ihave the expertise .to prepare such a rolling program. However, it could be reasonably assumed that such a program would involve concentration of production on a limited number of varieties made on a relatively large scale, if costs are to be kept within limits set by prices. for comparable imports. Other varieties of steel products would have to be imported, rather than made locally.

1New Zealand Steel Limited, Prospectus 1966. 21bid. 3A casual analysis of the sizes and shapes planned under the domestic production program reveals abdut 350 different varieties of merchant products. On many items, this would mean production runs of a few hours for a six months supply of New Zealand's domestic market requirements. B.4 42

89. Thus more billets may be produced than can be economically used in New Zealand, so either Pacific Steel or New Zealand- Steel or both may have to curtail their billet production. The first alternative would greatly reduce, and perihaps eliminate, Pacific Steel's profitability, because production costs for its scrap-based.billets are lower than those -for. New Zealand Steel's billets. The second alternative would' increase the production costs of New Zealand Steel,' while the third would spread the diseconomies inherent in the present program over both companies. Therefore, increases in costs appear inevitable in all three cases, unless alternative uses are found 'for. the surplus steel capacity. 90. One possible alternrative use might be the'production of special steel and steel alloys for which markets would have to be found mainly outside New Zealand. However; a great number of these products are commonly made in fairly small volumes in electric furnaces, geneially from the type.of steel New Zealand Steel would obtain-from its sponge iron, if the technical and metallurgical results obtained in tests can be realized in commercial production. Such ,products might well ,be in a stronger competitive position tihan ordinary steel, products, which could not compete against the output of large mills.' Research and development have greater scope, relative to the scale of output in special steels than in ordinary steels. Access to overseas mnarkets could perhaps be 'obtained by offering access for steel products which New Zealand should not make because of small volume. 91. However, this approach involves a number of metallurgical and operational problems, 'in addition to marketing problems, that would have to be resolved. At this time it is by no -means certain that 'they could be overcome at economic cost. It is, therefore, recommended that the time during which the plant' is under construction should be used to study the overseas markets for special and alloy steels, and if these results are encouraging, then the metallurgical and operational problems could be investigated, after the plant 'has gone into operation.

Pulp and Paper Industry 92. The pulp and paper industry over 'the past 15 years, 1951 to 1965, has been increasing production at an average annual rate of about 24 percent. In 1965 production from this industry constituted about 3.3 percent of gross domestic product. There are in all seven plants in New Zealand engaged in the manufacture of pulp, -paper, and fibre board. Three large plants' account for 80 percent of the total output, comprised largely of mechanical pulp, chemical pulp, newsprint, kraft paper and liner boards. About 30 percent of the newsprint and paper products manufactured in 1967 was exported. New Zealand now exports NZ$18 million in pulp and paper products. 93. The two largest New Zealand firms are Tasman Pulp and Paper Co. Ltd.' and New Zealand Forest Products Ltd. The principal shareholders of Tasman Pulp and Paper Co. Ltd. are: Bowaters (U.K.)2,

IA company in which the New Zealand Government owns,about 20 percent. 2Bowaters have certain responsibilities for management control, including vetting of capital expansion proposals. 43 13. 4 Indus- Reeds (U.K.), Australian Newsprint Mills (Australia), Fletcher Zealand), and the general public, who hold about NZ$2 tries (New holding million of the NZ$21.4 million equity. Tasman has a reciprocal million in Australian N-ewsprint Mills, which produces news- of NZ$4 are the print in Tasmania, Australia, and whose main shareholders publishers and users of newsprint in Australia. Tasman is a principal It major producer of mechanical pulp, chemical pulp and newsprint. its own logging operations and is a major producer of sawn carries out of It exports about two-thirds of its newsprint production timber. pulp, and 200,000 tons, about 90 percent (50,000 tons) of its market about one-fifth of its sawn timber. they have 94. Tasman Paper has substantial export potential, since an efficiency that is capable of competing in world markets. achieved 10 percent About 85 percent of its export sales is from newsprint and pulp. The difficulty with newsprint is that production from chemical from have been increasing and serious competition has arisen costs that at Canadian, Scandinavian and Chilean competitors. It appears is a world over-supply of newsprint. Wages have doubled present there to capital investments increased by 25 percent in the period 1955 and producers. 1967. Fuel and power costs run twice that of the Canadian factor is that Australian publishers prefer to maintain several Another to New world suppliers, allocating no more than one-third of the market Tasman recently announced its intention of diversifying into Zealand. ton kraft liner paper production with the introduction of a 100,000 supply the Australian market. This has led to serious conten- machine to in between Tasman and the major packaging paper manufacturer tion has led to Australia, Australian Paper Mills Ltd. (APM), which in turn between the two countries at the Government level. At the tensions the two request of the Government consultations are proceeding between 'to include companies, Tasman and APM, and these have been extended for the the possibility of increased New Zealand production of pulps Govern- Australian market. The situation will have to be resolved at the and 134). ment level within the next few months' (see paragraphs 133 Zealand 95. New Zealand Forest Products is at present mainly New about 80 percent, with the equity spread over 55,000 share- owned, total share holders, the largest holding being less than 1.5 percent of the The company, w,rho owns extensive forests, manufactures chemi- capital. kraft and mechanical pulp as well as a wide range of fine paper, cal It is also liner paper and fibre board for the protected domestic market. producer of sawn timber for the homne and export markets and a major converting the largest exporter of logs to Japan. Furthermore, in it produces wall boards, sacks (e.g. for fertiliser and cement) operations of and other finished packaging materials. In 1966/67 about one-fifth revenue was earned from export sales of logs, pulp, wall the company's primarily boards and paper. A major expansion program is under way to meet the growth in the domestic packaging and fine paper directed years of fields, but there will be some capacity for export in the early new production capacity. been entered into 'Subsequent to the writing of this report an agreement has will not produce kraft liner paper for the Australian with Australia that Tasman in Australia. market but will be given additional scope for newsprint sales Details are still under discussion. B,;4 44 VL IMPORT RESTRICTIONS, PROTECTION TO DOMESTIC INDUSTRIES AND RESOURCE ALLOCATION Effects of Import Restrictions 96. For a long time, New Zealand has maintained a system of quantitative restrictions on imports in order to safeguard the balance of payments. Some of these restrictions apply to certain raw materials, the allocation of which is used to direct industrial production, while other restrictions apply to processed goods,-and this provides protection to domestic industrial products. An evaluation of the industrial policy is made in Chapter V; the present chapter concentrates only on the relationship between the methods of protection and industrial development. 97. In general, New Zealand has followed a policy of offering domestic industries protection against competition of imported goods which,' in the Mission's view, has resulted in the allocation of scarce resources to industries of little net benefit to the balance of payments. Protectionism has been justified on the grounds of the need t6 provide full employment, to secure a high standard of living, to overcome the disadvantages of a small economy and paucity of raw materials, etc. Many of the arguments advanced for protectionism are fallacious, from. the viewpoints of -both economic reasoning and actual experience in New Zealand. A full discussion of the pros and cons. for protectionism, would be much wider than the scope of this report could permit, so the following comments will be limited. 98. There *is one particular argument for protectionism which seems to carry great respectability in New Zealand, even with several outstanding economists and officials. The argument is that as long as other countries, including some of the richest, pursue for. their domestic agricultural products protectionist policies harmful to New Zealand, she should in turn protect her own domestic industries against their exports. This argument seems to be based on the assumptions that either New Zealand has had some real gains from her industrial protectionism, or at least her industrial protectionism has strengthened her bargaining power vis-a-vis other countries. The Mission considers these assumptions invalid. The protectionism practiced by other countries on agricultural production is indeed deplorable and New Zealand, which specializes in agricultural production, is one of the victims of such protectionism; nevertheless, it is New Zealand herself, and not her trade partners, who pays the price for tying up resources in inefficient industries. 99. Import restrictions are a hidden form of protection, which tend to result in a misallocation of resources. Naturally, the degree of protection they give varies by industry and product. Moreover, the effective degree of protection afforded each product is not usually known by the public and probably niot even by the Government atithori- ties. In the absence 6f a clear set of quantitative rules con-cerning the degree of protection to be given, decisions on the effective degree of protection ,end up being made by the Government in' a round-about 'process, usually on a case-to-case basis. No administration, even with 'the best of expertise and intentions, can- expect to be a reasonable 45 B.4 substitute for the price mechanism in the proper allocation of resources for investments and production. In addition, the administration of import restrictions on such a wide range of commodities places a heavy burden both on the Government and the private sector, and thereby greatly hinders their efficiency. 100. Often quantitative restrictions on imports may be undesirable because of resource misallocation, but necessary on balance of payments ground. In the case of New Zealand, it is doubtful that import restrictions have resulted in net savings of foreign exchange on a considerable scale. It has been shown earlier that even with such restrictions, imports have soared in periods of increase in domestic demand. The experience in New Zealand is further evidence that import restrictions are not an effective substitute for fiscal, budgetary and income policies designed to prevent inflation in the domestic economy. ,If effective counter-cyclical policies are not introduced in the future, no refuge can be found in import restrictions. On the other hand, when counter-cyclical policies become effective, import restrictions for balance of payments reasons will be superfluous.

Protection for Infant Industries 101. While the Mission feels that a continuation of import restrictions as a permanent feature of the New Zealand economy is harmful to her best interests, it does concede that a certain degree of temporary protection for "infant industries" is reasonable. The rationale of such protection is to give new industries a grace period in which to become established on a competitive and efficient basis. A protective system which is economically reasonable should be based on the following principles: a) Protection should be given only to legitimate infant industries which could be expected to become competitive in the foreseeable future; b) A ceiling on the maximum percentage rate of protection should be established; c) Rates of protection could vary to a limited extent, as defined by well-established and clearly outlined economic criteria; d) The rate of protection for each product would be set in advance to be periodically reduced; e) The degree of protection given to each product should be made known to the public. In the Mission's view, a system of protection based on the above principles can be best achieved by the removal of quantitative import restrictions and by reliance on tariffs to protect domestic infant industries. 102. A discussion on tariffs or any other protective system is in many countries obscured by the question of the appropriateness of the rate of exchange. It ought to be emphasized that the present discussion does not refer to a general surcharge or 'tariff on imports designed to correct a possible overvaluation of the exchange rate, 'but is concerned with tariffs designed to encourage proper industrial development, which may be desirable even when the exchange rate is in full equilibrium. Nor does the suggestion refer to tariffs and duties imposed for merely revenue reasons, and which have no direct protective effects on domestic production. B.4 46

103. If the Government decides that quantitative import restrictions should be abolished and that tariffs should be the basic instrument for protection of newly established industries, then any industry which desires tariff protection would have to make a convincing case that during the initial protection period its costs could gradually be reduced to a competitive level. If the case is accepted, a tariff could be introduced on competing imports at a rate not exceeding a certain level at which imports would be freely permitted. The tariff would be set in advance for a certain number of years following the start of production, and it would be made known at the start that the rate would automatically be reduced every few years-by a certain percentage. 104. Close attention must be paid to the effects of a protective system on resource allocation, and the structure of protection is df great importance in this respect. A distinction must. be made between protection of the final good (nominal protection), protection of the materials and other items which are inputs for the production of the final good (inpUt protection) and protection of the actual manufacturing activity, i.e. the services of labor, management and capital (profits) (effective protection). For the factors of production which are employed in an industry and which can choose to work elsewhere, it is not the nominal protection which counts in deciding whether an industry is attractive, but the 'amount of protection left after paying for material inputs. Thus it is *the effective protection or the margin of protection provided to factors of production which is of major importance in the allocation of resources. 105. There seem to be reasons to apply an infant industry tariff in New Zealand to processed goods and to certain semi-processed goods, but not in most cases to raw materials and equipment which are not domestically produced. The effective protection of such a tariff should depend on the percentage of the value added of the product. An import tariff of 20 percent on the final product gives effective protection of 100 percent on a product with a value added of 20 percent. On the other hand, the same 20 percent tariff provides effective protection of only 40 percent for a product with a value added of 50 percent, and only 25 percent for another product with a value added of 80 percent. For that reason, tariff rates set on the final product have to take into account variations in the percentage of the value added of domestic products. If applied rigorously, such a system would require complicated calculations of the value added in each product, deducting the direct and indirect import component. To avoid these complex calculations, it would seem more desirable to classify the products by groups, for example, those with a value added of 30-40 percent, etc., and then to apply nominal tariff rates accordingly within the determined ranges. 106. Some special tariffs might have to be imposed as protection against "dumping." Such cases must be exceptional and quite limited in number. In general, the definition of "dumping" commonly used in New Zealand, as in several other countries, is too broad, and in fact refers to products wvhich can be regularly imported at low prices. The appropriate test for "dumping" is whether the product can be imported at the so-called "dumped" price only for a temporary period. Considerations of whether certain products are exported at prices lower than domestic costs, average or other, are irrelevant. When 47 B.4 products are exported for a lengthy period at prices said to be based on "marginal costs," there is no reason why New Zealand should not take advantage and buy these products at the lowest price possible. 107. Under such a tariff, system, the question would undoubtedly arise concerning the treatment of existing industries, which at present are subject to various levels of protection, with some levels equivalent to tariffs -of several hundred percent of effective protection on their value added. Probably certain existing industries would have serious difficulties 'if exposed to import competition, even at the maximum level of tariffs for new industries. Solely on economic grounds, it could be argued that since the basic investments have already been made, such industries would continue to produce as long as prices were in excess of their variable costs, even if they were not profitable on the basis of total costs. However, on equity grounds such a treatment may be too harsh, especially since many of the existing industries have been established with the blessing and sometimes the active encouragement of the Government. It would, thus, seem justified to make special arrangements during a transitional period for existing industries by giving them higher levels of effective tariffs than new industries. Yet, even for existing industries a ceiling on the maximum rate of effective tariffs should be established and should be subject to a gradual reduction. 108. It would be useful if the Government would discuss with management and workers representatives in various industries ways and means to make them more competitive. Within a system of import liberalization, this may lead to concentration of production in a smaller range of products made on a larger scale and at lower costs. In certain cases, amalgamation of small firms may be called for and retraining of workers may also be required. Whatever the arrangements to be made, it is important that these be within a set of basic criteria set by the Government. 109. It is difficult 'to say at this stage what changes in tariff rates will be required, if import restrictions are to be removed. The present maximum rate of tariffs is 32.5 percent, but this is the nominal rate which may often give a much higher effective tariff. For example, if the value added of a certain product is 50 percent and there are no duties on raw materials and other inputs, then a nominal tariff of 32.5 percent gives effective protection of 65 percent. However, for some products especially those with lower tariff rates, a rise in tariffs may be necessary. 110. To the extent -that tariff rates will be raised, fears will undoubtedly be expressed that this would increase domestic prices. In most cases, such fears seem unfounded. If removal of import restrictions should result in increased imports of products now domestically produced, prices would tend to be reduced. For products not domestically produced, larger imports even if subject to higher tariffs would more likely mop up some of the semi-monopolistic profits of importers now granted import licences, rather than raise prices. On the whole, price rises would not likely occur, if the Government makes it clear that the abolition of import restrictions is not a temporary measure. Another prerequisite for such a shift, as indeed for any other major policy changes, is the use of fiscal, budgetary and income measures to avoid inflationary pressures. B.4 48

111. A rise in tariffs would also require ntegotiations with GATT under Article XXVIII. However, if such rise is proposed as a part of a scheme to remove quantitative restrictions, which would expectedly involve an expansion of international trade, there is no reason to foresee great difficulties in such negotiations. 112. A shift to a new system of protection would require a good deal of preparatory staff work, to determine appropriate levels of protective tariffs and to anticipate the effects of the proposed changes. It is doubtful that accurate estimates of' the effects on each particular industry could be confidently made, but it might be possible to prepare a projection of the magnitude of the overall effects. The Mission recommends that a high-level commnuittee of officials, backed by a team of economists and industrial experts, be appointed to prepare a detailed scheme for such a shift, preferably with alternatives. 113. The Tariff and Development Board seems to be presently capable of handling only a few cases a year and 'its procedures are slow. A large scale operation involved in the removal df import restrictions will certainly pose a very heavy, pressure of urgent work on the Board, and the latter should be greatly strengthened in order to handle effectively such a situation. Its procedures should also be reviewed in order to assure expedient work. 114. The successful intro'duction of a better protective system would require a strengthened external reserve position, for both economic and psychological reasons. In the Mission's view, a basic change in the protective system affecting the development strategy would be a strong claim. for special borrowing operations from international and bilateral sources.

VII. THE DEVELOPMENT OF TOURISM

Present Situati6n 115The Government requested a broad indication of the Mission's views on '.'whether expansion of the tourist industry should be regarded as a useful avenue, for development." The first' cbisideration should undoubtedly be an analysis of the volume and composition of the tourist traffic that could hie expected. On the basis of such demand proje6tions, sbme idea' of the required investment and other 'expenditures could be 6btained. There would then have -to be a de'tailed examination of the economic justification for 'such expenditures. Such a justification would c6mpare returns from allocating resources to tourism' with those, from alternative uses, taking into account all costs ,and benefits, particularly New Zealand's need forforeign ekchange earnings .-and alaternatives for obtaining suah earnings. 116. The Mission did not have the opportuhityt o make an investigation along the' foregoing lines, nor dci we feel that the statistical data in New Zealand are in a forrn necessary for such an analysis. However, some broad inferences can be drawn from the available information. 49 B.4

117. The number of visitors to New Zealand, staying more than 24 hours, in the fiscal year ending March 1966, amounted to some 86,000 and their expenditures were, estimated at NZ$19.8 million. In the following year the number of such visitors rose to about 94,600 and presumably their expenditures rose in a similar fashion. 118. It should be noted that, following accepted international practice, the Mission has excluded from the foregoing temporary migrant workers both from the number df visitors and their expenditures, although New Zealand statistics include them as '"tourists on working holidays." The Mission finds the latter's inclusion in the New Zealand data a source of confusion with respect not only to the number of tourists, but also to the net exchange earnings of this sector. There are other temporary visitors earning remuneration in the country, who are not normally included in tourism statistics, which because of insufficient information we have been unable to exclude. It should also be noted that the expenditure figure does not include the receipts which the national airline, Air New Zealand, earns in bringing international visitors to the country.

Prospects for Expansion 119. The growth in the number of visitors to New Zealand remaining more than 24 hours has averaged about 17 percent annually since 1960, which is well above the world-wide -average of 12 percent. The Inter- national Union of Official Travel Organisations (IUOTO) has noted a tendency for long-distance tourism to expand more rapidly than other types of 'tourism.' In the main, the New Zealand market is long-distance, since its major markets apart ifrom Australia, are in 'the United States, the United Kingdom and other European countries. If the propensity to travel continues to grow in the future as rapidly as it has in recent years, and if air transport costs continue to decline as in the past, -there is no reason why the number of visitors to New Zealand should not increase at least as fast as in the last six years or even faster. 120. Another major consideration is the amount of the net exchange gains to the economy from tourism. On this question, there are two sources which offer greatly varying results: 1) Estimates based on Reserve Bank data show for 1965/66 a net gain of NZ$5 million, about 36 percent of gross receipts, and 2) Tourist Department estimates, based on more indirect indications, show for the same year net foreign earnings of NZ$13.2 million, about 57 percent of gross receipts. An Officials Committee which reviewed both estimates reached somewhat inconclusive results, showing alternative ratios of 25-50 percent net foreign exchange earnings to gross receipts from tourism. In the Mission's view, both calcullations underestimate the share of net foreign exchange earnings, if used as an indication of the benefits of tourism development in the future. 121. As stated by the Officials Committee, estimates based on Reserve Bank data show low figures on both gross and net receipts, because a good deal of tourists' foreign exchange seems to be transferred not

1 IUOTO, Economic Review of World Tourism, Geneva, 1967. -B.4 50

through the official banking channels, but sold in the "free market" and used for imports or travel. This was due primarily to the overvaluation of the.New Zealand dollar prior to the recent devaluation. Thus it is hoped that devaluation will remove this problem. 122. In the Mission's view, neither estimate presents a real picture of the tourism sector, 'because of the inclusion of tourists, coming for a "working holiday." In the above estimates the outflow of 'funds saved by "workers on holiday" exceeds the inflow of funds transferred by them for their initial expenditures. The number of "holiday workers" coming -to New Zealand is presumably ' affected less by factors related to the tourist trade, than 'by the labor situation in New Zealand relative to Australia. The fact that hotels and restaurants in New Zealand employ significant numbers df temporary foreign workers has been due to the shortage df workers in New Zealand, because of the reluctance of some New Zealanders to be employed in what they consider personal service. These factors might change in the future for reasons mentioned later. 123. Apart from their uncustomary definitions, both estimates have a very shaky statistical basis and should not be used as an indicator of 'the real benefits of the tourist sector. Therefore, the Government should make a more serious effort to arrive at a reasonable estimate of gross and net receipts from tourism. On the basis of estimates in other countries, it would appear that the share of value added to tourism should be in the range of perhaps 70-75 percent. 124. The major criterion as to the priority of 'the tourist industry relative to other 'investments is not 'the share of net receipts, but the cost of domestic resources per net U.S. dollar earned (see paragrapTh 65). The Mission does not have necessary data to make calculations of this type for the tourist industry. In preparation of an investment program such estimates should 'be made. Nevertheless, there seems to be an a priori case for a certain priority to be given to investments in an industry which makes use of natural attractions, is not too capital intensive and has a relatively high value added. 125. A report prepared for Air New Zealand by the consulting firm Child and Waters Inc. df New York' gave a fairly optimistic projection of the New Zealand tourist potential and included a number of detailed recommendations for improvements of tourist facilities. Further studies are now required to quantify demand trends, not only in numbers and in broad categories as shown in the official statistics, but also in much greater detail, such as the type of tourist expected, the kind of accom- modation required and the range of amenities and activities needed to help overcome the seasonal imbalance in tourist flows-and offset the high cost of transport from all countries, except Australia. In the course of these studies, a number of factors should be taken into account in fore- castings: 1).the scope for cooperation with other tourist destinations in the South Pacific and for marketing arrangements with travel organiz- ations in the countries of origin, 2) the extent to which investment opportunities would be conducive to market arrangements, 3) the effect of reductions in air transport costs, 4) the possibilities of air charter operations, and 5) the incentives which the Government may wish to 51 B.4 consider. This 'information would then provide the basis for an investment program which could and should be assessed in respect to the resources required, their relative scarcity and their costs and benefits. 126. One of the key questions that should be examined is the supply of labor in the hotel 'industry. As mentioned earlier, there is considerable use of temporary migrant labor from abroad and the latter's export of part of their season's earnings represents a drain on New Zealand's foreign exchange. However, recent lessening in demand for labor already seems to have increased the supply of New Zealanders willing to work in tourist industries. The Government should also encourage professional training programs for hotel and restaurant staff. This would not only raise standards of service, but would also provide the professional and social status required to attract good workers. 127. To summarize, the Mission sees a reasonable case for an expansion of the tourist industry. However, a detailed investment program showing the costs and benefits in quantitative terms needs to be prepared without delay,

VIII. INTERNATIONAL TRADE RELATIONS 128. The Mission's views on prospects for agricultural commodities and on the appropriate strategy for industrial development have a number of implications for New Zealand's international trade relations.

Relations with the United Kingdom 129. New Zealand's most important trading partner is the United Kingdom. For more than half a century New Zealand's economy has been developed as a complement to the British economy to the benefit of both. The trade agreement between New Zealand and the United Kingdom which has been recently extended to 1972 is of vital importance, since the United Kingdom is a market for 90 percent of New Zealand's butter and lamb exports and for 80 percent of (her cheese exports (Table 16, Volume II). New Zealand, in turn, accords preferential treatment at considerable margins to a wide range of British industrial products. The preferential tariffs accorded to British exports are generally a worthwhile quid pro quo. However, the present margins of preference should not be sacrosanct. If such preferences have detri- mental effects on the development of certain industries which can become more efficient by cooperating with non-British industries, New Zealand should negotiate for a reduction of the margins. 130. New Zealand is justifiably concerned about her access to the British market, if the United Kingdom should join the European Econo- mic Community (EEC). The United Kingdom has already announced that it would accept the Rome Treaty -and the Common Agricultural Policy (CAP) of the EEC. For all practical purposes, CAP reserves the domestic markets for 'local producers of most agricultural commodities, except beef. There is already 'a surplus of butter in the EEC and if the present expansion in output continues, the surplus is likely to grow. The B.4 52

probable entry of Denmark and Ireland along with the United Kingdom would naturally aggravate this problem of a surplus. If New Zealand were to be cut off from her present access to the British market, she would have little prospect of selling in other markets the same quantities of commodities, especially butter, which she now sells in the United Kingdom. 131. Ailthough the leaders of the British Government have stated a readiness to accept -the CAP, they have also emphasized on several occa- sions the need to make certain special arrangements for New Zealand's exports. Understandably they have not publicly specified the nature of such arrangements. The EEC Secretariat also has 'recognized the special problem of New Zealand. In informal talks with the Mission in August 1967, members of the Secretariat appeared to consider that a transition period in which New Zealand could adjust her production and marketing to a gradual reduction of sales in the British market might be advisable. Because of their concern over the prospects of an enlarged butter surplus with an expanded EEC, some Secretariat members 'would favor such an arrangement within the context of an international dairy agreemen't. At this time there is no basis for an evaluation of the prospects for such an international agreement and -its implications for New Zealand. In any case in the Mission's view, if the United Kingdom joins the EEC even with a special arrangement for New Zealand's dairy products, New Zealand's earnings from dairy exports in the United Kingdom would gradually be reduced. Relations with Other Countries 132. Regardless df the 'future relations df the United Kingdom with the EEC and of New Zealand with both, New Zealand should make special efforts to intensify its economic anrd trade relations across the Tasman, Sea and the Pacific Ocean. The Government has placed increased emphasis in these areas, but, in the Mission's view, an even more -concentrated effort is required, both to increase prospects of marketing her agricultural commodities and to 'help New Zealand raise the efficiency of her industrial-sector. 133. In particular, the Mission attaches great importance to a closer relationship 'between New Zealand and Australia. The New Zealand- Australia F-ree Trade Agreement (NAFTA), which came into effect on January 1, 1966, provides for a gradual reduction of duties on commodities which account for about 50 percent of the present trade between the two countries anrd 'for regular consultations with the intention of extend- ing its application to more commodities. In'practice, the list of commodities cov'ered in NAFTA has been limited because of 'strong protectionist interests in both countries, to ivhich the Governments of Australia and New Zealand 'succumbed alike. Even this restricted scope of NAFTA is now threatened by disagreement over planned sales of New Zealand kraft paper' to.Australia by the Tasman Pulp and Paper Com- pany.' This company, which already exports newsprint on a large scale, to Australia, can realize its comparative cost advantage, based on raw materials, advanced technology, and farsighted management, only if it is allowed to supply this type of paper up 'to 100 percent of the projected

"'See note I on page 43 53 B.4 increase in the Australian demand. An Australian counter-proposal, enabling New Zealand to participate in the market expansion of a number of paper products, would not permit concentration of production in just one line which is the necessary condition for cost reduction. 134. Tihe attitudes toward NAFTA of both Governments during the short period of its existence do not augur well. If presen't trends continue, NAFTA is likely to 'be overcome by protectionist interests and policies in both countries, and it will then be of little consequence to the development policies of either New Zealand or Australia. In the Mission's view, new initiatives are now called for at the highest levels of political leadership in both coun'tries to give a new impetus to NAFTA. The final aim should be closer cooperation in the future development of both countries, which will enable sufficient specialization of each in their respective fields of comparative advantage. Closer economic cooperation 'will benefit both countries: freer access to a relatively close and natural market can help New Zealand overcome some of the handicaps of its small-size market; and since New Zealand is the largest single market for 'Australian manufactured exports, the -freer trade becomes, the more New Zealand is likely to purchase from Australia. 135; Japan with rapidly increasing demand for agricultural commodities, especially 'for meat, is a very promising trading partner. The highly successful introduction of New Zealand mutton is a good example of a dynamic marketing effort. Of no less importance for the future is the potential cooperation in the field of manufacturing, particularly in science-'based industries. The Mission 'hopes that the New Zealand Gov- ernment will continue to pay increasingly more attention to close cooperation with Japan.. 136. A number of other countries in East Asia have been increasing their income levels at a rapid rate and are also likely to become importers of dairy products. New Zealand should strengthen her economic relations with those countries and should closely follow developments through trade commissioners and representatives. 137. In the Mission's view, there is a wide scope for increasing trade relations between New Zealand and both the United States and Canada. Progress has already been made by New Zealand in exporting agricultural commodities, such as beef and lamb. However, much more has to be done to process lamb in forms which can be marketed at higher price levels in both countries. A better adjustment to demand trends in the American market requires closer cooperation with progressive marketing firms in the United States. New Zealand's efforts to penetrate the United States market seem to be very cautious, because of 'the fear of prQtectionist restrictions, such as the recent imposition of quotas for dairy products and proposals for quotas on meat imports. It would indeed be deplorable if New Zealand, which is attempting to strengthen her overall relations with the United States, is further harmed by additional restrictions on her, export commodities. 138.The strengthening of international trade relations as suggested above must be based on more effective trade and marketing analysis in New Zealand (see paragraph 149), as well as on expanded trade representation in other countries. B..4 54

IX. INSTRUMENTS FOR ECONOMIC POLICY FORMULATION AND PLANNING Present Weaknesses 139. New Zealand is faced with serious and complex long-term economic problems,.which have to be expertly and systematically arialyzed prior to the' formulatioh of policy suggestions. Indeed, such an analysis is a prerequisite for a real,understanding of the basic economic problems by both, the civil service and: the political leadership. It is hard to imagine an ordinary process of policy formulation in a modern economy without a series of discussions based' on well-prepared and 'well- presented documents, containing forecasts, assumptions on external factors, and policy recommendatioris preferably with alternatives. Whether this process is called "planning", indicative or otherwise, is of secondary importance as long as it serves as a proper: guide in fields of general economic policy and development. 140. The need for creating an indicative planning unit in New Zealand was recognised and discussed in some, detail by the present Government in the "Economic Review" presented to Parliament in June 1966. In general, the Mission concurs w'ith the attitudes expressed in this Review, although it overemphasized the role of projections of public sector expenditures and underemphasized the need for overall guidance of the economy and the formulation of 'development strategy. Previous to the report, in 1965 a planning u'nit had been established in the Treasury, under the direction of a divisiori chief in charge of external economic policy affairs. 141. The Mission encountered some scepticism with respect to the difficulty 'of forecasting future trends for New Zealand's export commodities and the danger of basing policy suggestions on such uncertain forecasts. The M-ission concedes that' such projections are subject to considerable error, especially when short-term fluctuations are considered. However, in the Missiori's view, the vulnerability of New Zealand to external commodity fluctuations requires a more concerted effort to improve 'projection techniques and to work out policy suggestions on ways to make the domestic economy less vulnerable to unexpected fluctuations. Like a boat, an economy which is subject to rough and unexpected winds needs particularly good steering instruments. Even a continuation of past methods is a major policy decision which requires continuous scrutiny. Reorganization of Planning 142. In the Mission's' view, the Government should take steps to strengthen its machinery for medium-term economic policy and planning. This machinery should Provide a systematic analysis of the problems facing New Zealand's economy in the medium ,and long term,, and advise 'the Government' on overall economic policy, especially development strategy. One of the uinit's first tasks should be the recommendation of specific measures for the improvement of the balance of'payments' and of resource allocation. Whether the above functions can best be per- -formed by the preparation of a medium-term -indicative plan, or whether a different and more flexible policy: framework would be more 55 B.4

suitable, is for the Government to determine. It 'is actually the availability and continuous use of professional economic advice, rather than a formal plan, which is the essence of effective planning. 143. This strengthening of planning does not necessarily have to -increase the Government's role in economic affairs. In fact, an improvement of analysis and policy formulation should result in more reliance on general policies and guidelines, rather than the present practice of detailed licensing which necessarily involves Government intervention in the investments and production of individual firms. 144. There are in New Zealand political differences of opinion as to the type of planning suitable for the country. Such differences are legitimate and natural, and are found in most countries. Nevertheless, in view of the economic difficulties facing New Zealand, the Mission believes that a strengthening of the tools for economic advice and planning would have wide public support. Economic planning should become a regular feature of public administration, regardless of the party in power, and it should be established on a statutory basis, preferably approved by Parliament. However, at the present time the Mission favors a pragmatic approach; any machinery which would enable the work to be started without too much delay is acceptable. Then after a few years' experience, the planning unit could be set on a statutory basis. 145. Such machinery for policy advice and planning requires the combination of a central unit and sectorial ones. The central unit should be close to the principal department in charge of economic policy formulation, which at the present is the Treasury. It should be headed by a high4evel official, with the rank of no less than an Assistant Secretary, who would would devote his full-time attention to the planning function and would have direct access to Cabinet Members and Committees. The staff of the unit could be relatively small, perhaps eight to ten persons, but it should be strictly professional. This small staff could easily draw on wider resources by allocating specialized studies to research institutes and universities. 146. The division of responsibilities between the planning unit and the other divisions in the Treasury dealing with budgetary estimates, fiscal policy, current economic analysis, and other aspects of economic policy is important. The Mission supports the view expressed by senior officials that the Treasury should be reorganized along the lines of a central Ministry which is responsible for the management of a modern economy. This subject is presently being discussed by a special committee, which, in the Mission's view, should also define the relationship of the planning unit to the other Treasury sections at the same time. For instance, the planning unit should annually prepare a tentative framework of the use of national resources in familiar national accounts terms, as background for the preparation of the Government budget proposal, which would be the major function of a budgetary division. The planning unit should cooperate closely with other government units dealing with current economic problems, but it should not be detracted from its primary long-term functions. 147. The work of this central planning unit could also be easily coordinated with that of the Monetary and Economic Council, especially B.4 56

in the area of fiscal i'nd mo'netary problems. The work of this Coduncil, in the Mission's opinion, has made'important contributions to the. understanding of New. Zealand's economic problems. and policy formulation, and should be further encouraged. 148. A crucial aspect of policy and development planning is the analysis of major international trade and .marketing trends, which is presently weak and needs urgently to be strengthened. The Mission favors the establishment of a central unit for trade analysis, which would specialize in demand projections of majoi agricultural commodities, but which would also be able to project demand for other products; including industrial ones, of potential interest to New Zealand. Such a unit could be placed either in the Treasury, in order to maintain close contact with the units responsible for balance of payments analysis, or in the Department of- Industries and Commerce, which is dealing with external trade policy. 149. The trade analysis unit should have a permanent and professional staff. Its responsibilities should be well defined and' include the analysis of long- and short-term' prospects for the major export commodities and the presentation of periodic and.special reports'to the Government and 'to the marketing boards. The marketing boards could be invited to appoint representatives 'to an 'advis6ry committee, which should also include economists experienced in techniques of market analysis. In addition, each marketing board should, employ an economist-to serve as a liaison officer with the trade analysis unit. When appropriate the marketing boards might second staff to the unit provided this is done for a sufficient length of time. The-trade apalysis.unit should cooperate closely with' the economicS research unit in the D'epartment of Agricul- ture, which is mainly responsible for the analysis of proddction trends. 150. Alt major Departments dealing with economic development, such as Ihdustries and Commerce, Agriculture, Transport, Housing, Labor and Tourism- should have a unit for economic advice and planning. In fact, the Department of Industries and Commerce and Transport urgently need to establish such economic advisory and planning units, since both are faced with. pressing complex development prpblems. In most cases such units could- be small, epmploying sometimes no more -than one or two economists. These could, be' guided professionally by the central unit, although from the point of view 'of. administration and general policy they should be part of, their own,,Departments. -These sectorial planning units could also, delegate studies to economists not in-Govern- ment service. I1'51. Staffing of'the plannipg unit may present difficulties, but, in 'the Mission's -view, these, could be overcome with ' strong support from the senior civil service. The first, and most important step is to recruit the chief of' the central planning' unit,. either from the senior staff 'of the civil seryice or from'among leading economists outside Goverriment service. If 'a proper candidate cannot -be fecruited on the basis of th'e regular Government salary, scale1 which is rhuch too'low for senior civil servants, a special contract as a cbnsultant might be used to attract an appropriate candidate. Once the central and sectorial planning units are given resoriable stature arid irifludnce, othr' economists could more easily be attracted. In general, the Mission believes that as economic 57 B.4 advice and planning play a more important role in public policy formulation, the Government should be able to hire economists graduating from the universities and possibly even to attract some New Zealand economists who at present are too easily tempted to go abroad. This seems to be a case of demand creating its own supply. 152. Close consultation and cooperation with various economic groups, such as producers, marketing organisations, trade unions, etc., are essential parts of the planning process. The experience of close cooperation between Government and farm groups in the Agricultural Develop- ment Conference is encouraging, and similar arrangements should be sought in the future. At the same time, the respective roles of the Government and such groups should be clearly recognized. Since the Government is the representative of the community as a whole and of the long-term interests of the country, while the producers and marketing groups represent special though legitimate interests, it is the Govern- ment which has to take responsibility for economic policy and which should in all cases set the framework and the basic guidelines for the development strategy. B.4 58

ANNEX I

PROJECTIONS OF GDP AND IMPORTS FOR 1972/73 1. Basic Assumptions. Based on past performance and relationships, the Treasury estimated four alternative levels of GDP and imports -in constant prices rby combining the different estimated values of each variable. It was assumed that GDP would either grow at 3.0 percent or 4.0 percent per annum on a linear basis and that the -import component of this projected GDP would either be 19.5 percent or 21.0 percent in 1972/73. Ranging from the highest level to the lowest level of total' imports which coulld result, 'the four alternatives were: (1) GDP growth of 4%, import component of 21.0% (2) GDP growth of 3%, import component of 21.0% (3) GDP growth of 4%, import component of 19.5% (4) GDP growth of 3%, import component of 19.5% 2.Regression Equations. In order to determine which of these four alternatives was likely to occur in 1972/73, six basic equations were set up. Two equations were used to estimate GDP level and growth. Two equations using this computed GDP trend were run to estimate the expected import component. Two equations with the GDP level and growth projected by the Treasury were also computed to estimate the expected import component. All of these equations were compared with the four alternative assumptions of the Treasury. A. GDP-GDP in constant prices was computed as a function of time, once on a linear 'basis and once on a semi-log basis. Using the relationship between GDP and time determined by the regression coefficients, GDP was then forecasted to the period 1972/73. The equations and their correlation coefficients were as follows: Where: 1. GDPk = (f)T T or time = l in 1953/54 GDPk = 1616.92+97.78 (T) k = constant prices R- 2 = .972 R- 2 = correlation coefficient corrected for degrees of freedom 2. LogGDPk = (f)T LogGDPk = 3.23+.018 (T) R-2 = .990 The growth rates of these computed GDP trends as compared with those forecasted at 3.0 percent and 4.0 percent by the Treasury were as 'fdllows: Growth Rates 1953/54-72/73 1953/54-65/66 1965/66-72/73 1.GDP (linear trend) 4.0% 4.4% 3.1% 2. GDP (semi-log trend) 4.3% 4.3% 4.3% 3. GDP (Treasury 3% forecast) 4.0% 4.2% 3.0% 4. GDP (Treasury 4% forecast) 4.4% 4.2% 4.0% 59 B.4

In comparing these GDP growth rates, the following factors should be taken into account. First, the growth rates of the Treasury's alternatives were based on the actual level of GDP in 1953/54-65/66, and only the rates in the 1965/66-72/73 period were projected. Thus, 4.2 percent was the actual growth rate for the historical period. Second, the growth rates of the other two alternatives were based on computed GDP trends and forecasts from these trends. Consequently, as rates from computed trends, they depend upon the type of equation used. Since a semi-log equation produces an overall constant rate of growth, a 4.3 percent compound rate existed in all periods, actual and projected. This 4.3 percent rate was almost identical with that of the historical period, as illustrated by a very high correlation of .990. But if major export prices were to fall substantially in the forecasted period, then growth of 4.3 percent could not be maintained. On the other hand, a linear equation gives an overall decreasing rate of growth, because a constant amount is added to a higher base in the projection period. Thus, the simple rate of 4.4 percent for 1953/54-65/66 was higher than the actual rate for that period, while the simple rate of 3.1 percent for the projected period was much lower than that which actually should be expected. In fact, in only three years out of the thirteen-year historical period from 1953/54-65/66 did the growth rate ever'fall to 3.1 percent or lower. Therefore, a rate of 3.1 percent probably could not 'be maintained constantly throughout the forecasted period, except under very heavy social and pclitical strains. Thus, on the basis of past trends as supported by these equations, the GDP alternative which best seemed to estimate the future growth rate was the Treasury's alternative df 4.0 percent. This rate was somewhat lower than the compound estimate and higher than the simple estimate, neither of which could be expected to be maintained continuously. In addition, the growth rate of this alternative for the overall period, 1953/54-72/73, was 4.4 percent; a rate which was very close to that of 4.3 percent in the semi-log equation. Because the correlation of the semi-log equation was so high, a rate of 4.3 percent or 4.4 percent for the overall period 1953/54-72/73 would probably be close to that rate which could be expected, barring major economic disturbances. B. Import Ratio-Imports in constant prices were now computed as a function of the above computed GDP trends and the GDP alternatives projected by the Treasury. Using the relationship between GDP and imports determined by the regressions, imports were forecasted to the period 1972/73. The four equations, their correlation coefficients, and the import ratios each equation produced were as follows: 1. GDP trend computed on a linear basis: Where: Mk = (f)GDPk M = imports Mk =-90.41+.178(GDPk) k = constant prices R- 21= .631 R- 2 = correlation coefficient corrected for degrees import ratio = 20.4% of freedom B.4 60

2. GDP trend computed on a semi-log basis: Mk = (f)GDPk Mk = 78.23+.184(GDPk) R- = .662 import ratio = 20.4% 3. New Zealand GDP projection at 3.0%: Mk = (f)GDPkI Mk = 66.53+.189(GDPk,) R-2 =.738 import ratio = 20.7% 4. New Zealand GDP projection at 4.0%: Mk (f)GDPk, Mk = 66.53+.189(GDPk,) R-2 =.738 import ratio = 20.6%

In all of the four equations the ratio of total imports to GDP was approximately the same, 20.6 percent. However, since data is not available in order to determine to what extent this stability of the import ratio conceals a shift in import composition, the knowledge of which is important in more accurately estimating the future level of total imports, the Mission preferred to assume a range for the ratio of total imports to GDP in 1972/73 (see para. 31). 61 B.4

ANNEX II

THE CRITERION OF DOMESTIC COSTS OF FOREIGN EXCHANGE 1. In a private enterprise system, resource allocation is done mostly on the basis of the expected financial or private returns on capital. These criteria are customarily expressed by well-known techniques, such as the expected rate of return on capital, or the discounted value of future returns or other variations of a costzbenefit analysis. However, in many cases private returns on capital differ from the social returns, either because of non-financial benefits associated with the particular project or because of indirect taxes or duties which represent costs for the private firm, but which from the social viewpoint are merely transfer payments and do not represent real costs to the economy. Because cof such differences the Government often has to intervene in resource allocation, using criteria which represent social rather than private returns on capital. 2. If foreign trade, the exchange rate and international capital movements were free from Government regulation and thus able to be freely set by the forces of demand and supply, then the social rate of return, as expressed in domestic currency, would also express the rate of return in terms of international prices. However, there are very few countries where foreign exchange transactions as well as exchange rates are completely free from regulation. Even -in such countries there may be a difference between the present "equilibrium" exchange rate and the long-term one, if future changes, which the Government may anticipate, but the private sector may not, are considered. Almost all countries tend to protect the level of activity and employment in their domestic economies from fluctuations in international trade and finance. In such cases the allocation of resources according to the rate of return in domestic currency does not necessarily correspond to the optimal resource allocation consistent with 'balance of payments goals. 3. This discrepancy may not be particularly important in those countries with a relatively small foreign trade sector or in those in a strong balance of payments pogition. But in countries which have a relatively large external trade sector and/or a balance of payments deficit, which could adversely affect activities in the domestic economic market, such a discrepancy may be of great importance and may require some corrective measures to assure domestic resource allocation oDnsistent with the balance of payments requirements. This is indeed the case in New Zealand. Therefore, a criterion 'is needed to help identify those activities in which the domestic economy has a comparative advantage, and such activities ghould be expanded in order to make -the best use of domestic resources. Such a criterion can serve as a major guideline for Government incentives to improve resource allocation. 4. An appropriate criterion is the costs of the domestic economy per unit of foreign exchange saved by import substitution or earned by exports, on a. net basis. If by producing commodity a the economy can B..4 62

save or earn one unit of foreign exchange at a lower cost of New Zealand dollars than by producing commodity b, then more resources should be drawn into the production of commodity a. (For the sake of brevity the U.S. ddllar shall hereafter be used to represent all foreign currencies.) The domestic costs per net U.S. dollar saved or earned is actually the exchange rate implicit in the production of the various domestic products. 5. It is the net savings on imports or the net earnings of exports, rather than the gross, which represent the balance of payments effects. To the extent that the domestic product requires imported inputs such as raw materials or machinery, such inputs are a drain on the balance of payments, rather than a gain. Therefore, only the net savings of imports or export earnings should be 'taken into account. 6. In a modern and' diversified economy, there are various stages of processing of a final product, in some of which the domestic economy may or may not have 'a comparative advantage depending on its particular endowment of resources. For example, Australia may have an advantage in the breeding of sheep for wool, but not in the production bf wool clothing. She then benefits by exporting raw wool and importing wool clothes. On the other hand, the United' Kingdom may 'have an advantage in processing wool, rather than in breeding sheep for raw wool. Moreover, even in the production of certain types of wool clothing, one country may have a comparative advantage over another. The more diversified an economy becomes, the more significant are its advantages or disadvantages in different stages od production. Thus the costs of a particular processing stage or economic activity have to be evaluated rather than the comparative costs of the final product or'even the value added of the product. 7. Moreover, there may be a considerable difference in the comparative advantage involved in the various stages .of processing of the same product. The automotive industry clearly indicates such a phenomenon. In vehicle production the domestic costs per U.S. dollar of imports saved may be considerably lower in the first 20 percent of domestic content than in the next 20 percent. Thus in the evaluation of an investment project or production program, each df the stages of production should be evaluated separately. This is similar to procedures followed in the 'financiai analysis of investment projects, in which different stages of investment and production are assessed, separately. 8. In many cases domestic plan'ts are required to use domest'ic inputs rather than imported ones. If imports are free from licences or tariffs, the plant .itself' could decide whether to use domestic or imported materials, choosing the least expensive input for comparable quality. In actual practice, domestic production df raw materials or semi-processed goods is 'frequently protected either by tariffs or by quantitative restrictions in imports. In such cases, a plant, which is forced. to use domestic inputs priced higher than international ones, may show a relatively high domestic cost for its final product. This may even happen to products in which an economy has a comparative advantage in a particular processing stage. To avoid such pitfalls, each processing stage has' to be evaluated on its own merits: This could be done by calculating the value of inputs purchased dornestically at domestic prices at their import prices, or similarly at the domestic cost, less the effects df the tariffs. 63 B.4

9. This calculation can be applied to inputs which can be physically imported, but such a treatment cannot be used for inputs which for natural reasons cannot be imported and therefore whose imported price is meaningless. Such inputs are henceforth referred to in accordance with the practice in international trade literature as "nontradables." As a matter of fact even nontradable inputs could be separated according to their import content as opposed to their domestic content. Their import content could then be calculated, as other imported inputs, at their import cost. However, this separation requires somewhat complicated calculations, which in many cases may not significantly affect the domestic costs. A simplified method, as suggested 'by Corden, would be to treat nontradable inputs as part of the domestic cost of the plant, rather than as an importable input.' 10. The calculation of the domestic cost per net U.S. dollar saved or earned can be shown by the following hypothetical example. Suppose a car is domestically produced at the following costs: Symbol p Price of a Fully Imported Car .. .. US $ 2, 000 a Components Imported by the Plant c.i.f. (Engines and similar parts) .. .. US $ 800 b Purchases from Other Firms of Tradables, at import prices (Tires, Glass, Steel, etc.) . . US $ 80 c Depreciation, at import prices .. .. US$ 70 d Purchases from Other Firms of Non-tradables (Power, Water, etc.) .. .. NZ $ 100 e Value Added by the Plant (Wages, Interest and Profits) ...... NZ $ 1,600 The net savings of the national economy in the domestic production of the car is the difference between the full price of the imported car, p, and the import costs of the importable inputs, a+b+c, or US$2,000- US$(800+70+80) =US$1,050. The domestic costs are d+e, or NZ$(1,600+100)=NZ$l,700. The domestic cost per each U.S. dollar saved is NZ $ 1,700 = NZ $ 1.62 US$ 1,050 Illustrated symbolically the domestic cost per net U.S. dollar saved is NZ$ (d+e) US $ p -(a +b +c) In this way data on domestic production costs and net savings of imports, or net export earnings, of various products could determine those products in which the economy has a comparative advantage, as expressed by a lower domestic cost per net U.S. dollar saved. If the domestic cost per U.S. dollar saved in another activity, such as in tractor production for the domestic market, or in the production of paper for export or in

1W. M. Corden, "The Structure of a Tariff System and the Effective Protective Rate," The Journal of Political Economy,. June 1966, pp. 226-227. B.4. 64 tourism, is lower than in car production, then the national economy would gain, by drawing more resources into the latter activities and' contracting the former. 11. When the domestic cost criterion is used to evaluate export commodities, the marginal or additional export earnings have to be calculated rather than the average earnings, as would be done in an evaluation of the financial returns on capital. This has important implications for some of New Zealand's agricultural commodities, which face an inelastic demand. Similarly, when the extension of a plant is considered, the marginal domestic cost, rather than average., has to be taken into account. 12. Data on the,domestic cost per U.S. dollar saved or earned can help rank the various plants according to their comparative advantage. In order to make private firms act on.this criterion, rather than on.their financial returns, the Governmenit has not.only to recognize the proper ranking of plants, but also to offer sufficient incentives on this basis. Such incentives can be given in a number of forms, such as budgetary subsidies or development loans at concessionary rates, or protective tariffs on imports. As long.as such incentives are based on criteria expressing "real" values, in this case the long-term value of foreign exchange, they are corrective rather than distortive. 13. What is the relationship between the domesti6 costs per U.S. dollar saved aind the protective tariff as discussed ihn Chaptdr VI? From the point of view of the calculation technique, the domestic cost per -U.S. dollar saved and the protective tariff percentage are identical, if both are calculated. on the same processing stage. This can be. shown in the following way. The above symbols with the sign of (') represent the costs of production of the imported car, if fully produced abroad: p = a' + b' + c' +d' + e' (allin US$) If importable inpu'ts used in the domestically produced car are calculated at import costs, disregarding, transportation costs, then: US$ (a + b + c) = US$ (a' + b' + c') The effective tariff would be given to protect the domestic value added as opposed 'to the foreign value added content of the product, and could be expressed as: NZ$ (d + e) US $ (d' + e') Since p -(a + b + c) = d + e (all in US $) then NZ$ (d + e) NZ$ (d + e) US$ p .- US$ (a + b + c) US$ (d' + e') The domestic cost ratio and the protective tariff rate for the value added' are then identical, and both express the ranking of yarious plants according to their comparative adyantage. Obviously a plant which requires a lower effective tariff indicates a relative' comparative advantaget The major justification for tariff protection suggested in this report is based on the expectation that after a certain period plants will reduce costs, and in that way will improve their comparative advantage ranking. 65 B.4

14. The domestic cost criterion thus ranks the various plants according to the implicit exchange rate 6f their product. An interesting question then arises: What is the relationship of this criterion with the official exchange rate? As can be seen in the above example, the domestic cost ratio is independent of the official exchange rate. Yet it can serve as an important guide as to what exchange rate would be consistent with various targets of export expansion or import substitution. Suppose the data shows that even following measures taken to reduce costs such as concentration of production or amalgamation of firms, the domestic costs in most industrial plants would exceed say NZ$1.4 per U.S. dollar, while the official exchange rate is NZ$1.12 per U.S. dollar. Tlhis would be an indication that the official exchange rate is not conducive to sufficient expansion of industrial exports. Therefore, the data on the domestic cost ratio can be helpful in suggesting the exchange rate most conducive to a desired level of export expansion. 15. To the extent that the Government gives proper financial incentives, either by subsidies, tariffs or development loans to encourage the expansion of plants with lower domestic costs per U.S. dollar earned, the private financial returns on capital will indeed correspond to the social returns, consistent with the balance of payments requirements. In that case, the Government would not have to interfere with resource allocation as set by the market beyond the use of the above incentives. The role of the domestic cost criterion could then be a guide to the Govern- ment in grouping plants according to their rank, and such a ranking could in turn serve as a basis for tariffs or subsidies. This would be the most reasonable approach, since the Government could then limit its direction of economic activities to the minimum corrective policies, and let the private sector allocate resources in accordance with the financial rate of return. s.4 66

Part 2: Statistical Data

Table I-External Medium- and Long-term' Public Debt Outstanding, Including Undisbursed as of June 30, 1967

Debt Repayable in Foreign Currency

(In thousands of US$ equivalents)

Debt outstanding June 30, 1967 Itent Net of . Including undisbursed .undisburset

Total External Public Debt ,. .. . 632,964 675,801 2 Publicly-issued bonds .. ., . .. 524,902 524,902 Privately-placed debt ...... 24,779 25,400 Suppliers' credits ...... 99 720 Other ...... 24,680 24,680 IBRD loans ...... 64,391 101,019

U.S. Government loans-Export-Import Bank .. 18,892 24,480 t Debt with an original or extended maturity of one year or more. 2Net of accumulated sinking funds of $244,000.

Source: I.B.R.D., Economics Department, Statistical Services Division. 67 B.4

Table 2-Estimated Contractual Service Payments on External Medium- and Long-term Public Debt Outstanding Including Undisbursed as of June 30, 19671 Debt Repayable in Foreign Currency (In thousands of US$ equivalents)

Debt Outstanding Payments During Period Year (Beg. of Period) - Incl.-Undisbursed ' Amortization Interest | Total

Grand Total 1967 675,8013 17,360 33,005 50,365 1968 666,041 66,129 33,394 99,523 1969 * 599,906 23,962 31,707 55,669 1970 575,945 24,650 32,233 56,883 1971 551,294 62,345 30,794 93,139 1972 .. 488,949 73,968 27,061 101,029 1973 414,980 41,498 22,696 64,194 1974 373,482 55,906 19,501 75,407 1975 .. 317,575 13,314 17,502 30,816 1976 304,261 43,940 15,843 59,782 1977 260,322 35,254 13,640 48,894 1978 225,068 40,422 12,509 52,931 1979 184,646 12,975 10,614 23,589 1980 171,671 69,553 8,131 77,684 1981 102,118 6,256 5,731 11,987

Debt Outstanding | Payment During Period Year ~~(Beg.of Period) i Pyet uigPro Year I . Gross Net Amortization I Interest Total

Publicl-Issued Bonds-Total 1967 525,146a 524,9028 7,225 26,854 34,080 1968 519,846 519,592 55,478 26,375 81,852 1969 464,369 464,109 11,541 24,411 35,952 1970 452,828 452,568 8,732 25,208 33,940 1971 .. 444,096 443,836 47,842 24,690 72,532 1972 .. 396,254 395,994 61,842 21,730 83,572 1973 .. 334,412 334,152 33,842 18,000 51,841 1974 .. 300,310 300,310 47,842 15,269 63,111 1975 .. 252,468 252,468 5,842 13,744 19,586 1976 .. 246,626 246,626 36,012 12,543 48,554 1977 .. 210,615 210,615 26,842 10,827 37,669 1978 .. 183,773 183,773 31,492 10,212 41,704 1979 .. 152,281 152,281 3,492 8,869 12,361 1980 .. 148,789 148,789 59,492 6,967 66,459 1981 .. 89,297 89,297 3,492 5,064 8,556

See footnotes at end of Table 21. B.4 68

Table 2-Estimated Contractual Service Payments on External Medium- and Long-term Public Debt Outstanding Including Undisbursed as of June 30, 19671-continued Debt Repayable in Foreign Currency (In thousands of US$ equivalents)

Debt Outstanding Payments During Period Year (Beg. of Period) In. Undisbursed Amortization Interest Total

Privately-PlacedDebt-Total 1967 25,4003 3,260 1,412 4,672 1968 23,770 3,863 1,262 5,125 1969 19,907 4,363 1,041 5,404 1970 15,544 4,943 792 5,735 1971 10,601 5,443 511 5,954 1972 5,159, 4,953 210 5,163 1973 206 103 10 113 1974 103 103 4 107

Suppliers Credits 1967 7203 3 3 1968 720 103 38 141 1969 .. 617 103 33 135 1970 514 103 27 130 1971 411 103 21 124 1972 309 103 16 118 1973 206 103 10 113 1974 103 103 4 107

Private Bank Credits 1967 .. 24,6803 3,260 1,409 4,669 1968 23,050 3,760 1,223 4,983 1969 19,290 4,260 1,008 5,268 1970 ... 15,030 4,840 765 5,605 1971 .. 10,190 5,340 490 5,830 1972 .. 4,850 4,850 195 5,045

See footnotcs at end of Table 21. 69 B..4

Debt Outstanding Payments During Period Year (Beg. of Period) IncI. Undisbursed Amortization Interest Total

IBRD Loans 1967 .. 101,0193 1,125 3,629 4,754 1968 . 100,449 1,363 4,610 5,973 1969 .. 99,086 2,632 5,406 8,038 1970 .. 96,454 5,550 5,682 11,232 1971 .. 90,904 5,885 5,340 11,225 1972 .. 85,019 6,248 4,981 11,229 1973 .. 78,771 6,628 4,597 11,225 1974 72,143 7,036 4,189 11,225 1975 .. 65,107 7,472 3,758 11,230 1976 .. 57,635 7,928 3,300 11,228 1977 .. 49,707 8,412 2,813 11,225 1978 .. 41,295 8,930 2,297 11,227 1979 32,365 9,483 1,745 11,228 1980 22,882 10,061 1,164 11,225 1981 .. 12,821 2,764 667 3,431

U.S. Govt.-Eximbank Loans 1967 24,4808 5,750 1,110 6,860 1968 .. 22,230 5,426 1,148 6,574 1969 16,804 5,426 850 6,275 1970 11,379 5,426 551 5,977 1971 .. 5,953 3,176 253 3,429 1972 .. 2,777 926 140 1,066 1973 1,851 926 89 1,015 1974 '926 926 38 964

'Includes service on all debts listed in Table I prepared October 18, 1967. 2Net of accumulated sinking funds. 3Outstanding as of June 30, 1967; payments are for the entire year 1967. Source: I.B.R.D., Economics Department, Statistical Services Division. B.4 70

Table 3-Population, Labour Force and Migration, 1910-66 (in thousands of persons)

End of Calendar Year Population Labour Force Immigrants - Emigrants'

1910 .. .. 1,035 1920 ...... 1,258- 1930' ...... 1,507 1939 ...... 1,642 1945 ...... 1,728 1950 ...... 1,928 731.9 1955 ...... 2,165 800.3 19.5 9.0 1956 ...... 2,209 813.9 20.9 9.4 1957 ...... -2,263 829.9 23.0 9.2 1958 ...... 2,316 847.9 26.3 8.1 1959 ...... 2,360 861.8 24.8 11.0 1960 ...... 2,404 875.6 20.3 13.4 1961 ...... 2,461 895.3 21.4 14.8 1962 ...... 2,515 911.4 32.8 12.7 1963 ...... 2,567 929.7 32.6 14.6 1964 ...... 2,617 956.5 34.2 14.9 1965 ...... 2,664 988.7 35.4 18.2 1966 ...... 2,712 1,021.8 35.3 18.6 lImmigrants intending permanent 2 'residence. (Years to March 31). Nev. Zealand residents departing permanently. (Years to March 31). 3April of year shown. Source: New Zealand Official Yearbook and Monthly Abstract of Statistics.

'Table 4-The Labour Market, 1953-1966

Industrial Stoppages

End of Calendar Year Vacancies') Placements' empoed' Nurber of Average W ki Workersddays lot Wokn Wokr per worker dy involved involved lost

1953 .. .. 11,399 1,891 85 22,175 0.87 19,291 1954 .. .: 12,532 1,419 58 16,153 1.27 20,474 1955 .. .: 14,854 1,291 56 20,224 2.57 52,043 1956, .. .. 12,986 1,263 259 13,579 1.76 23,870 1957 .. .. 8,926 1,369 394 15,545 1.81 28,186 1958 .. .. 7,135 1,296 785 13,709 1.37 18,788 1959 .. .. 5,300 1,414 1,188 18,762- 1.58 29,651 1960 .. .. 6,764 1,122 .. 633 14,305 2.49 35,683 1961 .. .. 9,196 931 376 16,626 2:30 38,185 1962 .. .. 6,843. 1,205 1,040 39,921' '2.33 '93,157 1963 .. .. 5,731 1,173 849 14,911 3.65 54,490 1964 .. .. 6,613 1,180 650 34,779. 1.92 66,834 1965 .. .. 7,936 1,101 513 15,267 1.43 21.814 1966 .. .. 7,753 1,011 463 33,132 2.99 99,095 lOnly vacancies notified to Department of Labour in its capacity as a placement service. 2 Average for calendar year, based on monthly data. Source: New Zealand Department of Statistics, Monthly Abstracg of Statistics. 71

Table 5-Distribution of the Labour Force, 1955-19661

Thousand of Employees Percentage Distribution Industry April April Ap.Nril April Apr.il Api

Agriculture (incl. other primary in- dutries) .. 144.6 139.8 132.4 18.1 16.0 13.0 Manufacturing 198.9 222.8 277.7 24.9 25.4 27.2 Food, drink and tobacco . . 38.9 46.0 52.5 4.9 5.2 5.2 Textiles, clothing and leather .. 40.4 41.1 47.4 5.0 4.7 4.6 Building materials and furnishings 30.6 32.6 37.6 3.8 3.7 3.7 Engineering and metalworking.. 61.3 68.4 95.0 7.7 7.8 9.3 Miscellaneous manufacturing 27.7 34.7 45.2 3.5 4.0 4.4 Building and Cons- truction .. 73.5 81.1 91.5 9.2 9.2 8.9 Commerce .. 133.2 149.4 182.2 16.6 17.1 17.8 Administration and Professional . . 106.1 128.6 162.2 13.2 14.7 15.9 Other industry and Services .. 133.5 142.8 164.0 16.7 16.3 16.0

Sub-total .. 789.8 864.4 1,010.0 98.7 98.7 98.8 Armed Forces .. 10.5 10.6 11.4 1.3 1.2 1.1 Unemployed .. .. .6 .4 .1 .1 Total Labour Force 800.3 875.6 1,021.8. 100.0 100.0 100.0

'Figures adjusted in line with the 1961 census data. Source: New Zealand Department of Statistics, Monthly Abstract of Statistics, July 1966 and 1967. Table 6-Prices and Wages, 1953-1966 (1965 = 1000; yearly averages)

Consumers' Price Index Wholesale Price Index Weekly Wage Rates (adult males) Calendar Year Average Weekly Food All Groups Imported Home Produced Total Nominal Real

1953 .. .. 756 709 895 802 844 666 939 579 1954 .. - 795 741 855 839 837 717 968 632 1955 .. .. 814 760 870 841 846 742 976 663 1956 .. .. 860 786 893 887 878 756 962 690 1957 .. .. 858 803 916 880 889 791 985 730 __ 1958 .. .. 871 839 946 900 914 800 954 741 1959 .. .. 876 871 970 910 928 814 935 758 1960 .. .. 889 877 956 920 931 855 975 805 1961 .. .. 897 893 960 914 928 869 973 842 1962 .. .. 902 916 961 906 922 890 972 862 1963 .. .. 919 935 979 923 940 915 979 895 1964 .. .. 972 967 982 969 973 943 975 923 1965 .. .. 1000 1000 1000 1000 1000 1000 1000 1000 1966 .. .. 1018 1028 1017 1016 1017 1025 997 1031

'April of year shown. Includes bonuses and overtime. Source: New Zealand Department of Statistics, Monthly Abitract of Statistics. Table 7-Gross National Product, 1938/39-1965/66 (NZ$ milions)

Fisa Year 1193839 1946147 1949/50 [1954/551955156 1956/57 1957/58 1958159 9591601 1960/61 1961/62 1962/63 1963/64 1964165 J1965/66

Private consumption 322 485 709 1202 1279 1329 1447 1463 1471 1721 1798 1887 2010 2167 2391 Public consumption.. 63 107 140 227 249 274 287 302 324 346 363 395 416 459 494 Gross private investment .. .. 35 75 116 277 266 256 287 290 297. 366 392 390 430 497 553 Gross public investment 44 54 94 164 187 203 214 214 225 234 241 255 286 312 350 Change in stocks .. 10 42 28 58 38 20 32 31 12 49 23 29 78 88 133 Current balance m payments .. -10 88 14 -68 -44 -21 -83 -30 105 -94 -96 -32 -20 -34 -168 Exports of goods and services .. _ - _ 507 565 595 593 576 671 630 633 669 788 829 827 Imports ofgoods and - - - -556 -602 -596 -657 -578 -549 -683 -694 -651 -761 -798 -930 4 services Gross National Product 464 851 1101 1860 1965 2061 2184 2270 2434 2622 2721 2924 3200 3489 3759 Annual % change .. - 10.4 9.8 13.7 5.7 4.9 5.9 3.9 7.2 7.7 3.5 7.1 9.8 7.5 7.7 GNP at constant 1954/55 prices .m. _ _ 1860 1930 1966 2070 2120 2210 2332 2418 2480 2636 2786 2970 Annual % change.. _ _ _ - 3.8 1.9 5.3 2.4 4.2 5.5 3.7 2.6 6.2 5.7 6.6 Indexes at constant prices (1954/55 = 100) Gross National Product _ _ _ 100.0 103.8 105.7 111.3 114.0 118.8 125.4 130.0 133.3 141.7 149.8 159.7 GNP per worker _ _ I..100.0 101.9 101.6 105.2 105.9 108.7 112.1 114.3 114.9 118.7 121.4 125.2 GNP per head _ 100.0 101.7 101.4 104.3 104.4 106.6 110.6 112.1 112.2 116.7 120.8 127.1

Source: Data at constant prices supplied by the De tment of Statistics. New Zealand Department of Statistics, R=eport on National income and Expenditure, 1965/66. 7.4

Table 8Sector Contributions to Gross Domestic Product, 1964/65

. ~~~~~~~Increase Scto1954/55 Increase 195455-1964/65 % Distribution Sector (NZ$ million) m Volume at 1954/55 Prices 1964/65 1954/55-1964/65 (NZ$ miUion)

Farming .. .. 373.0 39.0 148.0 16.2 Forestry .. .. 13.8 47.7 6.6 .7 Fishing .. .. 6.0 26.9 1.6 .2 Mining .. .. 17.2 41.8 7.0 .8 Manufacturing .. .. 388.6 87.3 339.0 37.3 Power and Gas .. .. 32.6 120.4 39.0 4.3 Construction .. .. 126.8 37.9 48.0 5.3 AIl Services .. .. 780.0 41.1 320.0 35.2 GDP at Factor Cost .. 1738.0 51.8 904.0 100.0

Source: New Zealand Institute of Economic Research, Inc., Research Paper No. 8; and New Zealand Department of Statistics, Now Zealand Official Yearbook, 1967. Table 9-Composition and Source of Investment, 1938/39-1965/66 (NZ$ millions)

Fiscal Year 1938/39 1948149 1949/50 11955/56 1956/57 1957/58 1958/59 1959160 1960/61 ]1961/62 1962/63 1963/641 1964/65 1965/66

Gross Investment Private 35 101 116 266 256 287 290 297 366 392 390 430 497 553 Building - - - 143 141 166 166 181 209 208 202 243 274 299 Other . - - 123 115 - 121 124 116 157 184 188 187 223 254- Government 32 62 76 129 138 140 137 141 149 148 154 180 196 218 Local-Authorities 12 16 18 58 65 74 77 84 85 93 101 106 116 132 Change in Stocks 10 38 28 38 20 32 31 12 49 23 29 78 88 133 Sub Total 89 141 238 491 479 533 535 534 649 656 674 794 897 1036 Net Investment Abroad - 10 8 - - - - 89 ------

Total 89 151 246 491 479 533 535 623 649 656 674 794 897 1036 - Soirces of Capital U Private Savings 28 41 143 167 192 206 157 347 206 164 295 378 383 334 Revenue Balances of Public Authorities 14 45 33 135 115 82 175 108 153 178 115 151 215 251 Depreciation (a) Private - - - 114 127 135 141 141 155 .174 loti 197 214 Z29 (b) Gbvernment Trading Undertakings . . 34 64 70 15 16 18 20 22 24 24 26 27 27 28 (c) Local Authority Trading Undertakings .. _ _ - 3 4 4 5 5 6 6 7 8 9 10 Sub Total 77 151 246 433 455 446 497 623 544 548 629 761 848 850 Net Borrowing Overseas 12 _ - 58 24 87 38 - 105 108 45 33 49 186 Total 89 151 246 491 -479 533 535 623 649 656 674 794 897 1036

Source: New Zealand Department of Statistics, Repors on National Income and Expenditure 1965/66. Table 10-Gross Capital Investment by Sectors, 1956/57-1965/661 (NZ$ millions)

Fiscal Year 1956/57 | 1957/58 | 1958/59 1959/60 1960/61 1961/62 | 1962/63| 1963/64 1964/65 1965/66'

Private Investhmnt Building .. 141 166 166 181 209 208 202 243 274 299 Other .... .115 121 124 116 157 .184 188 187 223 254 Total .I...... 256 287 290 297 366 392 390 430 497 553 Percent of GNP .... 12 13 13 12 14 14 13 13 14 15 Public Investment Central Government 138 140 137 141 149 148 154 _ 180 196 218 Local Authorities .. 65 74 77 84 85 93 101 106 116 132 Total . .. 203 214 214 225 234 241 255 286 312 350 Percent of GNP...... 10 10 9 9 9 9 9 -9 9 9 Total Gross Investment... 459 501 504 522 600 633 645 716 809 903

Percent of GNP ... .. 22 23 22 22 23 23 22 22 23 24

lExcluding changes in stocks. 2Provisional. Source: New Zealand, Economi. Review, 1967. 77 B. 4

Table 11-Building Activity, 1949/50-1966/67

Number of Permits Issued for New Houses and Flats Total Value of Permits Issued (in thousands) (NZ$ millions)

Fiscal Year Private Government Total All New Houses All Buildings I ~ ~ -______Iand Flats

1949/50 .. 12.3 5.4 17.7 58.0 85.0 1953/54 .. 14.0 3.4 17.5 83.4 139.0 1954/55 .. 17.4 3.4 20.9 105.6 186.8 1955/56 .. 16.2 3.3 19.5 103.0 180.4 1956/57 .. 15.7 2.7 18.4 98.4 178.8 1957/58 .. 17.0 2.0 19.0 105.0 203.6 1958/59 .. 18. 1 2.4 20.6 114.0 203.0 1959/60 .. 20.5 3.1 23.6 132.6 228.0 1960/61 21.6 2.7 24.4 145.0 269.4 1961/62 20.3 2.1 22.4 138.6 259.2 1962/63 .. 18.4 2.2 20.6 129.2 274.2 1963/64 .. 19.8 1.9 21.8 139.8 294.6 1964/65 .. 23.4 2.0 25.4 165.2 357.6 1965/66 .. 23.6 2.3 25.9 176.4 361.8 1966/671 .. 21.9 2.2 24.0 176.2 371.4

IProvisional. Source: New Zealand Official Yearbook and Monthly Abstract of Statistics. Table 12-Central Government Finances, 1957/58-1966/67 (NZ$ millions)

Fiscal Year 1957/58 | 1958159 1959/60 1960/61 1961/62 1962/63 | 1963/64 | 1964/65 1965/66 1966/67

Receipts Taxes on income .. 288.2 380.0 351.8 413.8 457.0 432.8 466.4 547.8 606.0 664.4 Other taxation .. .. 201.2 232.0 246.8 256.6 259.8 252.4 277.4 297.2 312.8 325.0 Other current receipts .. 87.0 95.6 117.2 123.8 116.8 127.8 140.4 148.0 136.2 148.4 Total current receipts .. 576.4 707.6 715.8- 794.2 833.6 813.0 884.2 993.0 1055.0 1137.8 Expenditure of which: Benefits, health and education .. .. 291.0 319.8 371.6 406.4 414.8 444.2 451.0 500.6 534.2 571.4 Administration, defense and maintenance . . 123.8 114.2 125:2 128.0 135.8 153.6 161.8 187.2 204.2 221.8 Development financing . . 34.4 45.8 37.2- 44.4 42.6 46.6 50.4 49.4 55.0 60.0 Subsidies .. .. 25.8 25.8 25.2 30.8 27.8 28.6 29.6 34.6 37.2 35.8 Interest on government debt .. 51.4 57.2 58.2 61.0 66.6 72.4 82.6 88.2 95.4 107.0 Co Works and other capital expenditures 161.2 189.8 192.8 -302.8 202.4 171.6 192.0 222.0 243.6 275.8 Total expenditure.. 687.6 744.6 810.2 873.4 890.0 934.0 991.4 1082.0 1169.4 1271.8

Deficit ...... -111.2 -37.0 -94.4 -79.2 -66.4 -121 0 -107.2 -89.0 -114.4 -134.0 Financed by: Net receipts of govt borrowing and investment transactions- Domestic .. +70.6 +26.8 +66.0 +88.4 +32.6 +105.6. +113.0 +158.0 +93.0 +89.0 External .. -4.0 +74.0 -40.2 -0.8 +34.6 +32.8 f 19.0 -14.2 22.8 +67.8 Increase (-) or decrease (+) in cash balances .. - -33.0 +30.0 -8.4 - -17.4 -4.8 -1.8 -1.4 -2.8 Reserve bank purchase (-) or sale (+) of govt securities .. .. +44.6 - 30.8, +38:6 - .+0.8 - -20.0 -53.0 - -20.0

Source: New Zealand, Annual Budgetary Accounts. Table 13-Central Government Works and Capital Program 1960/61-1966/67 (NZ$ millions)

Fiscal Year 1960161 | 1961162 | 1962163 | 1963164 | 1964165 1965166 1966167

Electric Supply ...... 38.4 37.4 37.4 47.4 50.4 60.0 74.0 Land Settlement ...... 12.6 16.4 15.0 16.6 18.8 19.8 20.0 Housing Construction .. .. . 20.2 . 18.4 16.6 16.6 15.4 15.0 15.0 Education Buildings .. .. . 16.2 17.2 17.6 19.8 21.2 23.0 University Buildings 3. 17.4 1.2 2.0 4.0 6.2 7.2 12.0 Railway Construction and Improvements (incl. rolling stock) . 11.8 12.8 12.4 15.8 16.4 22.0 20.0 Telecommunications ...... 12.0 14.4 17.0 15.6 16.4 17.8 19.0 Forest Development ...... 6.2 5.4 5.8 6.4 8.4 8.6 9.0 Civil Aviation ...... 2.0 4.2 5.6 7.0 7.2 7.4 7.0 t National Roads -Construction ...... 17.0 16.8 18.0 23.6 23.6 28.6 31.0 Public Buildings ...... 7.6 10.0 10.0 9.8 12.2 12.2 14.0 Other ...... 3.2 4.8 5.6 5.8 6.0 6.8 7.0

Total of Works ...... 148:2 158.0 162.6 186.2 200.8 226.6 251.0

Advances to State Advances Corporation ...... 44.0 48.0 47.0 37.0 51.4 48.0 48.0 Advances to other ...... 3.2 6.0 1.6 2.6 2.0 3.0 3.0

TOTAL PROGRAM ...... 195.4 212.0 211.2 225.8 254.2 277.6 302.0

lAppears to exclude certain expenditure in connection with upgrading of State roads. Source: New Zealand Treasury Department. Table 14-Principal Exports, 1956-1966 (Values f.o.b. in NZ$ million; indices 1960 = 100)

Calendar Years - June-Years

1956 1957 1958 1959 1960 1961 1962 1962/63 1963/64 1964/65 1965/66'

Dairy Produce .. .. 164.4 132.6 117.0 177.0 157.8 -137.2 132.8- 147.2- 169.2 198.8 196.6 Volume index .. .. 102 95 107 116 100 105 107 107 116 124 126 . .. *89 Price2 index : 108 84 120 100 92 102 105 110 119 114 Meat .. .. - .. 142.2 141.4 159.0 153.8 162.4 154.6 160.0 183.4 195.2 223.6 207.6 Volume index .. .. 89 -85 91 94 100 100 104 113 114 110 104 O Price index .. .. 106 110 105 97 100 95 96 100 107 123 119 C Wool ...... 183.0 212.0 160.0 179.2 204.6 200.6 193.2 214.4 271.4 208.6 232.0 Volume index .. .. 80 83 88 101 100 106 105 III 109 102 119 Price index .. .. 110 121 86 92 100 95 93 100 127 99 97 Hides, skins and pelts .. 21.2 20.2 16.6 26.6 26.6 24.4 . 77.8 82.6 101.4 111.2 125:3 Other exports .. .. 44.2 47.0 47.8 50.8 53.6 51.2 Total Exports-.. .. 555.0 553.2 500.4 587.4 605.0 568.0 575.6 627.6 737.2 742.2 761.5 Volume index .. * 88 -88 94 102 100 103 105 111 115 114 119 Price index .. .. 108 106 90 103 100 95 96 101 114 112 III t Provisional. 2Includes sausage casings. Source: New Zealand Department of Statistics, Monthly Abstract of Statistics; and New Zealand Official Yearbook. Table 15-Exports by Principal Countries, 1955/56-1965/66 (NZ$ mfillions, f.o.b.)

1956 ...... 358.1 13.8 396.1 38.4 10.8 28.1 17.4 10.7 4.6 143.7 539.8 1957 ...... 346.8 19.1 389.5 32.4 11.6 40.6 26.0 11.7 11.5 164.4 553.8 1958 ...... 309.3 21.2 355.5 59.0 11.0 38.4 18.5 15.1 13.2 186.7 542.3 c 1959 ...... 286.6 19.8 329.0 90.9 9.2 28.6 16.0 11.6 11.7 191.1 520.1 1960 ...... 343.1 24.8 395.3 79.1 14.7 42.4 23.0 16.1 16.1 232.9 628.2 1961 ...... 295.9 25.6 348.2 80.6 14.1 34.7 15.4 10.5 24.6 211.5 559.7 1962 ...... 286.5 21.5 338.5 86.2 20.6 36.8 19.8 19.1 24.2 240.3 578.9 1963 ...... 296.4 27.5 358.9 107.8 16.7 41.1 22.4 19.2 25.5 268.7 627.6 1964 .. .. 347.8 34.0 417.2 110.7 22.9 46.9 28.3 25.1 32.3 320.0 737.2 1965 ...... 374.8 34.6 455.4 93.4 24.1 33.9 29.8 18.1 32.0 286.8 742.2 1966 ...... 339.0 36.4 427.9 107.5 22.4 40.4 26.2 20.0 56.9 333.7 761.5

Source: New Zealand Department of Statistics, Monthly Abstract of Statistics. B.4 82

Table 16-lSignificance of the UnitedKingdom Market for Major Export Commodities, 1955-1966 . (Proportion of export receipts from the U.K. for each group in value-percentages)

CalendarYears 1955 1960 1961 1962 1963 1964 j 1965 1966

Butter .... 90.0 89.9 94.4 93.0 95.8 93.4 89.1 87.7 Cheese .. .. 92.6 93.0 88.4 88.3 88.8 86.5 83.8 73.3 Meat ...... 87.1 64.1 62.7 58.5 53.4 61.3 66.3 58.5 Wool . . .. 47.3 31.7 30.7 30.1 28.5 28.2 24.7 22.9 Other exports .. .. 40.1 29.4 23.2 26.8 22.6 25.8 24.7 21.4

Total Exports .. 66.7 52.1 50.9 50.9 47.8 49.3 49.5 43.7

Soarce: Reserve Bank of New Zealand Bu&Jeriwa.

Table 17-Export Price Indices, 1950-1967 (1957 100)

Year or Quarter Butter Cheese Meat Wool and All Esports I I I} I BY-Products

1950 . .. 103 102 57 III 92 95 1954 . .. 129 125 87 92 92 101 1955 1..33 132 98 92 94 104 1956 . . . 108 171 96 91 94 102 1957 . .. 100 100 100 100 100 100 1958 . . . 86 120 95 71 81 85 1959 . . . 127 173 88 76 83 97 1960 .. .. 105 142 91 82 87 94 1961 .. .. 93 141 87 78 83 89 1962 .. .. 110 142 87 77 82 91 1963 .. .. 120 138 S4 94 93 101 1964 .. .. 126 140 104 98 101 108 1965 1 .. . 131 150 116 79 96 107 I .. 131 151 107 75 91 103 II .I 118 149 110 79 95 104 IV .. .. 118. -147* IIIl 84 98 106 1966 I .. .. 116 147 109 79 96 105 I .. .. 110 143 III 79 97 104 III .. .. 110 145 116 75 98 105 IV .. 110 '147 106 76 93 101 1967 I .. 110 149 111 69 89 98 II . .. 110 150 107 66 85 95

Source: New Zealand Department of Statistics, Monthly Abstract of Statistics. 83 B.4

Table 18-Imports by Commodity Classes, 1954-1964/65

Import Value Percent Distribution (NZ million, c.d.v.) e

Commodity Class Calendar Year _ June Year 1954 1960 1964/65 I ~~~1964/65 1954 I 1960

Food, Beverages, To- bacco .. 49.7 40.3 43.5 11.7 8.0 6.6 Mineral Fuels 29.9 41.4 45.4 7.0 8.2 6.8 Chemicals, inc. Manu- factured Fertilizers 26.5 40.6 65.3 6.2 8.0 9.8 BaseMetals and Manu- factures of Metal 54.3 78.6 99.4 12:7 15.5 15.0 Machinery and Trans- port Equipment .. 123.0 144.5 224.3 28.8 28.6 33.8 Textiles Clothings and - Footwear .. 70.5 71.4 74.7 16.5 14.1 11.3 Total Imports t 426.3- 'I 506.2 662.7 100.0 100.0 100.0

'Including imports not elsewhere specified. Source: New Zealand Department of Statistics, Monthly Abstract of Statistics; New Zealand Official Yearbook, 1966. Table 19-Imports by Principal Countries, 1956-1966 (NZ$ millions, c.d.v.)

Sterling Area and Canada Other Countries All Year Ended June outrIes United India Australia Canada Total U.S.A. G West Japan Total Importl Kingdom ~~~~~~~~~~~ermany pot 1956 ...... 260.1 7.0 62.5 15.4 377.6 41.1 13.6 5.9 105.9 1957 .. 483.6 ...... 249.6 8.8 80.9 13.5 383.6 37.0 13.2 4.4 102.8 486.4 1958 ...... 289.5 9.2 85.0 12.6 424.4 39.5 1959 17.5 5.2 112.2 536.6 0. .. .. 211.5 11.1 811 -9.6 336.3 31.7 12.5 5.8 98.2 1960 . 434.5 ...... 206.2 10.4 83.4 12;4 342.1 41.0 13.8 10.3 112.3 1961 .. 454.4 ...... 259.3 10.4 96.2 20.6 420.7 61-.1 18.9 17.7 161.9 1962 .. 582.7 ...... 215.4 11.2 95.1 18.5 373.0 45.1 17.0 13.7 134.9 1963 .. 507.8 ...... 219.4 9.5 97.2 17.9 378.5 48.0 15.5 24.2 145.2 1964 .. 523.7 ...... 246.5 10.8 132.7 21.8 454.3 59.1 17.5 30.7 183.1 637.4 1965 ...... 241.9 8.7 128.0 25.7 456.6 75.1 18.8 36.7 206.1 19661 .. 662.7 ...... 278.2 10.9 135.1 29.6 508.5 83.9 22.3 44.7 221.1 729.6 1Provisional. Source: New Zealand Department of Statistics, Afanthly Abstract of Statistics. Table 20L-Balance of Paymaents, 1950/51-1966/67 CURRENT ACCOUNT (NZ$ millions)

1950/51 ...... 405.4 -292.4 113.0 -26.1 - 8.2 -13.2 - 3.2 6.2 - 0.7 55.4 1951/52 .. ., .. 502.4 -475.0 27.4 -49.2 - 8.6 -13.5 -12.9 0.9 - 6.1 62.1 1952/53 ...... 477.0 -417.6 59.4 -31.6 - 6.3 -12.0 -13.7 0.3 - 6.8 - 10.7 1953/54 ...... 492.3 - 362.2 130.1 -18.3 - 6.3 -10.9 -16.3 - 3.9 - 4.3 70.1 1954/55 .. . .. 472.3 -459.6 12.6 -31.1 - 7.8 -18.6 -14.1 - 6.1 - 8.6 - 73.7 co 1955/56 ,, ,. .. 526.0 -499.0 27.0 -35.5 - 8.3 -17.4 - 7.5 - 3.6 -11.3 - 56.6 c. 1956/57 ,. .. .. 548.4 -488.9 59.5 -30.9 - 7.0 -19.5 - 8.1 - 3.9 -15.0 - 24.9 1957/58 ...... 540.4 -546.0 -5.6 -34.0 - 6.7 -19.4 - 6.5 - 3.5 -12.2 - 87.8 1958/59 ...... 528.0 -467.8 60.2 -31.9 - 9.6 -28.2 - 4.3 - 7,3 -16.3 - 37.4 1959/60 ...... 623.3 -442.2 181.1 -22.4 -12.4 -23.3 -11.9 - 9.7 -17.6 83.9 1960/61 ...... 574.1 -547.2 26.9 -29.8 -19.8 -40.6 -11.5 -11.5 -19.8 -106.2 1961/62 .. .. ,, 580.0 -551.0 29.0 -33.3 -20.2 -34.7 -11.2 -12.1 -27.8 -110.2 1962/63 .. .. ,. 606.0 -508.6 97.4 -38.0 -19,6 -50.1 - 9.6 -12.6 -13,9 - 46.3 1963/64 ...... 718.4 -600.5 117.9 -44.5 -19.1 -47.4 -12.1 -12.2 -16.6 - 33.8 i964/65 .. ,. .. 757.1 -615.3 141.7 -49.9 -22.5 -64.6 -12.7 -15.0 -27.3 - 50.2 1965/66 . . . .. 747.2 -718.8 28.4 -60.0 -27.5 -59.4 -17.7 -22.6 -28.4 -187.4 1966/67 ...... 781.9 -719.4 62.5 -55.0 -30.4 -66.6 -24.1 -23.4 -32.7 -169.9 Table 20--continued (NZ$ millions) CAPITAL ACCOUNT

.. Other Other Overseas N.Z. Long-Term Long-Term Long-Term Overseas Short-Term Short-Term Balance Direct Investment Private Government Official and Assets Goverranent Investnent on Fiscal Year Investment Overseas Investrment Investmnent Investment (net) Investment (including Capital in N.Z. (net) .(net) Banking (net) | Errors and Account Omissions)

1950/51 .. -1.21.. 3.2 - 8.0 17.0 - 2.8 53.01 - 0.2 4.4 55.4 1951/52 . .. -22.0 3.8 - 3.6 11.4 - 1.6 -40.01 - 0.6 - 9.3 - 62.1 1952/53 .21.2 2.0 - 9.8 - 4.8 6.0 46.81 - 0.4 -29.2 - 10.7 1953/54 :: - 6.4 4.4 -21.0 0.4 54. 61 5.6 32.6 70,1 1954/55 . 22.2 3.4 - 2.0 -14.8 - 1.8 -69.6 3.6 29.7 - 73'7 C 1955/56 .: .; -31.5 1.5 - 9.4 6.4 0.2 -19.0 -12.0 6.8 - 56.6 1956/57 .. .. -20.2 2.7 - 2.2 -20.0 - 2.4 9.4 2.8 5.4 - 24.9 1957/58 :: .. -19.2 2.5 - 6.9 4.2 - 7.4 -79.2 - 0.2 18.4 - 87.8 1958/59 .. :. -27.7 0.5 -10.8 -74.0 02 50.1 5.8 18.5 - 37.4 1959/60 .. .. - 6.5 3.5 -19.2 30.0 0.4 45.4 5.2 25.1 83.9 1960/61 . . . -34.2 2.1 -22.2 22.2 1.0 -88.1 - 9.8 22.7 -106.2 1961/62 .. .. -36.2 1.5 -21.8 -24.2 0.4 -17.71 5.4 -17.2 - -110.2 1962/63 .. .. -55.4 4.0 -12.3 -20.4 0.4 58.6 -11.8 -10.0 - 46.3 1963/64 .. .. -38.1 3.7 -12.8 -16.2 0.4 - 6.2 24.7 10.7 - 33.8 1964/65 .. .. -44.2 -0.3 -26.7 - 5.2 0.4 - 7.2 3.0 29.9 - 50.2 1965/66 .. .. -62.6 2.6 -21.0 -33.8 -43.3 -43.2 1 1.6 12.4 -187.4 1966/67 .. .. -26.4 2.3 -25.3 -59.7 -44.5 0.3 - 5.3 -11.3 -169.9

'Including monetary gold. Source: New Zealand Statistics Department. 87 B.4 Table 21-Foreign Exchange Reserves, 1958-1967 (NZ$ millions)

Gold Gvt. Held ~Gl Balance Reserve Trading Holdings Overseas Trancoe Total in Last Day I Bank Banks of Raerve Domiciled oio [ ~~~~~ ~~BankSecurities Position'1

1958 .. 94.8 15.4 24.0 64.7 - 199.0 1959 .. .. 130.4 44.7 24.6 87.6 - 287.2 1960 .. .. 101.4 30.5 24.8 87.2 - 244.0 1961 .. .. . 67.1 31.0 0.4 49.0 22.5 170.0 1962 .. .. 97.5 25.6 0.5 74.3 22.5 220.5 1963 .. .. 80.0 40.7 0.5 67.8 22.5 211.5 1964 .. .. 96.1 31.7 0.5 84.2 22.5 235.0 1965 .. .. 69.2 33.4 0.2 67.1 - 170.0 1966 (Ist Qtr.) .. 75.7 40.6 0.2 74.2 - 190.7 (2nd Qtr.) . 80.9 42.6 0.1 74.4 - 198.1 (3rd Qtr.) .. 94.7 25.5 0.3 73.4 - 193.8 (4th Qtr.) .. 67.8 22.8 0.2 73.2. . - 163.9 1967 (Ist Qtr.) .. 72.8 43.5 0.3 69.6 - 186.3 May .. 80.7 23.2 0.6 69.9 - 174.4 June .. 87.3 24.4 0.6 70.1 - 182.4

1The gold portion of New Zealand's subscription to the IMF was increased by NZ$5.8 million to NZ$28.2 million in March 1966, but the additional amount was drawn simultaneously. Sos ree: New Zealand Treasury Department.

Table 22-External Loans Raised Since 1950

Year of Issue Amount U.K. C Sterling Interest $ Maturity lssue Price

1953 10,000,000 4 11 December 1976/78 98.5 1954 .. 10,000,000 3-1/2 16 September 1981/84 98 1955 10,000,000 4-1/4 1 July.1970/73 97.5 1956 .. 5,000,000 5-1/4 14 November 1978/82 96.5 1958 .. 20,000,000 5 28 February 1976/80 99 1961 .. 20,000,000 6 15 November 1972 98.5 1962 .. 10,000,000 6 15 March 1975/76 97 1964 .. 15,000,000 5-1/2 28 February 1974 96.5 1965 .. 10,000,000 6-3/4 6 December 1971 98.5 1966 .. 12,000,000 7-1/2 1 June 1986 98

U.S.A. Dollars

1956 .. 13,054,549- 4-3/4 Various to 15 May 1966 100 1958 .. 10,000,000 5-1/2 1 December 1970 99 1961 .. 20,000,000 5-3/4 15 October 1976 97.5 1962 .. 25,000,000 5-1/4 1 May 1977 97.5 1965 .. 20,000 000 5-3/4 I July 1985 97.5 1966 .. 15,000,000 6-1/2 15 March 1986 96 10,000,000 7 15 September 1976 98

IBRD Dollars

1963 .. 7,114,000 5-1/2 15 February 1989 100 1965 .. 32,500,000 5-1/2 15 March 1984 100 20,500 000 6-1/4 15 September 1980 100 42,000,000 6-1/4 15 October 1980 100

Source: New Zealand Treasury Department. B.4 88

Table 23-Alternative Balance of Payments Projection;, 1972/73 (NZ$ millions)

Assuming G.D.P. Growth Rate of

3% 4%

In orts ITnports Im rta Imnorts 19.5 of 2!%f I9.5%of G.O.P. G.D.P. G.D.P. G.D.P.

Exports Pastoral ...... 870 870 870 870 Non Pastoral .. . . 100 100 100 100 Re-Exports ...... 20 20 20 20

Total Exports .. .. 990 990 990 990 Imports ...... -845 -780 -905 -840

Trade Balance .. .. 145 210 85 150 Ihvisibles - Net Deficit ! I Transp t ...... -62 -61 -65 -65 Travel ...... - 40 '-40 -40 -40 International Investment Income .. -133 -133 -133 -133 Government Transactions .. .. -32 -32 -32 -32 Miscellaneous (inCl. Ins.) .. .. -45 -45 -45 -45 Unilateral Transfers .. .. -34 -34 -34 -34-

Total Invisibles .. .. -345 -345 -350 -345

Current Account Deficit .. .. -200 -135 -265 -195 NTet Private Capital Inflow .. .. 105 105 105 105

Net Public Capital Requirements . -95 -30 -160 -90

NOTE-Main aggregates rounded to nearest NZ$5 million. Source: New Zealand Treasury Department. 89 B.4

Table 24-Pastoral Export Projection, 1972/73

(NZ$ million, f.o.b.)

1972/73 Projection Product Product Fiscal Year ~~1965/66 Vlm |_ ~~~~~ActaPricPrc _ | V I (000 tons) (NZ $/ton) Value

Meat- Lamb ...... 106.8 396 350 138.6 Mutton ...... 15.6 141 150 21.2 Beef ...... 48.8 203 310 63.0 Veal ...... 5.4 24 330 8.0 Offal, etc...... 16.0 38 480 18.2

Total Meat .. .. 192.6 249.0 Dairy Products- Butter ...... 112.8 248 530 131.4 Cheese ...... 41.4 136 440 59.6 Casein ...... 17.8 50 400 20.0 Skim powder .. 21.0 225 180 40.6 Buttermilk powder .. .. f 16 170 2.8 Sundry ...... 6.0

Total Dairy Products .. .. 193.0 260.4 (Mn. (Pence/ Lbs) Lb.) Wool ...... 217.6 884 40.5 298.4 By-Products ...... 66.9 72.6

Total Pastoral Exports .. 670. 1 880.41

1The figure for Total Pastoral Exports differs from that in Table 23 by NZ$10 million due to a difference in definition. Source: New Zealand Treasury Department.

Assumptions-The Treasury's projection of Pastoral Exports for 1972/73 were based primarily on the above assumptions for growth in volume and change in price. There are naturally further assumptions behind both of these forecasts, which are not repeated here because they are explained and examined in greater detail in Volume III: Prospects for Agricultural Commodities. B.4 90

Table 25-Non-Pastoral Export Projection, 1972/73 (NZ$ millions)

Figures Used Projection as Base for Projections MrhYa 927 June Year 1965/66' March a, 1972/73

Manufactured Exports Forest Products Newsprint .. ' ...... 11.9 12.4 Woodpulp .... 6.01 . . 24.6s. ... Other (excl. timber) 2.6' Prepared Foodstuffs 1.4 2.0 Other Manufactures, .. .. 12.92 26.0 Total Manufactured Exports (excl. petroleum) ...... 33.2' 65.0 Petroleum Products .. .. 4.8

Total Manufactured Exports .. .. 38.02 65.0

Other Non-Pastoral Exports .. Fish .. .. .7.4 .. . 6.0 Apples and Pears .. .5.4 . 10.0 Vegetables .. .. .4.8 . .. 6.0 Seeds .. .. 3.4 4.0 Timber .. . .. * .6.3 9.0

Total Other Non-Pastoral Exports I 27.3 .. . 35.0

Total Non-Pastoral Exports (excl. petroleum) . 60.4 .. 100.0

1 Provisional. 21ncludes NZ$2-3 million not included in Statistical Department's classification of manufactured articles. Thus, not readily identifiable. 3 Third machine in full production exporting to Australia, mainly other paper. Source: New Zealand Treasury Department-

Assumptions-The Treasury's projection for Non-Pastoral Exports for 1972/73 was based on the following suppositions: A. Forest Products (Manufactured) Projections for 1972/73 of Forest Products are from a detailed forecast by the Forest Service totalling .to NZ$12.4 million for newsprint and NZ$24.6 million for woodpulp and other products. The main assumptions made were: '(1) Stable Iexport prices' based on the average of the last three years; (2) Continued access to the Australian market; and (3) The introduction of a third liner board machine by,Tasman Pulp exporting to Australia, probably coming into full 'export production.by 1970. B. Prepared Foodstuffs These have been projected on the basis of -past- trends and are not related to specific manufacturing projects. A figure of NZ$2 million seems reasonable in 1972/73. C. Other Manufactures This includes textiles, machinery, and miscellaneous manufactures, such as rubber, leather manufactures and scrap metal, most of which have risen substantially over the last three years. The figures were projected on past trends and totalled to NZ$26.0 million in 1972/73. D. Fish The 1972/73 estimates include NZ$2 million for wet fish and NZ$4 million for crayfish. The volume of crayfish exports may be expected to 91 B..4

expand rapidly as a result of the new Chatham Islands grounds, but two factors will probably combine to prevent an overall rise in prices. First, the new beds will be extremely profitable until the old crayfish are removed, but after that they may decline in importance. Second, it was anticipated that the increase in volume of crayfish exports would depress prices. The figure of NZ$2 million adopted for wet fish is a considerable advance on recent trends and represents a compromise between a projection of NZ$4.6 million by the Industries and Commerce Department and an actual figure of NZ$1 million for 1964/65. The figure therefore may be too high, but the recent investment shown in the fishing industry may allow it to be realised. E. Apples and Pears The Apple and Pear Marketing Board advise that on present planting cycles the crop of apples and pears should more than double between 1964/65 and 1972/73. However, increased home consumption and price fluctuations with the additional sales would probably mean that the returns will be a little less than doubled. Assuming also that the increased quantity will depress the price somewhat, the 1972/73 projection for Apples and Pears is NZ$10.0 million. F. Vegetables This commodity was projected on the basis of past trends in export figures, and a figure of NZ$6.0 million seems reasonable for 1972/73. G. Seeds Agriculture Department agreed with the estimate of NZ$4 million for 1972/73. Seed production is not for export and is only the residual after meeting New Zealand demands which are growing with increased stock numbers. H. Timber The estimate was prepared by the Forest Service and assumes an increase for export of 60 million board feet of timber, amounting to NZ$9.0 million in 1972/73. BA4 92

Table 26-Import Projection, 1972/73 (NZ$ millions)

rts Import ... mot Fiscal Year Iportsorts ....(Bnde'x Prie f.954/. .b at 95155at G..Pas a % a of C.d.v. (B.O.P.) L1,o154 35954/55 Prices 1954/55 %) Prices Pricesm

1950/51 .. .. 292 857 341 1;690 20.2 51/52 .. .. 475 1,027 463 1,754 26.4 52/53 .. .. 418 1,060 394 1,756 22.4 53/54 .. .. 362 1,010 358 1,766 20.3 54/55 460 1,000 460 1,879 24.5 55/56 499 1,023 489 1,949 25.1 56/57 .. .. 489 1,056 462 1,986 23.3 57/58 . . . 535.7 546 1,081 505 2,089 24.2 58/59 .. .. 466.6 468 1,071 437 2,148 20.4 59/60 .. .. 433.2 442 1,050 421 2,232 18.9 1960/61 .. .. 538.5 547 1,060 517 2,369 21.8 61/62 .. .. 534.0 551 1,065 518 2,448 21.2 62/63 .. .. 511.3 509 1,039 489 2,523 19.4 63/64 .. .. 615.2 601 1,041 580 2,678 21.7 64/65 .. .. 633.81 615 1,051 590 2,841 20.8 65/66 .. .. 722.41 719 1,057 680 3,014 22.6 66/67 .. .. 722.61 719 1,071 671 3,149 21.3

Average Growth Rate for the Last- 5 years .. I 0+.5%p.a. + 5.3%p.a. 21.2% 10 years .. I 1+ 1.4%p.a.1 4.6%p.a. 21.3%

1972/73 Projections of Real G.D.P. and Imports- Assuming real imports as either 19.5% or 21 % of real G.D.P. and: (a) 3% p.a. increase in real G.D.P. (b) 4% p.a. increase in real G.D.P. (a) .. 844 1,082' 780 3,714 21 (b) .. 905 1,082' 836 3,974 21 (a) *- 783 1,082' 724 3,714 19.5 (b) .. 839 1,082s 775 3,974 19.5

1Revised from published trade figures. 2Assuming 1 per cent increase in import prices from 1966/67 to 1972/73. Source: New Zealand Treasury Department. 93 B.4

Table 27-Transportation Projection, 1972/73 (NZ$ millions)

(a) (b) (c) (d) Fiscal Year Transport Transport Total Exportsrae (c) as (b) as Credits Debits Transport Eports %f(d) %o (c) Charges Imports

1950/51 .. .. 10 37 47 696 6.8 77.7 51/52 .. 12 62 74 976 7.6 83.1 52/53 .. .. 25 57 82 895 9.2 69.2 53/54 .. 20 38 58 855 6.8 65.8 54/55 .. .. 21 52 73 934 7.8 71.3 55/56 .. .. 23 59 82 1,025 8.0 71.7 56/57 .. .. 28 58 86 1,037 8.2 68.0 57/58 . 30 64 94 1,286 8.6 68.1 58/59 . 27 59 86 996 8.6 68.6 59/60 .. 28 50 78 1,066 7.3 64.3 1960/61 .. . 33 63 96 1,121 8.6 65.5 61/62 . . . 33 66 99 1,131 8.8 66.7 62/63 .. . 31 69 100 1,114 8.9 69.1 63/64 . . . 30 75 105 1,319 8.0 71.4 64/65 36 86 122 1,372 8.9 70.5 65/66 . 35 95 130 1,466 8.9 73.1 66/67 . . . 37 92 129 1,501 8.6 71.3 1972/73 Transportation Projection- (13. . 47 109 156 1,8347 (2 48 113 161 1' 8 95 J.8 70.0 3) 45 106 151 1,773 8 .0 4) 46 109 155 1,829 Basis of Import Projection in 1972/73- (1) 3% p.a. increase in real G.D.P. and imports 21% G.D.P. (2) 4% p.a. increase in real G.D.P. and imports 21% G.D.P. (3) 3% p.a. increase in real G.D.P. and imports 19.5% G.D.P. (4) 4% p.a. increase in real G.D.P. and imports 19.5% G.D.P.

Source: New Zealand Treasury Department. TRANSPORTATION Assumptions-The Treasury projected transportation debits and credits on the basis of past relationships between (1) total transport charges (debits plus credits) and total trade (imports plus exports) and (2) the past relationship between transport debits and total transport charges (debits plus credits). The forecasts were computed in this manner because any transportation charges, debit or credit, will depend upon the level of total trade, both imports and exports. A. Total Transport Charges as Percentage of Total Trade For 1972/73 total transport charges were taken as 8.5 per cent of total trade. This percentage was a simple average of the. relation which ex sted for the past ten years 1956/57-1966/67. However, it represents a decrease from the average ratio of 8.7 per cent for the last six years from 1960/61- 1966/67. B. Transport Debits as Percentage of Total Transport Charges Transport debits for 1972/73 were taken as 70 per cent of total transport charges. This percentage was one of the highest average relationships which existed over the entire period 1950/51-1966/67 and equalled the ratio of 70 per cent for the last six years 1960/61-1966/67. C. Projection of Imports and Exports The projection of imports for 1972/73 was based on the four alternatives regarding GDP growth and import content (see Table 26). While the projection of exports was made on various assumptions and totalled NZ$990 million in 1972/73. B.4 94

Definitions Credits-Includes earnings of export freights and freights in international cross-trade, by resident shipping companies and port, disburse- ments by non-resident shipping companies in New Zealand. Debits-Includes import freights and marine insurance paid to non- resident shippirig and insurance companies and port disburse- ment of resident shipping companies overseas.

Table 28-Travel Projection, 1972/73 (NZ$' millions)

Fiscal Year Travel Credits | rave* oJies | Net Total

1950/51 .. .. 2.7 10.8 8. 1 51/52 .. .. 3.3 11.9 8.6 52/53 .. .. 3.4 9.7 6.3 53/54 .. .. 3.2 9.6 ' 6.4 54/55 .. .. 4.0 11.8 7.8 55/56 .. .. 4.9 13.2 8.3 56/57 .. .. 6.4 13.4 7.0 57/58' .. .. 7.0 13.7 6.7 58/59 .. .. 6.1 15.7 9 6 59/60 .. .. 6.6 19.0 -12.4 1960/61 .. .. 7.6 27.5 -19 9 61/62 .. .. 8.4 28.5 -20. F 62/63 .. ., 8.6 28.2 -19.6 63/64 .. .. 11.1 30.2 -19. 1 64/65 .. .. 12.6 35.1 -22.5 65/66 ... .. 13.5 41.0 -27.5 66/67 .. .. 14.5 44.9 -30.4 Projection 1972/73 .. .. 30.0 70.0 -40:0

Source: New Zealand Treasury Department. Assumptions-The'Tre'asury projected Travel Debits and Credits in 1972/73 'on the following relationships. A. Credits Travel receipts are expected to increase steadily up to 1972/73 in line with the Government's stated tourist earnings target for 1970. This target of NZ$40 million tourist expenditure as measured by a series.compiled by the Tourist Department represents 'approximately NZ$23 million in balance of' payments terms for 1970.' Thus, by 1972/73 tourist receipts in balance of payments terms may reach some NZ$3.0 million. B. Debiti If present' trends in the number of New Zealanders travelling overseas continue, the foreign exchange costs of this travel, could amount to some NZ$90 million by 1972/73. However, the measures now taken by Govern- ment to restrict demand and' generally slow 'down the econonny to a growth of 3-4 per 'cent per annum must mean that expenditure, on overseas travel will'be affected and will not attain this level. Thus it has been assumed that from 1966/67, for which year a slight down-turn is already apparent from preliminary figures,'a similar pattern will emerge: as occurred after 1960/61-a -slowing down in expenditure for 3-4 years followed by, a build-up to present rates of increase. There- fore, a figure of NZ$70 million has been taken for 1972/73 based on these assumptions. Definitions Credits-Includes all expenditure by travellers in New Zealand; including personal purchases for export. Debits-Includes travel expenditure (business and private) overseas and fares paid while traveller is abroad (fares paid in New Zealand are part of "transportation"). Table 29-International Investment Income Projection 1972/73 (NZ$ millions)

Credits Debits

Fiscal Year Direct | Oter Govt. and Direct Other Govt. and Local Total Total TNoet Investmet Pri=e Official Investment OPrciavAthott tn t|Investment Insttutons I Invesment Oicial Authority Income Invesme Instiuon Income vestmen Institutions Interest

1950/51 ...... 4.0 3.4 1.7 14.6 2.3 4.8 0.5 9.1 22.2 - 13.1 1951/52 ...... 4.2 3.0 2.9 13.4 4.7 5.0 0.5 10.1 23.6 - 13.5 1952/53 ...... 3.8 5.0 4.1 15.4 4.0 5.0 0.5 12.9 24.9 - 12.0 1953/54 .. .. 3.7 8.2 5.6 21.5 1.4 5.3 0.4 17.7 28.6 - 10.9 1954/55 ...... 4.2 4.8 5.6 23.3 3.6 5.8 0.4 14.5 33.1 - 18.6 t.0 1955/56 ...... 4.1 4.2 6.6 22.6 2.5 6.5 0.6 14.8 32.3 - 17.4 en 1956/57 ...... 4.0 3.9 7.7 23.8 4.1 6.8 0.4 15.6 35.1 - 19.5 1957/58 ...... 3.3 4.3 6.6 22.7 3.3 7.4 0.3 14.3 33.7 - 19.4 1958/59 ...... 3.0 4.0 5.4 27.1 4.0 9.3 0.3 12.5 40.7 - 28.2 1959/60 ...... 4.6 3.0 7.7 22.1 5.0 11.1 0.3 15.2 38.5 - 23.3 1960/61 ...... 2.7 4.3 8.5 40.1 5.4 10.5 0.1 15.5 56.1 - 40.6 1961/62 ...... 2.1 4.5 5.8 33.3 3.5 10.3 0.1 12.5 47.2 - 34.7 1962/63 ...... 5.4 2.3 6.5 46.0 5.1 13.0 .. 14.1 64.2 - 50.1 1963/64 ...... 4.2 4.5 7.3 46.8 3.0 13.5 0.1 16.0 63.3 - 47.4 1964/65 ...... 4.9 6.4 8.1 62.4 6.3 15.2 .. 19.4 84.0 - 64.6 1965/66 ...... 5.5 4.5 8.6 54.3 8.3 15.4 .. 18.6 78.0 - 59.4 1966/67 ...... I 5.6 4.5 6.9 57.0 8.3 18.3 .. 17.0 83.6 - 66.6 Projection 1972/73 ...... 6.0 1 10.0 j. 9.0 I 110.0 10.0 I 38.0 j .. j 25.0 158.0 f-133.0

Source: New Zealand Treasury Department. b Table 29a-Income from Overseas Direct Investment (Debits), Total Company Income, and GNP, 1972/73 ((NZ$ millions in current prices)

(I) (2) (5) (~~~~~~~~~~~~~~~~~~4) Aninual % Total ne (I) -s % of (5) GNPIncrease FiscalFiscal Year OvcrseDirtOtTert|Ivesrseas (I)) as % of (4) n?tTPrvae-rt.o

1950/51 .. 14.6 16.9 8.2 78.0 86.2 6.17 1396 51/52 13.4 14.5 11.5 81.2 92.7 6.41 1446 3.6 52/53 15.4 18.0 12.3 73.4 85.7 5.65 1518 5.0 53154 . . 21.5 19.7 10.3 99f.l 109.3 6.51 1680 10.7 54155 ' . 23.3 20.5 10.4 103.0 113.4 6.10 1860 10.7 55/56 22.6 22.3 12.6 88.6 101.2 .5.15 1966 5.6 56/57 23.8 21.5 14.8 96.0 110.8 5.37 2062 4.9 57158 22.7 18.1 16.0 109.2 125.2 5.73 2184 5.9 58/59 27:1 20.7 18.0 113.2 131.2 5.80 2270 3.9 59/60 22.1 14.3 18.4 135.8 154.2 6.34 2434 7.2 1960161 40.1 21.2 22.6 '166.6 189.2 7.21 2622 7.7 61/62 33.3 20.3 24.0 139.8 163.8 6.02 2722 3.8 62/63 46:0 22.3 24.3 182.4 206.7 7.07 2924 7.4 63/64 46.8 19.9 27.0 208.0 235.0 7.34 3200 9.4 64/65 62:4 25.4 33.6 212.3 245.9 7.06 3483 8.8 65/66 54.3 20.8 30.2 231.0 261.2 6.99 3736 .7.3 66/77 . 57.0 21.6 36.5 227.2 263.7 6.70 3937 5.4 Projection for 1972/73 ) 110.0 1 24.8 1 444.0 1972/73 Check of Total Company Income- Assuming

369 7% 397 7.5% 5%/ 423 8% 395 7% 424 7.5% 6% 452 8% 422 7% 463 7.5% 7% 483 8% 481 7% Excluding remitted profits. 483 7.5% 8% Source: New Zealand Treasury Department. 515 8% I 97 B.4

INTERNATIONAL INVESTMENT INCOME 1. Basic Assumptions-The, 1972/73 projection of international investment income debits and credits by the Treasury was based on the following assumptions and past relationships: A. Income Jrom Overseas Direct Investment On the debit side Overseas Direct Investment Income composed of all earnings, remitted or not, and net of New Zealand taxes, from overseas companies, their branches and subsidiaries, was projected on a 15-year trend and gave a figure of NZ$110 million for 1972/73. On the credit side, Overseas Direct Investment Incomne, comprised of earnings of branches and subsidiaries of New Zealand companies operating overseas, was estimated from the prevailing trend of the last five years and amounted to NZ$6 million in 1972/73. The debit for Overseas Direct Investment Income was further checked by projecting a 1972/73 estimate for Total Company Income, composed of Company Income After Taxes texcluding profits and dividends remitted overseas) plus Overseas Exchange Transactions, lnternational In- vestment Income (a figure for profits and dividends remitted overseas), and then comparing this 1972/73 estimate for Total Company Inconme with that of Overseas Direct Investment Income in order to see if the ratio was in line with their previous relationship. Finally, the 1972/73 estimate of Total Company Income was compared with four different GNP projections for 1972/73 to see if the ratio agreed with the relationship between these two variables. On a 15-year trend a figure of NZ$444 million was projected for 1972/73 for Total Company Income, which resulted in an overseas Direct Investment Income/Total Company Income ratio of 24.8 per cent. Total Company Income of NZ$444 million best fit the combination of GNP growth at 6 per cent and a Total Company Income/GNP ratio of 8 per cent. B. Income from Indirect Private Investment Composed of rents, interest, dividends, income from estates, etc. on investments held in New Zealand by non-residents on the debt side, Income from Indirect Private Investment, projected on a 15-year trend, rose to NZ$8 million by 1972/73. But with the sharp increase in 1964/65 and 1965/66 this estimate was increased to NZ$10 million. Any tendency toward a reduction in this figure was expected to be offset by interest payments oh such ventures as the Air New Zealand expansion program. However, Indirect Private Investment credits, composed of income from portfolio investments and shareholdings, rents, interest, etc., received by New Zealand residents, showed no trend from 1950/51 to 1965/66. Thus, the 1972/73 credit figure of NZ$10 million was projected from a trend of the last five years. C. In vestment Income from Government and Official Institutions Government transactions on the debit side, comprised of net interest paid on Government debt domiciled overseas, were 'based on a figure of net increased 'borrowing, after repayment of NZ$220 million at an average interest rate of 7% and amounted to an estimate of NZ$38 million in 1972/73. Since this debit figure assumed no sale of securities, Government transactions on the credit side, comprised 'of interest received by Government, Government-controlled and official institutions marketing and investing in long- and short-term securities abroad, were kept relatively constant at NZ$9 million. 2. Mission Evaluation-The Mission considers all of the above projections of International Investment IncoTme for 1972/73 to be reasonable, with the exception of the debit figure of NZ$110 million for Overseas Direct Investment Incozme. If the inflationary pressures in the economy are contained, then GNP in current prices may grow at 6% for,the projected period (see paragraph 7 in Volume I). Since this 6% ONP growth is slower than either the 6.7% trend for the period from 1950/51-1966/67 or the 7.0% growth from' 1960/61-1966/67, the assumption that the ratios. of Total Company Income to GNP and Overseas Direct Investment Income to Total Company Income will continue to follow only past trends and rise to 8% and 24.8% respectively may be slightly high. Thus, based on the past trends of these two ratios as well is the expectations that GNP growth will slow down, the Mission feels that it is more likely that the 4 B.4 98.

Total Company Income/GNP relationship may only increase.to 7.5%, rather than 8%, and that the ratio of Overseas Direct Investment Income to Total Company Income may rise only to 23.6%, rather than 24.8%. The'se' ratios would give revised figures of NZ$424 million for Total Company'Income and NZ$100 million' for Overseas Direct Investment Income. The net total for International Invest- ment Income would then be NZ$-123.0 million rather than the Treasury estimate of NZ$-133.0 million in 1972/73. Consequently, private investment financed mainly from undistributed profits of overseas companies would have to be adjusted downwards to NZ$100 million, following the Treasury's assumptions concerning the projection of this estimate for 1972/73 (Annex Table 33).

Table 30-Government Transactions Projection, 1972/73 *(NZ$ millions)

Credits Fiscal Year Total rotalT Net Total N.Z. Govt. Foreign Govt. Ceis )ebits Expenditure., Expenditure

1950/51 .. 2.2 .0.7 2.8 '6.0 - 3.2 51/52 .. 0.7 1.1 1.8 14.7 -12.9 52/53 .. 2.1 0.5 2.7 16.4 -13.7 53/54 .. 3.9 0.9 4.7 21.0' -16.3 54/55 .. 1.3 1.2 2.5 16.6 -14.1 55/56 .. 1.8 1.2' 3.0 10.4 - 7.4 56157 .. 1.5 1.8 3.3 11.4 - 8.1 57/58 . 2.5 1.6 4.0 10.6 - 6.6 58/59 .. 5.2 1.2 6.4 10.7 - 4.3 59/60 .. 1.9 2.4 4.3 16.2 -11.9 1960161 :. 1.1 2.7 3.9 15.4 -11.5 61/62 .. 0.9 2.5 3.3 14.5 -11.2 62/63 .. 2.7 3.1 5.9 15.4 - 9.6 63/64 .. 4.7 3.2 7.8 19.9 -12.1 64165 .. 2.5 3.8 6.3 19.0 -12.7 65/66 .. 1.7 3.1 4.8 22.5 -17.7 66/67 .. 2.4 3.2 5.6 29.7 -24.1 Projection 1972/73 4.4 3.6 8.0 40.0 -32.0

Source: New Zealand Treasury Department.

Assumptions-These estimates are based largely vin trenu projections, and show that Government expenditure overseas will continue to grow at a fairly rapid rate (e.g. military expenditure, extension of diplomatic and trade representation overseas).

Definitions Credits-Includes foreign Government expenditure, mainly expenditure by foreign legations in New Zealand, and New .Zealand Government expenditure, predominately miscellaneous Government receipts, re- funds of expenditure incurred previously, settlements arising out of war-time' agreements, etc. Debits-Includes military expenditure overseas, but not purchases of military equipment for use in New Zealand, 'expenditure on overseas missions, and expenditure connected with immigration and all operating'expendituire, other than.on imports and transfers. 99 B.4

Table 31-Miscellaneous (Including Insurance) Projection, 1972/73 (NZ$ millions)

Credits Debits Fiscal Total Total Net Total Ycar Credits Debits Misc. Insurance Misc. Insurance

1950/51 .. 8.0 -0.3 7.4 1.0 7.7 8.4 - 0.7 51/52 .. 5.9 1.0 12.1 1.0 6.9 13.1 - 6.2 52/53.. 8.5 -0.4 13.7 1.2 8.1 14.9 - 6.8 53/54.. 6.4 -2.2 8.0 0.5 4.2 8.5 - 4.3 54/55.. 8.7 -0.4 16.1 0.9 8.3 17.0 - 8.7 55/56.. 9.4 0.3 19.7 1.3 9.7 21.0 -11.3 56/57.. 9.2 0.8 23.6 1.5 10.0 25.1 -15.1 57/58.. 10.2 1.9 22.4 1.8 12.1 24.2 -12.1 58/59.. 8.6 0.3, 23.1 2.1 8.9 25.2 -16.3 59/60 .. 9.5 0.7 25.2 2.6 10.2 27.8 -17.6 1960/61 .. 10.9 0.6 29.8 1.6 11.5 31.4 -19.9 61/62 .. 8.0 - 33.6 2.4 8.0 36.0 -27.8 62/63 .. 17.8 0.2 29.3 2.6 18.0 31.9 -13.8 63/64.. 17.9 - 31.6 2.9 17.9 34.5 -16.5 64/65.. 14.3 - 36.0 5.7 14.3 41.7 -27.4 65/66 .. 17.0 - 40.3 5.0 17.0 45.3 -28.3 66/67.. 20.6 0.3 47.7 6.1 20.9 53.8 -32.8 Projection 1972/73 .. 28.0 - 64.0 9.0 I 28.0 1 73.0 1 -45.0

Source: New Zealand Treasury Department.

Assumptions-Treasury projections for Miscellaneous Debits and Credits (incl. insurance) in 1972/73 were made on the following suppositions. A. Insurance Debits have been projected to increase at a slower rate than has been apparent over the past two years. Credits have been negligible for many years and have been ignored. B. Miscellaneous This item mainly includes commissions, brokerage expenses of New Zealand firms overseas under Debits, and commissions earned by New Zealand firms overseas and expenses of overseas in New Zealand under Credits. The increase in Debits projected for 1972/73 recognizes increased trade promotion expenses overseas by New Zealand firms. No explanation can be found for the sudden increase in Credits for 1962/63 but it has been assumed the higher trend will continue. Table 32-Unilateral Transfers Projection, 1972/73 (NZ$ millions) .

Credits Debits

Fiscal Year* - ______- - ______Total Total Net .Personal Migrants Govt. Personal MigrantLs Credits Debits Total Remittances Funds Legacies Transfers Remittances Funds L

1950/51 .. . .. 4.3 4.0 1.8 2.0 4.6 6.9 2.7 10.1 16.3 -6.2 51/52 ...... 5.9 6.3 2.7 3.5 3.5 4.6 2.4 14.9 14.1 +0.8 52/53 ...... 6.5 5.0 2.2 3.0 4.4 3.8 2.3 13.8 13.5 +0.3 53/54 ...... 5.9 3.4 1.9 3.0 4.5 5.0 2.6 11.2 15.1 -3.9 54/55 ...... 7.4 3.1 2.3 4.0 5.7 6.4 3.0 12.9 19.0 -6.1 55/56 ...... 7.4 4.4 2.6 3.1 5.7 6.4 2.7 14.2 18.0 -3.8 56/57 .. . .. 7.7 4.8 3.4 4.2 7.0 5.8 2.9 16.0 19.9 -3.9 57/58 .. . .. 7.9 6.7 2.9 4.1 7.5 6.1 3.3 17.5 20.9 -3.4 58/59 ...... 7.6 5.1 2.2 4.3 7.2 8.0 2.7 14.9 22.2 -7.3 59/60 . .. 8.3 4.6 2.4 4.2 7.7 9.5 3.6 15.3 25.0 -9.7 1960/61 .. .. 8.9 4.4 2.7 4.0 9.7 11.1 3.8 16.1 27.6 -11.5 O 61/62 ...... 10.2 5.2 2.3 4.5 12.0 9.6 3.7 17.8 29.9 -12.1 62/63 .. :. .. 11.0 4.5 2.2 4.2 11.3 10.7 4.0 17.7 30.3 -12.6 63/64 . . . .. 11.9 6.3 2.5 5.1 11.8 11.2 4.8 20.7 32.9 -12.2 64/65 . . .. 12.9 - 6.6 2.5 4.7 12.6 14.6 5.0 22.0 37.0 -15.0 65/66 . .. 14.7 5.9 2.6 5.9 15.1 19.1 5.7 23.2 45.8 -22.6 66/67 ...... 16.4 8.4 2.5 6.3 15.8 22.4 6.2 27.3 50.7 -23.4 Projection 1972/73 ...... 26.0 10.0 4.0 8.0 26.0 30.0 10.0 40.0 74.0 1 -34.0

'Source: New Zealand Treasury Department. 1. Assumptions-The Treasury projected unilateral debits and credits in 1972/73 on the following suppositions: The three main items under this 'heading, Personal Remittances, Migrants Funds and Legacies, 'have in t'he main been projected on trends, and no falling off in the rates of increase of the past five years is anticipated in Credits and most Debits for 1972/73. An exception is in "Migrants Funds" Debits, which includes funds taken out of New Zealand by persons on working holidays. On present trends the projection for this item for 1972/73 would 'be some NZ$40 million. However, in the short-term there will -be a reduction in the number of persons on working -holiday because of the employment situation. To what extent this position will be changed by 1972/73 is uncertain. Thus, a figure of NZ$30 million has been taken as a reasonable estimate in 1972/73. 101 B-4

Table 33-Long-term Private Capital Inflow Projection, 1972/73 (NZ$ millions)

Credits Debits

Increase in Increasc in Total Net Fiscal Year Total Total Private Oi'edits Debits Capital N.Z. Direct N.Z. Port. Overseas Portfolio Inflow Investment folio Direct Investment Overseas Investment Investment in N.Z. Overseas in N.Z.

195051 .. 3.2 -11.8 11.2 - 3.9 - 8.6 7.3 15.9 1951152.. 3.8 - 5.6 22.0 - 2.1 - 1.8 19.9 21.7 1952/53.. 2.0 -11.1 21.2 - 1.3 - 9.1 19.9 29.0 1953154 4.4 - 1.0 6.4 - 1.0 + 3.4 5.4 2.0 1954/55 3.3 - 2.3 22.2 -0.3 + 1.0 21.9 20.9 1955/56 1.6 - 4.3 31.4 5.1 - 2.7 36.5 39.2 1956/57 2.7 - 2.9 20.2 - 0:8 - 0:2 19.4 19.6 1957/58 2.5 - 5.4 19.2 1.5 - 2.9 20.7 23.6 1958/59 0.5 - 6.0 27.7 4.8 - 5.5 32.5 38.0 1959/60 3.5 - 5.8 6.5 13.5 - 2.3 20.0 22.3 1960/61 .. 2.1 -13.0 34.2 9.2 -10.9 43.4 54.3 1961/62 .. 1.5 -13.7. 36.2 8.2 -12.2 44.4 56.6 1962/63 4.0 -16.0 55.3 - 3.7 -12.0 51.6 63.6 1963/64.. 3.7 -16.0 38.1 - 3.3 -12.3 34.8 47.1 1964/65.. -0.3 -18.8 44.2 7.8 -19.1 52.0 71.1 1965/66.. 2.6 -33.9 62.6 -12.8 -31.3 49.8 81.1 1966/67.. 2.3 -22.1 26.4 3.2 -19.8 29.6 49.4 Projection 1972173 ..I 4 -24 80 4 -20 84 104

Source: New Zealand Treasury Department.

LONG-TERM IPRIVATE CAPITAL INFLOW Assumptions-The Treasury projected Net Private Capital Inflow in 1972/73 on the following suppositions. A. Overseas Direct Investment in Neew Zealand Since a large proportion of Overseas Direct Investment consists of reinvested profits, there is a definite relationship between the capital inflow and income from Direct Investment. Although the percentage of Overseas Direct Investment to Income from Direct Investment has fluctuated widely over the last 15 years, a slight decline is discernible on trend. Thus, the proportion of the private capital inflow financed out of the profits of overseas companies already in the country is declining slightly. Taking the trend figure of 74 per cent and applying it to the NZ$110 million estimate of Income from Direct Investment, Overseas Direct In- vestment would equal NZ$79 million. Factors which could tend to reduce this figure are: (a) Pressure from overseas companies to remit an increasing proportion of their profits to their parent companies. (b) The emphasis on a minimum share of New Zealand capital in new overseas ventures in this country. (c) Restrictions on the outflow of capital by the U.K. and U.S.A. (d) A possible reduced level of activity in the economy and a conse- quent fall in the earnings, and inflow of new capital, of overseas companies. .4 102

Factors tending to increase direct investment are: (e) Because of the importance of re-invested profits, if a reasonably high internal growth rate continues, this would automatically ensure a high level of direct investment. (f) The-policy of capital issues control aimed at preventing excessive profit Tremittances by overseas companies. This should maintain a fairly high level of retained profits. It is difficult to say what the net effect of these factors will be. But,it seems likely that Overseas Direct Investment will continue to grow, probably about the 15 year trend. In addition, because of the considerable fluctuations' in the series, the longer 15 year trend should be the most accurate. The final estimate is, therefore, NZ$80 million for Overseas Direct Investment in 1972/73. B. New Zealand Direct Investment' Overseas This item has fluctuated violently for the last 15 years, without any specific trend. NZ$4 million seemed a reasonable estimate for 1972/73. C. O.verseas Portfolio Investment in New Zealand Again there is no trend whatsoever and a figure of NZ$4 million has been allowed for 1972/73. D. New Zealand Pbrtfolio Investment Overseas The figures under this heading have been continuously negative for the last 15 years. In other words, according to the overseas exchange record, New Zealand have been continuously reducing their holdings of overseas funds. While there seems to be little doubt that considerable sums have also been leaving the country (outside the banking system) to supplement these investments, we are concerned here with the size of the capital inflow from shis source. The greater part of this inflow comes in the form of no remittance imports. Recent and likely future changes in no-remittance licence regulations could possibly reduce the inflow through this channel. On the other hand, the tightening of regulations for the transfer of overseas shares could force more capital through this official channel, rather than through other, means. Thus, on the basis of these considerations and a very rough trend an approximate figure of NZ$24 million is estimated for 197 2/73. Consequently, Total Net Capital Inflow now comes to NZ$104 million for 1972/73. Table 34-Government Overseas Borrowing and Repayments Projection to 1972/73 (NZ$ millions)

Fiscal Year l l l | F.stimatesE | Projections F 1963/64 1964165 1965166 1966/67 1967/68 1968/69 1969170 1970/71 1971/72 1972/73

Borrowing- United Kingdom .. 24.4 4.4 19.4 57.01 20.0 30.01 United States of America - - - - - _ Euro-BondMarket .. _ _ 23.8 6.8 28.0 35.0 65.0 65.0 90.0 95.0 Australia .. .. _ _ _ 1.0 1.0 Iv. I.B.R.D. Govt. .. _ 14.4 11.8 15.4 16.0 7.0 3.C _- - 24.4 18.8 55.0 80.2 65.0 72.0 68.0 65.0 90.0 95.0 Local Auth.. .8 1.2 0.8. 0.4 0.2- - - 0

Borrowing .. 26.2 20.0 55.8 80.6 65.2 72.0 68.0 65.0 90.0 95.0 Repayments- l United Kingdom .. 14.6 - 34.1 13.4 20.0 30.4 - | 29.6 38.8 United States of America 1.6 3.0 3.7 3.2 1.4} 4.9 6.0 7.5 5.4 5.4 Euro-Bond Market . . - J l I.B.R.D. .. .. - _ _ 0.8 1.0 1.4 2.0 4.0 4.4 4.6

Repayments .. 16.2 3.0 37.8 17.4 22.4 36.7 8.0 .11.5 39.4 48.8 Net borrowing by Government 10.0 17.0 18.0 63.2 42.8 35.3 60.0 53.5 50.6 46.2 lIncludes credit from Midland Bank of NZ$20 million which was repaid May 1967. Source: New Zealand Trcasury Department. Table 35-Exchange Credits, I.M.F. Drawings, ctc., and Repayments Projection to 1972/73

_ . ~~~~~~~~~~~~~~~~EstimatesProjectionzs Fiscal Year ~~1963/64 1964/65 1965/66 1966/67 1967/68 |1968169 1969170 |1970/71 197.1/72 |1727

Credits or Drawings- I:M.F.--drawings .. __ 50:3 _ -compensatory drawing _ _ _ 21.0O Rleserve Bank of Australia _ 24.0O Bank for International Settle- _ 21 .6 14.4 ( 14. 4) ments ,l(21.*6) |_l Credits or Drawings .. __ 5-0.3 45.6 57.0 14.4 1 Repayrnents- . I.M.F.Drawing .. 11 ° l 11.31 -Compensatory . -7.6 2 140 8 Reserve Bank of Australia 7.5 8.0 4.1I 4.4 Bank for International Settle- _(21.6) (14.4) 14.4 ments . ||21.6 1lll Repayments ... . ____ 21 .6 6.I 477 4,I 4, 4 Net Receipts (+) Repayments _ F50. 3 + 45 .6 + 3 54 -47.7 -47 .7 -4, I -4.4

lAssumes gold tranche not repaid. 2Assumes exports receipts recovery. Source: New Zealand Treasury Dcpartment. Table 36-Total Net Borrowing by the Government and Central Bank With Projection to 1972/73 (Based on Tables 34 and 35) (NZ$ millions)

_ _I___Estim ates_|_F_ Projection s Fiscal Year | 1963164 1964(iG5 1965166 1966/67 | 1967168 | 1969 /69 1969(70 1970/71 1971172 1972173

Net borrowing by Government 10.0 17-0 18.0 63.2 42.8 35.3 60.0 53.5 50.6 46.2 > Net Credits/drawings- (+) receipts,(- repay- mnents (- ra _ - _ +50.3 + 45.6 +35.4 -47.7 -47.7 - 4.1 4.4 - TotAl Net Borrowing- (+) receipts, (-) repay- . ments ...... +10.0 +17,0 +68.3 ±108.8 +78.2 -12.4 +12.3 +49.4 +46.2 +46.2

SoOrce: New Zealasid Treasury Department. B,.4 106

Table 37-Automotive Industry, 1951/52-1964/65

Entire Industry | 1951/52 1 1964165 | Average Annual r I t / Percentage Change

Number of plants . 1 17 Number of employees 1,949 4,090 5.7 Capital stock (NZ $ million) .. .. 1,340 5,920 12.1 Value of output (NZ $ million) . .. 26,148 95,920 12.0 Value added (NZ $ million) .. .. 4,023 17,798 12.1 Volume of production (number of passenger cars) .. .. 15,712 58,015 10.6

Source: New Zealand Department of Statistics.

Table 38-Vehicle Imports Into New Zealand, 1961/62-1965/66

CompleteOtcToa Knocked-Down Units Other Total June Year ci. c.i.f. c.i.f. Number value Number value Number value (NZ $ (NZ $ NZ$ million) million) million)

Passenger Cars .. 1961/62 32,804 10.3 2,576 1.5 35,380 11.8 1962/63 38,003 14.3 4,006 2.6 42,009 16.9 1963/64 61,680 .22.7 7,150 4.8 68,830 27.5 1964/65 56,775 21.4 8,570 5.5 65,345 26.9 1965/66 58,718 22.0 8,035 5.2 66,753 27.2

Trucks .. 1961/62 10,870 5.0 694 0.4 11,564 5.4 1962/63 8,075 4.1 180 0.1 8,255 4.2 1963/64 8,859 4.7 97 0.3 8,956 5.0 1964/65 9,505 5.5 131 0.2 9,636 5.7 1965/66 13,134 9.1 117 0.3 13,251 9.4

Total .. 1961/62 43,674 15.3 3,270 1.9 46,944 17.2 1962/63 46,078 18.4 4,186 2.7 50,264 21.1 1963/64 70,539 27.4 7,247 5.1 77,786 32.5 1964/65 66,280 26.9 8,701 5.7 75,081 32.6 1965/66 71,852 31.1 8,152 5.5 80,004 36.6

Source: New Zealand Department of Statistics. 107 B.,4

Table 39-Comparative Scale of Production for Automotive Firms in Selected Countries, 1965

Number of National Percent of Firms Average National Wor. Accounting Production of Production- Productinr For 80-90 These Firms ProduProduction Percent of (nearest 1,000) Production

Italy ...... 1,158,200 4.6 1 988,000 Germany .. .. 3,055,700 12.2 4 649,000 France ...... 1,581,600 6.3 4 383,000 U.K...... 2,134,900 8.5 4 498,000 Japan ...... 1,870,500 7.5 8 211,000 Brazil ...... 180,800 0.7 3 54,000 Spain ...... 212,500 0.9 3 60,000 Argentina .. .. 196,800 0.8 5 34,000 Mexico .. .. 126,700 0.5 6 19,000 India .. .. 69,500 0.3 5 11,000 Venezuela .. .. 53,500 0.2 6 8,000 New Zealand .. .. 72,000 0.3 7 8,000

Source: McGraw-Hill, 1966 World Automotive Survey; New Zealand Department of Statistics. B.-4 08 Table 40-Passenger Vehicle Assembly by Firm and Model, 1966

Company Product Units Percentage .______- Distribution

Ford Motor Company of New Zea- Anglia 2, 118 3.3 land Ltd. Cortina 4,898 7.7 Zephyr/Zodiac 3,103 4.9 Falcon 2,128 3.3 Other 90 0.2 Total 12,337 19.4 General Motors New Zealand Ltd. Vauxhall 6,470 10.2 Holden 8,651 13.6 Chevrolet 394 0.6 Pontiac 201 0.3 Other 36 0.1 Total 15,752 24.8 Todd Motors Ltd. Hillman/Hunter 5,742 9.0 Chrysler 3,033 4.8 Singer 573 0.9 Renault 325 0.5 Other 53 0.1 Total 9,726 15.3 The Dominion Motors Ltd. Morris/Nuffield 8,716 13.7 Wolseley 905 1.4 Total 9,621 15.1 Austin Distributors Ltd. Austin Mini 1,648 2.6 Austin 1100 2,289 3.6 Austin 1800 1,667 2.6 Other 228 0.4

Total 5,832 9.2 Motor Industries (International Ltd.)' Volkswagen 2,491 3.9 Fiat 1,318 2.1 Skoda 416 0.6 Simca 374 0.6 Total 4,599 7.2 Leyland Standard Triumph Triumph 2,331 3.7

Steel Bros. (Addington) Toyota 23 - Prince 614 1.0 Total 637 1.0

Campbell Industries Ltd. Peugeot 380 0.6 Hino 266 0.4 Rambler 332 0.5 Isusu 8 - Datsun 349 0.6 Total 1,335 2.1 Other Companies 1,397 2.2 Total (All Companies).. 47 63,567 100.0

Source: Report by New Zea!and Vehicle Manufacturer. Table 41-Cost Increases at Successive Stages of Vehicle Production in Selected Latin American Countries, 1967'

Argentina Brazil Mexico ______- ______- _ _ _ - ~~~~~~~~ ~~~~~~Relative Vehicle Production Stages % cost %Value Weighted % Cost % Value Weighted %ICot %Value Weighted Magnitudeof Ices of Local Average of Increase of Local Avrg o nres f Local Average of over u.s. s content Cost Increase over U.S. Content Cost Increase over u.S.. Content Cost Increase

Local Content- (1) (2) (3) (1) (2) (3) (1) (2) (3) Assembly 115 15 17 140 15 21 106 15 16 4 Mandatory Items 280 6 17 150 6 9 180 6 11 I Easily Sourced Parts 320 4 13 160 4 7 225 4 9 2 Some Supplier Development Required .. 300 10 30 150 10 15 230 10 23 3 Engine & Driveline - Assembly and Machinery- Make . ... 190 5 10 -130- 5- 7 190 6 11 6 Buy * 400 3 12 270 4 11 240 1 2 Engine & Driveline- Foundry- Make 160 13 21 220 10 22 5 Buy 400 14 56 180 3 5 Specialized Investment for Parts Production . . 430 9 39 200 12 24 240 8 19 7 Sheet Metal & Other Components 200 17 34 180 27 49 250 3 8 8

Sub-total .. 272 83 227 172 99 169 192 63 121 Import Content .. 161 1..7 27 160 1 2 115 37 43

Total Vehicle .. 100 254 100 171 100 164 lIncludes data for light trucks in Argentina and Brazil, and for both light trucks and passenger cars in Mexico. 2 Costs for production runs of 20,000-30,000. Percentage increase compares domestic procurement price or production cost to the ex-factory price in the U.S. Percent ratios are derived by converting domestic prices at official exchange rates at the time of purchase. 3Investments ranked from lowest (1) to highest (8). NOTE-This table illustrates costs of vehicle production in selected Latin American countries as compared with production costs in the United States. Column (1) indicates the cost premium for production at each stage as compared with US costs; US = 100 on the cost increase index. Column (2) indicates the percentage value of local content to the total vehicle value for each production stage. Column (3) indicates the weighted average cost increase for each production stage; Column (1) X Column (2). Thus, Argentina at the assembly stage of production: (1) Argentine assembly costs run 15% above comparative US costs; (2) Argentine assembly costs are 15% of total vehicle value; (3) Argentine assemblying contributes 17% of total costs for the equivalent of 15% US content. The items in Column 4 (3) add up to the total cost increase in Argentina, or 254% of US costs. In other words, a vehicle which cost $2,000 to manufacture in the US, would cost $5,080 to reproduce in Argentina. Source: American Vehicle Manufacturers. B.4 110

PART 3:

Prospects for Agricultural Commodities

SUMMARY AND CONCLUSIONS 1. Gross income originating in New Zealand agriculture in 1965/66 amounted to NZ$850.5 million, of which approximately NZ$143 million is accounted for by arable crops, fruit, poultry, vegetables, bees and pigs. The major income is derived from sheep, dairy and beef products, and it is on these commodities that the present report concentrates. The main emphasis in this study is on the international marketing prospects of these major commodities 'and their relationship to domestic production. 2. New Zealand produces pastoral products for export which provide over two thirds of farmers'income. However, for individual commodities the share of export income in 'total production is even higher. Export income 'from wool accounts for 98 percent, lamb and cheese 93 percent and butter 80 percent of -total production. In 1965/66, New Zealand exported NZ$232 million worth of raw wool, which corresponds to 30 percent of her total exports. Since two thirds of New Zealand's total meat exports'of NZ$197 million consist of mutton- and lamb, the total export Tevenue from sheep rearing, both wool and sheepmeats, comes to almost 50 percent of total export, earnings. Another major group of exports originates 'in the dairy industry and accounts for approximately 30 percent of total exports. In 1965/66, dairy products alone amounted to NZ$195 million. Beef exports equalled approximately NZ$67 million in 1965/66. 3. New Zealand's largest export market is the United Kingdom, which in 1966 bought two thirds of her total exports. Dependence on the British market is even higher for exports of lamb, 'butter and cheese, which range between 80. to 90 percent in each. This dependence on the British market is also reflected in domestic production patterns. Since there is a great demand for butterfat in the United Kingdom, over 70 percent of the New Zealand dairy herd consists of Jersey cows because their milk has a higher butterfat content than the milk of other cows. In addlition, the types of sheep raised.in New Zealand are 'bred.not only because they are best suited to the climatic conditions, but also'because they produce the type of lamb which corresponds to the taste of the British consumer. 4. This close association with the stable British market and the tailoring of domestic supplies to meet the latter's reqiuirements have not requilred fundamental changes in the New Zealand agricultural productive pattern. The country has had to find markets only for part of her additional output. In the past this search was successful because the diversification in processing, particularly by the dairy and meat industries, enabled a commercial outlet to be found on the world market. In the future, Britain is not likely to provide a market for much of the expecied increase in .111 B.4

New Zealand's exports. More important, if the United Kingdom joins the EEC, New Zealand may lose her preference over European primary producers in the United Kingdom. Furthermore, in other international markets the country is faced. with strong competition in dairy products and probably different preferences for sheepmeats. 5. The decline in the British market's relative share of New Zealand's total exports will force New Zealand to adjust her agricultural exports even more to the demand on the international market. Such prospects -have not as yet received sufficient recognition in New Zealand's long- term market planning. The lack df adequate long-term trade analysis is probably the most serious shortcoming df New Zealand's agricultural policy planning. Export projections are primarily 'based on production forecasts, assuming that the traditional products can be sold on international markets. The Agricultural Development Conference convened in 1964 adopted a 1972/73 target to increase exports of agricultural products by NZ$280 million. The conference has concluded that this target requires the value df pastoral exports to grow at a compound rate of 4.1 percent per annum. The target for total animal population has been set at 111 mlillion ewe equivalents for 1972/73, which equals a compound annual growth rate of 3.5 percent. These projections greatly exceed the trend growth of output in the past. Moreover, these targets were set in terms df "ewe equivalents" and no account was taken of variations in demand for different types of products and of changes consequently required in farming patterns. Furthermore, the target composition df livestock may not be the optimal one from the point of view of future returns to producers, when probable variations in the production costs and market returns 'are taken into account. 6. In the Mission's view, the target growth off agricultural production can be achieved if farmers are induced by their present and prospective returns to raise investments. The recent devaluation has indeed increased considerably farmers' incomes not only in nominal values but also in real terms. The increase in real income is due to the fact that the expected increase in farmers' incomes, especially from exports to countries which have not devalued, exceeds the rise in their expendituires resulting from devaluation. From the point of view of the overall level of agricultural production and exports, devaluation can therefore be expected to show favourable results. However, attention needs to be paid to its effects on the composition df agricultural exports. 7. The Mission's trade survey indicates that long-term world market prospects are generally good for beef and that the international demand for dairy products will slowly increase if the United Kingdom does not join the Common Market. On the other hand, the growth in demand for wool is progessively slowing down, and the prospects for expanding sales of sheepmeat, particularly lamb, are somewhat uncertain. Further- more, the entry of the Unlited Kingdom into the European Economic Community would result in a serious loss df export income from dairy products, unless special concessions were given to New Zealand. 8. Market developments in the past have not particularly favoured beef compared with dairy and sheep farming, and therefore beef production in New Zealand has not expanded as rapidly as future market prospects warrant. The Government should inform farmers that B.4 .12

the long-term prospects for beef are better than for dairy and sheep products.. It should also consider whether some special financial incentive for beef would not be desirable for long-term production growth. 9. Dairy farming will no doubt remain profitable if the United Kingdom does not enter the Common Market. If Britain joins the EEC, returns on investment in dairy farming might be severely reduced, but probably they would still be comparable to returns on other types of farms, as long as butterfat prices received by farmers did not decline by more than 25 percent fron'i their 1966 level. Dairy farming is thus in a healthy situation and the impending but uncertain entry of the United Kingdom into the EEC is no reason to apply Yneasu'res to reduce the growth in daliry productior'. On the other hand, the expected decline ,in international dairy prices should be passed on to farmers to prevent any excessive growth. The larger profit margin on dairy farms together with diversification of dairy processing would serve to cushion the loss in income should England enter the EEC. 10. Wool faces the least favourable future outlook. In 1966/67 prices of crossbred wool declined considerably, and this decrease indicates a long-term change in the market for crossbred wool'. Prices are likely to increase in the long-run above the present level of approximately 23 NZ cents. But in the short4run the presence. of large wool stocks and their gradual disposal by the Wool Commission will prevent prices reaching .the long-term level (after devaluation) projected by the Commission. This projected price wouid probably not be sufficient to achieve the target production set by. the Agricultural Development Conference. The present marketing system for wool needs to be improved by the under- taking of direct sales by the Wool Commission: The recent experience of large purchases by the Commission and deficiency payments to farmers should give valuable information as to how the new system rmay be established. 11. Market research with respect to all 'export commodities needs to be greatly improved. To that effect, the Government should establish a trade analysis group, as suggested in Volume I, paragraphs 149 and 150. The individual marketing boards should employ economists to act as liaisons with the trade analysis group, to interpret and supervise con- tracted consumer research studies and to evaluate promotional expenditures. 12. The increased rate of growth in export trade projected by New Zealand authorities implies an increase in her share of the world market in wool, sheepmeats, dairy products and.beef. This will lead to increased .competition with other world market suppliers such as Australia and the EEC. Considerable salesmanship and advertising will be necessary to achieve the desired' goals. Promotional expenditures should be con- 'centrated on the new and expanding markets, particularly in North America and Asia. The number of trade representations abroad should be increased, and the respective industries are well advised to examine their present policy 'in this respect. The reopening of the office of the Dairy Board in Japan should be considered. It also seems advisable to increase the number of trade commissioners because they have plaved an important role in New Zealand's export drive and their services could contribute to future export expansion. 113 B.4 I. WOOL 1. Wool constitutes a major source of foreign exchange earnings in the New Zealand economy. In 1965/66 approximately 88 percent of the wool clip was exported and export income from wool amounted to 30.4 percent (NZ$231.9 million) of total export income. Wool also provides an exarnple of the close dependency of the economnic fortunes of the country on the vagaries of international trade. Because of sluggish demand by foreign buyers in 1966/67, New Zealand auction prices fell below the floor price of 30 cents per pound set by the Wool Com- mission. This led the Commission to buy nearly 30 percent of the total offerings and resulted in a loss of export income from 1965/66 to 1966/67 of NZ$66 million. It is of major importance, therefore, for the New Zealand authorities to determine whether the recent international trade developments in wool are of a short-term nature. If this is not the case, then an analysis of international market trends is needed in order to decide what changes in production and marketing policies are necessary to adjust to the new situation.

THE INTERNATIONAL MARKET FOR WOOL Production 2. World wool production has been increasing at about 1.6 percent' annually since 1956. But it has slowed down in the 1960's to approxi- snately 0.6 percent annually (Annex Tables 1 and 2). Production has risen in response to a 1.2 percent annual increase in sheep numbers and an increase of 0.5 percent in output per head of sheep. Sheep numbers and production have shown the sharpest rise in Oceania,2 West Asia and the centrally planned countries. In the latter, output increased at a rate of approximately 7.5 percent annually, between 1955 and 1965. In Argentina and Uruguay rising demand for beef and veal stimulated cattle raising at the expense of sheep breeding. But rising fleece weights and slightly higher yields led to an increase in production in Argentina and partlv offset the decrease in production due to declining sheep numbers in Uruguay. In most Western European countries sheep numbers declined but production remained on the same level. In North America sheep numbers as well as wool production declined continuously since 1960. 3. The supply of crossbred wool rose even faster than the total production of wool. This trend was particularly marked in 1965/66 and 1966/67, and New Zealand contributed considerably to this development. Her production increased continuously in the past ten years and as a result her share of total crossbred wool production increased from 27 percent in 1955/56 to 32 percent in 1965/66. The annual increase during the period amounted to 4 percent compared with an increase in total world wool production of 1.6 percent. 4. Wlorld wool production is estimated to continue its upward trend at 2.3 percent annually from 1961-63 to 1975. Output per head of sheep

'AII rates of change are compounded. 2New Zealand, Australia. B 4 114 is likely to continue to increase because of greater efficiency in production. On the other hand, the expansion in sheep numbers may slow down 'because of the increasing competition 'for land and other resources from other livestock and crops. Table 1 indicates the mission's projections for 1975.1 The major production expansion is likely to take place in Oceania and the centrally planned economies, particularly the USSR. Production in the developing countries, 'is expected to increase only slightly, while production in Western Europe and North America will probably decline.

Consumption 5. World -consumption of wool -increased from 1956 to 1962 by approximately 2.6 percent annually but -thereafter declined until 1965 ('Annex Table 3). Until 1975 consumption is estimated to' increase by approximately'2.0 percent annually as indicated in Table 1. The greatest expansion is expected to take place in the centrally planned countries (186,000 metric tons from 1961-63 to 1975) accounting for 42 percent of the total world increase in consumption. Increases in the developed countries account for 39 percent (173,000 metric tons) of the consumption expansion, while the developing countries make up the rest. The requirements were met until 1960 mainly through production increases. After that year the drawing-down of stocks contributed also to increased sales. Stocks declined until 1963/64. Afterwards they increased, particularly 'in crossbred wools, in:spite of the partial liquidation of large stocks of accumulated wools' in Argentina and Uruguay in the 'latter part of the 1964/65 season. The more recent addition to New Zealand stocks which resulted from price support operations of the Wool Commission during 1965-67 probably increased world stocks 'of crossbred wools to their highest level since'the early 1960's. Complete data for 1966/67 are not 'available yet, bu't 'it seems certain that high wool inventories will deter increases 'in wool prices in the short-run.

Trade 6. World wool trade has been running about 50 percen't of world production during 'the past decade. Both world production and exports are dominated by.Oceania which typically accounts for about 45 percent of each. From 1955/56 to 1961/62 wool exports expanded by 3.8 percent annually without causing any excessive accumulation in world stocks. The rate of export growth is estimated to slow down to 1.9 percent annually in the period .from 1961-63 to 1975 (Table 1) because of a slower rate of expansion in utilization 'inthe major consuming countries. This 'is also the reason why imports, defined as the difference between consumption and production, will increase somewhat more slowly at 1.1 percent annually. The result would be excess supplies in 1975 of approximately 130,000 metric tons or 11 percent of total world exports. Cross- bred wools are likely to constitute a considerable share of these excess supplies since demand for these may fail to grow at -the same rate as aggregate demand for all wools.

1The' projections were arrived at from FAO projections and other-information available in the Bank. Projections for New Zealand are lower than estimates given to the mission by New Zealand authorities. Table 1: Projections of Production, Consumption and Net Trade in Wool for 1975 (Thousand metric tons, clean basis)

Base Period-1961-63 1975 Projection

Consumption Production | Net Trade I Consumption Production Net Trade I

I Developed Countries 952 923 + 29 1,124 1,175 - 51 North America .. 222 62 + 160 228 60 + 168 Western Europe .. 555 141 +414 663 135 + 528 Oceania 36 643 -607 48 885 - 837 Australia .. 28 446 -418 37 585 - 548 New Zealand5 .. 8 197 -189 11 300 - 289 South Africa .. 9 76 - 67 20 95 - 75 Japan .. 130 1 +129 165 - + 165

II Developing Countries .. 146 291 -145 231 374 - 143 Argentina .. 13 101 - 88 18 127 - 109 Uruguay ...... 6 54 - 48 8 166 - 58 Others ...... 127 136 + 9 205 181 + 24

III Centrally Planned Countries ...... 390 310 + 80 576 512 + 64

World Total ...... 1..,488 1,524 + 6 1,931 2,061 - 130 Imports ...... +821 + 949 Exports ...... -819 -1,079 l_+ 2 _ - 130 lIncludes -trade in raw wool and wool manufactures. Note: + = Imports 2One pound clean = 1.43 pounds greasy. - = Exports B.4 116

7. The trade developments of the centrally planned countries are probably the most uncertain factor in assessing the future trade situation. Considerable consumption increases in this area may be expected, but the mission ,believes that this will not 'be felt on the international market because expansion in production is estimated to be large enough to meet the rising demand. Furthermore, production of synthetic fibers is also likely to increase in the centrally planned countries, and this would act as a curb on the growth of wool consumption. These developments probably will result in a slight decrease of imports by the centrally planned countries from outside the area. 8. The decline in wool stocks after 1960 coincided with a strong expansion in man-made fiber production, a development which was encouraged in its early stages 'by a rise in wool prices. The increase in fiber production has continuously gained momentum (Annex Table 3), increasing by 24 percent per year from 1959/60 'to 1965/66. So far there is no evidence that the expansion in production capacity for man-made fibers is slowing down. 'Capacity for synthetic fiber production is being increased in all 'the major producing countries and 'by the end of 1968 is expected to reach nearly 10,000 million pounds, more than 80 percent above 1966/67 levels of production. 9. The recent 1966/67 abrupt decline in the import demand for wool may be explained partly 'by the current textile recession and general economic slowdown 'in Britain, other parts of Europe and the United States. Part of the price weakness is not specifically a wool phenomenon but a general cyclical weakening in demand. But these factors alone are not sufficient to explain the general decline in wool prices. The main cause of th'is development has been the increase in synthetic fiber production and other 'technological innovations which are causing a restructuring of the textile industry. A simple example may illustrate this: The -tufting process which was invented about ten years ago in the United States (where over 90 percent of the carpets are already manufactured by th'is process) makes it possible for a carpet to be manufactured 15 times more rapidly than on a weaving loom. Ihis new technique has been introduced into Western Europe. It is, however, an expensive process which is only remunerative when it is utilized intensively. To guarantee a high and continuous utilization of carpet manufacturing capacities requires a steady flow of the raw material with little change in quality. Producers of man-made fibers wh'ich are not subject to the vagaries of weather and disease are able to provide this. Another major factor is the relative price of inputs. Important in this connection is a sharp distinction between the history of wool prices and synthetics, as Annex Table 4 indicates. Whereas wool prices have fluctuated significantly, synthetics have almost uniformly shown a progressive downward 'trend. Prices 10. Wool prices have been notoriously unstable in the past, but some broad trends can be observed. Prices on the United Kingdom market, which the Mission considers representative for the international market, showed an increase from a low level in 1958/59 to a peak in 1963/64 and declined afterwards. A year with high prices was usually followed by a one- or two-year price decline. For crossbred wools this trend was 117 B.4

changed in 1963/64 when prices. began 'a continuous fall which has not been halted so far (Table 2). Furthermore, there is a tendency for the price difference between merino and crossbred wool to increase, a situation which was already marked in the early 1950's and may be experienced .in the future. This price development is, of course; of particular concern to New Zealand, where crossbred wools account for over 90 percent of total production. The sharp decline of crossbred wool prices is due to a relatively greater use of synthetics in carpet production where a large share of New Zealand's wool clip is utilized. In the United States, for example, mill consumption of raw wool in the apparel class increased by 2.1 percent annually from 1960-62 to 1964-66 while consumptibn of carpet class wool declined by 8.8 percent annualy in the same period (Annex Table 5). 11. Previously two developments were described which will influence future price levels, particularly of crossbred wool. One is the abnormally high increase in stocks which would tend to prevent a significant improvement in price in the short run. The second is the tendency toward excess supplies of various wool types in the long run. The latter will exercise a 'depressing influence on longer term prices of wool in general. How- ever because of differences in demand strength, the increase in supply may reduce prices of crossbred wool more than prices of merino wool. The longer term average price df crossbred wool is likely to decline fromn the 1961/63 level to an f.o.b. price of 32 NZ cents per pound with present handling charges. The short term price outlook for crossbred wool 'is depressed by the large stocks which are holding 'down prices. It is most likely that prices will remain below the long term price of 32 NZ cents, as lcng as the stocks are not cleared from the market.

Table 2: 'Wool Prices in New Zealand and the United Kingdom 1951/52 to 1966/67 (N.Z. cents per pound)

New Zealand United Kingdom ______- ______- Price of 50's Average Price Average Average Price of Clean as Percent at Auction Fgoor Pricegof 64'9 64'9 50's (greasy basi) i95 1;52 .. 33.49 20.0o 111.4 59. 1 53.1 1952/53 .. 2 38.49 20.00 120.9 61.7 51.0 1953/54 .. 41.87 21.67 120.0 66.9 55.8 1954/55 .. 41.39 21.67 99.4 66.0 66.4 1955/56 .. 38.49 25.00 88.3 61.7 69.9 1956/57 .. 45.63 25.00 ItO.6 71.1 64.3 1957/58 .. 34.30 27.50 89.1 59.! 66.3 1958/59 .. 30.06 27.50 71.1 50.6 71.2 1959/60 .. 37.21 27.50 81.4 62.6 76.9 1960/61 .. 33.62 27.50 74.6 58.3 78.2 1961/62 . 32.65 27.50 78.9 57.4 72.8 1962/63 .. 35.70 27.50 84.9 60.0 70.7 1963/64 .. 45.89 27.50 94.3 74.6 79.1 1964/65 35.12 29.17 80.6 63.4 78.7 1965/66 .. 34.68 - 29.17 8, 9 62.6 73.7 1966/67 ,, 29.39 30.00 84.0 57.4 68.3

Sources: Australian and New Zealand Bank Limited, Quarterly Survey; Commonwealth Economic Committee, andwirial Fibres and Wool lntellrgence; Quarterly Bulletin of the International Cotton Advisory Committee, Colton-Worl .S listic; Textile Economic Bureau, Inc., Textile Orgnon. ]B. 4 I118

THE NEW ZEALAND WOOL SITUATION Production .12. Wool production in New Zealand increased steadily in the past two decades. From 1955/56 to 1965/66, this expansion amounted to approximately 20 million pounds or four percent annually. The increase was achieved by an expansion in sheep nuunbers (Annex Table 1), as well as an increase in yield per sheep. This development was accompanied by an .increase in the relative share of coarse wool in the total clip. In the' past ten years the volume of wool of 46/50's quality and lower had ,increased its share from 45 percent to more than 60 percent. Its present qualities are the result of many generations of selection to produce a sheep that will tolerate lush, damp conditions and intensive stocking. and produce a heavy clip of coarse wool. Other factors such as fertilizei use and breaking-in of new land have also contributed greatly to the increase in coarse wool production. 13. The major uses of the type of wool produced in New Zealand are in the manufacture of carpets, felting and the heavier woollen goods and tweeds. The very. coarse qualities are utilized mainly in carpet manufacturing. As shown above the demand for wool in this industry and possibly: in the blanket industry is declining. This situation became evident recently in price developments on the international and New Zealand markets. While prices for finer wools have always been higher than prices for coarse wools, the long-term trend in the two price series was approximately paral lel from 1955/56 to 1963/64. Thereafter the spread between prices of the two types has increased, both types declining but coarse wools at a faster rate. The evidence of three years 'is, df course, not sufficient to recommend a general shift in the New Zealand sheep industry from coarse to fine wool. But the structural changes which are now taking place in the carpet manufacturing industry indicate that the downward trend in prices is of a permanent nature. Thus, the sheep industry must decide whether it is more profitable to maintain and expand production with the existing breed under less favourable price conditions or to modify its breeding policy and encourage the output df finer wool. 14. It is too early to present convincingly a case for a change in breeding policy. For the New Zealand farmer a change to production of finer wools would be no easy task. Merinos were tried in New Zealand in the early days, but neither they nor the other finer-wooled sheep thrive in the damp, lush pasture conditions where the 'bulk of the breed, that is, Romneys, is concentrated. The alternative would be 'to breed a strain of finer-wooled Romneys, either by selection within the breed or by crossing with a fine--wooled breed. The New Zealand authorities would be advised to examine the possible consequences of such a change on the future production of wool and lamb in the country in case market conditions indicate more clearly that such a shift is warranted. What is clear now is that the long-term trend in auction prices is downward to a level of approximately 31 to 32 cents per pound. This already gives one important indicator for an analysis of the situation. In Chapter V the, mission compares recent returns on investment of dairy and sheep farms. It appears that the profitability of sheep farming would be severely impaired through lower prices. '119 B.4

15. If the past trend in wool production is maintained, output would amount to approximately 827 million pounds in 1972/73 and 916 million pounds in 1977/78. However, the Agricultural Development Conference set a target for 1972/73 of 927 -million pounds, and Government officials gave the Mission a tentative production estimate for 1977/78 of approximately 1,058 million pounds. These projections would result in an increase in output of 40 million pounds annually or twice as large an expansion as in the past. The divergencies between production targets hnd projections which should 'be expected -accord,ing to past trends are illustrated in Chart I. Although New Zealand authorit'ies were confident that this output growth could be achieved, the Mission has reservations in accepting these figures. The Mission 'believes that improvernients in production techniques will have a lasting effect but to a smaller degree than forecast by New Zealanrd authorities. One explanation for large production increases recently was favorable weather conditions. Another was the extension of improved farming methods. The latter development was to a large extent due to an influx of young, well-trained farmers into the farming community. In order to become farm owners, the new- comers had, to commit themselves to considerable financial obligations which they could carry only by increasing farmn output with modem production techniques. As long as farm prices are at 1963-66 levels, the increased expenses for fertilizer, debt repayment etc. will 'be bearable. But with the prospect of lower net farm incomes from wool the rate of growth in output may be curtailed because farmers may cut back on input expenditures.' The past improvements in soil fertility are probably sufficient to maintain the recent growth rates for one or two years even if fertilizer application is reduced. But beyond two years output is likely to slow down. The New Zealand Government is therefore advised to reconsider its production forecasts, taking into consideration lower prices and future prospects on the world wool market. Trade 16. The increase in production was followed by export expansion of 4.2 percent from 1956/57 to 1965/66. This represents an increase of approximately 17 million pounds annually. The major importer of New Zealand wool is the European Economic Community, which accounted for approximately 36 percent of New Zealand's exports in 1966 (Table 3). The United Kingdom and the United States are the second and third largest customers for New Zealand -wool. But the growth in 'these three markets has not been spectacular, as Table 3 indicates, and is unlikely to become so in the future. Japan absorbed most of the growth in New Zealand exports in recent years. From 1965 to 1966 nearly all countries increased their imports of New Zealand wool, apparently in response to falling wool prices. But the onset of the textile recession prevented full utilization of these purchases, the result of which was a slump in demand in the 1966/67 season in spite of even lower wool prices.

1 Fertilizer sales during the nine months from July 1, 1966 to March 31, 1967 went down 13.5 percent. While some of this drop may have been a levelling off from the high usage in recent years, the more immediate cause for the decrease was probably reduced farm income. From NZ$459.2 million in 1965/66 farm income dropped to an estimated NZ$420 million in 1966/67. NEW ZEALAND: WOOL PRODUCTION AND EXPORTS, 1955/56 TO 1966/67, GOVERNMENT AND TREND PROJECTIONS FOR 1972/73 AND 1977/78 - (MILLIONS OF POUNDS)

PROJEC710NS TREND GOVrERNMIENT 1,000 - PRODUCTION + *-- ExPORTS -O- O

900 * / 900

Soo / 800

700 700 0

PRODUCTION ._ __ 600 600

500 -- EXFORT5 _ 500

400 , 400_,I,,.,

W 0 1' 0 ' 0' 0x 0 0'r- Co°I 0 - N ID', Cn 0" N 0D 0' 0 N r7 loNeC 0'

NOTE 196616r d.40 h., not D..n OC-odO In COICUllon 01 Ih. Ilnd 1-d I6R0- 5564, 121 B. 4

Table 3: New Zealand: Exports of Raw Wool' (Million pounds-Actual weight) 1962 1963 I 1964 1965 1 1966

EEC ...... 235.0 229.6 219.8 215.0 223.1 Belgium ...... 47.3 38.2 46.3 50.0 46.3 France ...... 93.8 94.7 87.6 81.5 94.0 West Germany .. .. 35.9 40.1 33.3 42.3 34.7 Italy .. .. 42.0 37.9 33.5 30.7 32.0 Netherlands .. .. 16.0 18.7 19.1 10.5 16.1 United Kingdom .. .. 152.5 137.9 157.4 126.3 137.2 Japan .. .. 18.6 33.7 25.6 34.6 59.3 United States .. .. 87.6 91.1 82.4 83.9 100.4 Soviet Union .. .. - - 3.7 8.9 26.2 Other Countries .. .. 51.5 73.8 63.7 80.2 77.6 Total .. .. 545.2 566.1 552.6 548.9 623.8 Estimated n_ Greasy Equivalent of Total .. .. 577.0 599.0 586.0 585.0 669.0 Estimated- Clean Equivalent of Total .. .. 409.0 429.0 421.0 422.0 476.0

lncludes greasy, scoured and slipe. 2 Calculated on the basis of: 1 lb. scoured = 1.3 lb. greasy. Souirce: WVoolIntelligence and Fibres Supplement, Vol. XX, No. 4, April 1967, Commonwealti Secretariat, London. 17. If the past rate of growth in New Zealand wool exports continues, they would reach approximately 723 million pounds in 1972/73 and 806 million pounds in 1977/78. The New Zealand Production Council has set an export target for 1972/73 of 900 million pounds and a tentative target for 1977/78 of 1,029 million pounds (Chart I).' This implies that New Zealand would increase her share of the world wool market from approximately 23 percent in 1961-63 to 27 percent in 1975, as indicated in Table 1. Although exports from Argentina and Uruguay, New Zealand's two major competitors in -the world market for crossbred wool, are expected to increase very little, the yearly export expansion contemplated by New Zealand would 'be 'larger than the combined growth experienced by all three countries in the past. 18. The Mission's 1975 projections for world wool production, consumption and trade are indicated in Table 1. The forecasts indicate an excess supply on the world market of 130,000 metric tons of clean wool, which could probably be cleared by a fall in international wool prices of some seven percent (para. 11.). 19. The projections assume that in 1975 New Zealand will produce 300,000 metric tons of 'vrool,2 of which 285,000 metric tons will be exported. The estimates assume that New Zealand exports would increase faster than the past trend indicates because the increased expansion in output would force more wool onto the world market. The

'Exports in 1975 would amount to approximately 765 million pounds under the trend projection and 965 million with the New Zealand target forecast. 2 Calculated on the basis of 1 lb. clean wool 1.43 lb. greasy wool. B.4 122

Mission forecasts that'at an f.o.b. price of 'NZ 32 cents per pound (in pre-devaluation prices) New Zealand would be able to export 850 ril- lion pounds in 1972/73 and 950 million pounds in 1977/78.1 Thus in 1972/73 and 1977/78 export earnings from wool should reach NZ$256'million and NZ$288 million respectiVely.

Marketing 20. Most of the wool marketed in New Zealand is -sold privately at auction. The New Zealand Wool Commission buys- in at the appropriate floor price for a particular type of wool-if the auction bids do not reach this price. The Commission is a grower-controlled organization the principal aim cif which is td minimize downward fluctuations in wool prices received by farmers. Normally, it does not carry large stocks, nor does 'it attempt to limlit or contain the extent-of upward price fluctuations. The major factor in the stabilization program is the level of minimum floor prices. The Commission prepares a table of minimum prices for each type of wool at wh-ich it is ready to buy at auction. The average floor-price for all wool types must subsequently 'be approved by the Ministry of Agriculture. The Commission's operations are financed by a fund established in 1952. In that year it amounted to NZ$53 million, of which NZ$40 mrillion came from profits on the sale of wool held in stock after the period of 'bulk purchase during the War and NZ$13 million from the wool growers' contributory account. Since 1952, the original NZ$53 million has been augmented from interest earned on investments and from profits on the resale of wool; At the beginning of the 1966/67 season, 'the Commission's financial. resources amounted to NZ$76.78 million. 2'1.'The major factors the Conimission 'takes into consideration in setting the prices are: (a) current trends and prospects in Incernaionat markets, and' in prices of commodities generally, and particularly .those corn- modities that enter substantially into international trade; (b) the amount of available financial resources; (c) the views of the Wool'Board; (d) the maintenance of 'the production of wool in New Zealand;.and (e) such other matters as the Commission frbm time to time deems relevant. 22. Experience shdws (,Table 2) that in the past'the floor price had little relationship to the market price and conditions of the international wool markets. Market prices were usually in excess of reserve prices and very little buying-in was required. Only during the 1957/58 and 1958/59 seasons did the Commission buy any substantial amounts, but even these constituted only four percent of the total number of bales offered at auction in' each 'ear: In su'biequerit seasons the Corimission was able to dispose of .this wool at a profit, which instilled confidence in the lThe difference between the export target projected by New Zealand authorities and the Mission's export projections' amounts to 34,000 metric tons of clean wool. If this amount were added to the initial surplus of 130,000 metric-tons, -a decline in 'price-of eiight petcent instead of seven percent on the international market may be expdcted.' This would result ini a New Zealand auction price of NZ 31 cerits per pound. 123 B.4 reserve price system and the activities of -the Commission. The fact. that the Commission had failed to judge and relate international market conditions and prices in establishing the reserve price was probably not sufficiently appreciated. This shortcoming, however, led to serious results in the 1966/67 season. 23. At -the beginning of the 1966/67 season the Commission announced that the floor price level -for greasy wool for the new selling season would be 30 cents (36 pence) per pound, a rise of 1 pence above the previous season. The decision to raise the reserve price was taken because the Commission anticipated an increase in the international wool market price. But at this time the price of crossbred '(52's) 'wool on the Un'ited Kingdom market continued a decline which had started in 1963. Prices of other agricultural raw materials (cotton, fats and oils, tobacco) and of -industrial fibers were declining, economic conditions -in Western Europe and 'the United States were 'less favourable than in previous years, and the currencies of Uruguay and Argentina, New Zealand's major competitors in the international crossbred wool market, had been devalued. The 'latter -factor 'implied that supplies from these countries could become available at lower prices on' the international market, a situation which has indeed developed. 24. The results of the 1966/67 marketing season are well known. When the market price fell below the floor price, the Commission began to buy and at the end of the season had accumulated' approximately 650,000 bales in stock. Its reserves declined from NZ$76.78 million at the end of June 1966 to NZ$6 million at the end of the season. Floor prices were 'educed to 25 cents (30 pence) per pound in August for the 1967/68 season. There was little commercial demand at this price and the Commission had to buy most of the wool offered at auction. As a result, floor prices were further reduced to NZ 16.25 cents per pound in October 1967.1 The cost for the storage of the wool bought by the Commission could amount to over two million NZ dollars in 1967/68. 25. Two reasons have been given for holding the wool off the market. The first is related to ideas of an international buffer stock scheme. It is believed that through its actions the Wool Commnission affects international market prices considerably. However, this is doubtful since New Zealand supplies only about 23 percent of the International market. Buying-in of the wool by the Commission resulted only in by-passing the New Zealand market since buyers were able to find supplies elsewhere. Speculation is the second reason given for the buying-in operation of the Commission. It is believed that the fall in wool prices is merely temporary and will thus rise in the future, at which time the Commission can sell the accumulated wool stock. This reasoning is encouraged by the experience of 1957/58 and 1958/59 when the Wool Commission bought at auction and sold, in later seasons at a profit. However, such a system only works when prices are expected to rise, but, as shown earlier, long-term and short-term prospects do not indicate such a rise. lln October and November most of the wool offered at auction was' sold .at approximately NZ 20' cents per Pound. The grower gets a deficiency payment making up the difference between this price and the previous minimum floor price of NZ 25 cents per pound. B..4 124 26. The New Zealand Government and Wool Commission are now faced with two major decisions: (a) how to dispose of the wool stock; and (b) the future policy of wool marketing. With respect to the former, the Commission has to decide whether the accumulated stocks should be disposed of rapidly at reduced prices or slowly over an extended period. If rapid. disposal is decided upon, such a sale would probably show a greater loss than would have been incurred had the Conimission allowed the wool to be sold during the past season since this season's prices are unlikely to go beyond the reserve price prevailing at that time (30 pence per pound). Slow disposal has the disadvantage of depressing the market over an extended period, but it would still be preferable to quick disposal. In this case, it is very important that a definite assurance is given by the. New Zealand Government that it would not sell at short notice in order to obtain foreign exchange. Such a step would only encourage speculators to hold off the market in the hope of future price declines. 27. The developments in the international wool market may call for changes in the New Zealand marketing system. There seem to be good reasons for more active participation by the Government representatives at the Wool Commission. This task of changing the marketing system would also be facilitated if a trade analysis unit were established by the Government along, the lines discussed in Volumne I, Chapter IX. In addition, the Wool Commission should strengthen its market research in order to be in a position to advise its members on the outlook for wool marketing. The Mission concurs with recent recommendations to this effect.' * 28. The past two wool seasons have shown that under the conditions which exist in New Zealand the floor price system cannot be effectively relied upon when prices tend to decline over a longer period. In periods of falling prices, the maintenance of an unrealistic floor price results in the accumulation of stocks, which in itself tends to prevent price advances. Floor prices have had to be sharply lowered at the beginning of the 1967/68 season. For the present (1967/68) season, the Com- mission's, floor price is NZ 16.25 cents per pound. Farmers, however, will continue to get the 1966/67 floor price of NZ25 cents a pound, with the Government making up the difference through deficiency payments. The Mission concurs with the recommendations of the Wool Marketing Study Group,' which propose: (a) Appraisal and purchase of all wool produced in New Zealand by a Wool Marketing Authority. Purchase prices would be based on a bareme set with the objective of providing complete within- season, and 'relative between-season, 'stability of prices to the grower. (b) Sale of the wool by the Authority through existing channels. 'l'he difference between the cost of the Authority's purchases and market sales would be financed from a stabilizing fund, with the aim of making the fund self-balancing in the long-run. lWool Marketing Study Group, Final Report, prepared for New Zealand Wool :Board'and New,Zealand Wool Commission, November 1967. 125 B.4

29. The establishment of a purchase price based on a bareme set will require a'considerable amount of research. Since New Zealand has to export most of its wool output, the long-run world market price, as indicated in paragraph 19, shouild be the main criteria. Prices should not be set above this level since this would only result in increasing deficiency payments. Presently the average auction price is considerably below the projected long-run price. In the short-run, the average purchase price' should gradually be adjusted upward towards'this level. The presence of large wool stocks which should be released at the indication of sharp price increases, would guarantee the relative stability of this short-rin price adjustment. The Reserve Bank would -have to set up an adequate fund to maintain a guaranteed price. In times when market prices fell below guaranteed prices, the Authority would pay the difference to fanners and in times when prices rose above the market price, the excess would be paid back into the fund. 30. The Mission sees several advantages in such a system. The Coin- mission could dispose of the wool through auction or through private contracts, or by a combination of both. The advantage of selling through private contracts is to gain a better knowledge of distribution systems and market conditions in general. The Commission could set relatively high guaranteed prices on a selective basis to encourage the production of certain desirable types of wool. It would also be able to accumulate some -stocks to be disposed of in times of scarcity to guarantee buyers a stable price and supply of a uniform quality and in this respect would gain some of the advantages of synthetic fibers. 31. It should be emphasised that the establishment of such a system requires a highly competent staff able to undertake economic analysis, sales and administration, as well as the introduction df some technical changes such as improving the grading system. These are analyzed in the report of the Wool Marketing Study Group.

RESEARCH AND PROMOTION 32. To counteract the growing threat from synthetics, wool interests should explore and promote every possible avenue to increase the demand for wool. The worldwide agency charged with promoting wool products is the International Wool Secretariat (IWS). The Secretariat is financed by contributions from the wool boards of South Africa, NewQ Zealand and Australia. The proportionate contribution of each country is based on the exports of greasy, clean and slipe wool. At the present time, Australia contributes 63.5 percent, New Zealand 24.2 percent and South Africa 12.3 percent. The Secretariat also receives funds from the wool textile industry in a number of countries, spent in joint campaigns. New Zealand's contribution to the Secretariat amounted to NZ$2.7 million in 1965/66 and is collected in the form of a levy on growers by the Wool Board through the Wool Comrrnission. 33. Advertising and merchandising which mean direct selling campaigns through and with the wool industry account for three quarters df total expenditures. Education and research account for the remainder. In research, the role df the Secretariat is to co-ordinate the work of scientists throughout the world and to translate results into commercial

'Average of' barenie prices. In this paragraph average purchase price -and guaranteed price are identical. B.4 126

processes. Market research is mainly limited to promotional research to determine areas where the expenditure of promotional funds is going to yield the mdximum return in terms of sales. Systematic trade analysis and long-term forecasting have so far not been undertaken by the IWS; although it intends to undertake some work in this field. The Mission feels, however; that the New Zealand Wool Commission should undertake its own trade and market research service, as suggested in para-~ graph- 27. The research work of the IWS should 'supplement this service and need not result in 'a duplication of efforts. The importance of the New Zealand market research service lies in its lbng-term continuous work, while the studies of the International Wool Secretariat are more along the lines of intermittent projection studies similar to the work carried out by FAO. Since the promotion of wool will be of greatest importance in the future, the major task of the Secretariat should remain in promotional activities and any major diversion to other types of work such as projection studies would be ill-advised.

II. MUTTON AND LAMB 34.,New Zealand lamb production in 1965/66 amounted to 305,400 tons, of which 280,800 tons or 92 percent were exported. Mutton production in the same period amounted to 159,700 -tons, of which 50 percent was exported. The production-export relationship for both products has not substantially changed in recent years. It clearly indicates that New Zealanders prefer mutton1 ' -to lamb and eat more than three times as much mutton as lamb. One reason for 'this preference, of course, is due to the fact that mutton is less expensive, but there is also a definite taste preference. 35. The major element in international trade in mutton and lamb 'is the flow of exports from Australia and New Zealand to the United Kingdom. During 1964-66 the United Kingdom absorbed 60 percent of internationally traded mutton and lamb; New Zealand and Australia supplied' about 80 percent of world exports. 'In projecting the international trade 'in mutton and lamb the Mission relied on FAO forecasts (Table 4) with the exception of Japan. Imports into that country could increase up to -twice 'the figure indicated if restrictions on beef imports (see para. 64) 'remain in force. Excluding the centrally planned countries, these projections predict a more rapid rise in import demand' than in domestic production. This gap will be covered by increased supplies from the major exporting countries. Thus supply and demand on the international market for mutton and lamb are projected to be in equilibrium in 1975 at 1961-63 prices. Bu't there exists also a potential import demand from -the centrally planned countries. Although production in these countries may. increase sufficiently to eliminate most of the import demand, it may also exercise an upward pressure.on the world market. For 'this reason, the. Mission. accepts the New -Zealand price projection which is above the 1961-63 level,2 although this is an optimistic assumption.

1The type of mutton consumed is termed hogget in New Zealand. It is- a relatively young sheep approximately ten months of age. 2 The Government assumed an f.o.b. price for 1972/73 and 1977/78 of-NZ$350 per ton for lamb and NZ$150 for muttdn. The average 1961-63 f.o.b. price amounted to NZ$311 per ton for lamb and NZ$132 per ton for mutton. 127 B.4

Table 4: International Trade in Mutton and Lamb 1961-63 and Projection for 1975 (Thousand metric tons)

1961-63 1975 Average

Importers (total) 531 1,055 North America . .. .. 76 148 2 Europe . .. .. 399 546 United Kingdom .. .. 369 385 European Economic Community .. 12 72 Enlarged European Economic Community . 359 423 4 South Europe ...... 16 78 Japan ...... 32 76 Centrally planned countriesS .. .. 24 285 Total, excluding centrally planned countries 507 770 Exporters (total) ...... -554 -776 6 West and South Europe ...... -31 -28 7 Oceania ...... -481 -727 Eastern South Americas ...... -42 -21 Total of above countries ...... -23 280 Total of above countries, excluding centrally planned countries -47 -6

No sign indicates imports; (-) minus sign indicates exports. 1Canada, United States. 2Austria, EEC, Denmark, Finland, Greece, Norway, Spain, Sweden, Switzerland, United Kingdom. 3Six member countries plus United Kingdom, Ireland, Denmark. 4Greece, Spain. 5USSR and Eastern Europe. 61reland and Yugoslavia. 7Australia, New Zealand. 8Argentina, Uruguay. NOTE-The 1975 projection represents the average of the high and low FAO trade projections. Source: FAO, Agricultural Commodities, Projections for 1975 and 1985, October 1966.

36. The projections envisage that Western Europe is likely to become a substantial net importer of mutton and lamb. The main causes are are small projected increases in production in 'France, Italy, Spain and Greece as well as substantial increases in per capita consumption in Southern European countries and to a lesser extent in the European Economic Community. Import demand of the United Kingdom is projected to increase by only 0.3 percent in the 1961-63 to 1975 period because British production is likely to rise. North American demand is also expected to increase. 37. The FAO projections predict an increase in the demand for mutton and lamb in the European Economic Community. This applies also for a Common Market enlarged by' the entrance of the United B.4 128

Kingdom, Denmark and Ireland. As yet there is no common policy for sheepmeats in the European Economic Community, but under the pro- visions of the Rome Treaty some kind of common agricultural policy is mandatory. Although at this point any prediction of the future shape of this policy is mere speculation, *the'Mission does not expect that a common policy would reduce the trend of import demand. If the United Kingdom joins the European Economic Community, an increase in meat retail prices in the United Kingdom may be expected. This would probably result in a decrease in per capita-meat consumption. But since mutton and lamb are less expensive than beef and pork, it is likely that consumllers will shift to mutton in order to compensate for -the decrease in the consumption of other types of meat. 38. As stated before, the import demand in the United Kingdom, New Zealand's major customer, is increasing very slowly. The major part of additional exports will therefore have to be directed to other markets, such as North America, other Western Europeanrcountries, Japan and other Asian countries. Con'siderable efforf in terms of market research, promotion and sales organization will /be required to gain and expand exports to these areas. Sales in these markets can be increased only if supplies are tailored to meet specific customer requirements. Thus the cutting and preparing of carcasses which is presently undertaken would have to be increased. In addition, marginal pricing will have to be undertaken which may imply -that the net return per ton in new markets may be 'lower than in the British market. It is also very likely that a greater demand for mutton, rather 'than lamb, is going to develop. The preference for this tvpe of meat, as illustrated in New Zealand, is also likely to become more prevalent in new-markets. This probably implies a narrowing of the lamb-hogget meat price ratio which could have inportant repercussions on future production policies. The affects of this on output will have 'to 'be analyzed. 39. The New Zealand Meat Producers' Board is charged with the responsibility of promoting New Zealand's meat exports. The Mission has not been able to assess in detail the effectiveness of its activities, since this would have required an on-the-spot analysis. However, as far as could be ascertained, it appears that efforts of promotional campaigns have been too largely concentrated on the United Kingdom market and have not been effective enough in other markets, particularly the United States. Market research, if any, is carried out by management teams visiting individual countries and formning opinions about future developments. Their market evaluation is often -based mainly on estimates of businessmen in 'foreign countries. The Mission feels that this type of research is inadequate and should 'be supplemented 'by a more continuous and systemic analysis by competent economists (see Vol. 1, par. 149 and 1950)'. 40. The official New Zealand projections of future production and exports of mutton and lamb assume a considerable increase. Exports of both commodities are expected to increase by 215,000 tons until 1975, based on the average of 1972/73 and -1977/78 projections (Table 5). Since the tbta'l world import dermand, excluding the centrally planned countries, 'is projected to increase by approximately 263,000 tons, it 129 B.4 implies that New Zealand expects to supply over 80 percent of *this increase. This seems reasonable in view of the fact that New Zealand supplied approximately 75 percent of the lamb and mutton exports of Oceania. However, the New Zealand projections assume a much larger share of lamb exports compared with mutton. As explained before, the additional demand is more likely to concentrate on mutton, unless lamb prices are reduced. Furthermore, the projected export volume for lamb does not coincide with the trend experienced in the 1960/61 to 1965/66 period (Chart II). For mutton; both exports and production projections are considerably larger ithan the past trend would suggest (Chart 'III). 41. Since the world demand would probably increase sufficiently to absorb the projected export volume, -the Mission accepts the New Zealand forecast. If 'the projections materialize, the f.o.b. value of larnb exports in 1972/73 would amount to NZ$136.2 million, and for mutton (f.o.b.) NZ$21.8 million could be expected. The forecasts are based on price forecasts of NZ$350 per 'ton for lamb and NZ$150 per ton for milutton. For 1977/78 the respective f.o.b. values wvould be NZ$164.8 million and NZ$26.3 million, assuming the same f.o.'b. export prices. How- ever, it is suggested that the New Zealand authorities reconsider their projections assuming: (a) lamb prices of $350 per ton, mutton prices of $150 per ton, and a continuation of past trends in export and production (e.g. lower output and exports); and (b) lower 'lamb prices, but no change in the volume of export projections. Since mutton and lamb production is intimately linked to wool production, and an 'increase in export earnings 'from wool, as predicted by Govemment projections, is not likely to materialize, 'the authorities should also ana:yze whether reduced earnings from wool production will result in lower sheep numbers. Mutton and lamb output projections would 'then have to be considered on the basis of a smaller sheep population.

Table 5: New Zealand: Official Lamb and Mutton Exports 1965/66 and Export Projections for 1972/73 and 1977/78

1965-66 1972-73 1977-78

Price IQuantity Valtue Price I Quantity Value Price I Quantity I Value

Lamb 376.6 287.8 105.8 350.0 398.8 139.6 350.0 471.0 164.8 Mutton 170.0 91.7 15.6 150.0 143.0 21.4 150.0 175.0 26.3

NOTE-Price in NZ dollars per ton, quality in 1,000 tons, value in million NZ dollars. Souzrce: New Zealand Treasury Department.

5 NEW ZEALAND: LAMB AND MUTTON EXPORTS, LAMB PRODUCTION AND EXPORTS, 1955/56 TO 1965/66 AND GOVERNMENT AND TREND PROJECTIONS FOR 1972/73 AND 1977/78 (THOUSANDS OF LONG TONS) 500 , , , , ,5T00 SEMI- LOGARITHMICSCALE 450 t 450 400 _ 400 LAMB AND MUTTONEXPORTS 350 - - 350 LAUB . .O-UCTION - - 300 So_

250 /<2 t . 250

_;P S _ LAMB EXPORTS . 200 / _ _ _ _ 200 PROJECTIONS TREND GOVERNMENT PRODUCTION_ - EXPORTS - O 0

150._ID F 01 01 0p °0D1Dx NDt X t ° 150

01 01 01 01 01 0 01 011 0101 01 01 01 01 01 01 1 01 01-01 4 I0RO-35I 0I_ NEW ZEALAND: MUTTON PRODUCTION AND EXPORTS, 1955/56 TO 1965/66, GOVERNMENT AND TREND PROJECTIONS FOR 1972/73 AND 1977/78 (THOUSANDS OF LONG TONS) 300 r ---a--I I I I I I I I I 300

PROJEC!Ot1S

250 _ ExORTS -- ^ O __ __ , . 250

200 _---200

150 p- .___5

_ ~~PROXJCTON

100 100

0~ ~ ~ ~~~~~~~~~~~~~~~~~5

SO~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1036__._ S ---- - l t B. 4 132

III. DAIRY PRODUCTS 42. In 1961-63 New Zealand's exports of dairy products accounted for 16.5 percent of the total international trade in 'terms of milk equivalent. The future international mlarket for dairy products will be characterized by three main factors: (a) rising surpluses of milk in the major dairying regions; (b) large increases in demand for milk products in the developing countries; and (c) changes in trading patterns which may arise if the United Kingdom, Denmark and Ireland enter the Common Market. THE WORLD TRADE SITUATION 43. In 'the past butter production became an increasingly important outlet for milk in the major dairying regions,' absorbing 36 percent of production in 1962 compared with 33 percent in 1952. The share accounted for by milk and cream in direct consumption fell from 39 to 35 percent during the same period (Annex Table 6). In the industrialized countries the aggregate demand for milk products has lagged behind production. As a result surplus buatter stocks accumulated, but they are now concentrated in Western Europe, while those in North America declined slightly. Output of milk in the developing countries, on the other hand, scarcely kept pace with 'the increase in -their population during the past decade. In the centrally planned countries increases in production were absorbed by increases in demand leaving -only small quantities for export. 44. The volume of international trade is shown in Annex Table 7. Developed countries are the main importers of butter and cheese. Developing countries import mainly condensed and dried milk. Since many of these countries were unable to provide the foreign exchange to buy on th'e world market, surpluses of high-cost countries were often disposed of on concessional terms, or as donations, or were marketed with the aid of export subsidies. As a result of the introduction of import quotas by the United Kingdom in 1961, import prices in this major mark-et became relatively stable. 45. Table 6 indicates the Mission's projection of world milk supplies at constant 1961-63 prices2 in 1975. It indicates that if present price levels prevail, world milk output will fall short of aggregate demand by approximately 18 million metric tons milk equivalent or 880,000 metric tons butterfat equivalent. This imbalance arises from deficits of about 25.8 million metric tons in developing countries and eight million tons in the, group of "other developed countries", mainly Japan and various Mediterranean countries. On the basis of past developments and 1961-63 constant prices, FAO assumes that of the projected trade deficit of 18 million metric tons milk equivalent in 1975 only 7.2 million metric tons would be imported on commercial terms. In butterfat equivalent, commercial imports into developing countries would amount to 327,000 metric tons, leaving 355,000 metric tons to be supplied under concessional trade arrangements or not at all. This situation is illustrated in Table 7. For New Zealand, the largest exporter of dairy products, these developments are of vital importance. 'United States, European Economic Community, Northern Europe (Austria, Denmark, Finland, Ireland, Norway, Sweden, Switzerland, United Kingdom), Australia, Canada and New Zealand. 2The estimates were obtained from FAO, individual countries and our own estimates. i33 B. 4

Table 6:-rnternational Trade in Milk Products, 1961-63 and Projections for 1975 ______(Thousand metric tons)

Milk Equivalent Butter Equivalent' Region 1961-63 1975 1961-63 1975

North America .. .. - 386 - 131 - 17.5 _ 5.9

Western Europe .. .. +2,655 - 4,874 +120.0 - 221.5 United Kingdom .. .. +9,156 + 8,895 +416.2 + 404.3 European Economic Community -1,596 - 8,214 - 72.5 - 373.4 Enlarged EEC2 .. .. +3,890 - 3,682 +176.8 - 167.4 .. -4,905 - 5,555 -222.9 - 252.5 I Other Western Europe" 4 II Other Western Europe .. -1,235 - 1,192 - 56.1 - 54.2

Oceania ...... -5,775 - 9,020 -262.5 - 410.0 Australia ...... -1,983 - 2,776 - 90.1 - 126.2 New Zealand .. -3,792 - 6,244 -172.4 - 282.8

Other Developed Countries .. + 441 + 7,276 + 20.0 + 330.7 Japan ...... + 47 + 1,601 + 2.1 + 72.8 Republic of South Africa .. - 114 - 125 - 5.2 - 5.7 South European Countries . + 508 + 5,800 + 23.1 + 263.6 Developing Countries.. .. +3,546 +25,761 +161.0 +1,170.9 USSR and Eastern Europe .. - 481 - 975 - 21.0 - 44.3

World Total .. .. 0 +18,037 0 + 819.9 Exports ...... -301.0 - 681.7 Imports ...... +301.0 +1,501.6

'Conversion factor for milk: 22 kilograms milk = 1 kilogram butter. 2Present EEC plus United Kingdom, Ireland, Denmark. 3Europe excluding EEC and United Kingdom. 4 Europe excluding enlarged EEC. NOTE-Any discrepancy between individual figures and totals is due to rounding. Source: Committee on Commodity Problems, FAO, Rome, FAO Projections 1975 and 1985; own estimates. Table 7-Prospects for Commercial Trade and Projected Imbalances' 1975 (Thousand metric tons) Milk Equivalent Butter Equivalent I Region . Comniercial Imbalance' Commercial Imbalance2 Trade Trade

North America .. .. - 131 _ - 6 Western Europe .. .. -4,874 _ -222 Oceania ...... 9,020 - -410 USSR and Eastern Europe .. - 975 _ - 44 Developing Countries .. .. +5,500 +20,261 +250 - 921 Other Developed Countries . 2,3002. + 4,976 +105 + 226 Total .. .. 7,2007. +25,237 -327 +1,147 Trade surplus of dairy exporting -7,800 -355 countries

1Conversion factor for milk to butter equivalent is: 22 kilograms milk- 1 kilogram butter. 2 Amount which has to be covered either by aid shipment or not at all. Source: Committee on Conmodity Problems, FAO, Rome, FAO Projectioats 1975 and 1985. B.4 134

THE NEW ZEALAND SITUATION 46. Milk production in New Zealand increased from 1955/56 ,to 1965/66 by 213 million gallons (Annex Table 8). Expressed in butterfat it expanded from 240,000 metric tons to 293,000 metric tons or approximately two percent per year. In 1972/73 and 1977/78 butterfat production is expected to increase to 375,000 metric tons and 445,000 metric tons respectively. These production data and.the export statistics indicated in paragraph 52 are the basis for 'the Mission's projections of New Zealand trade in Table 6. 47. In the past three years, 1963/64-1965/66, due in part to favourable weather conditions, butterfat production increased at a faster rate (5.2 percent) than in the previous decade. The rapid growth of dairy production. has resulted in a considerable expansion in exports under favourable price conditions '(Annex Table 9): Except for butter prices, which increased until 1964/65 but declined thereafter, the export prices for all dairy products have increased since 1962/63. The expansion of New Zealand's exports was accompanied by a diversification in markets as Annex Tables 10 and 11 indicate. But in spite of thlis diversification, New Zealand is heavily dependent upon the United Kingdom market. Therefore, New Zealand's export prospects to 'this market depend on whether or not the United Kingdom enters the European Economic Community. 48. If the United Kingdom does not enter 'the European Economic Community, it is reasonable to assume that'the import quota system will -be maintained and the -level of the quota will be determined by the import demand, e.g. domestic production and utilization. Recently, -the United Kingdom Milk Marketing Board projected 'the future demand and supply of milk products in 'the United Kingdom for 1970 and 1975. Table 8 surmnmarizes the results. The Board forecasts an increase in total 'import demand for dairy products ,in milk equivalent for 1970 and 1975. Butter imports would be larger in 1970 and 1975, while cheese imports would only grow until 1970 and 'then decline to their 1965 level by 1975. Whole milk powder imports would decline slightly from 1965 to 1975. Below are the relevant statistics: U.K. Import Demand in Thousand Tons 1965 1970 1975 Butter ...... 412.5 414.6 430.9 Cheese - 152.6 160.4 151.3 Whole Milk Powder 16.6 17.8 16.1

49. Demand and supply. projections always contain an' element of uncertainty. If this is taken into account, the United Kingdom forecast suggests 'that the future British market offers very few prospects for an increase in butter, cheese or whole milk powder import demand. For New Zealand this implies that markets for the additional planned output in dairy products must be found or extended outside the United King- dom. The estimates do not take account, however, of the situation which would 'develop if the United Kingdom enters the Common Market. If this should happen, the whole outlook would be drastically altered. Table 8: UNITED KINGDOM: DEMAND AND SUPPLY OF MILK PRODUCTS 1965 AND PROJECTIONS' FOR 1970 AND 1975 (million gallons milk equivalent)

1965 1970 1975 U.. Imported U.K. Imported Dean U.K. IIpre Demand Suples Supplies Demand Supplies- Supplies Dead Supplies Sple

Liquid Milk . .. 1,643 1,643 - 1,733 1,733 - 1,829 1,829- Fresh Cream . . 117 III 6 177 116 61 248 121 127 Butter .. . . 2,508 190 2,318 2,680 350 2,330 2,823 401 2,422 i- Cheese .. . . 614 263 351 642 273 369 678 330 348 Condensed Milk' .. . 78 101 -23 79 93 -14 83 97 -14 ~ Chocolate Crumbs . . 60 42. 18 64 44 20 66 44 22 Whole Milk Powder .. 78 48 30 83 51 32 84 55 29 Sterilized Cream . .. f 34 20 14 51 18 33 69 20 49

Total .. . . 511 247 274 553 2,699 2.834 5,907 2,19 2,988

'Estimates assuming: poptulation growth 1966 to 1970 of 4.8 percent and 1966 to 1975 of 6.9 percent and increase in per rcapita disposable income of 2.0 percent per year. 2 Sweetened and unsweetened. NOTE.- (-) minus sign indicates net exports. Souree: U.K. Milk Marketing Board, Demand and Supply oj Milk and Dairy Pr6ducts in the U.K. to 1975, May 1967. BAJ.+ 136

50. The seriousness of the problem for New Zealand's dairy exports, if the United Kingdom enters the Conmmon 'Market, results from the prob- ability of a growing milk supply in the European Economic Community. Increases in retail pricesmfor butter in -the United Kingdom and a conse- quent decline in butter.consumption can also be expected. Furthermore, if the United Kingdom joins the EEC, it is reasonable to assume that Denmark and Ireland, tw6 major dairy countries, will also enter without much delay. If the United Kingdom enters the Common Market, one must assume that present EEC dairy policies will be applied without great modifications in an enlarged EEC. Under these circumstances, the excess production of the EEC, plus ,Denmark and Ireland, would be sufficient to supply 'the import requirements of the United Kingdom. The situation is outlined in Table 6 and indicates that the enlarged Community would become self-sufficient and still be in a position to export approximately 3.7 million metric tons of dairy products in terms of milk equivalent, unless measures are taken by the EEC Commission to slow down the increase in milk production. The Commission is aware of this problem and is presently trying to set a milk-beef price ratio which encourages beef rather than milk production. So far these measures have had little success. Even if this policy becomes effective, it is unlikely that production will be reduced to a level which wvould result in an import demand in the enlarged Community. 51. New Zealand's case for special arrangements to protect her trade in butter and cheese in an enlarged Community rests on the fact that the United Kingdom is the only large market for butterfat products and New Zealand's dairy industry has been geared to supply that market. Although it 'is hoped that the Six will grant special arrangements for New Zealand, nevertheless there is a danger that New Zealand will be faced with a contraction of the United Kingdom market.

Outlook for Exports 52. New Zealand plans to accelerate its exports of dairy products considerably as the following 'table shows: Past and Projected Exports of Dairy Products (in thousand tons) 1964/65-1965/66 1972/73 1977/78 Butter ...... 189.3 '248.0 298.8 Cheese ...... 94.2 136.0 161.5 Buttermilk Powder 13.3 16.0 20.0 Casein 46.3 50.0 59.4 Skim Milk Powder .. 78.5 225.0 268.9 Even assuming :that the United Kingdom does not 'become a member of the European Economic Community, these exports wvill have to find marlkets outside Britain. Japan offers the best commercial prospects for New Zealand's butter exports, as Table 6 indicates. With a well-directed and we]E-informed sales organization, New Zeieland should also be alble to find commercial markets for her expanding dairy production in South America, South Africa and Southeast Asia, especially Japan. Her major efforts should 'be concentrated on Southeast Asia. But competition, particularly from the EEC, will be strong. 137 B.4

53. FAO estimates that the European Economic Community will increase exports from 1.6 million metric tons (milk equivalent) in 1961-63 to 3.0 million metric tons in 1975. But the Community will still be faced with a surplus of 5.2 million metric tons of milk which could not be disposed of on commercial markets. This surplus would either have to be utilized within the Common Market, given away as aid or sold in other markets at subsidized prices. No doubt the latter policy will have depressing effects on 'the world market prices. 54. As far as world market prices are concerned, New Zealand authorities rightly predict a fall in all product prices with which the Mission agrees. The New Zealand projections assume that the United Kingdom market will be nmaintained. In terms of volume, the forecasts are higher than could be expected according to the 1960/61 to 1965/66 trend, as Chart IV illustrates. Considerable sales effort, market research and promotional expenditure will be required to find markets for the additional output. Assuming this can be achieved, export income from dairy production in 1972/73 and 1977/78 would be as follows:

NEw ZEALAND EXPORT INCOME FROM DAIRY PRODUCTION

1972/73 1977/78

Price Volume Value Price Volume Value f.o.b. 1,000 million f.o.b. 1 ,000 million NZ$ per ton tons dollars NZ$ per ton tons dollars

Butter .. .. 530 248 131.4 500 298.8 149.4 Cheese .. .. 440 136 59.6 406 161.5 65.6 Skim milk powder .. 180 225 40.5 180 268.9 48.4 Casein .. .. 400 50 20.0 400 59.4 23.8 Buttermilk .. 170 16 2.8 170 20.0 3.4 Sundry .. .. 6.0 6.0

Total .. 260.3 296.6

55. But if the United Kingdom, 'Denmark and Ireland join the Common 'Market, New Zealand might be faced with the loss of the Bribish butter market and probably also the cheese market. Although this is unlikely to happen before 1975, alternative export possibilities should be considered now. At its worst, the loss of the United Kingdom market could mean that surpluses would have to be sold as butteroil on the international market for vegetable oils. Presently the highest priced vegetable oil is coconut oil. The price for this oil (c.i.f. Unlited Kingdom) is expected to decline to £96 per ton in 1975. New Zealand exports approximately 170,000 tons of butter to the United Kingdom market. This volume represents approximately 141,000 tons of butteroil.1 If this amount is sold at projected 1975 coconut oil prices, earnings would amount to £13 million compared with a bbutter income of approximately £50 million: Thus' the loss due to 'the conversion and sales on the vegetable oil market would amount to £37 million or NZ$74 million.

1Assuming a buttercil content for butter of 82 percent. NEW -ZEALAND: BUTTER AND CHEESE PRODUCTION AND EXPORTS, 1955/56 TO 1965/66, GOVERNMENT AND TREND EXPORT PROJECTIONS FOR 1972/73 AND 1977/78 (THOUSANDS OF LONG TONS) 300 _ 1300

EXPORTPHOJECTIONS TREND GOVERNMENT eUTT R - 0 250 _ CHEES _ 0 250

2.00 EXPORT S; .__.20

- iT _ _ 50 PRODUCTUNI ___ a, ------_

500 . . . 0

a, 0 N * n ' C FJ GC _ N f 0 '0 OD

'IRD-35?4 139 B.4

56. The above example is hypothetical, 'but it illustrates the magnitude of the loss of the United Kingdom butter market. It still assumes that by-products of bbutter production such as skim milk powder and casein would find a market. Thlis appears to be a reasonable assumption. The calculation allows an assessment of ,the reduction in the average f.o.b. price of NZ$500 per ton predicted for 1977/78, as follows: Volume Price Value 1,000 NZ$ million tons per ton NZ$ Total projected exports of butter 298.8 of which: butter ...... 128.8 500 64.4 'butteroill ...... 141.0 1662 23.4 Average f.o.b. price per ton of butter 294 87.8 1170,000 tons butter equivalent. 2c.i.f. price (£92) less freight (£9). Thus the 1977/78 average export price for butter under the above assumptions would be approximately NZ$294 per ton (NZ$87.8 million, d'ivided by 298,000 tons) or 41 percent below the price projected 'by the New Zealand authorities of NZ$500 per ton. 57. A similar calculation for cheesel would reduce the projected average 1975 f.o.b. cheese price from NZ$406 per ton to NZ$251 per ton, resulting in a loss of export income from cheese of NZ$25.1 million. Thus the result of the diversion of butter and cheese exports from the United Kingdom market onto the international vegetable oil market could result in a loss of export 'income from dairying of approximately NZ$86.7 million in 1977/78. 58. This is probably the worst development New Zealand could experience in the export dairy market. The situation could be improved by a number of adjustments. Firstly, some butter and cheese exports could be directed into other markets. Efforts to increase such sales in other markets should be undertaken as soon as possible. Secondly, the production of solids-non-fat rather than butterfat should be encouraged, since the former faces a more favourable market outlook. This would imply a shift from the -traditional Jersey breed to other dairy breeds. To what extent 'and in what length of time this could be achieved would have to 'be analysed. This shift should be generally advantageous since it would support the 'increase in beef production, since Friesian cows provide more and better quality meat.

IV. BEEF AND VEAL 59. Total world production of beef and veal has increased continuously since World War 'M and 'has achieved a growth rate of approximately 2 percent per year. International trade in beef and veal, which accounts for 6 percent of total production, expanded more rapidly and increased by 8.5 percent annually. This expansion in trade was the result of a strong increase in demand in the major importing regions-North America and Western Europe. Of the total exports and imports of beef and veal, exports of veal represent only a minor share and trade is not lAssuming a butterfat content of cheese of 35 percent. .B.4 140 expected to increase appreciably. The principal reasons are increased domestic production in the major importing countries and 'the slow increase in per capita consumption of veal. Formerly veal constituted the major source of the supply of white meat, but with the expansion of the broiler industry, the increase in consumption of white meat is to a considerable extent based on poultry. 60. Import demand for beef and veal is expected to increase in the future, although at a slower rate. The projection is indicated in Table 9. Little change is expected in import demand in the United Kingdom, but imports of other European countries and of the U.S. are likely to increase. The main increases in demand will arise in the centrally planned and developing countries. Most of this demand is not expeoted to be reflected 'in international markets but is likely to stimulate internal production and can be expected to lead to substantial increases in domestic beef and cattle prices. New Zealand's prospects on the growing world market are generally good. The fact that the country's herd's are not afflicted by diseases such as foot and mouth disease coupled with 'the ability to cater to particular needs of individual countries by providing fabricated 'meat cuts (Annex Table 12) will help to improve her competitive position. 61. Domestic as well as international market prices for beef and vea] rose considerably in :the past 15 years.' Since the growth in demand for beef is expected to continue to 'increase at a faster rate than supply, further price increases on the international markets may be expected. But since international trade will increase at a slower rate than in the past, prices are also likely to advance at a slower rate. The increase in f.o.b. beef prices of 6 percent from the' average 1962/66 level1 to 1972/73 which the New Zealand authorities assumed for their export projections seems reasonable. 62. The past growth of New Zealand exports of beef and veal was largely due to the emergence of the United States as a substantial importer. The growth of this market has to a large degree depended on U.S. regulations prohibiting non-canned imports from countries in which foot and mouth disease exists; these regulations precluded the major South American exporters. However, if the United States had imported non-canned meat from 'tha't area, 'it is reasonable to expect that New Zealand's exports to other markets, particularly the United Kingdom and 'the European Economic Community, would have 'been correspond- ingly greater. 'Prices on these markets, however, would 'have been lower. 63. New Zealand (and Australian) beef 'and veal are not fully comparable to meat produced locally in the major importing countries, or to that of the other major exporting area, South America. Because of the distance to be travelled to the major markets, nearly all New Zea- land's meat exports are in frozen form. Freezing 'tends to lower the quality below that of similar fresh or chilled meat, the latter being the form in which most South American meat 'is exported. New Zealand beef is supplied to -the manufacturing trade for hamburgers or sausages. Usually meat from culled cows is used for this purpose but in the case of New Zealand this is not always true. A considerable amount of cut-up, packed meat of young animals is also used for manufacturing, mainly

IYears ending June 30. 141 B. 4

Table 9: International Trade Prospects for Beef and Veal in 1975 (000 metric tons) Average 1975 1961-63

Importers .. 1,772 2,671 of which: North America . 652 841 Europe .. 936 1,370 European Economic Community 2 284 588 North Europe3 .. 580 614 South Europe' .. .. 72 166 Japan ...... 5 70 5 Centrally planned countries ...... 8 114 225 Developing countries ...... 65 165 Far East ...... 26 66 Exporters -1,775 -2,263 of which: 7 Europe ...... -484 -612 Oceania ...... -515 -682 Australia ...... -358 -437 New Zealand ...... -157 -245 8 Eastern South America ...... -701 -864 East Africa ...... -75 -105 Net Balance ...... -83| 408

ICanada and United States. 2Including EEC exporters. 3 Finland, Norway, Sweden, Switzerland, United Kingdom. 4 Grecce and Spain. 5 USSR and Eastern Europe. 6 Estimated net import balance of all developing countries except Eastern South America (Argentina, Paraguay, Uruguay) and East Africa. 7 Austria, Denmark, Ireland and Yugoslavia. 8 Argentina, Paraguay, Uruguay. 9 Includes other exports not listed. Source: FAO, Anricultural Coni,nodifies, Projections for 1975 anld 1985, CCP 67/3, October 1966; an own estimates. because it is imported in the frozen state. But the demand for this type of meat is expected to remain good in North America as well as in Europe. 64. Of particular importance for New Zealand is the growing import demand for beef and veal in Japan. The demand figure listed in Table 9 may actually understate requirements. An official Japanese forecast for meat in 1976 indicates a gap between demand and domestic production of between 250,000 and 450,000 metric tons. Even the lower figure is equal to almost half of New Zealand's present total meat exports. Unfortunately, 'the official estimates do not indicate the type of meat which may have to be met by 250,000 metric tons of imports. It seems probable, however, tha.t by 1976 the Japanese farming industry will be self-sufficient in pork and poultry production. FAO projects an import demand in Japan for 'lamb and mutton of approximately 80,000 metric tons. Although 'this figure is probably too low (see par. 35), the remaining import demand for 'beef would still be above 100,000 metrir tons in 1976. Presently beef 'imports to Japan are under quota restrictions. In 1967 this quota amounted to approximately 15,000 metric tons for all B. 4 142 beef and veal imports. However, considering the very evident shortage of beef, it seems likely that these restrictions will have to be eased in the future. Thus import demand prospects in the Japanese market for beef appear very encouraging. But it should be pointed out that New Zealand will face heavy competition from Australia, as that country is also con- centrating much of her sales' effort in the Asian market. 65. The past growth of beef and veal production and exports in New Zealand has been sluggish; as Chart V Iillustrates. Marketing factors, build-up of herds, insistence on -traditional farmling mnethods and the standard df living are the- major reasons: Beef has a high income elas- ticity and 'New Zealand is no exception. A4proximnately 60 percent of the domestic beef production lis consumed at -home. According to Govern- ment projections, this share may even increase slightly in the future. Past marketing developmen'ts also provided no incentive for efforts to increase beef exports. Butterfat and lamb production were more profitable if judged by the butterfat-beef and lamb-beef price relationship. Furthermore, farmers have. been reluctant to venture into commercial beef enterprises 'because of the financial risks involved, labour shortage and the structure of the national beef industry. Cattle are deemed necessary to keep pastures in an ideal condition and suitable for maximum grazing conditions of sheep: Generally, mahv farrners are convinced that a greater profit can be made by raising more sheep, rather than fewer sheep and more beef cattle. 66. Even though past market conditions justified this view, the Mission's examination of the long-term prospects of the sheep industry indicates that changes may -be expected in the future. Export earnings from wool and possibly also from lamb and mutton production will decline in the future. Thus developments in farm prices will begin to encourage the expansion of beed production, since beef prices on the world market are expected to increase. This probably would also result in a similar price development in the domestic retail market which would lead to a substitution of lamb for beef in domestic consumption, and thereby free more beef for export. 67. 'In view of the favourable outlook for beef exports, encouragement should be given to expanding beef production. Fortunately, New Zealand has a great potential for increased production in its dairy calf reserve. It is estimated that 'this reserve, approxiniately 640,000 calves, could produce an additional output of approximately 150,000 *tons without increasing the dairy herd. The difficulties in building up the dairy beef and traditional 'beef industries and the ways to overcome 'these difficulties seem to be well recognized by New Zealand authorities, but so far relatively little has been done. The establishment of the dairy beef industry and the expansion of 'the traditional beef industries will involve structural changes in the dairy and sheep industries which no doubt will require additional expenditures by farmers. The New Zealand authorities have set very high beef export targets for 1972/73 and 1977/78 as Chart V illustrates. These targets are higher than the past trend and this achievement would require mobilization of the dairy beef cattle potential, and additional 'incentives to farmers to increase beef production. Even then the targets may not be easily reached. NEW ZEALAND: BEEF AND VEAL PRODUCTION AND EXPORTS, 1955/56 TO 1965/66, GOVERNMENT AND TREND PROJECTIONS FOR 1972/73 AND 1977/78 THOUSANDS OF LONG TONS) 500 ' _s500

PROSFCTIONS TREND COI/ERNmENT PRODUCTION +-* O EYPORTS *-0-_ 400 _._' _400 1

300 - .300

0.= l

100 , -- -- ___>v______- .______.______0

O r ooI I I I It (Ul_ ID I O U, U) U) U) (P_ -0 -00 (0D-3575(0 (0 . $- B.4 144

V. RETURNS ON INVESTMENTS FOR VARIOUS TYPES OF FARMS 68. The volume of production expansion would, of course, be strongly affected by the rate of return on investments for various farms. In this respect it is the return on total investments rather than income per acre which is relevant. Although income per acre is sometimes quoted in New Zealand, this represents returns on only one among several inputs of agricultural- production. Data on returns on total investments on New Zealand farms are scarce. However, on -the basis of statistics on sheep farming from the economic services of 'the Meat' and Wool Boards, and on dairy farms from 'the Department of Agriculture, the Mission made some estimates on the rate of returns in a number of representative types of farms. These are indicated in Table 10 and are based on prices which prevailed in 1963/64.1 There have been significant changes in returns since 1963/64, but because of the lack of data 'these changes cannot be easily quantified. 69. The recent devaluation has increased farmers' incomes in nominal and real terms. But the increase will not be uniform for all types of farms, since thc expected change in the world market price for New Zealand's 'individual export commodities will vary. This could affect not only the general level of profitability, but also the relative profitability of the different 'types of farms. As stated in paragraphs 10 and 11, world market prices for wool are likely 'to be considerably lower in the long-run than 'those prevailing in 1963/64. This developmenit will particularly affect farms which concentrate almost entirely on wool production. Farms which also carry 'beef cattle are in a much stronger position, since international 'beef prices are expected :to increase. This suggests 'that ;beef production should be expanded where conditions are suitable even if it leads to a decrease in sheep population.

70. International prices of dairy products, especially of butterfat, may also be expected to decline. Although in 1963/64 prices dairy farming was more profitable than sheep -farming, as shown in Table 10, the relative profitability could change in favor of sheep farming, if butterfat prices decline considerably, especially if they decline to the level of vegetable oil prices. However, this is a very pessimistic assumption, and would materialize only if the United Kingdom were to enter the Euro- pean Economic Community and if New Zealand were to be unable to obtain concessions from the European Economic Community or were not to succeed in finding other markets for its bu'tterfat. In view of the long-term prospect of lower wool prices, it is unlikely that dairy farming will become less profitable than sheep farming as long as butter prices do not decline by more than 25 percent below 1966 levels. 71. An expansion of dairy beef production would benefit both dairy and sheep farms. It would probably provide the dairy farmer with a high return from his calves, and it would enable 'the sheep farmer to diversify into beef production, by buying calves from dairy fanners and raising them to slaughter weight. lDetailed data are given in Annex Tables 13 and 14. 145 B.4

Table 10: Rate of Return on Dairy and Sheep Farms in 1963/64'

Dairy Farming (percent) Bay of Plenty ...... 10.40 N. Auckland District ...... 10.96 Central Auckland Region ...... 10.53 S. Auckland Region ...... 13.00 Wellington Region ...... 12.21 Sheep Farming I and2S ...... 10.01 3S ...... 9.13 2N ...... 10.23 3 N ...... I11.05

'See Annex Tables 13 and 14 for an explanation of the dairy and sheep farm categories. B. 4 146

STATISTICAL ANNEX

Wool- Table Estimated World Wooled Sheep Population .. .. I World Production of Raw Wool ...... 2 World Consumption of Wool and Man-made Fibers .. 3 Representative Price Indices of Apparel Fibers in U.K. .. 4 Mill Consumption of Raw Wool in the U.S. by Classes .. 5

Dairy Products- Utilization 6f Whole Milk in Selected Regions .. 6 World Imports of Milk Products ...... 7 New Zealand Milk Production and Butterfat Processed by Dairy Factories ...... 8 New Zealanid Export 'Unit Values for Agricultural Exports .. 9 New Zealand Shipment of Dairy Products by Destination .. 10 New Zealand Shipment of Milk Powder by Destination .. I

Beef- New Zealand Beef Exports by Catagories ...... 12

Financial Analysis- New Zealand Financial Analysis of Five Regional Groups of Dairy Farms...... 13 New Zealand Financial Analysis of Four Groups of Sheep Farmns 14 147 B.4

Table 1-ESTIMATED WORLD WOOLED SHEEP POPULATION (Million) MainCo~mtnes 1,956 57- 95 Main Countries 1 19 1961/62 1962/63 1963/64 1964J65 1965Y661

Australia .. .. 151.9 157.7 158.6 165.0 170.6 157.6 New Zealand .. 46.2 49.0 50.2 51.3 53.7 57.3 Argentina .. 47.2 45.0 47.5 48.0 48.3 48.7 South Africa .. 34.1 35.0 35.1 36.1 36.9 38.0 United States .. 32.2 31.3 29.8 28.0 25. 1 24.7 Uruguay .. 22.0 21.3 21.6 23.0 22.0 22.0 United Kingdom .. 27.1 29.5 29.3 29.7 29.9 30.0 RestofW. Europe 76.5 75,6 71.8 70.4 70.7 69.6

Total .. 437.2 444.4 443.9 451.5 457.2 447.9 USSR, E. Europe and China (Mainland) 224.0 241.0 244.0 239.0 231.0 236.0 Other .. .. 229.8 235.6 236.1 239.5 241.8 243.1

World Total .. 891.0 921.0 924.0 930.0 930.0 927.0 lProvisional. Source: World Wool Digest, June 22. 1967. Table 2-World Production of Raw Wool (Million pounds, greasy basis) 1956/57 to 1962/63 1963/64 1964/65 1965/66 1966/67 1960/61

I Production in Main Countries (Rounded) Australia .. ., 1,582 1,673 1,785 1,784 1,660 1,712 New Zealand .. .. 539 620 617 623 695 715 Argentina .. .. 414 408 395 419 430 441 South Africa .. .. 296 300 303 296 326 308 United-States .. .. 309 297 281 255 241 235 Uruguay .. .. 181 190 192 187 185 190 United Kingdom .. 116 131 127 127 129 129 Rest of Western Europe 300 304 297 293 304 302

Total .. 3,737 3,923 3,997 3,984 3,970 4,032 II USSR, Eastern Europe and China (Mainland) .. 1,004 1,148 1,149 1,101 1,136 1,177 III Others.. 599 592 587 600 604 613

World Total .. 5,340 5,663 5,733 5,685 5,710 5,822 of which: Merino .. .. 2,177 2,275 2,349 2,319 2,260 2,295 Crossbred .. .. 1,953 2,175 2,189 2,158 2,222 2,260

Total apparel .. 4,130 4,450 4,538 4,477 4,482 4,555

Other . . 1,2101. 1,213 1,195 1,208 1,228 1,267

Clean Equivalent Merino .. .. 1..,186 1,245 1,301 1,263 1,220 1,239 Crossbred .. .. 1,272 1,405 1,422 1,399 1,446 1,470

Total apparel . . 2,458 2,650 2,723 2,662 2,666 2,709

Other .. .. ., 605 607 598 604 614 634

Total .. 3,063 3,257 3,321 3,266 3,280 3,343

Of which non-Communist world 2,512 2,615 2,675 1,651 2,646 2,686 Source: Commonwealth Secretariat, Commodities Division. B.4 148

Table 3-World Consumption of Wool and Man-made Fibers

Mill ccnsumption Percent Man-made fiber Percent Year of wool change over consusnption change over (1,000 m. tons) previous year (,300D m. tons) previous year

1955 .. 1,226 - 587 - 1956 .. 1,322 8 679 16 1957 1,360 3 902 33 1958 .. 1,276 -6 924 2 1959 . 1,446 13 1,270 37 1960 1.,495 3 1,548 22 1961 * 1,505 1 1,830 18 1962 .. 1,501 - 2,380 30 1963 .. 1,475 -2 2,937 23 1964 * 1,460 -1 3,721 27 1965 .. 1,473 1 4,510 21 1966 -. 1,511 3 5,458 21

.Sources: Commonwealth Economic Committee, Industri4l Fibres and WYoot lnteliigence; arerly Bulletin of the International Cotton Advisory Committee, Cotton- a1ZridStat iuics, Textile Economics Bureau, Inc., Textile Organon.

Table 4-Representative Price Indices of Apparel Fibers in the United Kingdom, 1955-1966 (1955 = 100)

Non-Cellulosic Staple Year Wool' 50's (cif) Nylon Acrilic Polyester

1955 .. 100 100 - 100 1956 .. 100 100 100 100 1957 111 100 100 100 1958 79 100 100 100 1959 .. 80 100 99 10O 1960 .. 93 100 96 100 1961 .. 93 100 96 95 1962 .. 88 93 91 91 1963 .. 107 93 80 91 1964 .. 111 90 84 75 1965 . 95 86 84 75 1966 .. 95 86 84 75

Sources: Wool: Board of Trade Journal, United Kinidom, Vol. 192, No. 3649. Non-Cellulosic Staple: Commonwealth Secretariat and Skinner s Record of the Man-made Fibres Industry.

Table 5-Mill Consumption of Raw Wool in the United States by Classes (Million pounds clean basis) Apparel Class f Carpet Class Total

1960-64 .. 254.9 149.2 404.1 1960 . . . 246.4 164.6 411.0 1961 .. . 263.0 149.1. 412.1 1962 . . . 280.2 148.9 429.1 1963 .. . 251.4 160.4. 413.8 1964 .. .. 234.0 122.7 356.7 1965 .. .. 274.5 112.4, 386.9 1966 .. .. 277.0 105.0 382.0

Source: Textile Economics Bureau, Inc., Textile Organon. Table 6-Milk and Milk Products: Utilization' of Whole Milk in Selected Regions

1952 1962 1 Country Liquid | { ¢ Other' Feed | Liquid Other' Feed' Production Milk & Butter Cheese Manuaf. and Production Milk & ButterI Cheese Manuf. and Cream Products Waste Cream Products Waste thousand pcrcentage thousand percentage tons tons North America- Canada 7,137 36 45 5 9 9 8,338 33 47 8 8 5 United States .. 52,434 48 24 10 14 4 57,162 46 27 12 13 2 EEC- Belgium .. 3,538 22 67 2 I 8 3,815 26 55 4 6 9 Fed. Rep. of Ger- many .. 15,813 35 45 6 3 11 20,295 28 51 6 6 9 France .. 14,633 27 35 15 3 20 24,300 21 38 18 4 19 Italy . 8,824 28 19 30 1 22 9,285 1 30 15 28 4 23 Netherlands 5,592 30 30 20 14 6 7,269 24 31 22 18 5 Other European Coun- I tries- Austria .. 2,311 45 30 4 1 20 3,005 37 31 8 3 21 Denmark .. 4,998 15 65 12 3 5 5,355 15 61 14 4 6 Finland , 2,770 41 49 6 - 4 3,654 37 53 6 1 3 Ireland , 2,242 23 55 1 7 14 2,871 23 42 3 7 15 Norway .. 1,580 52 23 14 2 9 1,673 50 25 19 1 5 Sweden .. 4,480 30 47 10 2 11 3,927 35 50 10 1 4 Switzerland .. 2,648 41 15 24 2 18 3,113 34 19 26 4 17 United Kingdom 10,175 78 4 6 5 7 12,919 65 12 9 7 7 Oceania- Australia 5,709 20 64 8 7 1 6,872 22 64 9 5 - New Zealand .. 5,052 10 69 17 2 2 5,464 10 70 15 2 3 Other Countries- Argentina .. 4,999' 36 32 27 5 - 4,183 30 30 34 6 1 .Japan .. .. 584 37 17 1 45 - 2,437 53 20 3 22 2

Total/Average .. 155,519 39 33 12 8 8 186,237 35 36 13 8 8

varying statistical concepts, production and utilization of milk are not fully comparable from country to country; 'Owing to somewhat 2 this relates especially to feed and waste. In the Netherlands as in some other countries, butter is a by-product of standardized . milk, cheese and other milk products. 3 Condensed, evaporated, dried milk and minor products. 41955. 51963. Source: FAO, Commodity Division. B.4 150

Table 7-Milk and Milk Products: World Imports of Milk Products, 1957-1965 (Thousand tons)

-______-1957 11960 1961 11962 1963 1964 1965

Butter- World Imports .. .. 507 529 552 522 582 630 589 457 479 497 461 511 562 510 of which: Europe.. 2 of which: Developing Countries ,. 48 47 54 60 71 59 67 Cheese- World Imports ...... 394 423 462 493 519 539 547 308 330 360 396 421 434 445 of which: Europe.. 2 of which: Developing Countries .. 58 58 61 50 47 52 47 Evaporated and Condensed Milk- World Imports ...... 438 468 480 495 509 556 522 2 of which: Developing Countries ,. 396 413 420 436 447 480 444 Whole Milk Powder- World Imports ...... 95 114 111 114 139 164 180 2 of which: Developing Countries ,, 94 88 87 86 95 97 107 Skim Milk Powder- World Imports (Total) .. 386 372 491 568 712 785 726 of which: Europe.. 154 149 163 175 267 387 325 of which:Japan ...... 32 56 29 62 87 70 59 of which: Developing Countries2 .. 200 167 299 331 358 328 342 U.S. Donation" ...... 243 147 268 302 318 234 215

1Preliminary. 2Includes Israel and Turkey. 3Shipments under PL 480, Title II and III (including UNICEF donations). Source: FAO, Commodity Division.

Table 8-New Zealand: Milk Production and Butterfat Processed by Dairy Factories

Total BtOther Whole Skim Tt Season' Milk Butter Cheese Milk Milk PrTotal Production Products Products rocessed

(mil. gals.) mil. pounds

1955/56 .. 1,112.4 370.5 86.3 6.6 1.6 465.0 1956/57 1,097.2 367.2 84.1 6.2 1.8 459.3 1957158 1,159.6 397.5 85.6 6.1 2.2 491.4 1958/59 .. 1,152.8 403.5 76.9 6.5 2.5 489.4 1959/60 .. 1,138.2 384.3 83.9 8.1 2.4 478.7 1960/61 .. 1,147.7 387.4 89.0 8.3 2.6 487.3 1961/62 .. 1,149.3 383.2 90.9 7.9 2.6 484.6 1962/63 . 1.,176.1 395.0 87.9 10.2 3.0 496.1 1963/64 .. 1,214.0 421.6 83.9 12.3 4.0 521.9 1964/65 1,283.8 445.0 93.8 13.5 4.5 556.8 1965/66 . 1,325.2 463.1 93.8 16.4 4.8 578.1

lYear ended 30 June to 1960/61, thereafter 31 May. 21ncludes estimated quantities used in farm buttermaking. 3Provisional. Source: New Zealand Dairy Board, Fifth Annual Report, May 31, 1966. 151 B. 4

Table 9-New Zealand: Export Unit Values' for Agricultural Exports 2

- L J962/63 1963/64 1964jSS J1 1965166 1 1966/67

Daigy Products and Meat NZ $per ton Dairy Products- Dried Milk .. .. 149.0 145.8 202.2 225.0 223.8 Butter ...... 541.2 590.6 625.8 596.0 546.2 Cheese ...... 406,2 399.2 426.2 434.0 449.4 Casein ...... 290.8 273.0 303.6 439.6 448.6 Meat- Beef . ' 451.0 483.0 474.8 501.0 596.6 Veal ., .. .. 476.2 508.4 540.6 574.4 697.0 Lamb ...... 318.2 323.2 400.2 391.4 367.6 Mutton ...... 135.0 140.6 187.2 185.4 200.6 Other-fresh chilled or frozen 439.0 452.8 489.2 535.2 579.8 Wool: Cens per lb (greasy equivalent) Wool 3- Greasy .. .; .. 34.8 42.8 42.8 36.0 35.0 Slipe (greasy equivalent) .. 30.0 36.0 35.4 29.8 30.0 Scoured (greasy equivalent) 31.8 38.2 41.2 34.2 32.6 Total Wool (greasyequivalent) 33.8 41.2 41.6 35.0 34.0

IThese unit values are derived from Trade figures. They should be taken only as a general indication of unit values as some of the Commodity headings include more than one commodity (e.g., Dried Milk includes both whole milk and other). 2 March Year. 3 SIipe and Scoured wools have been converted to a greasy wool basis (for weight). Source: New Zealand Treasury Department Trade Statistics. Table 10-New Zealand Shipment of Dairy Products from Production in Seasons Ending May 31: Analysis by Destina- tions, 1962/63 and 1965/66 (Tons) Bu-tter Cheese

Country and Area _ _ ° 1962/63 Distribution 1965/66' Distribution 1962/63 Distribution 1965/661 Distribution ______,______. .______- _ _ __ _ I ___ _

Africa ...... 386 - .2 11,875 5.8 772 .8 2,500 2.6 Caribbean, Central and South America .. 7,034 4.2 11,341 5.6 2,495 2.8 2,962 3.0 EEC ...... 1,225 .7 297 1 1,448 - 1.6 6,750 6.9 India...... 21 *- - - - - Mediterranean and Middle East .. .. 256 .2 107 _ 47 * 208 .2 i'Q North America...... 741 .4 567 .3 4,198 4.7 8,859 9.1 Pacific Islands, Australia .. .. 671 .4 1,070 .5 379 .4 343 .4 Southeast Asia, ...... 1,690 1.0 9,743 4.8 1,342 1.5 3,828 3.9 of which Japan ...... 9 * 2,719 1.3 1,137 1.3 3,100 3.2

Total of abovc Regions ...... 12,024 7.1 35,000 17.2 10,681 11.9 25,450 26.1 United Kingdom ...... 156,761 92.9 167,903 82.8 79,099 88.1 71,935 73.9 Total Exports ...... 168,785 100.0 202,903 100.0 89,780 100.0 97,385 100.0

'Ten months. *Less than .01 N Source. -New Zealand Dairy Board, Fifth Anriual Report, M6ay 31;- 1966. Table 11-New Zealand: Shipment of Milk Powder from Production in Seasons Ended May 31: Analysis by Destinations, 1962/63 and 1965/66 (Tons)

Skin-filk PowderI Other Milk Powders Country and Area 1962/63 Distribustribu1965/66tion 1962/63 Distrbution 1965166 Distribution

Africa ...... 1,445 3.0 1,801 2.2 64 .6 254 1.5 Caribbean, Central and South America .. 6,719 14.2 10,422 12.7 1,106 10.1 1,915 11.3 Western Europe .. .. 3,134 6.6 4,712 5.7 1,705 15.6 2,732 16.1 Asia and Pacific .. .. 15,467 32.6 41,370 50.5 2,259 20.7 7,778 45.9 (_n Mediterranean and Middle East .. .. 274 .6 5,119 6.2 6 - 64 .4 > North America...... - - 7 - 51 .5 48 .3 Indeterminate ...... 95 .2 ------

Total of above Regions ...... 27,134 57.3 63,431 77.3 5,191 47.5 12,791 75.5 United Kingdom ...... 20,254 42.7 18,540 22.7 5,743 52.5 4,145 24.5

Total Exports ...... 47,388 100.0 81,971 100.0 10,934 100.0 16,936 100.0

]Includes Spray Skim-milk Powder and Roller Skim-milk Powder. 2 1ncludes Spray Buttermilk Powder, Roller Buttermilk Powder, Spray Whole Milk Powder and Roller Blended Full Cream Powder. 3 Provisional. Source: New Zealand Dairy Board, Fifth Annual Report, May 31, 1966. B.4 154

Table 12-New Zealand: Beef Exports by Categories October 1, 1964 to September 30, 1965

Percent Class Tons of Total

FabricatedCuts- Chilled beef ...... 237 Ox and heifer ...... 16,311 Cow ...... 2,675 Veal ...... 161 Sub-total ...... 19,384 16.9 Boneless- Cow, ox and heifer ...... 44,562 Bull ...... 10,976 Bobby veal .. .. 9,489 Sub-total .. :...... 65,027 56.8 Quarters- Chilled beef ...... 493 Ox and heifer ...... 16,870 Cow ...... 10,827 Veal ...... 2,009 Sub-total ...... 30,199 26.3 TOTAL ...... 114,610 100.0

Source: Annual Report 1966, New Zealand Meat Producers Board. 155 B.4

Table 13-New Zealand: Financial Analysis of Five Regional Groups of Dairy Farms in 1963/64' (NZ dollars)

Bay North Central | South Item of Auckland Auckland Auckland Wellington Plenty' District' Region Region' Region'

Income Butterfat .. 6,6527 4,5138 5,1169 6,61410 5,4501 Cattle ..*. 798 814 738 828 790 Other .. 854 866 522 626 810 Farm income: Total 8,304 6,193 6,376 8,068 7,050 Per acre 74.81 46.22 57.96 83.17 81.03 Total cash expenses and de reciationi .. 4,910 3,621 3,690 3,944 3,522 Netfarmincome: Total 3,394 2,572 2,686 4,124 3,528 Per acre 30.58 19.19 24.42 42.51 40.55 Investment in land, buildings, plant and stock .. 32,634 23,450 25,520 31,719 28,884 Rate of return (Percent) 10.40 10.96 10.53 13.00 12.21

Footnotes to Annex Table 13: t The 1963 London ex-store butter price was NZ$652 per ton which corresponds approximately to net f.o.b. price in New Zealand of NZ$560. 2Average of 184 farms with an average acreage of 111 and an average number of 86 cows. 3Average of 300 farms with an average acreage of 134 and an average number of 68 cows. 4Average of 125 farms with an average acreage of 110 and an average number of 65 cows. 5Average of 215 farms with an average acreage of 97 and an average number of 79 cows. 6Average of 84 farms with an average acreage of 87 and an average number of 64 cows. 7Butterfat sold = 23,421 pounds at 28.4 cents per pound. 8 Butterfat sold = 16,616 pounds at 27.2 cents per pound. 9Butterfat sold = 18,040 pounds at 28.4 cents per pound. 0°Butterfat sold = 22,892 pounds at 28.9 cents per pound. 'Butterfat sold = 18,792 pounds (216 lbs/acre) at 29.0 cents per pound. MAdministrative expenses, wages, insurance rates, ordinary depreciation, other farm expenses such as fertilizer, seed, repairs etc. 13Net income divided by investment times 100. Source: New Zealand Department of Agriculture, Farm Economics Section, Dairy Farming in New Zealand. B. 4 156

Table 14- New Zealand: Financial Analysis of Four Groups of Sheep Farms in 1963/641

|I and2Ss |3S I 2N' I 3N5

Income Wool .. .. 22,9826 9,5847 12,966 8 9,368 0 MuttonandLamb .. 4,474 6,596 6,166 4,906 Cattle ...... 1,162 2,108 5,078 2,950 Other ...... 224 488 314 106

Farm income: Total .. .. 28,842 18,776 24,524 17,330 0.97 5.36 12.07 21.55 Per acre 10 Total cash expenses and depreciation 17,018 11,092 14,294 9,076 Net farm income: Total ...... 11,824 7,684 10,230 8,254 Per acre ...... 0.40 2.19 5.04 10.27 Investment in land, buildings, plant and stock'" ...... 118,102 84,124 99,934 74,670 1 2 Rate of return (Percent) l .. 10.01 9.13 10.23 11.05

Sotirce: New Zealand Meat and Wool Boards' Economic Scrvicc, Financial Analysis of New Zealand Sheep Farmns 1963/64.

Footnotes to Annex Table 14: 'See note below for description of farm types. 2 Average of 34 farms with an average effective acreage of 29,898. 3 Average of 42 farms with an average effective acreage of 3,505. 4 Average of 47 farms with an average effective acreage of 2,031. 5 Average of 93 farms with an average effective acreage of 804. 6 Wool sold 52,777 pounds at 43.54 cents per pound. 7 Wool sold 23,974 pounds at 39.98 cents per pound. 8 Wool sold 31,300 pounds at 41.40 cents per pound. 9 Wool sold 22,794 pounds at 41.10 cents per pound. °0Wages and Rations, Farm Requisites, Shearing Expenses, Fertilizers, Lime and Seeds, Fuel and Power, Feed and Grazing, Contract, Repairs and Maintenance, Railage and Cordage, General Expenses, Insurance, Rates and Land Tax. Illncludes improvements. 12Net income divided by investment times 100.

Note: Classification of sheep farms: Class I and 2S: High country, South Island Properties situated at high altitude, where the risk of snow loss is usually involved, and where carrying capacity is low, averaging about 5 acres to the sheep. The cover is principally native tussock, and wool is by far the most important source of revenue-75 percent or more in most cases. This type of farming has no counterpart in 'the North Island. Class 3S: Foothill country, South Island The name is almost self-explanatory. Whereas Merinos and halfbreds pre- dominate on the high country, Corriedales, halfbreds and threequarterbreds comprise the sheep flocks of the foothills. Carrying capacity is about I sheep to the acre. Wool is very important, as are sales of store sheep and cast-for-age ewes. Cattle play a minor role. Class 2N: Hard hill country, North Island On this type of country and on all the remaining classes, the Romney (or Romney cross) is the only significant !breed of sheep. In topography the hard hill country of the North Island is not so different from the South Island foothills, but the rainfall is higher, the winter is shorter and less severe, and cattle occupy a much more important place in the farm economy. Carrying capacity is 1 to 2 sheep to the acre, plus cattle to the general order of I beast to 8 sheep. Wool accounts for just on half the revenue while the balance is derived from sales of breeding ewes, store sheep and cattle. 157 B. 4

Class 3N: Hill country, North Island Easier hill country than the preceeding class and usually smaller holdings, carrying 2 or 3 sheep to the acre with a higher proportion of breeding ewes. Cattle again are an important adjunct, with a general average of 1 beast to 10 sheep. Sales of wool have been slightly more important in recent years than sales of sheep and cattle. As a result of aerial top-dressing much of the surplus stock (other than breeding ewes and heifers) is now turned off in fat or forward condition, for example wether lambs and steers.

BY AUTHORITY: R. E. OWEN, GOVERNMENT PRINTER, WELLINGTON, NEW ZEALAND-1968 48510-68 G