Her Fiscal Responsibility Act, passed just before she left parliament in mid-1994, is landmark legislation that has successfully cemented in fiscally responsible government behaviour.
Since her departure during her fifth term in Parliament, Ruth Richardson has established a private business offering strategic and economic policy advice. She travels the world meeting the extensive demand from other countries to duplicate, adapt or adopt the New Zealand model of economic and public-sector reform.
In New Zealand Ruth Richardson sits on the boards of a number of publicly listed and private companies and undertakes regular speaking engagements. Many of her presentations are to visiting government and public-sector delegations, as well as to private investors, all of whom are attracted by the New Zealand reform model and want to understand and experience its benefits first hand.
[Book excerpt - pages 200-204]
Producer Boards
If our government set out today to design agricultural marketing arrangements from scratch, it is extremely unlikely it would come up with the current structures for producer boards. To enter the world of new Zealand's producer boards is to enter a world of distorting mirrors, where the normal market relationships between price and quantity, investment and return do not apply. It is a world where competition with outsiders is severely rationed, where it is allowed at all. Yet such is the tyranny of the status quo that any suggestion that agricultural marketing might benefit from substantially greater competition, or that farmers might prefer to receive proper market signals for their activities, is met with derision from the producer boards, and blank incomprehension and fierce resistance from many farmers.
The producer boards are strange beasts. First, they have a large degree of monopoly power. Some, such as the Dairy Board, are the sole agency empowered to purchase the farmer's product and sell it on world markets. Others do not have the sweeping powers of a 'single-desk seller', but do have the power to license exporters. Yet everything we know about the importance of competition suggests such arrangements are unlikely to produce the best outcomes. Competition breeds ideas, and in the battle of ideas, good ideas tend to win out over bad. All our experience of the reform programme suggests competition brings improved performance, from better air services to cheaper clothing.
Producer boards, naturally enough, claim no-one could do a better job than they are currently doing. So long as they face no competition they will not be contradicted. The same claim was made by many a government trading organisation, protected manufacturer or licensed operator in the old days. We discovered how hollow those claims were. If producer boards think they can beat all comers there is a simple test for that hypothesis: the market.
Not only are producer boards to a greater or lesser extent commercial monopolies, but many boards are themselves regulators of the industry they dominate. One of the themes of the New Zealand reform programme has been the separation of commercial from regulatory activities -- and for good reason. The incentives faced by a regulator will be hugely affected if they have a commercial interest themselves in the regulations they are making. A regulator should consider the total public welfare, including all the second-round and flow-on effects of a regulation -- not just the welfare of one interest group. If the regulator happens to be that interest group, one would need to be a Pollyanna of superhuman faith in human nature to imagine regulations would be undertaken even-handedly. Giving producer boards power to regulate is like asking the old, unreconstructed Manufacturers' Federation to set tariff policy.
The monopoly and regulatory powers of producer boards have seriously discouraged new ideas and new investment in agriculture. They have been particularly serious in discouraging foreign investment. The flow of foreign investment into manufacturing, retailing, tourism, forestry, transport and many other sectors has been an important element in New Zealand's economic transformation. It has not happened in agriculture and horticulture, and these sectors are undoubtedly the power.
The third and most bizarre feature of our producer boards is their unique organisational form. Typically, the farmer is both a supplier to he producer board and an implicit equity-holder in the board's wide range of commercial activities. Yet the dairy farmer, for instance, is paid purely through a single payout on the basis of milk supplied to the Dairy Board. The payout to the farmer is a 'bundled' average return from a wide range of activities; his or her on-farm investment and a variety of off-farm investments. This bundling of returns can, and almost certainly does, produce serious resource misallocation. Imagine if the equity-holders in Fletcher Challenge were the same people who supplied Fletcher Challenge with logs, and that both the return to equity and the return to the logs were paid in a single payment as a price per log. No-one would call that an efficient economic arrangement.
It is inefficient because such an arrangement will probably give quite misleading signals to suppliers. Producing milk and marketing milk and other products are quite different activities. A farmer's investment in the production of milk should be determined by the return on producing milk, not the return on other activities. Under current arrangements, if the Dairy Board has a good year in the wide range of other activities it is involved in, such as selling Belarus Russian Tractors, dairy farmers will take this -- other things being equal -- as a signal to produce more milk. If the Dairy Board has a bad year in its other activities, dairy farmers will produce less milk. That is plainly nonsensical. At the same time, dairy farmers have little information by which to assess whether their investment in the board's processing and marketing activities is earning a decent return. If they decide it is not earning a return, there is no way in which they can transfer their equity holding to someone else - short of ceasing to be a milk supplier at all. Normal market disciplines simply do not apply.
Those advocating reform of producer boards are often told a single seller is necessary in order to maximise price. But that is to vastly overestimate the degree of market power possessed by our pastoral products. We are largely price-takers in almost all the markets we sell to. We face a high degree of competition, and it is unlikely competitive forces will lessen in the years ahead. In such circumstances, inhibiting competition among New Zealand as a whole to capture, alternative arrangements could capture the rent in a more efficient manner. The British butter quota, for instance, should be put up for tender.
The idea that New Zealand producers need to band together in order to be a 'strong seller' was a major concern back in the inter-war years when many of the producer boards were established, and remains a strong sentiment among farmers today. Yet it demonstrates a misunderstanding of the nature of market forces. To many farmers, unfettered competition will lead to their being repeatedly ripped off by processing and marketing industries further down the chain. It is a view of the market one expects to hear coming from the Council of Trade Unions or a left-wing academic, but not from New Zealand farmers. Ironically, farmers have been happy to urge unfettered market forces on other areas of the New Zealand economy, while considering themselves to be immune from the logic of such arguments.
Major reform is required if New Zealand is to capitalise best on its strong natural advantage in meat, dairy, wool and other land-based products. First, producer boards should be reorganised along more conventional corporate lines. In political terms this would be the easiest step to take. The equity in the boards would be given to farmers, thus separating out the return on a farmer's investment in downstream activities form the return from on-farm investment. Farmers would then face a more rational set of price signals. The equity in the new structures should be tradable between farmers; there is no reason at all why every farmer should necessarily wish to hold shares in a company undertaking downstream activities. The logic is also strong for allowing the purchase of shares by third parties. Listing on the sharemarket would provide a much improved set of disciplines on management and boards.
In tandem with restructuring the producer boards, all of the boards' activities should be fully opened up to competition. The regulatory functions of the boards should be abolished, and agriculture made subject to broadly the same regulatory disciplines as other industries. The Commerce Act should apply to the successor corporates of producer boards, and to new entrants into the market. Research and development of a 'public good' nature undertaken by producer boards could be maintained by producer board successors and their competitors bidding for funds from the contestable pool for public-sector science. As a second source of funding for research and development, the industry has the power to levy itself under the Commodities Levies Act. The farming industry would continue to be subject to standard regulations on hygiene. However, it would not be able to self-regulate for 'quality control'. There is no reason why all industry players should necessarily wish to meet the same quality standards. The question of which market niches to aim for is best left in the hands of individual producers and marketers.
These initiatives would hugely improve the environment for the processing and marketing of agricultural products. Currently the primary sector is flagging in its performance. If these trends continue, non-commodity manufactured exports will soon overtake the traditional trio of meat, wool and dairy exports. Psychologically, this could be an important moment. Despite having believed for generations that they are 'the backbone of the country', the news for New Zealand's farmers will be that - statistically speaking - the townies are out in front.
Producer board reform is so long overdue that one might well ask why it has not already happened. One reason is that producer boards are extremely effective lobbyists. When Australian economist Denis Hussey, in association with the New Zealand Business Roundtable, recently produced his lengthy and cogently argued study of the industry problems, the reaction from the boards was precisely what we have come to expect: rage, a great deal of declamation from high horses, protestations that Hussey did not know what he was talking about - everything except an attempt to meet Hussey's arguments in a rational fashion.
Another reason for the endurance of producer boards is that for generations they have been an article of faith for New Zealand farmers. Faith is the operative word, because logic has rarely entered into it. National, as the farmers' party, has reflected this deeply ingrained instinct. There is no doubt that producer board reform would face opposition from many farmers and near-hysterical opposition from the boards themselves. As Finance Minister I would have dearly loved to push reform into this area. Yet Jim, Bill, Agriculture Minister John Falloon and even his associate minister, Denis Marshall, were all solidly in favour of producer boards. I would have received some support from the lower ranks of Cabinet, but the key people were all against me.
Ironically, Bill, judging by his recent speeches, may now be waking up to the merits of reform. His conversion, however, came too late for the two of us to form a Cabinet coalition on the issue.
The best political chance for producer board reform probable came under Roger Douglas. Since farmers were not Labour's political constituency, there was perhaps a greater likelihood a reforming Labour government would grasp the nettle. Whatever the reason, Douglas -- like me -- could not muster the numbers around the Cabinet table. Yet I still live in hope that some government, before too long, will initiate producer board reform, even if it begins simply by corporatising the boards and making the shares tradable between farmers. Such a policy scarcely objectionable in itself, might produce some very interesting political and economic dynamics, particularly if -- as I suspect -- farmers find that some of their investments in the new corporate structures are earning less than spectacular returns.