An exploration of the effects of more efficient resource allocation in selected manufacturing sectors in the New Zealand economy in the years 1965/66 and 1972/73

Abstract

This study set out to show that, with a more efficient allocation of resources, a higher standard of living, as measured by the total consumption level, could have been achieved in New Zealand. In the model used to explore this question, the new allocation was to be facilitated by the relaxation of import licensing controls so that some inefficiently produced goods could be replaced by competitive imports. These competitive imports could then be purchased with the foreign exchange obtained from increased exports of goods from the more efficient sectors. The possibility of such an outcome, without there being any net increase in resources required, depended on the fact that the more efficient sectors would have been able to step up production with the use of resources released by the fall in production in less efficient sectors. For each of the two years, 1965/66 and 1972/73, control models were created to represent, as closely as possible, the actual New Zealand economies in those years. For the same two years, experimental models, which included various import-export choices, were created. These choices allowed for replacement of less efficiently produced output by competitive imports as well as increased exportation and import substitution by the more efficient sectors, the relative efficiency of sectors being determined by means of either estimates of the effective rate of protection or the cost excess of output over world prices in each sector. Using the linear programming technique, the solutions of the control and experimental models were compared for each year. It was observed from the solutions that the opportunity to reallocate resources and change the import-export pattern made a substantial difference to the 1965/66 consumption level but made only a small and insignificant improvement in the 1972/73 consumption level. The difference between the results of the two years was attributed to several causes. One of these was the fact that estimates of cost excess of less efficiently produced goods were higher in 1965/66 than in 1972/73. Another cause could have been the use of more realistic data in the former year. These official data appeared to have produced a 1965/66 control model of an economy in a relatively unstable position which responded to invitations to change. In contrast, the 1972/73 control model with its large proportion of unofficially estimated data had produced what appeared to be an unrealistic replica of the 1972/73 economy, one which had a relatively stable state of equilibrium and responded reluctantly to opportunities for change. When the equilibrium of the 1972/73 model was disturbed, however, by an exogenous adverse change in the balance of trade constraint, the solution chose substantial reallocations of resources in order to gain the optimal, though lower, consumption level. The inferences drawn from this study were that the consumption level in the New Zealand economy could probably be raised substantially without increasing the labour supply or capital investment ratio if there were shifts of resources within the manufacturing sector, together with some replacement of less efficiently produced goods by imports and an increase in import substitution in the more efficient sectors. The amount of increase in the consumption level would depend, among other factors, on the level of cost excess of output in the less efficient sectors. (This had been found to be much higher overall in 1965/66 than in 1972/73.) It was observed, however, that although the method employed in this study appeared to be viable for such a purpose, it would really require more extensive exploration if recommendations for policy changes were to be made.