Structural Change in the New Zealand Economy: Data, Model and Strategy

Abstract

This study is concerned both with the general process of structural economic change and the particular case of New Zealand during the two decades 1954 to 1974. There are three main parts: Part 1 constructs a statistical record of the industrial development of the economy from 1954/55 to 1973/74. Building on earlier unofficial estimates of industrial growth and patterns of expenditure a set of industry accounts is compiled and presented. The figures show the use of primary resources and the disposition of output at constant and current prices for thirteen industrial sectors. Some care has been taken to obtain a picture which is comprehensive in its coverage of the whole economy and which is consistent both with the official inter-industry tables and with the movement of the National Income accounts, but no claim is made to match the accuracy of official statistics. The qualifications associated with the series need to be borne in mind when they are used. The second, technical, purpose of the study is to specify and construct an input-output model capable of analysing the process of structural change in quite general terms, at a variety of levels of disaggregation and for a number of different purposes. The particular model developed in this study is of the static, general-equilibrium, neo-classical type in which the process of reconciling and adjusting the behaviour of different sectors, industries and markets is carried out by the price mechanisms and which requires for its solution equilibrium in all prices and quantities. The result is an analytical tool of considerable economic flexibility, rich in results, but also one of theoretical complexity and computational difficulty. The associated computer programme is given as an Appendix. The remainder of the study is concerned with an explanation of the properties of the model and its application to the New Zealand economy as it was, and might have been, in the early 1970s. Partly because of statistical difficulties, partly to keep the task within manageable proportions, no attempt is made to simulate the historical experience of the last twenty years or to forecast the development of the economy beyond 1974. Instead the analysis is directed at the single strategic question: whether or not there existed alternative policies which would have yielded a higher level of output and welfare than that actually achieved whilst at the same time maintaining full employment and equilibrium in the balance of payments. The broad conclusion, discussed in some detail, is that a higher level of Gross Domestic Expenditure was and is possible through a greater use of the exchange rate to promote exports, the discouragement of import substitution and the attraction of resources into the trading sectors of the economy rather than tertiary and service activities. The direction of these results is of course an understandable consequence of the neo-classical origins of the model combined with New Zealand’s comparative advantage as a primary producer. What is equally pertinent, however, are the relative magnitude of the costs and benefits. The most extreme form of specialisation yields rewards amounting to a little more than 4 per cent of Gross Domestic Product: but to achieve them requires a large distribution of wealth between sectors and exposes the economy to the risks and fluctuations of international trade. The policy conclusion is therefore much more equivocal than the analytic one. Social disturbance, political tension and exposure to uncertainty may be too high a price to pay for such small returns.