Impacts of Trade Liberalization on New Zealand’s Agricultural Supply Response: A Counter Factual Analysis

Beginning in the mid-1980s New Zealand underwent a comprehensive set of economic reforms, which were notable for their breadth and sequencing. The impacts of policy changes on the real exchange rate (RER) and resulting changes in the agricultural sector and related processing industries were the central issues in evaluating the benefits and the costs of the reforms. In this paper, a counter factual analysis was developed to analyze what would have been the supply response of agricultural industries if the sectoral order, sequence and timing of trade liberalization policies had been different from what actually occurred. In addition, the impact of "early" trade liberalization and a deferred capital market liberalization was also examined. Five structural equations explaining the real exchange rate for exportables (RERx), the agricultural capital stock, the supply of primary and processed agriculture and the total demand for exportable industries were estimated using an error correction model. Dynamic simulations were performed which involved three policy scenarious. The results indicated that both the sequence of trade and capital market liberalization and the sectoral sequence and timing of the liberalization policies were important in terms of increasing the agricultural supply response in the post-reform period.

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 Record created 2017-04-01, last modified 2020-10-28

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