The pattern of manufacturing industry assistance in New Zealand, 1981-82

Abstract

Public assistance to manufacturing industries, in the form of import licensing, subsidies, tariffs, and tariff and tax concessions have been important features of the New Zealand economy. This thesis econometrically models the inter-industry variation in manufacturing assistance rates in the early 1980s to test hypotheses about the causes of government support for industry.

Previous investigators have characterised manufacturing assistance levels in New Zealand as being both higher and more variable than in other developed economies, and relying on quantitative import restrictions. Various commentators have suggested that policy makers hoped manufacturing assistance would insulate the economy from overseas commodity price fluctuations, by protecting the balance of payments in the short term and altering the composition of the economy in the long term (Deane, et al., 1981; Gould, 1982). They have also suggested that there was a policy desire to expand the range of employment opportunities for a growing urban population (Hawke, 1985). This study notes these motives but also identifies employment maintenance objectives within industries facing declines due to increased comparative (and absolute) advantage of some overseas competitors, notably low wage economies.

The New Zealand data on assistance rates in 1981/82 was used to test six hypotheses about the causes of government support for industry. These hypotheses were: 1) adding machine: where assistance policies are designed to increase the re-election probability of politicians. 2) interest group: where assistance reflects the abilities and incentives of industries to form political pressure groups. 3) regulatory equilibrium: where assistance policies are designed to restore balance to wealth transferring (regulatory) markets. 4) cartel substitute: where assistance is a substitute profit-seeking activity for industries unable to form effective private cartels. 5) equity concern: where industry assistance is a mechanism for softening adjustment costs and protecting economically weak workers. 6) national policy: where assistance is designed to alter the industrial structure of the economy.

An econometric model which encompassed all six competing hypotheses was specified and estimated using data on effective rates of assistance for 95 industries. Particular attention was paid to the process of finding a statistically adequate model in the context of uncertainty about appropriate functional forms, error distributions, and relevant proxy variables. Parametric restrictions to nest models for each hypothesis were tested and rejected; the exclusion of relevant variables was particularly evident in the case of the adding machine, regulatory equilibrium, cartel substitution and equity concern models. Models representing each hypothesis also suffered predictive failures, in terms of the expected direction of explanatory influences.

Results suggested that assistance was greatest for slow or negatively growing import competing industries, which lacked natural protection (high transport costs), were located in Auckland or Wellington, and had many firms, and workers with low skill levels. The results suggest that institutional rules and the small size of the New Zealand economy and society made rent-seeking profitable and feasible for individual firms, so problems of collective goods provision ('free-rider' effects) did not appear to influence the inter-industry variation in assistance. The results also suggest that by the early 1980s, policy goals as reflected in prevailing assistance levels, appeared to be influenced more by adjustment cost minimisation rather than structural transformation of the economy. There was also evidence to suggest that the political process focussed on effective protection, rather than nominal, but did not have full control over licensing assistance outcomes due to international price and productivity movements.