Log in here to learn the benefits of reform

By Mark Reynolds

New Zealand foresters reckon their industry points to a possible answer for Apec delegates asking how economic liberalisation might improve their lot.

A report on the local forestry industry published this week shows that the restructuring of the New Zealand economy over the past 15 years has produced an internationally competitive forestry manufacturing and exporting industry.

The report - prepared by the privately operated Forest Industries Council and state-owned Forest Research - concluded that reform had whittled down the cost of key forestry industry inputs, such as energy, labour and transport.

That, coupled with the privatisation of state forests, had turned New Zealand forestry into "one of the most globalised industries in the world."

The report said internal competitiveness, labour productivity and the forestry sector's contribution to regional trade had all increased over the past 15 years.

But perhaps the most significant benefits came from the removal of market distortions, which allowed domestic producers to take a rational approach to capacity growth in forest industries.

In other words, a dose of commercial reality stopped New Zealand foresters joining an international rush to build new subsidised forestry industries to take advantage of a rise in prices earlier this decade. Instead, they looked to become more efficient by improving marketing and distribution operations.

This has held them in good stead in the competitive market.

When New Zealand's economic reforms began in 1984, the Government's influence on the economy was overwhelming. At least 400 Acts of Parliament and 1000 associated regulations had potential impact on the forestry industry. In addition, 127 tribunals and 400 official advisory committees and boards strongly influenced the running of many commercial enterprises.

As this week's industry report said: "Government influence in the forestry industry was especially strong, through ownership of half the exotic plantation resource, subsidies, incentives, regulations, import controls and tariffs."

The result was "little competition, a cosy environment, and a static and narrow view of production, investment, innovation and marketing."

General economic reform solved some of these problems. The changes included floating the New Zealand dollar and deregulating financial markets; reforming the labour market to make it more easy to bargain on a business-by-business basis; allowing further competition among road, rail and port operations; and opening up international investment opportunities.

Specific reforms that affected the forestry sector included privatisation of some forests through international tenders, removal of import licensing and tariff barriers, and an equalisation of forestry taxation regulations.

The Forest Research/Forest Industries Council report said closures of inefficient mills and resulting job losses had negative social impact.

But the benefits, like increased global competitiveness of forestry companies, and a stable inflation and exchange rate regime, soon saw investment flow back into the industry by the early 1990s.

The turnaround has been such that over the past eight years $2.2 billion has been invested in forestry sector processing facilities in this country. At the same time the size of planted New Zealand forests has increased from 1.2 million hectares to 1.7 million hectares.

Forest product trade has grown fourfold to nearly $3 billion annually while its contribution to the nation's overall merchandise trade has topped 13 per cent compared with less than 8 per cent before the reforms.

Simultaneously, New Zealand's share of the global forestry industry has grown from 0.7 per cent to 1.1 per cent, while in the Asia-Pacific region the New Zealand market share has risen from 6.6 per cent to 8.8 per cent. That is despite last year's Asian market downturn having taken some heat out of the market.

The industry research did see a few continuing problems. In particular, it said that despite the competitiveness gains processing of New Zealand logs within the country was not as much as was desirable. New Zealand was missing out on added-value business that could push up the industry's contribution to economic growth enormously.

That might be changing though, with companies looking at installing further processing capacity in the next few years.

A key to such investment coming to fruition would be continued progress in the economic reform process.

In particular, higher tariffs of 15 to 50 per cent in many Asian economies, as well as non-tariff barriers such as prescriptive building codes, were preventing the further development of the industry here.

"Achieving trade liberalisation, particularly in Asian Pacific markets, is a critical development need of the industry and will be an important determinant of further investment in on-shore processing," the report said.

The future of tariff regimes is uncertain, with this weekend's talks by Apec officials potentially setting the scene for further cuts.

Trade Minister Lockwood Smith, who is pushing for tariff reductions, said the forestry sector report showed continuing liberalisation of trade in forest products was vital.

"While it is good business to sell 15c seedlings as $150 logs a few years later, the real money and the additional jobs for New Zealanders, lie in controlling more of the value chain," he said.

"The New Zealand industry can't exploit the milling, processing and manufacturing opportunities while it faces tariff barriers in the 30 per cent to 50 per cent range, as it currently does for valued added products.

"Ongoing trade liberalisation, through working with our trading partners in Apec and the World Trade Organisation, is crucial to the industry's ongoing growth and New jobs for New Zealanders."

The Forest Research/Forest Industries Council report reached a similar conclusion, suggesting the industry should become an increasingly important contributor to New Zealand's economic growth and a more significant force in the regional forest product markets if market liberalisation continues.

Estimates by the Ministry of Agriculture and Forestry indicate a potential for up to $6 billion to be invested in forest products manufacturing over the next 15 years. The harvest will double to 60 million cu m over the same period.

The ministry said: "This level of development could see the forestry industry emerge as New Zealand's leading industrial sector, with export receipts increased by at least a factor of six to more than $18 billion a year, thereby creating significant growth in direct and indirect employment."