Rethinking the Crafar farms

16/02/2012 § 1 Comment

I was formulating a post on the Crafar farms and the overturning of the Overseas Investment Office’s decision as I walked to work this morning. I arrived and found that TVHE got in before me with this post. Their key message:

If the OIO is routinely conducting CBAs by comparing the factual to the current state then its hard to have much confidence in their assessments.

So, basically, the OIO didn’t do the economics right and the court called them on it.

What should OIO have done? Put another way, how do we think about the potential benefits of selling to overseas buyers?

Let me start by ruling something out. The whole pearl-clutching about being tenants in our own country is nonsense. Property rights — your ability to do something with a piece of land — are partial and contingent. They only exist because the government says they exist and is willing to back that up. You can’t build a sky-scraper in a residential area because (a) it’s against the rules and (b) the government has the means to enforce the rules (rough men standing ready to do violence — Orwell). If foreign-owned farms started creating nuisances for the neighbours, the country could pass legislation to deal with the nuisances. If foreign-owned farms became the majority and we were concerned about them sucking profits overseas, we could simply tax them.

Back to think about the impacts of overseas investment. It is simply, like all CBAs, about two curves. One curve says, here’s what could happen over time if we do nothing. The other curve says, here’s what could happen if we allow the investment. What you want to see is Curve 2 higher than Curve 1.

Then, the complexity is thinking about the economy and all the things that affect the paths of the curves.

  • Does the investment affect the resources available? If the investor is will to increase the amount of capital on-farm, then there are more resources. This can lead to more production or higher wages.
  • Does the investment create market opportunities? New Zealand has difficulties creating the necessary foreign linkages to promote exports. We are small and far away; investing in building networks takes resources. If an investor brings the market to us, we don’t have to go to it.
  • Does it affect technology? An investor may bring to New Zealand new production technology that allows it to produce more. In the case of dairy, this may be locally true — a particular farm may be less productive — but is unlikely to be generally true. Because the country has leading technology available, there is less scope for technological spillover.

The details start to get fiddly and uncertain. Crystal balls, rabbits, and hats might be employed. But the essence of the case is actually really simple. The court has asked the OIO to make it.

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