The New Zealand Solution

by Maurice McTigue

Table of Contents

I am not an expert in the area of the environment. But I do have a background of having tried, as an elected member of our parliament, to deal with some of the environmental issues that were facing us and to find workable solutions. In the areas in which you work, I probably more often sat in the position of the stony-faced minister of finance who was saying to all of these agencies, "Forget it."

But given that experience, we also finished up with some outcomes in a number of areas that were extremely encouraging. It really deals with the historic battles that have existed in our countries between the developers and the conservers. It goes right back to the very beginnings of the histories of our countries.

New Zealand suffered environmental problems even before European settlers arrived in New Zealand. The Maori people who arrived from Hawaii about 900 were just as ignorant of the damage they were doing to the environment as the Europeans who followed them about a thousand years later. For example, there is a now-extinct species in New Zealand called the moa. It was like an ostrich, only significantly larger, it stood about twelve-feet tall.

The Maori hunted those animals by burning the snow tussock and chasing them over cliffs as a means of finally capturing them. The net result was that they went extinct. Not only were the moa extinct, but much of the flora and fauna as well because the snow tussock doesn't necessarily readily regenerate. So even before European settlers got there much of the damage was being done.

When the first Europeans arrived, they came around the Cape of South Africa and often suffered demasting in storms. This was the first port of call and they started to use some of our timbers for remasting their ships. They particularly used a species of timber called cowry. We used cowry for all sorts of things because it was a wonderful timber. But nobody realized that mature cowry was just over 2,000 years old. So we used it for building houses, we used it for ships, we used it for firewood before people realized just how valuable this species was. And this was the circumstance that prevailed in my country, and I don't think it was any different in your country in those early days.

And as we saw these things happen, we reacted by saying, "We must stop this process." So we tended to go into a command-and-control process of saying "we must ban the utilization of these things." But on the other side you had people who were desperate to find a means of housing themselves, look after their animals, provide for a means of survival, and their whole quality of life. What tended to be missed was whether or not these things were actually giving the right kind of incentives to people to act in a more responsible manner. In our experience, and I dare to say in your experience as well, the answer was that they did not.

Dealing with Exotic Pests

One of the early things that the English settlers did in New Zealand was to try and recapture the quality of life that they had experienced in the United Kingdom. So they brought with them some animals that were interesting to hunt, called rabbits and deer. In no time at all, the rabbits were totally out of control doing much more damage than the Maori had ever done to our environment in terms of gobbling up everything in front of them. In a country with typically very steep hillsides, this caused enormous amounts of erosion.

We declared those noxious species and set about trying to eradicate them. We never succeeded. We used to have deer culling programs because of the damage that they were doing to our native forests and we would pay people, even private individuals, to go in and hunt the deer. Yet we never managed to get them under control.

Until about the 1980s when somebody had a bright idea: Let's repeal the prescription against letting people domesticate deer and let people decide to domesticate them if they want to. Within four years, we had captured virtually all of the deer that were in the wild, putting them inside fences that were eight feet high and started to domesticate them and create a new industry that has put us at the forefront of being one of the major exporters of venison in the world.

I spent the last three years as New Zealand's ambassador to Canada. Canada gets three-quarters of its venison from New Zealand. Yet they have the most ideal climate in the world for growing venison. What happened was, by creating a market process, we enabled ourselves to get on top of what had been an intractable issue for something like 110 years. There are still enough deer in the wild for people to go and hunt, but no longer are they a threat to our indigenous forest, no longer are they a threat to much of our high country, no longer are they a cause of erosion.

And all we did was to take out one prescriptive law and put in one permissive law: You may domesticate them. I've seen photos that will raise the hackles on the back of your neck of people who went about capturing those deer by jumping on their backs from helicopters, wrestling them to the ground and tying their legs up. It was the most wild west exercise you have ever seen in your life, but it got the job done. All of a sudden these animals had acquired a value of not just a trophy head but of something like $5,000 a head for a fawn and about $8,000 for a prime stag or about $3,000 for a less desirable animal. They acquired an enormous value, which meant that people were prepared to deal with that issue.

So there are ways of dealing with things that produce results that for a variety of reasons, most of they psychological, we are not prepared to accept. What I am saying is that in many instances markets work in dealing with problems where prescriptive laws don't. What happens with prescriptive law or prohibitions is that people always want to push the envelope: The incentive is to take it to the edge of the regulation and see how much further you can go. If you use a market process it tends to keep you inside the middle of the parameters and you don't have that problem with people pushing the edges.

The interesting question is, having had that experience, why have we not done the same with rabbits or opossums. I have no answer because they are a bigger problem than they ever were before and we are thinking of introducing all sorts of extraordinary biological diseases to try and control those animals rather than perhaps doing something that's sensible and saying, "Let's just commercialize them and in the commercialization process we will deal with that problem." Maybe you would only harvest rabbits for the value of their skins and put the rest into pet food, but it might be better than introducing something like myxomytosis, which is the alternative that is being considered.

Markets don't necessarily produce the worst result. Markets often produce the best result in that they bring together competing forces and they start to say to those forces: We have common goals here, let's see if we can make those common goals work.

What happened as a result of this in my country is that it started people thinking about, Shouldn't we have a process that says that the values remain constant but that the process for applying those values be flexible to meet the differing circumstances? Let me put that to the test in two instances: First with regard to how we manage our forests and secondly with regard to how we manage our fisheries.

Reforming New Zealand Forestry

Forestry in New Zealand right from the very beginning had been an extraordinarily controversial issue. Our indigenous forest is made up of trees that vary in life expectancy from the beeches at about 80 to 100 years to the cowry at about 2,000 years. And nobody had given any consideration to any kind of sustainable regime for harvesting. It was really a matter of how quickly can we clear the land for farming purposes.

In fact, most of our 160 years of history, New Zealand governments have promoted that concept by offering very strong incentives to clear the land regardless of whether it was suitable for farming. That is starting to reverse.

In developing our forestry policy we recognized that before we started there were going to have to be some kind of negotiating process between the opposing camps. The environmentalists and incidentally the vast majority of the community at large said that the logging of our indigenous forests has to stop and the foresters on the other side saying that there is indeed a major need for the timber that we are producing, that it is economically viable and it is essential that we do it.

The trade off finally came down to saying that we will progressively shut up our indigenous forests and replace them with exotic forests of planted species that will give the right kind of economic return to the foresters. We got to the stage finally with that policy of saying that we would close up all of the indigenous forests that were in public ownership except for sustainable yield logging, which would amount to about 1 percent of our annual logging. Sustainable yield would be based upon taking trees that were so far through maturity that they were at the point of dying, which in our case means mainly helicopter logging of high-valued species where that would probably be economic.

We said to the private sector people who own indigenous forests, We will offer to you a number of concessions to comply with this policy voluntarily. If you are not prepared to comply voluntarily we will buy you out or we will compensate you for not utilizing the forest that is in your ownership. We got takers for all three options.

For the forests that had already been converted to exotic species, we now started to look at what we had, which was a very significant forest estate with relatively short-rotation timbers that we could harvest. When we looked at that, we decided that we needed something that was going to satisfy the requirements of the conservationists and environmentalists but still allow the people in the logging industry to function profitably. As we looked through all of the options we finally decided that the best way to do that was to create a form of property right.

We created that form of property right by deciding that we would sell off those forests but in a rather different way: That we would sell the standing trees and the next two generations, that we would not sell the land. This was due to a mix of aboriginal issues, but also a mix of public opinion saying that as approached this policy our polls showed we had 94 percent of the population opposed to what we were going to do. But we went ahead and did it anyway. (After we did it, it became very popular.)

We had very strong public opposition to selling land. It was more acceptable to sell the standing trees as a crop than it was to sell the land. But also instead of trying to use the prescriptive process of the past, by going through the sale process we opened up to ourselves the opportunity of using contract law. We used that contract law as a means of being able to write in some of the environmental principles that we thought were really important. We didn't want to see any diminution in the size of the forest estate. So in the sale and purchase agreement there was a requirement that the forester replant a tree for every tree that they cut down. There was also a requirement that they allow access to the forest to the public at large as long as it was safe for them to be there.

Because much of this was what we describe as fragile country we wrote into the sale and purchase agreement that your harvesting plan and forest management plan had to be subject to the approval of the ministry of conservation. But the ministry of conservation didn't have the right to tell you that you couldn't harvest the forest. It had the right to tell you how you could harvest. So in some instances in fragile country it said you could cut 80 percent of the stems but you must leave 20 percent standing evenly dispersed across the hillside so that it won't erode. When the next generation gets to 15 feet in height or about 8 years old, you can go back and harvest the rest.

In some instances it said that in this particular area of native forest or in that area of native forest where your exotic forest goes between the two you have to leave a corridor for animals to be able to move back and forth. When the new generation has developed to a sufficient extent you can take that corridor out.

Most of this was done in an environmental where there was little controversy whatsoever, we had agreement on both sides. In some instances, where we were selling those forests, we actually said to the conservationists, we will give you the revenue from the forests to be able to regenerate some of the native forest that have been despoiled over time. So we were doing a lot of trading. Some of it was trading in monetary terms, but a lot of it was trading in value terms. You can have a market in terms of values, so the conservationists were prepared to say, "We concede that you harvest these forests and you manage them in this way and we are getting some of the values in terms of money to regenerate some of the native forests." So you can find ways of finessing the policy so as to make it possible to get the best of both worlds.

What actually happened when we did that? The most notable change was this: That all of a sudden we had changed the culture of the logger, the miller, the forester, whatever you like to term them, from being a person who is just interested in taking out the tree for the maximum buck to somebody who has as great or greater interest than anybody else in preserving that forest for future utilization. A major cultural change. All of a sudden, the foresters ethics and motives are starting to line up with those of the conservationists and environmentalists.

In addition to that, they started to look at the value of that whole ecosystem: How can we make it even better? So some of the things that were high risk in the past started to disappear. For example, while the sold forests on the basis of stumpages, so much per cube, you had this awful problem of people high grading: We'll just take the best and we'll let the rest go to waste. This used to infuriate the conservationists and environmentalists. But when that person became the owner of the lot, they found ways and means of being able to utilize all of what was there rather than just part of it.

What that did was to see the production from the forests increase by 24 percent without increasing the felling acreages at all. It was going to lower value in uses than the premium, but it also saw people putting a lot more work into silviculture to the point where I have seen a number of forestry companies utilize satellites as a means of being able to take photographs of their forests to identify those trees that need single-tree treatment as opposed to those that don't in terms of either disease or fertilization. So you can use this means to actually produce the best of each result.

Reforming Commercial Fishing

Fisheries have proven to be just as controversial around the world as forests. In our case, we have one of the largest exclusive economic zones in the world: the 200-mile limit around our country. It's the fourth-largest in the world, larger than the exclusive economic zone of the United States. That's because we have all these nice, tiny islands scattered around the Pacific and each of us gives us another 200-mile radius and they all happen to just link up.

Our fishery like all fisheries around the world was being very dramatically depleted. When you think about the fishermen of the past, all he was, was a hunter and killer. The culture of a hunter and killer is to go out there and get as much as possible as quickly as possible because somebody else might get it tomorrow instead. How can you change the culture of that person?

We have tried by prescriptive methods to actually change their culture and to get a limitation. But you've got the same problems that you had in the forestry, if you limited how much they could catch they went into high grading. So all of the undersize and undesirable species were killed but thrown over the side--even if it was illegal to do it because the seagulls would eat them before the ministry people would be able to get there and photograph them.

So the incentives were to high-grade, to specialize, and to deplete the resource because they had no continuing interest in what would happen. In 1986 we decided that we would change all of that. We decided that we would convert the right to fish into a property right. According to your past history we would allocate to you your share of the fishery to actually catch.

We got it wrong at first in that we decided to allocate to each fisherman so many tons of fish to catch. That turned out to be wrong because what we needed to be able to do was allocate more as the fishery grew in size and allocate less if it shrunk in size. So we changed that to not be a number of tons that you were entitled to catch, it was a proportion of the total allowable catch for that species in that area.

With that, immediately, the interest of the fisherman was to conserve that fishery so that if it grew in size they had an entitlement to more. Immediately those people became conservers rather than despoilers. We had changed their culture. Now, fortunately, we are one of the few countries in the world where our fishery resource is growing in size and we are allocating out more than ever before.

Effects of Reform

Let me take these two instances--forestry and fisheries--and quickly show what happened downstream of making those decisions. As soon as we made the decision on forestry, that we were going to allocate forests out as property rights and give people security of supply for up to seventy years (three rotations of our timber), they did something that we had tried for many years to do by other means. We had tried to encourage secondary processing. We had thrown taxpayer money at them in the form of free gifts. We had given them special depreciation allowances, tax holidays, everything that you can think of in terms of traditional policy. It made virtually no difference.

As soon as we sold those forests, and about half went to domestic owners and half to international owners--we made no discrimination, the highest bidder got them--in every single case the new owners made an investment in secondary processing that was equal to or greater than the purchase price of the forest. Why did they do that? Because all of a sudden they had the thing we had forgotten about all the way along: they had security of supply of resource at a known price over a long period of time. Then they were prepared to make capital investments.

That saw employment in the forestry industry increase by 40 percent. It saw the value of the product in our country go up by 400 percent as more value was added to it. So a major economic gain.

In the fishery, exactly the same thing happened. Those of you who buy groceries from time to time might have bought a fish called orange roughy. It is probably about the most expensive white-fleshed fish that you will buy on the market today. It comes almost exclusively from New Zealand or a little bit from Australia. We used to convert that into pet food because we had no other end use for it. Now it is the top of the white-flesh fish market.

What made the difference was that when people knew that they had a property right, that X quantity of fish was going to come through their factory every year, they were prepared to invest in the further processing that would move those products up the value scale. That meant that in the fishery, for a 25 percent drop in the quantity of product, we expanded the value of it by just on 500 percent. Five fold. We increased employment in the fishery by 60 percent.

If you deal with those issues, some of the problems that you are going to find is that your member or somebody else's member is going to say, "But hell, if we do those things, some of my people in this nice little community, who are small fisherman, are going to be bought out." So they were. But this is what happened that would never have happened if we were making those decisions.

Because the big operators had access to this asset for no money, because they had their historic catch, marginal trading happened to such an extent that somebody with a small allocation, like 20 or 30 tons of snapper or sole, would get $200,000 to $300,000 for it. Its market value was $20,000 to $30,000. But for somebody who wanted to build their throughput, it was worth paying ten times market value because you got the rest for nothing and when you spread it across your total catch it wasn't too important.

Those people took that money and in many instances used it to equip themselves with a catching facility that enabled them to contract to the processor and stay in the industry.

When you looked at the public scenario, everybody said to the fisherman, "Hell, I wish I'd been in fishing when you got money like that thrown at you." If the government had done it, they would have got about a tenth, if they were lucky, of what they got from the marketplace. So the market was able to resolve for us much of the political problem that would have been irresolvable as far as we were concerned.

Lessons for Reformers

I just want to conclude by saying this. I've taken two examples. I could have taken the allocation of water, or a number of other situations. But these are clear, classical examples of resources that around the world are considered to be at threat. Create a property right, and surprisingly, you start to align the values of what were previously considered to be conflicting groups and they come on side.

If you are a politician, the nice bit is this: that you get away from the grip of having to deal with all of those unhappy people who say, I can't survive unless you through more taxpayer money at me. And you know darn well there is no more taxpayer money to throw at them. Instead, you have a process out there that in most instances has very adequately rewarded them for the change in their lifestyle. In fact, in many instances provided them with opportunities that would otherwise never have arisen for them.

The process of command and control does not work. The process of using a market mechanism whenever it is available to you does work. And it works not only on the monetary values but it works on the social values as well.

This requires changing laws. If you are going to get involved in the issue of changing laws, there are some very simple concepts that you have to adhere to. First and foremost, the law has to be simple. It has to be easily understood by the people who have to abide by it. It has to be concise. A bad law is a law that goes to over a hundred pages in the statute book.

Second, rather than amending existing law, this probably requires repealing all of the old law and writing a new law. That is an interesting concept because as legislators we normally think about how do we get this to fit into the existing body of law. But if the existing body of law has gone down a particular course for the last 150 or 200 years, and you now think it is wrong, you are not going to be able to amend it to make it right. All you are going to do is make it worse.

Taking the initiative to be able to sit down and start to think about that in terms of saying, "What would we do if we started from scratch" is a very exciting concept.

Maurice McTigue is the former New Zealand Minister of Employment, Associate Minister of Finance, Minister for State-Owned Enterprises, Minister for Railways, Minister of Public Works and Development, Minister of Labor, Minister of Immigration, and Ambassador to Canada. Currently he is with the Center for Market Processes at George Mason University. This is a slightly edited transcript of a speech he gave at a Center retreat for Congressional staffers on 20 August 1997.

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