The impacts of deregulation and privatization on cost efficiency in New Zealand's forest industry

Abstract

In this paper, we investigate whether deregulation and privatization induced changes in cost efficiency within the New Zealand wood industry. Unlike previous work, the effects of privatization, deregulation, and removal of log export bans are compared to determine which shock had the most influence on efficiency changes. Cost efficiency is measured by estimating stochastic frontier models using the recent cost function approach, which does not suffer from the endogeneity problems associated with stochastic frontier production function estimation. The results show that cost efficiency decreased after each policy reform, but deregulation was more important in this regard than privatization. This suggests that countries with comparative advantages in wood processing, who also implement deregulation or privatization, may suffer through a short-run period of lower efficiency as the economy adjusts to higher input costs in those sectors. In New Zealand's case, the adjustments most likely affecting efficiency have been investments in new technologies, where time is required to attain maximum efficiency. The results are contrary to other studies that have predicted increased efficiency as a result of privatization.