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Economic Risks And Opportunities From GMOs

Report to
MINISTRY FOR THE ENVIRONMENT

for

ECONOMIC RISKS AND OPPORTUNITIES
FROM THE RELEASE OF
GENETICALLY MODIFIED ORGANISMS
IN NEW ZEALAND

April 2003

*PROJECT TEAM

· Kel Sanderson Director, BERL
· Prof Caroline Saunders Director, AERU
· Dr Ganesh Nana Senior Economist, BERL
· Dr Adolf Stroombergen Director, Infometrics Consulting Ltd
· Assoc Prof Hugh Campbell Director, CSAFE
· Assoc Prof John Fairweather Senior Research Officer, AERU
· Andy Heinemann Principal Researcher, NRB

BERL ref#4173

All work is done, and services rendered at the request of, and for the purposes of the client only, and neither BERL nor any of its employees accepts any responsibility on any grounds whatsoever, including negligence, to any other person.

While every effort is made by BERL to ensure that the information, opinions and forecasts provided to the client are accurate and reliable, BERL shall not be liable for any adverse consequences of the client’s decisions made in reliance of any report provided by BERL, nor shall BERL be held to have given or implied any warranty as to whether any report provided by BERL will assist in the performance of the client’s functions.

Disclaimer

This report was prepared by a project team led by Business and Economic Research Limited (BERL) and should not be taken as representative of the views of the Ministry for the Environment or the Treasury.

Peer review

Working draft reports were peer reviewed by the following persons:

Brian Bell Nimmo-Bell & Company Ltd
Stephen Thornton PA Consulting Group
Dr Anne Stewart University of Auckland, School of Business and Economics

This report should not be taken as representative of their views.

Economic Risks and Opportunities from the Release of Genetically Modified Organisms in New Zealand

The Ministry for the Environment and the Treasury commissioned Business and Economic Research Limited (BERL) to lead a team to carry out this investigation of the economic impacts of releasing genetically modified organisms (GMOs) in New Zealand. This research forms part of the government’s response to the Royal Commission on Genetic Modification. The government sought an economic analysis of the risks and opportunities that may arise from the use of genetic modification and non-genetic modification technologies. This research will assist in making decisions on the overall strategy of preserving opportunities and proceeding with caution with genetic modification. Other government decisions can be found at the Ministry for the Environment website – http://www.mfe.govt.nz/issues/organisms/legislation/

New Zealand has not approved the release of any GMO either in primary production or in any other industry. Therefore, there is no information available about the impacts on the New Zealand economy of a release of a GMO. In order to gather information, BERL was commissioned to lead a team to assess what the economic impacts might be. BERL and its team have tackled this issue by undertaking a survey of international consumers, gatekeepers and inbound tourists, and by employing two economic models. The survey was used to give an indication of the impact of a GMO release on New Zealand’s clean green image, and the extent of any price impacts on the use or avoidance of GMOs. The modelling was carried out using a partial-equilibrium trade model to estimate the specific effects for producers, and a general-equilibrium model to estimate the effect these producer returns would be likely to have on the wider economy.

It is important to emphasise that the research is based on the modelling of four hypothetical scenarios and a snapshot consumer survey. The findings rest on a set of assumptions and a specific methodology that is a simplification of reality. While informative, the findings are indicative and give a mix of economic impacts.

The research was funded through the Cross Departmental Research Pool of the Ministry of Research, Science and Technology. The Treasury also provided funding for additional analysis. The work has implications across government, and consequently was overseen by a steering group comprising representatives from the Ministry for the Environment, the Treasury, the Environmental Risk Management Authority, Ministry of Agriculture and Forestry, Ministry of Foreign Affairs and Trade, and the Ministry of Research, Science and Technology.


For Full Report see…
http://www.mfe.govt.nz/publications/organisms/economic-impact-apr03/

See Executive Summary Below

Executive Summary
The Base Case: New Zealand’s clean green image
Impact on CGI of changing New Zealand’s GM status
World consumer reaction to release of GMOs
Technology and New Zealand production system
Economic model experiments
Scenario impact on New Zealand economy ten years hence
Conclusions on economic outcomes
Critical factors determining economic outcome of GM status

1 Introduction
2 New Zealand’s Clean Green Image and GM Status
2.1 New Zealand’s Clean Green Image
2.2 The economic analysis of GM in primary production
2.3 Issues making GM economically important to New Zealand
2.4 Approach to the analysis
2.5 Risks and world market opinion
2.6 Potential GMO opportunities
3 Impact on New Zealand Image and Markets of GM Status
3.1 International market survey results
3.2 Inbound tourist survey results
3.3 Translating the survey results to model inputs : demand changes
3.4 Translating the survey results to model inputs : sensitivity to price changes
4 New Zealand’s Production System
4.1 GM application globally
4.2 GM opportunities in production
4.3 The pest control scenario
4.4 Human therapeutics scenario
4.5 New Zealand refrains from releasing GMOs scenario
5 Economy-Wide Model Experiments
5.1 The model
5.2 Inputs for the experiments investigating the release of GMOs
5.3 Interpreting the model
5.4 The Control or Base Case scenario
5.5 Schema of model experiments
5.6 Pastoral GMO scenarios (refs #1 to #3 and #6)
5.7 Pest control GMO scenarios (refs #4 and #5)
5.8 Discussion of pastoral and pest control scenarios
5.9 Scenarios where New Zealand foregoes GMOs (refs #7 to #10)
5.10 Human medicine GMO scenarios (refs #11 to #14)
5.11 Discussion of human medicine scenarios
5.12 A combined scenario
6 Agricultural Trade Model Experiments
6.1 The Empirical Model
6.2 Results
6.3 Scenario: New Zealand releases pastoral GMO
6.4 Scenario: New Zealand foregoes use of GMOs
6.5 Discussion of GM scenarios on agriculture
7 Conclusions on Economic Outcomes
8 Critical Factors Determining Economic Outcomes
9 Appendices Error! Bookmark not defined.

EXECUTIVE SUMMARY

The Base Case: New Zealand’s clean green image

Surveys of respondents in overseas markets and inbound tourists within New Zealand confirmed that in the perception of environmental image, New Zealand was consistently ranked ‘above average’ or ‘among the best’.

The survey in overseas markets was of a net sample of 444 people in three of New Zealand’s main overseas markets, namely Australia, United Kingdom and United States. The respondents’ image of the New Zealand environment was excellent, with 85% in both Australia and United Kingdom stating that their image of New Zealand’s environment was ‘above average’ or ‘among the best’, and only 5% had no image of New Zealand. The remaining 10% had images of New Zealand as average or below. The response was different in United States where only 70% had images of New Zealand as ‘above average’ or ‘among the best’, and this difference was perhaps because 19% had no image of New Zealand. Similar to the other two markets, in United States 10% had images of New Zealand as average or below.

The survey of inbound tourists was of a sample of 93 visitors to Christchurch, and 99% of these had an image of New Zealand as ranked ‘above average’ or ‘among the best’. Clearly there were none of these respondents who had no image of the New Zealand environment, and only 1% thought it was ‘average’. Variations in percentages between these two surveys can be expected because of the relatively small sample sizes, but also with the inbound tourist survey, perhaps the reality has reinforced their prior perceptions, and there could also be some “be kind to host” effect which could bias their responses.

In terms of New Zealand phrasing, these surveys confirmed that New Zealand has a clean green image (CGI), with its existing genetic modification (GM) status. Questions remain as to the value of the CGI in overseas markets.

Impact on CGI of changing New Zealand’s GM status

The release of genetically modified organisms (GMOs) has a varied impact on that image. Should New Zealand use GMOs in pest control or livestock feed, approximately 55% of respondents stated their image either would not change or would improve in such a situation. This included 29% who stated their image did not change and 25% who said their image would improve. Approximately one-third of all respondents stated that their image of the New Zealand environment would get worse.

Should New Zealand use GMOs in human disease prevention, approximately 68% of respondents stated their image either would not change or would improve. This included 29% who stated their image did not change and 39% who said their image would improve. About 20% said their image of the New Zealand environment would get worse.

These numbers show that the magnitude of the effect on New Zealand’s CGI of GMO release depends upon the purpose for which the GMO is released. There are also variations in response in different markets.

Should New Zealand not use GMOs then over 50% stated their view of New Zealand’s image would remain unchanged, while one-third of overseas respondents stated that their image would improve. Of inbound tourists, nearly 50% stated that their image would stay the same, and a similar percentage stated that their image would improve.

World consumer reaction to release of GMOs

Survey results indicate that the release of GMOs in New Zealand has an impact on foreign consumers’ purchase intentions. There is a large group of consumers (ranging between 40% to 70%) who state their purchasing behaviour would remain unchanged. This share ranged from 43% who whose fruit purchasing intentions would remain unchanged, through 54% with dairy product purchasing, to 72% whose holiday choice would remain unchanged if there was a release of GMOs in New Zealand.

There is also a significant group of consumers (ranging between 20% to 30%) who state they would cease purchasing New Zealand commodities if New Zealand released GMOs, though only a much smaller 5% to 10% would not choose New Zealand for a holiday in that instance. From the smaller survey of inbound tourists the numbers were substantially lower than these.

In addition to these two groups there is a third group of consumers. This group indicate that their responses would be contingent on prices, and furthermore, the degree of sensitivity to price changes is considerable. This implies that there are consumers who, following a New Zealand GMO release, are disinclined to buy but would re-enter the market if there is a relatively small reduction in price. The characteristics of these groups of price-responsive consumers has enabled us to determine the impacts on demand for New Zealand goods and services following a GMO release, and flexibility of pricing and supply by New Zealand suppliers in the export markets.

The stated purchasing intentions if New Zealand’s GM status changed, as measured by these two surveys, provided the information on expected world market demand changes in the various scenarios of the economic model experiments.

There is uncertainty around the relationship between the purchase intentions as stated in the surveys and the actual point-of-sale purchases. There are at least two factors that need to be borne in mind when generalising from scenarios as presented in a survey to ‘real life’ The first relates to information at point-of-sale. It is unlikely that consumers would know, or bring-to-mind at point-of-sale, the GM attributes of New Zealand in other contexts, and yet in the survey context, of necessity this has been brought specifically to their attention.

Secondly, the price-quality characteristics of the product, relative to those from other countries can assume a powerful if not predominant influence in the product choice for many consumers, including in particular trade-offs of immediate tangibles (cost, appeal) against intangible and more remote perceptions of other considerations like GMOs.

There is one type of consumer response which is not sensitive to price which expresses an aversion to GM food which is categorical, a similar purchasing behaviour to vegetarians or consumers guided by religious codes.

The durability of the consumer perception figures will depend on the dissemination of favourable, unfavourable and neutral information about GMOs, and the way this is received by the public. It is common for people to be cautious about such innovations until sufficient time has elapsed for them to be proven.

In other words, it has to be acknowledged that there are many influences that determine purchase behaviour. Price is one of these influences. Amongst others is a wide spectrum of product characteristics integrated with buyer knowledge and taste preferences. In addition, these influences change across time as external events impact on consumer behaviour.

The relationship between stated consumer perceptions and actual purchasing patterns is also likely to be compounded by the behaviour of institutional ‘gatekeepers’ in a range of export markets. In some cases their behaviour may amplify consumer concerns. If consumer attitudes on GM remain stable over time, ‘gatekeeper’ behaviour is likely to reflect those attitudes. Should consumer attitudes in markets change, the ‘gatekeeper’ behaviour could be expected also to change.

Technology and New Zealand production system

New Zealand’s main productive industries are based on production from plants and animals and so economic wealth could be created by GMOs applied in agriculture, horticulture, plantation forestry, aquaculture and medicine. GM also has the potential to create entirely new products and sectors of economic activity.

Three specific examples of GMO releases were investigated and scenarios specified for pastoral agriculture, pest control, and human therapeutics. These scenarios assume effects on productivity in industries due to the release of GMOs.

Economic model experiments

Two economic models were used to undertake various experiments simulating the impact on the New Zealand economy of the release of GMOs, as well as the scenario of New Zealand foregoing GMOs: an agricultural trade model and an economy-wide model.

The modelling assumes similar consumer reactions across all markets, derived from the ‘average’ reaction calculated from the survey responses. Consumer preferences and concerns are likely however, to vary over markets. Furthermore, the modelling assumes that consumers are able to choose between a range of suppliers - distinguished by their GM status - of the products (and holidays) they wish to purchase. The model experiments therefore should be interpreted within the context of the diversity of the markets in which New Zealand exporters are active.

The agricultural trade model is ideally suited to investigating the impacts on the New Zealand agriculture sector in response to changes in productivity, commodity demand and supply and the consequential changes in world prices and producer returns.

The economy-wide model is better suited to investigating the impacts on the wider New Zealand economy. It captures the influences of relationships between sectors as well as the impacts when resources shift from one sector to another.

Scenario impact on New Zealand economy ten years hence

The numerous experiments performed using the two economic models signal a range of outcomes in terms of economic impact.

The agricultural trade model indicates that change in GM status has significantly large effects on New Zealand agriculture industry. In particular, the results find the world market reactions (export demand responses) significantly larger than the impact originating from the supply reaction (ie productivity increases or cost reductions).

New Zealand releases GMOs

From the agricultural model, the release of a GMO that resulted in 2.5%pa higher productivity for 10 years with no demand response leads to only a 5.1% increase in New Zealand agriculture producer returns. However, a demand change reflecting a 20% discount on all New Zealand exports of dairy, meat and fruit with no productivity changes leads to a 43% reduction in producer returns.

From the economy-wide model, the impacts of productivity changes are relatively greater, as increased productivity in one industry makes more resources available to other industries. This effect is captured by this model. The effect of a more price-sensitive foreign consumer is also included in this model so that the impact on export returns is more muted.

As a result of the assumed negative demand reaction to the release of a GMO in New Zealand (as indicated by the consumer intentions from the surveys), and assuming that the GMO release provided no productivity increase, the economy-wide model finds that GDP ten years hence is 2.4% lower than it otherwise would have been. In this experiment dairy and meat export returns were 8.2% lower than the base case.

On the other hand, a GMO release which generated an assumed 2.5%pa higher productivity in pastoral agriculture, and assuming this release caused no demand reaction, resulted in GDP being 2.5% higher ten years hence. In this case, dairy and meat export returns were 8.9% higher.

Clearly in any particular case one could expect a GMO release to cause both some reduction in demand for some products in some markets, and also some increase in productivity. The effects on GDP in 10 years time would therefore be expected to be between these two limits of GDP 2.4% lower and 2.5% higher than would otherwise be the case, and the various scenarios modelled gave such results.

In particular, the experiment combining both the productivity and demand responses resulted in GDP ten years hence being lower by 0.1%. The sensitivity of this outcome to the magnitude of the demand response was also tested. The experiment with a 50% large export demand reaction resulted in GDP being lower by -1.3%, but if the export demand reaction was 50% smaller the outcome for GDP ten years hence was 1.2% higher.

New Zealand refrains from GMO release

Where New Zealand refrains from releasing GMOs, the trade model finds that other countries increasing productivity with GMOs has little impact on producer returns. In contrast, a demand effect resulting in a 20% preference for non-GM products increases New Zealand producer returns by 33% above the base case.

The economy-wide impact of a New Zealand refraining from release of GMOs was also modelled. This experiment showed a shift in preference to New Zealand-labelled dairy and meat, as well as a shift to all New Zealand fruit and holidays, which together led to 7.5% higher GDP ten years hence. In this case, dairy and meat export returns were 14.5% higher. However, if other competitor countries adopted GMOs which led to their enjoying greater productivity improvements, New Zealand GDP would then be 6.4% lower than in the base case. Dairy and meat export returns were over 40% lower.

Conclusions on economic outcomes

The general conclusions on the economic outcomes are that while the impact of single influences (either world market demand effects or New Zealand production opportunities) are potentially large, together many of the influences counter each other.

Because of the counter-balancing influences, the actual effect on New Zealand’s annual GDP ten years hence is thus not very great under any of the scenarios. Impacts at the level of the individual industry - especially the agriculture industry - remain significantly large. In particular, demand shifts tend to have relatively larger impacts on agricultural returns that do supply shifts.

The results of the Lincoln agricultural trade model suggest that a supply-side strategy focussing on raising New Zealand’s productivity would be less effective at increasing producer returns than would be a demand-side strategy raising demand for New Zealand products. However this model does not take account of the resources released to the other industries in the economy when resource productivity in agriculture is increased. These effects are specifically embodied in the economy-wide model.

Numerous experiments using the economy-wide model, combining aspects of both influences found economic outcomes, in terms of the level of GDP in 10 years hence, ranged from 3% higher GDP to 3% lower GDP.

In other words, the impact of releasing a GMO in New Zealand or not using GMOs in production can result in both negative or positive overall economic outcomes.

Critical factors determining economic outcome of GM status

Assessments of the detailed results of the economic experiments has enabled us to isolate four critical elements that determine the economic outcome:

(1) The magnitude of the change in demand for New Zealand goods and services.

This factor describes the extent to which the purchase decisions of foreign consumers for New Zealand goods and services is dominated by their desire to buy from a country where there are no GMOs released. If the survey responses are reflected by actual purchase behaviour, such behaviour has significant and substantial negative consequences for New Zealand’s conventional export commodities and, consequently, the wider New Zealand economy. There is uncertainty attached to actual behaviour justifying the close monitoring of consumer attitudes and purchasing. International research indicates that when faced with actual purchase decisions at point-of-sale, consumers’ reactions will be different from what they say they would do in “willingness to pay” surveys.

The price-quality characteristics of the product displayed, relative to those from other countries can assume a powerful if not predominant influence in the product choice for many consumers. It is also unlikely that consumers would know, or bring-to-mind at point-of-sale, the GM attributes of New Zealand in other contexts, and yet in the survey context, of necessity this has been brought specifically to their attention.

The origin country of products are not necessarily identified on supermarket shelves. It is likely that the labelling of products as GM or non-GM could influence consumer behaviour rather than the country of origin.

(2) The response of foreign consumer demand to price changes.

This factor describes the extent to which the purchase decisions of foreign consumers for New Zealand goods is influenced by price differentials between commodities from other countries. This price responsiveness can allow New Zealand to counteract loss of sales to CGI-sensitive market segments by reducing prices and thus increasing sales in other market segments.

(3) The access of New Zealand goods to global markets.

Associated with the consumer reactions to the release of GMOs in New Zealand, described by the first two factors, is the institutional, regulatory, commercial aspect of access for New Zealand products to particular world markets. In many markets the actions of regulators and gatekeepers - for example, retailers, wholesalers, traders, buyers for supermarket chains and others - can either mirror, amplify or in some ways modify the effective consumer demand.

(4) The opportunities for productivity enhancements.

This factor describes the extent to which GMO releases can improve productivity or open new opportunities in New Zealand industry. If these productivity improvements, leading to cost reductions, occur at historically comparable rates, significant gains to the New Zealand economy can be recorded. In this case though, the achievability of such gains are contingent on New Zealand overcoming quota, regulation and other market-access barriers to expanding New Zealand commodity sales in key markets. On this production side there are potential benefits from a portfolio of GMOs with a range of effects on productivity, product quality and the environment.

The degree of uncertainty surrounding all four elements is considerable. As such, it remains important for New Zealand to manage GMO related activities for the benefit of all New Zealanders. Progressively reducing the degree of this uncertainty over time will be a prerequisite to reaching a conclusive statement on the economic outcome of either a GMO release or a policy foregoing GMO release.

The results of the economic experiments confirm that establishing actual (as opposed to surveyed) purchase response to GMO release is pivotal to determining its impact on the New Zealand economy. Similarly, greater information aimed at confirming the actual (as opposed to asserted) productivity gains from GMO release is the other critical element that is a pre-requisite for a conclusive determination of the economic impact.

------------------ ENDS ----------------------


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