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

In this paper, we investigate whether deregulation and privatization induce d changes in cost efficiency within the New Zealand wood industry. Unlike p revious work, the effects of privatization, deregulation, and removal of lo g 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 su ffer from the endogeneity problems associated with stochastic frontier prod uction function estimation. The results show that cost efficiency decreased after each policy reform, but deregulation was more important in this rega rd than privatization. This suggests that countries with comparative advant ages in wood processing, who also implement deregulation or privatization, may suffer through a short-run period of lower efficiency as the economy ad justs to higher input costs in those sectors. In New Zealand's case, the ad justments most likely affecting efficiency have been investments in new tec hnologies, 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.