Tweeten (1992) argues that the relative rate of productivity growth is a key determinant of the international competitiveness of an industry. As a result of the recently negotiated General Agreement on Tariffs and Trade (GATT) and North American Free Trade (NAFTA) deals, the competitiveness of the Canadian dairy industry is, for the first time, of direct concern to producers. In particular, the effect of supply management, or quotas on the amount of fluid milk each producer can sell, is of primary importance. Barichello (1981); Veeman (1982), and Schmitz (1983) each document the static welfare costs of supply controls, but little is known about supply management's impact on productivity growth, and hence competitiveness. Several recent studies compare the competitiveness of Canadian and U.S. dairy production. Barichello and Stennes (1991), Jeffrey (1992), and Price Waterhouse (1992) use measures of financial cost and partial productivity to arrive at conflicting conclusions -Jeffrey, and Barichello and Stennes finding Canadian costs significantly higher than those in the U.S., with Price-Waterhouse concluding that little or no difference exists. Partial productivity measures, such as milk yield per cow, are misleading indicators of competitiveness due to differences in input prices, input usage levels, and herd sizes, among other reasons. Financial cost comparisons are distorted by input subsidies and the capitalization of policy rents into fixed input prices. Furthermore, these studies provide only a static 'snapshot' of the state of competitiveness of the Canadian dairy industry and do not capture the dynamism of genetic and technological change in dairy. This study determines the effect of supply management on investment and total factor productivity growth in the Alberta dairy industry. Treating quota licenses as 'quasi-fixed' inputs in a multi-variate, cost-of-adjustment investment framework, an econometric model of investment demand estimates the effect of introducing quotas on the rate of adjusting all other
Read full abstract