The US FTA issue highlights policy failures in Australian agriculture

The political rhetoric surrounding the signing of the Australian US bilateral trade agreement brings to mind Joan Robinson’s view of neoclassical economics. Writing in Economic Philosophy back in 1962, she said:

 For the neo-classicals a belief in Free Trade became the very hallmark of an economist: protectionists belonged to the lesser breeds.

Today’s market economics is a neo-classical synthesis and anyone who argues with it is certainly regarded as belonging to “the lesser breeds”.

General equilibrium theory underwrites neoclassical philosophy. Since the 1970s general equilibrium modelling has become the accepted tool for rural policy analysis and for finding solutions to industry dislocation. Efficiency and productivity gains necessary for industry to meet competitive international pricing have become its central tenets.

The ascendancy of theory over reality has now become the major problem for Australian rural policy; and an exploration of the concept of  “competitive efficiency” draws the conclusion that  “lesser mortals” might better understand reality than neoclassical theorists.

“Competitive efficiency” is a theoretical concept accepted professionally as a textbook teaching benchmark for first year economics.  It cannot exist in the real world because of its very restrictive underlying assumptions, the most restrictive assumption being that of pure competition. It assumes a market structure with these characteristics:

• A large number of buyers and sellers none of whom can influence price or output
• Free entry and exit of firms
• Profit maximization
• No government regulation
• Perfect mobility of production factors
• Perfect knowledge

The real world agricultural markets consist of substantial government intervention; unequal distribution of market power; intense government regulation; immobile factors of production and very imperfect knowledge. Competitive efficiency cannot exist in the real world.

Moreover, competitive efficiency has been misunderstood by Australian politicians, academic advisors, bureaucrats, and media commentators and has become a populist concept involving the ability of an agricultural industry to meet some international or border price of a particular commodity.  Border price comparisons, incidentally, show Australian farmers to be very competitive.

Examination of the 2003 OECD Report on Agricultural Policies demonstrates Australia is second only to New Zealand in terms of %PSE which measures total farm support as a percentage of total farm revenue at farm gate value. Furthermore, using the common farmer efficiency measure( NPCp), it can be shown that average farm gate prices for Australian commodities equal the international or border price benchmark. Finally, the ratio of average price paid by consumers at farm gate to farm gate border price ( NPCc) for Australian agriculture suggests that Australian consumers have the cheapest food inputs across the OECD.

Australian farmers, therefore, are border price competitive - but not competitively efficient. They are two different concepts. This confused understanding of competitive efficiency carries important implications for rural policy and sectoral stability

Extended time series data demonstrates the consequences of inappropriate policy.