The US FTA issue highlights policy failures in Australian agriculture

The underlying cause of conflict between rural and environmental policy lies in the theoretical pricing system underpinning rural policy. Third party impacts such as pollution, resource depletion, and environmental degradation are not included as input costs in economic models used for rural policy analysis. Modelled input costs are confined to actual physical inputs used in the production process.

The compensation solution espoused by participants in the environmental debate breaks down in reality. The principles of compensation theory require only that compensation is theoretically possible. In the real world losers lose and winners win. Consequently, if government intervenes to correct third party impacts from production processes, then any mal-distribution of income and declining living standards become evidence of policy failure. It also reflects a misallocation of resources and economic inefficiency.

Australian farm policy is the product a complex debate from the third quartile of last century over industry and tariff reform. Of particular note were:

• The Green Paper on Agriculture 1974
• Establishment of the IAC 1974
• Development of a neoclassical synthesis computerized model of the Australian economy
• Emerging low farm income problem
• Agricultural economists favoring rural adjustment over rural reconstruction
• Worldwide move to right wing economic philosophies across Europe, USA, NZ, Australia.

In 1977 the Rural Adjustment Scheme (RAS) replaced Rural Reconstruction. Rural Reconstruction had been about assisting the farm sector to adjust to changes in overseas market conditions. The Rural Adjustment Scheme (RAS) seeks to adjust industry to structural change. RAS includes drought assistance, farm household support and farm build-up finance. Assistance is restricted to the long term viable; long-term “non-viables” are expected to exit the industry. It is a very contentions policy instrument domestically, and is described overseas as a policy of rural depopulation.

Since National Competition Policy legislation was introduced in 1995, RAS has been used to assist industries through the deregulation process. Pork, dairy and sugar are “deregulated” industries that are seriously questioning the relevance of RAS. It is becoming increasingly consistent with social engineering principles

International agricultural trade changed dramatically in 1995 with the ratification of the WTO Agreement on Agriculture (AoA). A rules-based system became the international legal framework for agricultural trade. Australia steadfastly refuses to accept this and maintains support for the 1980s Cairns Group agenda.

WTO provides for bilateral and regional trading agreements between member nations.  Hence WTO AoA Rules become significant for agriculture in bilateral and regional trading arrangements. NAFTA is a good example. The Australian / US bilateral agreement is another.

Times series analysis suggests that the Australian /US bilateral agreement will force a re-think of Australia’s agricultural policy. Consider the following table - and Mexican behavior

Selected % PSE Comparisons

Source: Agricultural Policy in OECD Countries Monitoring and Evaluation 2003; Annex Table 2p.p.44-45.