Departments of Agriculture could have an important future in rural policy

It is a positive exercise to engage the public in debate over public sector involvement in the social and economic fabric of society and Dr. Duffield should be given credit for starting the process.

Nonetheless, the content of her article was disappointing. There is no doubt about the need for active Departments of Agriculture in rural communities focussed upon real world policy. That the roles of Departments of Agriculture have changed since the 1970s is not in question. However, it is necessary to understand the underlying forces that brought this about if a sound policy direction is to emerge.

Background:

The current rural policy direction of minimum government involvement in agriculture has its origins in economic philosophy that emerged in the early 1970s. This involved a move away from 20th century interventionist economics of Keynes to a market mechanism approach based upon late 18th. and 19th. century economics comprising Ricardian comparative advantage and Walrasian general equilibrium theory.

Principal architects of the drive towards market economics from the 1970s were Britain and the United States. At the time, it was associated with monetarism and the premise that unregulated markets were superior to regulated ones. Certain basic policy principles pertained (Shone, Issues in Macroeconomics1984):

• Industry policy structured upon market solutions that required the withdrawal of subsidies, market impediments, abolition of government controls, and privatization of public enterprises
• Minimal government involvement in wage determination by the curbing of trade union power and downward revision of unemployment benefits where possible

Over time, center-left and social democratic governments adopted market philosophy. In Australia, it emerged publicly in the latter days of the Whitlam Administration. The 1975 Budget Speech had this to say:

we are no longer operating in the simple Keynesian world in which some reduction in unemployment could, apparently, always be purchased at the cost of some more inflation

The development by Evans in the early 1970s of an acceptable general equilibrium model of the Australian economy was an important factor in its acceptance here. The model was Ricardian in nature and became the antecedent of the Impact Model incorporated into the IAC Impact project to analyze social and economic change in the Australian economy. Anyone currently involved in industry policy would understand the pervasive importance of computable general equilibrium modeling; and its 'one shoe fits all' industry solution of increased efficiency and rising productivity through structural adjustment.

Rural decline in Australia can be explained by Engel's Law which states that as incomes grow expenditure on food grows less than proportionately. In the US eg. expenditure on food has declined as a proportion of disposable income from 22 per cent in 1949 to less than 12 per cent in 1999.

This demonstrates an inelastic demand for agricultural output. In other words, production beyond the equilibrium level between supply and demand will result in disproportionate decline in price. Supply and demand theory combined with Engel's Law therefore explains why rural sectors must decline proportionately over time in mature growing economies. Relative changes in terms of employment and contribution to GDP ratios is simply the expression of this phenomena at work.. In absolute terms however, rural sectors will continue to expand. It is more helpful therefore to explain proportionate rural decline as structural realignment of sectors over time as economies mature and grow. Distribution of income then becomes a major policy issue.

Under the postwar fixed exchange rate system ( Bretton Woods Agreement), rural production was very important for earning foreign exchange to maintain balance of payments stability. Consequently, complex agricultural policy was developed to enhance foreign exchange earnings. Assistance was structured through price support programs, taxation concessions, export subsidies, research and development, public investment in land development and rural infrastructure. From the mid 1960s onwards mining began to contribute increasingly to export earnings reducing the importance of agriculture for balance of payments stability. Finally, floating of the exchange rate in the early 1980s made external balance the province of currency markets and appropriate domestic economic management.

The role of agricultural economists was important also. By the early 1970s, they began to identify the problem of small farm/low farm income emanating from established closer settlement policies. Professional focus turned to reconstruction and adjustment. Not all agricultural economists agreed with the importance of structural adjustment. This group felt productivity could offset the decline in agricultural profitability.