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.

The following extract is from a 1979 address by the Director of the BAE (now ABARE) and reflects dangers inherent in prophecies by agricultural bureaucrats. There are too many unknowns not the least of which is the international marketing environment.

Farm policies during the 1970s shifted noticeably in the direction of promoting productivity, adjustment and economic progress. The 1980s offer the opportunity to consolidate, reinforce and advance those policies. If this opportunity is grasped, the 1990s will welcome a continuing strong and prosperous rural sector.

The 1990s proved very different from the expectations of this respected senior public servant.

Comment:

Dr. Duffield's five bases for change in the role of Departments of Agriculture merit some discussion:

• Total value of food and fibre industries has grown because of the strong growth in value adding post farm gate.

Value adding was a policy priority for all major political parties and supported by the agro-political movement during the 1980s and 90s. It was supposed to reduce Australian primary industry dependence upon selling unprocessed product on international markets and therefore deliver better farm gate prices. While down line employment has been generated by this policy, it has not delivered on farm gate prices. Processors base farm gate prices on competitive international trade and the levels of demand for particular products not political wishful thinking.

• Rural communities in terms of numbers living there have declined and now have more sources of economic wellbeing

The Productivity Commission in its Draft Report found that only 31 per cent of towns surveyed were in decline. They were mainly inland service towns associated with dryland grazing, grain industries and mining. Therein lies the policy issue.

The Draft Report was based upon the 1996 Census. More recent data available in the Queensland Year Book 2001 demonstrates that over the latter 1990s the trend continues. Tourism has not solved the problem for grazing, mining and dryland farming towns experiencing population decline. For example, the Central West statistical division of Queensland continues to decline despite embracing tourism enthusiastically, with the Stockmans Hall of Fame (Longreach), Blackall Wool Scour, Workers' Heritage Centre (Barcaldine) and the Waltzing Matilda Centre (Winton). This should come as no surprise. Tourism is a low income industry considered overseas a repository of the working poor. Such industries will not stem the population flow particularly of the young and talented from inland towns.

• Five percent of Australians are employed in primary industries which produce less than three percent of GDP.

This microeconomic perspective is typical of a wider community view cultivated in the media to rationalize Australian rural policy direction. Overseas, a macroeconomic perspective underwrites rural policy. The United States views rural America as an integral part of a total food and fibre industry. Research has been undertaken to identify the overall importance to the economy of a stable domestic supply chain for the food and fibre industry. The fact that agriculture accounts for less than 1 per cent of GDP in the US is not an issue because research reveals that it underwrites 16 per cent of GDP and contributes directly and indirectly to 17 per cent of total employment.

We should ask ourselves where is similar work on the Australian situation? Departments of Agriculture should have a vested interest in this area of research.

• Primary industries have a poor image among some members of the public particularly in urban communities.

Unfortunately, this is very true. A lot of the anti-rural sentiment is politically motivated by highly organized market "theologists" and single issue urban groups seeking to influence the political process. What does not seem to be understood by agro-politics and Departments of Agriculture is that political objectives of these groups lie beyond market achievement. Legislative change through the political process by agitation becomes their alternative to market solutions. They can be countered only by active educational programs into urban homes by a more highly organized and professionally skilled agro-political movement. The support role of Departments of Agriculture could be vital in providing professional input for this purpose (a possible example of the 'honest broker' role?)

• National Competition Policy and the increasing shift from government supported 'agrarian socialism' means it is no longer acceptable to support publicly individual landowners in Australia.

National Competition policy was the logical outcome of economic orthodoxy. It has institutionalized by legislation the microeconomic reform agenda of the market 'theologists'. A change in community tolerance to Australia's economic orthodoxy could quickly moderate Competition Policy legislation. In the US, farmers are given limited exemption from anti-trust legislation under the Capper-Volstead Act because unequal distribution of market power between farmers and the agro-business sector is understood; and, considered detrimental to fair farm gate pricing.

Australia's support of agriculture has fallen from 0.8 per cent of GDP in 1986-87 to 0.3 per cent in 2001. Comparative EU figures are: 3.1 per cent in 86-87 to 1.7 per cent in 2001. The US is 1.4 per cent in 86-87 to 0.9 per cent in 2001. It is always interesting to read public servants and university academics - whose salaries and departments are fully funded by Australian taxpayers - pointing to the evils of supporting other important sectors of the economy. Try making the same GDP percentage comparisons for the bureaucracy and the political nature of this thinking becomes exposed.

The role of Departments of Agriculture have certainly changed. Changes that have been wrought on Australian institutions have been driven by political economics in the name of reform agendas. A lot of this change has failed to deliver promised outcomes. Projecting future roles for public service departments therefore becomes more speculative than logical. Alterations to the underlying political philosophies could change the current direction of agricultural policy and the role of Departments of Agriculture.

Meanwhile a fruitful direction for Departments of Agriculture would be to research agricultural policy in other mature economies and seek to coordinate Australian farm policy with their findings. Our "holier than thou" attitude to market driven agricultural policy is out of step internationally and it is us who need to change.