1. INTRODUCTION: DEPRESSED RURAL INDUSTRIES
Australia's agricultural and other rural industries produce about 5 per cent of GDP and 24 per cent of export income, down from 11 per cent and 60 per cent twenty years ago. The sector generally is efficient by international standards, although some particular industries are not. Markets for most products are and will for some time remain depressed; industries also face high costs, including high interest rates. Land values have suffered accordingly and some farm businesses are facing bankruptcy. Most, however, have quite low debt/equity ratios and will survive.
Reflecting the downturn in rural sector income, and because of the seeming inability of farm organisations and governments to arrest the slide, farmer militancy is increasing. It is possible that an ill-informed fringe may take the initiative from the established and economically responsible leadership, and gather enough political force to make it difficult for the Government to implement policies for continued restructuring.
The Government should not buy off this movement with short-run palliatives in the form of subsidies, price support schemes or other devices to shield farmers from the signals of the market place. Subsidies do not solve "the problem", they only mask the symptoms. The subsidisation of efficient industries is a negative policy because normal adjustment is impeded and the presence of the subsidy reduces overall industry competitiveness by allowing costs to rise. Moreover subsidies of the size required to have a visible impact (that is, achieve favourable political results) would involve heavy and damaging burdens on other taxpayers.
1.1 THE CASE AGAINST THE "SECOND-BEST"
In general, the more open and competitive an economy is, the more efficient it is and the higher the living standards it can provide. If, however, it is assumed to be politically impractical to remove trade barriers, it can be shown theoretically that efficiency and living standards may be superior with uniformly high trade barriers than with widely differing levels of protection for different industries. This is the economists' "second-best" argument and was called on to justify the former policy of the Country Party, which demanded "protection all round". Thus, some low-cost farm industries in the past gained subsidies by pointing to the high levels of protection afforded to manufacturing industry.
"Protection all round" is a poor second-best. It suffers these objections:
- It inevitably causes misallocation of resources within industries because the government cannot ensure that each productive process within each enterprise gets the same level of protection. An example is the tendency of the super bounty to shift wheat production from heavy to light land.
- Heavily-assisted activities within a sector will gain further protection from support available to the whole sector.
- Subsidies granted to economically efficient industries reduce their ability to press for lower protection for inefficient industries. The super bounty is worth only as much to rural industries as a 3 per cent reduction in overall protection, but its existence is used by high cost industries, such as textiles, to discredit calls for lower protection by, for instance, the National Farmers Federation.
- Overt assistance to export industries may breach GATT rules and invites retaliation from foreigners.
Ultimately, "protection all round" reduces the international competitiveness of export industries and so reduces the contribution of those industries to an economy.
Because of the damaging effect of subsidies on the long-term viability |
The importance of this is explained further in the Trade and Industry chapter.
1.2 WHAT GOVERNMENT SHOULD DO FOR RURAL INDUSTRIES
Several aspects of government policy waste the resources of the whole economy, and particularly prejudice producers of traded goods. Because of the export orientation of most primary products, farmers are especially disadvantaged. The wasteful actions of the government include import barriers, wage and pension indexation, a fiscal and exchange rate policy which requires high interest rates, and inefficient statutory monopolies. Reforms recommended in other chapters will incidentally be of substantial benefit to primary producers; here, we particularly discuss the statutory authorities which monopolise marketing of many rural products, and in whose reform short-run farmer interest and long-run farmer, consumer and taxpayer interest coincide.
2. SECTION 92 OF THE CONSTITUTION
Many of the regulations which restrict rural industries are State-based, and most are zealously guarded by influential vested interests. Like all regulated interest groups, these are vulnerable if some people are able to avoid the regulations. This is why protective governments try to build walls around markets. Persons living in other States are a potential source of such competition, as regulation of interstate trade is hampered by Section 92 of the Constitution.
The extent of regulation Section 92 permits is not clear even after eighty years of High Court cases on the subject, many involving primary produce, particularly wheat and dairy products. There would have been more challenges to such regulations if the odds were more even: to mount a major constitutional case is beyond the means of almost all individuals and most small businesses, while statutory marketing authorities have effective taxing powers of their own and ultimate recourse to those of the state. In addition, other governments may intervene in constitutional cases to protect their own legislation. The result is that possibly unconstitutional regulations may survive because no-one affected is rich enough, or brave enough, to risk the cost of an unsuccessful challenge.
The Commonwealth should not itself intervene to protect State |
This policy is so obviously fair and generally applicable that a government is unlikely to face a sustained campaign against it.
3. THE DEPARTMENT OF PRIMARY INDUSTRY
The Department of Primary Industry is an industry-specific department responsible for advising the government only on agricultural and pastoral matters. But agriculture competes with other sectors for manpower, capital and inputs such as transport, services and fuel. Inevitably, decisions taken on the recommendations of the Department affect other sectors and do so in ways unknown to those who make the decisions. As the IAC, OECD and the secretariat of the GATT have often emphasised, industry policy should not discriminate between industries. If all industry policy were within the responsibility of one department, even though much of the information necessary to conduct detailed regulation without untoward side effects would still be unknowable, some of the grosser distortions might be avoided. For instance, those who set tariffs might be encouraged to consider their effect on exporters and those who set wheat and sugar prices might be encouraged to consider the effects of these on the CPI, wages and the ability to match the price of imports.
Ideally, the Department of Primary Industry should be incorporated in a |
The question of super-departments is discussed in the Government and Administration chapter.
4. SPECIFIC RURAL INDUSTRIES
4.1 WOOL
The wool industry is large and efficient. It is not highly regulated. The Australian Wool Corporation (AWC) buys and sells in the open market, trying to smooth price fluctuations.
In the event of a price downturn, the AWC might acquire stocks it could not responsibly finance, causing cost to the industry and disruption to the financial markets. Ultimately, the taxpayer might have to bail the Corporation out, with effects on the Budget. The stocks would continue to depress the market long after it would otherwise have recovered. It appears that the AWC has managed well for the last twelve years, although when full account is taken of the cost of inventory and the opportunity cost of the market support fund, the benefit to woolgrowers is somewhat ambiguous. The evidence of other industries brings a warning: the London Metal Exchange had a similarly successful record in managing the tin market before things went spectacularly wrong in 1985, demonstrating the very high cost of holding supplies off the market when managers guess the future wrongly.
The wool industry differs from wheat and sugar in that the AWC has no acquisition powers and woolgrowers have the benefit of competing marketing and transport arrangements (transport competition is often restricted by State governments). Farmers can hedge against price drops by selling forward. Although there is no clear economic justification for the AWC, it has achieved a position of industry leadership. There are more important things for the Government to do than abolishing the AWC; but it should protect the taxpayers.
The Government should state publicly, in terms from which retreat |
4.2 RED MEAT
Beef, mutton and pork are largely unregulated and as such are efficient contributors to the national economy. Like wool, they would benefit from sound macroeconomic and transport policies.
The principal unnatural handicaps of the industry are excessive killing and processing costs -- including government meat inspection -- and possibly the unnecessarily high cost of shipping. The last issue is discussed in the Transport chapter; here we need only note that a statutory monopoly, the Australian Meat and Livestock Corporation, designates shipping lines and negotiates rates.
That killing costs can be substantially reduced by better industrial practices has been demonstrated at Mudginberri and Wagga. As the reforms proposed in the Labour Market chapter are implemented, similar opportunities to improve efficiency will be taken by management and workers in many other enterprises.
The Commonwealth does not directly control abattoirs but it does control the export meat inspection service.
4.2.1 Meat Inspection
Some markets, including the United States, require Australian meat to be of a standard and to be killed under conditions which accord exactly with standards in the importing country, even though ordinary Australian standards are as high or higher. Such restrictions have less to do with public health than with a desire to maintain import barriers that do not technically infringe GATT and other international trade instruments. The customer is always right, however: we can protest but the matter is out of our control. Export meat is certified by inspectors supplied by the Commonwealth Government but paid for by the abattoir in which they work. An unfortunate consequence of government inspection is that when something goes wrong, as when kangaroo meat was exported as beef, the whole industry is held responsible rather than just the guilty firm.
Meat producers in importing countries dislike competition and look for excuses to disrupt imports, including those from Australia.
Most States do not accept Commonwealth meat inspection and appoint their own inspectors to double-check the carcasses.
Deregulate and privatise Commonwealth meat inspection. |
If importing countries require Australian Government inspection, this should be done by private firms specialising in meat inspection or by State or local government inspection services, with appropriate Commonwealth authorisation, tendering for various contracts. As agents of the Commonwealth, private inspectors would, where these were required, sign government certificates. (It should be no easier to bribe a private firm than a public-service inspector; and it is a good deal easier to cease doing business with one firm than to sack a public servant.)
Abattoirs have been particularly prone to industrial trouble, usually at the height of the killing season. Many have closed because they have become uncompetitive. During the Mudginberri dispute the Hawke Government failed to provide other meat inspectors when two refused to cross a picket line to get to their work. Export markets were lost. Appropriate responses to such industrial action are recommended in the Labour Market chapter.
The Australian Meat and Livestock Corporation has been developing an independent, commercially operated, national, computerised, livestock marketing network -- CALM. It has been funded with compulsory levies. By June 1988 it will have been selling for nearly two years and the industry will have had the opportunity to assess whether CALM represents a cost-effective marketing strategy.
Sell CALM to private enterprise for the best achievable price. Do not |
4.3 WHEAT
Australian wheat accounts for about 13 per cent of world trade. Australian producers cannot have much influence on world prices, however their sales are organised.
The price the grower receives is only about half what a foreign importer pays. Modest proportional reductions in the costs which attach to the grain after it leaves the farmer's direct control will have a very large effect on farm profitability.
The wheat industry is heavily regulated. All foreign and most domestic sales are in the hands of a Federal statutory monopoly, the Australian Wheat Board (AWB). Between farm gate and ship's hold the crop is handled by State-based monopoly bulk handling systems, railways and ports. Many recent studies point to the inefficiency of the handling system. (1) The Bureau of Agricultural Economics (BAE) estimates that savings of at least $10 per tonne can be achieved by reorganising bulk handling, wharves and railways.
Although the handling system is subject to State legislation, a Federal government can help reduce the burden it imposes on farmers. The monopoly position of the State bulk handling systems is preserved by complementary Commonwealth legislation which establishes the AWB and gives it power to acquire the crop and to set prices. In return for the States' giving up their pricing powers, the Wheat Marketing Act stipulates that the AWB must use only "authorised" bulk handling authorities. A necessary step to a more efficient bulk handling and transport system is therefore to remove the AWB's powers of acquisition, and to require it to call tenders on the open market for handling and transport services.
There is no need to abolish the AWB: the benefits of greater efficiency and higher returns from better marketing can be achieved by removing present restrictions which prevent others from offering competitive services.
The Government should legislate to:
|
The effect of this deregulation would be to reward growers, traders and buyers who discover and satisfy demand for variety, quality, and conditions of sale and delivery. It will reward farmers, traders, handlers and carters who establish more economical ways of dealing with the harvested grain. It is particularly important that there should be opportunities to bypass expensive union-dominated waterfront facilities.
If these changes are not made, a further High Court challenge to AWB powers can be expected, especially if the recommendation in section 2 has been implemented.
4.4 SUGAR
European Community, Brazilian and United States policies produced the world "sugar explosion" while consumption declined in developed countries as tastes changed and substitutes became available. Sugar has been particularly severely affected by the international commodity price slump. Its price may never fully recover. Most Australian cane sugar is sold on world markets. Domestic prices have varied but over many years have averaged less than export prices. The IAC has calculated that the industry receives low and often negative effective protection.
The sugar industry is as completely regulated as any in Australia. Little sugar is grown outside Queensland, and the government there licenses sugar farming and milling and influences the sale of sugar farms. The industry's rigid structure has inhibited adjustment to the severe downturn and so exacerbated growers' problems. Deregulation seems essential to ensure that the industry emerges from the slump in a viable condition, able to survive continuing low prices.
The IAC has recommended termination of the import embargo, the introduction of full negotiability and transferability of farm delivery quotas within mill areas, and removal of restrictions placed on land used for growing cane. A Queensland committee of inquiry, the Savage Committee, has substantially endorsed the IAC's recommendations. The necessary legislation is largely the responsibility of the Queensland Government.
Using the lever of price support, the Hawke Government induced the industry and the Queensland Government to deregulate partially. Despite opposition from some elements of the industry and of the Queensland Government, a policy which is more consistent with the efficiency of the industry is in place and embodied in legislation. It must be counted a political success against entrenched opposition. The new Government will have more important things to do than to attempt further improvements.
The Government should continue the present policy, making it very |
4.5 DAIRY PRODUCTS
The dairy industry too is in a bad way as a result of world market conditions and particularly inappropriate Australian regulations. The industry is divided into the manufacturing sector and the so-called "market" or whole milk sector.
For the same product, milk, farmers have received prices as far apart as 11 and 30 cents per litre depending on whether it is destined for manufacturing or market purposes. Milk products were sold below cost on foreign markets, Australian consumers paying over the odds to make this possible.
Australian dairying is a heavily-protected high-cost industry, which has expanded 15 per cent since 1980 in response to an artificial price stimulus. In this it is similar to European Community agriculture.
New dairy industry arrangements, introduced in 1986, provide for:
- abolition of export pooling and "allowances" (allowances pool certain costs);
- stabilisation arrangements which provide relatively equal support for all manufactured products;
- progressive reduction of price support to the level at which deregulated New Zealand dairy products sell competitively, or 85 per cent of the estimated long-run trend; and
- supplementary price support to phase in the new arrangements.
These arrangements remove many of the grosser distortions and reduce the level of protection. They are still likely to provide very high subsidies, reducing to 30 per cent by 1991 from an initial subsidy estimated at 75 per cent of the export price.
The Government should legislate to phase out the supplementary |
4.6 DRIED VINE FRUITS
The dried vine fruit (DVF) industry produces raisins, currants and sultanas. Statutory marketing arrangements levy domestic sales and disburse these revenues over all sales. This taxes Australian consumers to subsidise exports. It has so disguised export prices that vast quantities of fruit have been sold to export markets at a loss.
The industry has not been heavily assisted for much of its recent history, but a sharp decline in export prices in the early 1980s automatically increased assistance to very high levels by 1984. These have since declined with higher world prices.
In 1984, the IAC described the administration of the DVF industry as:
... pervasive, introducing an element of control over all aspects of DVF production and marketing from farm gate to final consumer. However, the arrangements also involve discretionary judgments and, hence, offer scope for individuals and industry organisations to put pressure on the system to have it altered in their favour.
The Hawke Government adopted the IAC recommendations to reduce protection so that, by 1990, growers' returns would be at most 15 per cent above the average export return and domestic sales would be at most $200 per tonne above duty free imports.
The Commission also recommended that DVF marketing procedures be brought within the reach of Section 45 of the Trade Practices Act, and that State Government restrictions on the entry of new packers be removed. This advice is important for the long-run efficiency of handling and marketing.
The Government should continue with the 1985 plan for the Dried Vine A further reference should be given to the IAC as soon as possible The industry should be subject to S.45 of the Trade Practices Act. |
5. FERTILISER BOUNTIES
Farmers are paid $12 per tonne bounty on superphosphate, an equivalent amount on other phosphatic fertilisers, and $20 per tonne of nitrogen on nitrogenous fertilisers.
The super and nitrogen fertiliser bounties should be discontinued. |
Because rock phosphate is carried in Australian flag vessels at higher freight rates than those charged by competing shipping companies superphosphate suffers a price penalty which varies with movements in international shipping freight rates but is of the order of $ 12 per tonne.
The Government should also if possible exclude the carriage of rock phosphate from the provisions of the Navigation Act (see the section on Coastal Shipping in the Transport chapter). If this is too difficult, a bounty of not more than $12 should be paid to Australian shipping companies to enable them to reduce freights to international standards.
The waterfront and seamen's unions may still prevent the carriage of rock by the cheapest means, but this problem should be seen as one that is appropriate to the more general policies presented in the Labour Market chapter.
Most farmers have a natural interest in free trade, deregulation and free competition. They form an important lobby that generally supports economic efficiency. When farmers join the tariff and subsidy rip-off game they weaken their influence and damage their own general interest. When farmers are perceived by themselves and others not to be recipients of government largesse they will become a more effective lobby, balancing the concentrated vested interests which successfully demand tariffs and other barriers to trade. If the community is to accept structural adjustment it is important that everyone shares in the move to a genuinely competitive environment. Abolition of the fertiliser bounties is important in this political sense.
6. DROUGHT AID
Droughts are an inevitable and recurring feature of Australian rural industry. Most farmers balance good and bad times. Government subsidies for drought assistance are substantial transfers of resources to the rural sector. The broad objectives of the assistance are to retain resources in the rural sector and provide welfare relief to farmers. The principal measures are discussed below.
6.1 FODDER SUBSIDY
The purchase price and transport of fodder bought during a drought is subsidised; fodder produced on-farm or purchased before a drought and stored is not, except that the construction costs of storage receive a higher depreciation rate for tax purposes than the life of the asset would ordinarily justify.
6.2 INTEREST RATE SUBSIDY
Concessional carry-on loans and debt interest subsidies are available to farmers who are assessed to be viable and cannot obtain funds from another source. The latter provision is not effective as banks will furnish good customers with letters refusing to lend them money if that is what the customers need.
These subsidies increase the prices of commodities such as hay, livestock and farm land, the supply of which cannot in the short run readily be increased. Moreover, provident farmers are treated less favourably than less provident farmers: drought assistance reduces incentives to provide against drought. The subsidies are loosely if at all related to farmers' immediate standards of living (household consumption). They are an inefficient means of distributing welfare. (2)
An alternative strategy would involve the government in providing information to aid private decision-making and providing direct income grants for welfare support. Most farmers go through droughts without government assistance. There are many strategies farmers can adopt to ease their businesses through the dry season; these include conservative stocking rates and cash and fodder reserves. There is no reason to believe that the deregulated capital markets are not adequate to the task of providing farmers with the opportunity to protect themselves against adverse seasons, although there is no rainfall insurance readily available to farmers.
The Government should announce that from the financial year Instead, it should underwrite, for the first five years, rainfall insurance |
The only conditions should be that the policies must be actuarially sound and based on commercial rates of interest. Financially-sophisticated farmers might prefer to hedge on rainfall futures.
7. CONCLUSION
Perhaps the most notable feature of this chapter of Mandate to Govern is that for many of the industries concerned relatively "tough" policies, which will increase efficiency, have recently been introduced. All the new Government need do in these cases is persist with established policies. What is more, the fact that economically rational policies have already been introduced in some areas answers critics who claim that such policies are not politically "realistic". Reformers should not forget this.
Another point that should not be forgotten is the failure of statutory marketing and handling to serve either farmers' or national interests. Space has not permitted inclusion of recommendations for all rural industries; the Government should as occasion arises introduce analogous reforms in industries we have not mentioned.
ENDNOTES
1. See e.g. D. Hussey, Australian Grain Marketing: achieving lower costs, AIPP, 1986.
2. See the discussion by Freebairn, The Australian Journal of Agricultural Economics, December 1983.
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