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What's wrong with rural Australia

By Ben Rees - posted Wednesday, 19 March 2003


Over the past three to five years, however, constructive discussion on rural policy appears to have waned and, in the name of empowering rural communities, politicians have effectively fragmented the rural voice and managed dissent by arguing that rural communities know best their own solutions.

The policy position that local communities are responsible for their own destiny carries a number of interesting implications. It would appear that rural policy accepts responsibility only for positive economic outcomes such as deregulated labour markets, competitive exchange rate, low inflation and interest rates, vibrant industries and communities that are growing. Negative economic outcomes affecting industries, communities and regions are not the consequence of policy. They are stand-alone situations determined somehow within communities lacking a sense of "community" and quality local or industry leadership.

Shifting responsibility for perverse policy outcomes back to community level makes individual communities feel somehow to blame for their plight. Consequently, every small community seeks to demonstrate responsibility for its situation by chasing individual solutions such as local tourism, retirement housing; local market days, and some promising industry. Effectively, each community competes against its neighbor to secure its own small portion of any available project or dollar.

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This is an 'enclave theory' of rural renewal based upon a philosophical position.

The1999 Draft Report of the Productivity Commission tells us that the majority of small rural communities continue to grow. Overall, rural population is growing in absolute numbers - but the distribution is shifting, producing such phenomena as sponge cities and coastal drift. Population is declining in the 31 per cent of inland communities based upon grazing, wheat and mining. These towns comprise the service centres for major industries in inland rural Australia and herein lies the policy problem.

Graphical analysis of the monetary value of all farm assistance expressed as a percentage of farm gate revenue (%PSE) in OECD countries from 1997 to 1999 reveals that all member countries except Australia and NZ increased the %PSE. (Australia continued to reduce support from 7 per cnet to 6 per cent while NZ remained constant at 2 per cent). This suggests that OECD member nations considered farm revenue support a more important policy mechanism than empowerment.

Alternative Analytical Framework

Engel's Law states that as income grows, the demand for food grows less than proportionately. This is a Law of pervasive importance in economic growth. - Kindleberger

Its presence can be demonstrated whether considering the behavior of an individual, a nation or several nations, and it explains why as an economy grows and incomes increase, demand increasingly shifts away from food with low-income elasticities of demand e.g. grain and other staple foods. Consequently, the relative price of food declines compared to expenditure on manufactured goods and services. These effects of Engel's Law occur across both domestic and internationally traded goods and services.

In the real world, Engel's Law can help explain the structural realignment of agricultural sectors in economies as they grow over time. An important point is that Engel's Law does not disappear at some given level of economic maturity. It is a continuous process and mature economies such as Europe, America and Australia continue to experience ongoing structural realignment of agricultural sectors in their economies.

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It is important to remember that while agriculture declines relatively in an economy, in absolute terms agricultural output continues to grow. Engel's Law directly challenges market economics and its belief in an international free-trade solution and establishes the case for managed trade. The political agenda that restricts Australian trade-policy debate to a position of either 'fortress Australia' or 'free trade' says more about the quality of politicians and ideology than about the breadth of economic theory.

Conventional supply -and-demand theory explains price determination under market forces through business-cycle activity. There is an optimum price level determined in the market when the level of supply equals the level of demand. From the price elasticity of demand for food implied in Engel's Law, it follows that production beyond the optimum level will see prices decline disproportionately to the increase in output.

Considered together, Engel's Law and conventional supply-and-demand theory mean that rural decline is a problem of structural realignment of a rural sector in a growing mature economy. Engel's law explains why under rising incomes food expenditure falls proportionately in overall expenditure patterns. Structurally, this implies rural production will decline as a proportion of overall aggregate output in a mature economy.

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This is an edited version of a larger paper, available from the New Country Party website.



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About the Author

Ben Rees is both a farmer and a research economist. He has been a contributor to QUT research projects such as Rebuilding Rural Australia. Over the years he has been keynote and guest speaker at national and local rural meetings and conferences. Ben also participated in a 2004 Monash Farm Forum.

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