What's wrong with rural Australia

Supply-and-demand theory explains the volatility of the price over a trade/business cycle. Supply and demand theory also explains the oscillations of the terms-of-trade curve around the long-term trend curve at any given moment in time

Market economic theory with its emphasis upon increased efficiency and rising productivity cannot solve the long-term decline in real farm prices. Continued adherence to market theory is more likely to reinforce trade-cycle momentum than produce desired stability. Indeed, in time of international oversupply, increasing efficiency and rising productivity will have the perverse policy effect of exacerbating the oversupply problem and exert increasing downward pressure upon already inadequate prices.

The solution lies in management of structural realignment and not in increasing production.

Political Economics

Political economics would identify the Australian economy as a competitive capitalist system. All the major political parties easily meet the characteristics of contemporary conservatism. They all philosophically support low taxation, small government, free international trade, competition policy in some form and 'empowerment of rural communities' regional development strategies.

Party policy positions differ only in degree and rhetoric. In other words, their political orders are remarkably similar while their economic orders differ only at the margins.
Specific policy issues of rural income distribution, drought policies and regional development comply with the central tenets of contemporary conservatism and competitive capitalism.

The Universal Solution: Regional Development

The Productivity Commission Draft Report (May 1999) identified rural towns in decline as primarily support-centers for dryland grazing, wheat and mining industries. These major rural industries comprise broadacre agriculture accounting for approximately 60 per cent of gross value of agricultural output. In these towns, protracted commodity price dislocation and volatility has undermined income stability, saving, investment, industry confidence, regional development and stability.

Recently, commodity prices have recovered somewhat but, over time, purchasing power of commodity prices remains below real price movements in the wider community. Given the cyclical nature of commodity prices, it is uncertain how long the current relief will remain

Rural and regional development through infrastructure expenditure has become the solution slogan for politicians and market economists to address these underlying rural problems. Rural and regional development, however, implies establishment of new industries to rebuild declining towns or regions. Infrastructure by itself is only one aspect of the underlying problem.

Moreover, to attract industries to new locations, certain characteristics are required - a core population base necessary to deliver services, capacity to service markets and a skilled workforce. Competitive business does not welcome unnecessary hardships when selecting a new location. It is more likely to select towns offering established service centers and required work skills.

The rural workforce is poorly educated relative to urban workers where 15 per cent of breadwinners hold a university degree at pass or higher level compared to 8 per cent in rural areas (Productivity Commission Draft Report). Moreover, and according to the National Farmers' Federation, only 25 per cent of Australia's farm workforce have completed secondary school or hold a trade or tertiary qualification. The figure for New Zealand is 50 per cent and Europe 90 per cent.

Real-world industries looking to relocate are more likely to seek out vibrant and viable towns possessing the necessary attributes. While it is fine to include tourism and retirement industries in a balanced development program, over reliance on these low-income industries could prove self-defeating. Low-income, aged communities characterised by entrenched poverty traps are unlikely to attract modern expanding industries. Older type industries seeking low-wage workers to survive will transfer their own problems to debilitated towns.

What Needs to be Done

Economics is about choice - and market economics concentrating on efficiency and microeconomic reform is only one option. Solutions are available but they lie beyond narrow market theories and embrace income distribution, sustainable economic growth, full employment, rising standards of living and equality of opportunity. Solutions must be two-tiered: short term and long term. And the overall policy objective of rural and regional development must be broken into two major economic targets: stemming the disproportionate flow of GVFP to the wider community; and reality-based regional development for declining broadacre service towns

Development of a comprehensive regional development strategy will require a "sea change" from the popular empowerment thesis.

Political economics tells us that no directional change in rural policy will be possible without change in the established Australian political and economic orders. This will require a strong rural voice in the political process and the development of a third way for Australia, lying somewhere between competitive capitalism and over-zealous modern liberalism. Without a directional change in rural policy, substantive rural renewal will not take place. Established commodity price volatility will continue to undermine income stability, saving and investment patterns, industry confidence and regional stability and development.