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Rural debt and viability

By Ben Rees - posted Wednesday, 17 July 2019

The paper Rural Debt and Viability presented at the recent Rangelands Conference in Brisbane, discusses the failure of agricultural policy and the declining performance of the agricultural sector. Agricultural performance has declined since 1980.

In the mid 1960's the small farm low income problem was recognised in most advanced economies. Australia was slow to react; but, in 1977 agricultural policy direction changed from rural reconstruction to rural adjustment. Under rural adjustment, policy sought to improve farm sector performance through economies of scale increased efficiency; and, rising productivity. The policy objective was to create an internationally competitive rural sector.

The basic policy instrument of rural adjustment has been concessional interest loans to assist merging enterprise achieve long term viable operations. The policy strategy of rural adjustment has been "shipping out" lame ducks whilst rewarding enterprise. The inevitable perverse policy outcome of population decline in rural Australia has never been recognised let alone understood by industry representatives and major political parties.


In 1993, the principle of rural adjustment was extended to embrace drought policy. The political mantra of "on farm risk management" also accompanied revamping of drought policy. The remake of drought policy followed a national drought policy review by the Productivity Commission which recommended only enterprises that contributed to GDP should receive assistance. Less worthy beings were to receive income safety net benefits. No peak rural body or major political party has questioned the flawed economics of the PC recommendation. In calculation of GDP, imputed rent of owner occupied housing is included. Consequently, inclusion of small farmer income both on farm and off farm contributes to calculation of GDP.

Drought assistance based upon rural adjustment was always exposed to a set of circumstances arising which would generate severe policy structured rural dislocation. Those circumstances arose between 1996 and 2013:

  • RBA independent management of monetary policy;1996
  • Millennium Drought; 1997-2009
  • GFC, 2008
  • GFC collapse in rural asset values
  • Current drought 2013

The role of an independent RBA management of monetary policy appears little understood by rural political representatives. An independent central bank, RBA, is a central characteristic of monetarism. Whilst monetarism does not recognise the real sector of an economy, their mathematical model assumes the real sector responds to variables stipulated in their model. Within the mathematical model is a wealth variable (W); and, (h) the ratio of human capital to non-human capital. The longer term improvement of human capital is achieved through education and training whist the wealth variable drives shorter term economic growth. Monetarisms growth strategy comprises expanding the money supply to inflate financial sector asset values faster than real sector prices i.e wages and CPI prices. The asset inflation strategy replaces the need for industry policy. Consequently, income distribution is determined by flexible markets particularly in the labour market

For asset inflation to work, the Commonwealth Government must structure fiscal policy to ensure monetary expansion flows into financial assets. Consequently, taxation incentives encourage financial asset investments. Meanwhile, the RBA maintains the cash rate at a level which manages real sector price of credit, aggregate demand, natural rate of unemployment, and stability of the exchange rate.

Monetarism fails on a number of counts. Under economic theory, one policy instrument (cash rate) should target one variable; but, the RBA targets a number of variables with the cash rate. Consequently, RBA management of monetary policy becomes theoretically flawed resulting in an inefficient allocation of resources, inequitable distribution of income, and declining living standards. More importantly, underlying assumptions of monetarism do not reflect the real world hence applied monetarist policy must fail.


Meanwhile, inflating asset values encourage banks to lend on rising equity values rather than capacity to repay. When the inevitable asset inflation bubble bursts, many borrowers find liabilities exceed deflated asset values. Financial dislocation occurs as banks move to stabilise their asset portfolios. When the GFC arose, the Commonwealth government injected $15 billion dollars into the RMBS market stabilising urban house prices whilst rural assets were left to the market. Hence, the rural financial dislocation that followed the GFC can be explained in unrealistic monetarist assumptions and theories.

A further complication for monetarism is the long established Engels Law. In 1857, Ernst Engel determined empirically that in modern economies as income grows expenditure on food declines proportionately. In 2011, Richard Anker from University Massachusetts, Amhurst, published a research paper "Engel's Law Around the World 150 Years Later" in which he argued that Engel's Law is just as relevant today as the day it was developed in 1857. It applies equally to both domestic and international demand for agricultural products .As Engels Law is a real sector phenomenon, it lies beyond monetarism's wealth variable. In terms of monetarist theory, rural decline is assumed away. Consequently, monetarism has no answers to rural dislocation resulting from economic growth; and, drought.

It is time to look for a new economic philosophy which will return the three arms of economic policy to government i.e. monetary, fiscal and external policy arms. Of particular concern to economic management should be a review of agricultural and drought policy. After 40 years of "shipping 'em out" and "on farm risk preparedness", agricultural policy and drought policy need to be based upon sound economics - not unrealistic assumptions.

What is required.

  • There needs to be a revisit of the 1945 Full Employment White paper principle 7: "The rural industries present a series of problems which the Rural Reconstruction Commission is at present examining. When the Commission's work is complete, the Government will publish a detailed statement of its policy in relation to primary producers in full employment economy, and set out the measures by which it is proposed to improve and stabilize their standards of living."
  • Reindustrialise the regions e.g. biofuel production extended beyond sorghum and sugar industries
  • Establishment of a rural reconstruction authority to rebuild and restructure regional economies damaged by 40 years of rural adjustment.
  • Dam construction to conserve water and support irrigation industries
  • Animal protein processing decentralised to major towns with adequate water
  • International air transport facilities to enable regional industries to tap into both domestic and international markets
  • Recognise rural tourism is not a stand alone solution ; but, part of industrial broadening of regions
  • Regional transport and communications made comparable to urban facilities.
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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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