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Drought

John Freebairn

Professor and Head of the Department of Economics, The University of Melbourne, Parkville, Victoria.

Droughts are a natural and regular characteristic for Australian agriculture and other climate sensitive industries.  Australia should, and most businesses do, invest their scarce labour and capital in agriculture only if on average they expect to earn as much here as they would in other parts of the economy.  Most families recognise and plan to balance low incomes of drought periods with higher returns received in better seasons to maintain living standards.  Drought assistance is another form of selective industry subsidy, just like tariffs and quotas.  Worse, the history of Australian drought assistance reveals that some farmers are advantaged at the expense of other framers.  Inevitably droughts result in some farm families, and perhaps more so other rural families and some in urban areas, being forced into poverty.  Social security system support targeted on family incomes is a more direct and effective way of meeting society equity concerns than is drought assistance.

Australian agriculture is a game of uncertainty with fluctuating fortunes in seasonal conditions and commodity prices.  While our ability to predict the timing and duration of drought is still limited, we know for sure that they will occur, and that in time rain will restore periods of favourable conditions.  Drought causes losses of production, challenges maintenance of the capital stock, and it may threaten the environment.  The adverse effects of drought are often worse for non-farm rural businesses and even for urban businesses and their employees providing agriculture with machinery, transport, materials and services, than drought is for farmers.

As a nation, and as individual businesses, we should allocate our limited and scarce labour and capital to wheat growing, sheep grazing, horticulture and other rural activities only if we expect to earn over time as much here as we would by investing in tourism, manufacturing, education, and so on.  Good economic management for the economy and good business decision making recognises the ups and downs of the business environment.

Calls for drought assistance are really a call for selective subsidies to a particular industry, or particular components of an industry.  Government subsidies for fodder, for transport, for concessional interest rates on credit, and direct grants to farmers in drought declared areas are no different to tariffs on motor vehicles, subsidies for first home buyers, restrictions on taxi plates, and quotas on domestic content on television.  Drought assistance increases the return to agriculture above market returns.  Such subsidisation causes over the longer run too much labour, capital and other scarce resources to be drawn into agriculture away from other parts of the economy.  Australia's world class economic growth over recent decades has been achieved in part by removing selective industry assistance.  Drought assistance would be a retrograde move for a productive economy.

Further, the selective nature of drought assistance as practiced in Australia has adverse effects on other efficient farmers.  For example, a part of the subsidy for fodder for drought affected extensive sheep and cattle gazing is borne by higher prices for feed used by dairy, pig and poultry farmers.  Concessional interest rates for farmers in debt quickly become capitalised in higher land values than otherwise, and these higher land values tend to hold-up and defer the transfer of land from those who do not prepare for drought to those who do.  Again, why self prepare for drought if you know the government will provide some assistance.