National Affairs: Manufacturers, farmers: a natural allianceby Colin TeeseNews Weekly
, September 23, 2000
Colin Teese, formerly Deputy Secretary of the Department of Trade, delivered this address last month at a public meeting in Swan Hill, Victoria.
he problems facing country people are — in essence — no different from those facing city-dwelling Australians. It is only when we come to specifics that we identify real differences. That is natural enough, since farmers grow things and city people make them. Or, at least, once they did.
My unabashed aim is to draw city and country people closer together. If I succeed, and the two groups can speak with one voice about the problems confronting them, then that voice will be all the more compelling.
There has been no such unity in the past. Indeed, it has been the purpose of some to set city and country folk against each other. I should add, further, that this has been done with the worst of all possible intentions. But more of that later.
Our existing problems arise from a failure of both economics and government. We, as individuals, are, at most, only indirectly responsible for the failure of economics. We do, however, bear much of the responsibility for the failure of government.
There have been times when government and economics proceeded in harmony — and from entirely different assumptions to now.
In politics, the terms left and right still meant something. And certainly, they served the political purpose. One could identify clear differences between the Labor Party and the Conservatives.
Curiously, the parties’ themselves were not keen to underline the differences. Labor downplayed its commitment to socialism; the other side pretended not to be conservative.
But as the party faithful- — and the voters — knew quite well, and appreciated, what the respective sides stood for.
Labor stood up for worker interests. On the other side there existed, at least federally, a Coalition. The Liberal Party helped advance the interests of business large and small. And there was no doubting that the Country Party served the interests of farmers and rural communities. The conservative side of politics also had a noticeably different social agenda.
I’m generalising, of course. Certainly, neither the Labor nor Liberal parties would accept my definitions of their respective roles. Perhaps neither would the Country Party after it went National.
And there was, in the post-War period, an ideological divide between Labor and Conservative, which sometimes served to blur the traditional distinctions.
But mostly the system worked. The right balance was struck between the interests of competing groups. It wasn’t perfect, but we did manage to create and maintain a thoroughly workable society, one that acknowledged the capacity of enterprise to flourish alongside social justice.
Economics was different too. Australians readily accepted that we were part of a wider world. Within that world the domestic political consensus aligned us with what was called the Western Alliance (a grouping that was both economic and political in nature).
In essence, we opted to be part of the group which absolutely, and rightly, rejected communism. We backed a capitalist form of economic organisation. We conceded market forces a major role.
Yet we managed to place market forces in a proper context. We recognised the value of business and enterprise as the engine of production. We knew it would largely determine the extent of our future prosperity.
But we also acknowledged a role for government. Not merely to facilitate free enterprise, but to ensure that nobody was left behind when it came to distributing the fruits of our economic gains.
Importantly, our economic and social policies were shaped by and for the benefit of Australians.
We also acknowledged the kind of country Australia was physically, and recognised how, realistically, we should relate to the world as it was. Not as we would wish it to be.
External realities have not changed. Neither could they be changed. And it had to be confronted.
Our prosperity rested heavily on exports of farm products. Apart from wool, which sold itself, exporters of farm products could not stand alone against the world. More so than ever was this so after the collapse of the preference arrangement our exports enjoyed with Britain, when that country joined what was then the European Economic Community.
Long before that there had been a recognition that Australia was a large and conspicuously prosperous continent siting on the edge of a vast population mass of poor countries to our near north.
After World War II, many of these countries began emerging from a colonial past. There was bipartisan political agreement to a commitment to increasing Australia’s population — importantly for defence reasons, and what today would be regarded as a racist slogan: “populate or perish”.
Population was also considered to be important to Australia’s growth. In what was to be a change in emphasis, future prosperity would depend as much on industrial development as it had previously relied on farm exports.
The future need would be for more capital and labour resources. Both would have to come from overseas.
As a legacy of the Depression — which hit city and country alike — there was also a bipartisan commitment to full employment. When the Menzies Government in 1958 created the Reserve Bank, one of its obligations was to maintain full employment. (Ironically, the Reserve still has that obligation, though it chooses to ignore it.)
Rapid population increase was only possible through immigration. Combining large-scale immigration with full employment confronted government with an immediate policy problem. Jobs had to be created for a huge intake of low-skilled migrants. Our commitment to full employment and social equality demanded that they have well-paid and permanent jobs.
Foreign investment capital was essential to making this policy work. The new industries had to provide reliable and living wages to the workforce and a return to the shareholder. To meet these obligations, the industries would have to be protected from import competition.
Thus industry and labor policy came together and became the basis of Australia’s post-War development and prosperity. It wasn’t so much that the political consensus of the time gathered around an interventionist form of capitalism, but rather that one was forced upon us by a combination of circumstances and policy.
There was a focus on manufacturing industry in the new push for development. There had to be. How else could a new labour force be employed?
But the farm sector remained as important as ever, feeding the growing population and leading the export drive.
Increasingly, though, agricultural producers confronted the problem of a cost/price squeeze. Farmer returns for their exports never seemed to keep pace with the prices they had to pay for their imputs.
There was nothing new in any of this. It had been true of farm exports for all of the 20th Century — though the benefits of British preferences and the capacity of farmers to absorb the additional costs in the early days, managed to conceal it.
Cost-price pressures on farmers are not always understood. They arise from one simple fact: competition.
Farm production consists of mostly large numbers of small producers selling an undifferentiated product to a relatively small number of buyers. Sheer competitive pressures push down prices.Response
The individual farmer’s response — logical enough in isolation — is to produce more to maintain income. Overall, the result is to further depress prices.
None of these circumstances apply to sellers of farmers’ imports of manufactured goods. By contrast with farm output, manufactures are differentiated products supplied by few large producers. The same competitive pressures don’t apply.
In this difference lies the true explanation of why farmers- — more so those heavily dependent on exports — are permanently condemned to the cost/price squeeze.
Australian governments have long been aware of this difficulty for farmers. Indeed, concern over it led to the creation of marketing boards before World War II.
Behind the idea of the boards was the desire to protect the individual farmers from their own vulnerability as price takers, and from the concentrated buying power of their customers. Such a board takes up all the output of a particular product, and takes responsibility for exporting it on their behalf. Necessity actually drove government intervention a step further in the case of some products. Wheat provides a convenient example.
Returns to farmers could be further enhanced if the marketing board took over the selling of all wheat — domestic and export. Assuming, of course, the board could control the price of wheat sold on the domestic market.
Importantly, this control enabled it to draw from a prosperous domestic market a differentiated, and higher, price for wheat sold domestically.
It should be acknowledged that control over the domestic price could only be achieved so long as the Government was willing to restrict imports.
Now translate this picture to the most vulnerable farm export industries in the post-War Australian economy, and you have something many farm industry organisations either don’t understand or refused to accept — orderly marketing arrangements were the flip-side of manufacturing industry protection.
You also have a glimpse of a delicately achieved balance of advantages which enabled our general level of prosperity to build up during that era.
Unfortunately, there were those both in the city and country who, for a variety of reasons, were determined to disturb this delicate balance.
Farmers were told that industry protection came out of the hides of farmers and represented a permanent cost burden on them. Indeed, this was the cause of the cost/price squeeze. If that burden were lifted, then farmers would be more internationally competitive.
It was a seductive argument, though sustained by no more than a grain of truth — as farmers now know.
Cost/price pressures remain. The removal of industry protection has given farmers no more competitive advantage than they enjoyed before. Not that costs were ever the real impediment to the growth of farm exports. Access to most markets was, and continues to be restricted worldwide. It’s simply no help to be cheaper.
In the European Union, for example (and it is the same in some other markets), the more we lower prices the higher they raise the frontier barriers.
And demonising manufacturing industry protection overlooked a critical factor. Our two-price system — which helped farmers improve overall returns — could only be sustained while city workers retained well-paid jobs.
Farmer prosperity, and the capacity to export farm products, depended upon full employment and a protected manufacturing sector. This was more so in Australia than in any other country, for the following reasons.
- Unlike most of our competitors, Australia exports most of its farm output. Competitor countries sell most of theirs on their respective domestic markets. The percentage is about 80/20.
- Subsidies provide about half of farm incomes in the European Union; about a quarter in the USA; about 20 per cent in Canada. By comparison, only about eight per cent of Australian farmers’ incomes is provided by subsidy.
- Even if our Government were disposed to support farmers to the same extent as our competitors — which it is not — we could not afford it. Our competitors can do so because a relatively small part of their total output is exported.
- In the EU, imports are kept out, and consumers support farm incomes by paying heavily inflated prices for local produce. Its surpluses are dumped on world markets.
- In the USA, the taxpayer pays rather than the consumer. That’s possible because agriculture, while huge by our standards, is small by comparison with the rest of the American economy.
What we were doing was the best possible solution for Australia. But it depended upon a combination of taxpayer support and consumers willing and able to pay more for Australian grown farm products in order to help maintain farmers’ returns.
In more recent times, there was a sea change in attitudes and politicians and their farm industry advisers began to induce farmers to believe that they would be better off with manufacturing protection dismantled.
Free trade, farmers were told, would help us all — but especially farmers — when it was tied to a package which promised liberalisation of trade in agricultural products through the World Trade Organisation.
This, as we now know, never happened. Further reductions in protection by subsequent governments of both political persuasions have worsened the problems.
Reducing industry protection immediately increased import competition and unemployment levels. It also affected the structure of the budget.
Lower tariffs meant smaller revenue collections. And the newly created pool of unemployed became welfare recipients instead of taxpayers.
Consequently, pressure on the Budget led to expenditure cuts which, among other things, affected programs for farmers.
The sustained surge in manufactured imports, over time, has almost demolished Australia’s manufacturing industry. And the deficit on manufactured trade is of such size that we are confronted with a current account deficit of unmanageable proportions.
And further, the WTO had made no progress in dismantling agricultural protection. National Party leaders and many lesser politicians, faithful to the new orthodoxy, nevertheless support the extension of free trade to the farm sector.
It’s called deregulation, and its linked to an ideologically-driven attitude to so-called competition policy. Thanks to this policy, farmers should look forward to not only continuing tough problems in overseas markets, but to a less certain future at home.
Let us hope that the end of agricultural protection does not follow the example of manufacturing industry. Twenty years ago, our manufacturing output as a percentage of GDP was only slightly below the OECD average. Now we are 30 per cent below it.
A similar decline in agricultural output would put even greater pressure on our already disastrous current account.
So what is to be done? In economic terms, the answer is easy: we need first to raise the level of manufacturing output to the OECD average. Get everyone employed again and reconstruct the revenue base. We need to reverse the deregulation process that is beginning to overtake agriculture.
But don’t expect any of this to happen while both sides of politics are locked into policies with the opposite intent. Why are they so committed?
The reasons are many and complicated. They are linked to the push for so-called free trade. Those really pushing the free trade barrow are interested not in competition, better deals for consumers, or any of the other stated reasons. They are mostly big businesses in North America and Europe. Their interest is in maintaining their dominance of world manufacturing in all the major industries, and in freezing out new competitors.
They want to manufacture where they wish and sell anywhere in the world. To do this they need open economies where border controls, and other impediments, are beyond the control of governments.
They have deep pockets. They pour money into political parties supporting their views and withhold it from others. They scare political parties. Those who believe their support base of voters is secure do their bidding. They support free trade and globalisation.
Through this process, country people have been disenfranchised. The same is also true of manufacturers, who are mostly small and medium-sized businessmen.
The problem is that Labor won’t listen to farmers because farmers don’t vote for them. The Coalition ignores farmers because they do.
Such expectations must be changed. This involves separating political preferences from self-interests. For rural voters it means deserting the Coalition . It isn’t enough to vote for Independents — even if they can be trusted to hold the line. All they can do is block legislation. It means voting for Labor — at least for one election. Labor won’t do anything for farmers, but it is the only hope for bringing the National Party around.
If farmers and manufacturers got together, economic policy could possible be turned around.