Adjustment Pressures on the Agricultural Sector of an Open Economy: The Australian Situation

Abstract

The Australian economy has undergone substantial compositional changes since the early 1960s. The relative position of agriculture has declined following the more rapid growth rates of other sectors, especially mining. The uneven growth rate between sectors has led inexorably to adjustment pressures emerging on the slower growing sectors and on the slower growing industries within sectors. The agricultural output mix has changed markedly. Value shares of output and exports represented by wool, fruits, and dairy products have declined, while those represented by beef and wheat have increased. Numerous factors have contributed in recent years to the adjustment pressures facing the agricultural sector and its constituent industries. These include changes in international trading conditions, the mining boom of the late 1960s, real wage increases in excess of productivity gains in the domestic economy, and increased protection from imports afforded key manufacturing industries. From the late 1960s to the mid-1970s, world prices for textiles, footwear, and other manufactured products fell relative to the prices of agricultural and mineral products and processed and unprocessed energy products. The Australian economy as a whole benefited from these changes, though adjustment pressures emerged in certain sectors (Freebairn). In particular, export and export related industries expanded at the expense of industries competing with imports which experienced the largest relative price declines. On the debit side, restrictions on the access of Australian products to overseas markets, particularly the EC, have severely curtailed a number of rural industries. Unprocessed mineral export earnings jumped from A$64 million in 1962/63 to A$1,753 million in 1974/75. The effects on the balance of payments and subsequently the exchange rate, standard of living, and industrial structure have been the subject of several recent studies (Dixon, Parmenter, and Sutton; and Gregory). The basic mechanism involves a lowering of the domestic price of traded relative to nontraded goods either by revaluation of the Australian dollar or by a higher local inflation rate. Real wage costs net of productivity gains increased at an annual rate of over 3 percent for the period 1968 to 1975. In addition, despite a 25 percent across the board tariff cut in 1973, substantial increases in protection, primarily by way of import quotas, have since been. granted to key domestic industries. The competitive position of the export oriented agricultural sector is especially vulnerable to increases in domestic production costs. Our paper investigates the medium term impact on the Australian agricultural sector of two of the previously mentioned adjustment pressures: (1) changes in international demands for and supplies of agricultural and other commodities of importance to Australian trade; and (2) a further expansion of Australian mining activity. It then explores the effectiveness of reducing tariffs on import competing industries as a means of dissipating adjustment pressures on agriculture arising from the combined effect of (1) and (2).