Andrew Leigh

The latest lineup of links that have caught my eye.

• Do your genes affect how you vote?


• How should we measure the benefits of broadband?


• How anti-science views have migrated from far-left to far-right


• Estimating the cost of the US war on drugs


• A review of Ed Glaeser's magisterial new book on cities


• Who is (more) rational?


• How a group of young Serbs have helped ferment democratic revolutions worldwide (thanks to Tony Shields for the tip)


• How do random events affect election outcomes?


• Paul Krugman on deficit reduction


• What determines aid effectiveness?


• Which schools do teachers want to work at?

Canberrans have responded strongly to Federal Member for Fraser Andrew Leigh’s call to ‘dob in a Black Spot’. Since nominations were called two weeks ago, 21 intersections or corners have been nominated as potentially dangerous locations.

 Andrew Leigh, Chair of the ACT Black Spots Consultative Panel, said the response highlighted that importance of road safety to Canberrans.

“By working with the community we can ensure this program continues to make our roads safer,” said Andrew Leigh.

“Canberrans drive their local streets every day, and the number of nominations shows the interest we take in road safety.

“The nominations will now be assessed to ensure they meet the criteria set out by the Federal Black Spots Program before being considered by the panel.

“The federal Black Spots program sets a high bar. To receive funding, a project must have community benefits that are at least twice the cost of construction,” concluded Andrew Leigh.

Since 2007 the Federal Labor Government has allocated over $4.6 million to over 34 black spots across the ACT.

 

My AFR op-ed today is on carbon pricing, and the Liberals' volte-face on market mechanisms.

Liberate the True Liberals, Australian Financial Review, 1 March 2011

In 1989, when US President George HW Bush proposed the use of market-based mechanisms to deal with acid rain, electricity generators warned that costs would skyrocket. Today, the program is universally regarded as a success, achieving its emissions targets at around one-third of the projected costs.

Why are market-based mechanisms so much cheaper at cutting pollution? In the case of acid rain, researchers found that firms used a variety of approaches to reduce emissions. Some retrofitted emissions control equipment. A number switched to cleaner fuels. Others retired their dirtiest generators. Because each firm took the lowest-cost approach to abatement, the social cost was minimised.

For environmental economists, this result merely reaffirmed theoretical work going back to Arthur Pigou in the 1930s and Ronald Coase in the 1960s. By the time Coalition climate change spokesman Greg Hunt won a prize for his 1990 university thesis on ‘A tax to make the polluter pay’, the economic theory was widely recognised. Hunt pointed out that ‘An attraction of a pollution tax regime is that it produces a strong incentive for firms to engage in research and development’. For consumers, ‘goods which do not generate [pollution] in their production will become relatively cheaper and therefore more attractive’.

Discussing the politics surrounding pollution taxes, Hunt argued out that ‘a pollution tax is both desirable, and, in some form, is inevitable’, but acknowledged ‘even if some of the Liberal’s [sic] constituents do respond negatively, a pollution tax does need to be introduced to properly serve the public interest’.

The purpose of quoting Hunt’s thesis is not to play some form of ‘gotcha’ game, but because it represents the view that most small-L liberals have held for decades. The UK Conservatives are proud champions of their nation’s emissions trading scheme. As recently as 2007, the Liberal Party of Australia’s election platform promised: ‘To reduce domestic emissions at least economic cost, we will establish a world-class domestic emissions trading scheme in Australia (planned to commence in 2011).’

To provide certainty, the Gillard Government proposes to start with a carbon price (in which the market determines the quantity of pollution), before transitioning to a fully flexible emissions trading scheme (in which the market determines the carbon price). Both have the advantage that they allow millions of households and businesses to find the most cost-effective way to reduce carbon pollution. For the first time, it also becomes profitable for entrepreneurs to find ways to reduce carbon emissions.

Because the arguments for harnessing markets to cut carbon pollution are essentially the arguments for free markets themselves, the opposition to emissions trading has historically come mostly from the left of the political spectrum. Yet today, we have the odd spectacle of a supposedly market-friendly party advocating a climate change policy that looks awfully like command-and-control. If you think that we can cut smoking rates more effectively by subsidising celery sticks than by taxing cigarettes, you’ll love Tony Abbott’s Direct Action plan. On one estimate, the only way the Coalition can meet its own emissions target is by spending many billions buying permits from other nations.

Among many in the Coalition, a commitment to markets is frighteningly fragile. Sitting in House of Representatives these days, I sometimes feel as though I’ve passed into a parallel universe in which Labor is the only true defender of free market economics. In recent months, Coalition MPs Michael McCormack, Ken O’Dowd and Karen Andrews have called for protectionism for agriculture, fishing and surfboards respectively. George Christensen believes income taxes – one of the government’s most efficient sources of revenue – should be abolished.

One of the essential lessons from first year economics is that the best way of addressing a negative externality is to put a price on it. But getting the design right will be critical. For households, we need to craft an appropriate assistance package. For businesses, it will be vital to ensure that emissions-intensive trade exposed industries can remain competitive. And for energy generators, it will be important to provide certainty as they go about transforming themselves into cleaner producers.

As it deals with these issues, the Multi-Party Climate Change Committee could doubtless benefit from the ideas and experience of many in the Coalition – if only they were allowed to participate. Let’s hope Mr Abbott takes the chance to constrain his conservatives and liberate his liberals.

Andrew Leigh is the federal member for Fraser.

I moved a motion today on randomised trials:

DR LEIGH: To move—That this house:

(1) reaffirms this Government’s commitment to evidence-based policy making;

(2) notes that:

(a) the Productivity Commission has highlighted the importance of rigorous evaluation in assessing the impact of social, educational, employment and economic programs; and

(b) randomised policy trials are increasingly being used as an evaluation tool in developed and developing nations; and

(3) supports measures to increase the quality of evaluations, and calls on the Government to consider whether randomised policy trials may be implemented to evaluate future Government policies.

Here's what I had to say:

Evidence-Based Policy – Private Members’ Motion
28 February 2011

No government has been more committed to evidence-based policy than ours. In areas from water reform to climate change, from foreign aid to schools reform, activity-based health funding to fiscal stimulus, Labor has drawn on the best knowledge of experts in the field. What drives those of us on this side of the House is not a love of particular programs, but a hope that our time in public life will help leave Australia more prosperous and more tolerant, with a cleaner environment and jobs for the future.

To achieve these goals, we need to keep finding better ways to evaluate our policies. As a former economics professor, I can assure the house that this is particularly hard in the case of social policies. Unlike scientific experiments, evaluations of social policies are particularly tricky. We don’t always get the right answer from simple before/after evaluations, nor from comparisons of those who opted in with those who opted out.

A great advantage of randomised trials is that participants are allocated to the treatment or control group by the toss of a coin. The beauty of randomisation is that, with a sufficiently large sample, the two groups are very likely to be identical, both on observable characteristics and on unobservable characteristics. The only difference between the treatment and control groups is the intervention itself. So if we observe statistically significant differences between the two groups, we can be sure that they are due to the treatment and not to some other confounding factor.

In Australia, our farmers have used randomised evaluations for over a century, and our medical researchers have used randomised evaluations for over half a century. Yet social policy random evaluations are much rarer.

One exception is the New South Wales Drug Court trial, conducted in 1999–2000. Offenders were referred to the Drug Court from local or district courts, underwent a detoxification program and were then dealt with by the Drug Court instead of a traditional judicial process. At the time it was established, the number of places in detoxification was limited, so participants in the evaluation were randomly assigned either to the treatment group or the control group. They were then matched to court records in order to compare reoffending rates over the next year or more. The evaluation found that the Drug Court was effective in reducing the rate of recidivism, and that while it was more expensive than the traditional judicial process, it more than paid for itself.

In the case of the Drug Court, many of us probably had an expectation that the policy would reduce crime. But high-quality evaluations do not always produce the expected result. Staying for a moment with criminal justice interventions, take the example of ‘Scared Straight’, a program in which delinquent youth visit jails to be taught by prison staff and prisoners about life behind bars. The idea of the program — originally inspired by the 1978 Academy Award winning documentary of the same name — is to use exposure to prison to frighten young people away from a life of crime. In the 1980s and 1990s, several US states adopted Scared Straight programs.

Low-quality evaluations of Scared Straight, which simply compared participants with a non-random control group, had concluded in the past that such programs worked, reducing crime by up to 50 percent. Yet, after a while, some US states began carrying out rigorous randomised evaluations of Scared Straight. The startling finding was that Scared Straight actually increased crime, perhaps because youths discovered jail was actually not as bad as they had thought. It was not until policy makers moved from second-rate evidence to first-rate evidence that they learned the program was harming the very people it was intended to help.

Being surprised by policy findings is perfectly healthy. Indeed, we should be deeply suspicious of anyone who claims that they know what works based only on theory or small-scale observation. As economist John Maynard Keynes once put it when asked why he had changed his position on monetary policy during the Great Depression: ‘When the facts change, I change my mind. What do you do, sir?’

One common argument made against randomised trials is that they are unethical. Critics say: when you have a program that you think is effective, how can you toss a coin to decide who receives it? The simplest answer to this is that the reason we are doing the trial is precisely because we do not know whether the program works. The great benefit of a randomised trial is that it gives us solid evidence on effectiveness, and allows us to shift resources from less effective to more effective social programs.

We should not lightly dismiss ethical concerns about randomised trials, but they are often overplayed. Medical researchers, having used randomised trials for several decades longer than social scientists, have now grown relatively comfortable with the ethics of randomised trials. Certain medical protocols could be adapted in social policy, such as the principle that a trial should be stopped early if there is clear evidence of harm, or the common practice of testing new drugs against the best available alternative.

One example, again from New South Wales, helps to illustrate this. Since 2005, an NRMA CareFlight team, led by Alan Garner, has been running the Head Injury Retrieval Trial (HIRT), which aims to answer two important questions: Are victims of serious head injuries more likely to recover if we can get a trauma physician onto the scene instead of a paramedic? And can society justify the extra expense of sending out a physician, or would the money be better spent in other parts of the health system?

To answer these questions, Garner’s team is running a randomised trial. In effect, when a Sydney 000 operator receives a report of a serious head injury, a coin is tossed. Heads, you get an ambulance and a paramedic. Tails, you get a helicopter and a trauma physician. Once 500 head injury patients have gone through the study, the experiment will cease and the results will be analysed.

When writing a newspaper article about the trial, I spoke with Alan Garner, who told me that, although he has spent over a decade working on it, even he does not know what to expect from the results ‘We think this will work’, he told me in a phone conversation, ‘but so far, we’ve only got data from cohort studies.’ Indeed, he even said, ‘Like any medical intervention, there is even a possibility that sending a doctor will make things worse. I don’t think that’s the case, but [until HIRT ends] I don’t have good evidence either way.’

What is striking about Garner is his willingness to run a rigorous randomised trial, and listen to the evidence. Underlying HIRT is a passionate desire to help head injury patients, a firm commitment to the data and a modesty about the extent of our current knowledge. High-quality evaluations help drive out dogma. As US judge Learned Hand famously said, ‘The spirit of liberty is the spirit which is not too sure that it is right’.

Naturally, randomised trials have their limitations. Not all questions are amenable to randomisation. Like the kinds of pilot programs that we run all the time, randomised trials do not necessarily tell us how the program will work when it is scaled up, and they’re not very good at measuring spillover and displacement effects.

Because of these limitations, it is unlikely that we would ever want 100 per cent of government evaluations to be randomised trials. Most likely, the marginal benefit of each new randomised trial is a little lower than that of the previous one. At some point, it is indeed theoretically possible that we could end up doing more randomised trials than is socially optimal.

However, this is unlikely to ever occur, at least in my lifetime. My best estimate is that less than 1 per cent of all government evaluations are randomised trials (excluding health and traffic evaluations, the proportion is probably less than 0.1 per cent). Another way to put this is that, to a first approximation, Australia currently does no randomised policy trials. Governments throughout Australia could safely embark on a massive expansion of randomised policy trials in Australia before we come close to the point where the costs exceed the benefits.

Finally, one way that we might expand randomised policy trials is to learn from the US, where federal legislation sometimes sets aside funding for states to conduct randomised evaluations. The Second Chance Act for rehabilitating prisoners, the No Child Left Behind school reform law, and legislation to improve child development via home visits are just some of the US laws in which the federal government explicitly puts aside a portion of program funds for states to run random assignment evaluations.

What we need in Australian policy today is not more ideologues, convinced that their prescriptions are the answer, but modest reformers willing to try new solutions, and discover whether they actually deliver results.

Update, 14/3: Thanks to Ross Gittins for a generous mention in his column.

I'm speaking on 31 March at an ANU climate change conference being organised by Frank Jotzo. Details here.

When I gave my maiden speech to parliament last year, I promised to speak more about randomised policy trials, which I've managed to do on a couple of occasions.

But just to make sure that people don't think I've dropped the randomista ball, I've moved a private members' motion, which the House of Representatives will be debating on Monday.

DR LEIGH: To move—That this house:

(1) reaffirms this Government’s commitment to evidence-based policy making;

(2) notes that:

(a) the Productivity Commission has highlighted the importance of rigorous evaluation in assessing the impact of social, educational, employment and economic programs; and

(b) randomised policy trials are increasingly being used as an evaluation tool in developed and developing nations; and

(3) supports measures to increase the quality of evaluations, and calls on the Government to consider whether randomised policy trials may be implemented to evaluate future Government policies.

I spoke in parliament yesterday about the role of community arts organisations, and the importance of local sporting clubs. Both speeches are below.

Arts, 24 February 2011

Amidst the hurly-burly of busy lives, it is sometimes easy to forget the transcendent power of the arts. Great art can inspire us and remind us of what truly matters in our lives. It can take us to new places and evoke strong emotions. The work of Fred Williams and Arthur Boyd, Clifford Possum Tjapaltjarri and Sidney Nolan can be truly breathtaking. For artists, producing artworks can bring enormous pleasure and fulfilment.

On the north side of Lake Burley Griffin, there are a plethora of hardworking artists and small art galleries. These include Craft ACT, Craft and Design Centre, the Canberra Museum and Gallery, the ANU School of Art Gallery, the Watson Arts Centre, the Chisholm Street Gallery, the Helen Maxwell Gallery, the Canberra Contemporary Art Space, the Australian National Capital Artists, Megalo Print Studio and Gallery, the Strathnairn Homestead Gallery, the Aboriginal Dreamings Gallery, Aarwun Gallery, the Graham Charlton Studio Gallery and the Belconnen Arts Centre. And apparently there is even some good art displayed on the south side of the lake.

I am proud to have in the public gallery today my mother-in-law, Anna Marie Newman. She is here with my father-in-law, Robert Newman. Anna Marie is a talented and prolific artist, and the ‘critters’ she makes bring great joy to and admiration from others. I want to pay tribute to her and to all the artists and craftspeople whose work enriches our lives.

Sports in Canberra, 24 February 2011

Canberra is the sportiest city in Australia. We are not just the national capital, the cultural capital and the research capital but also the sporting capital. At the last Commonwealth Games Anna Flanagan, Alicia Coutts, Ellie Cole and Luke Adams, amongst many others, continued a proud tradition which saw Canberrans at the Games bring home more medals than those of any other Australian city. Admittedly, having the Australian Institute of Sport tucked away in the suburb of Bruce, in my electorate, does provide a little help.

We are all familiar with the dent in the national pride at the 1976 Montreal Olympic Games which led to the opening of the AIS, in 1981. Since that the time the AIS has become a world renowned institute, the envy of the nations of the world for the sporting supremacy which it has helped Australia achieve, so much so that other nations around the world have started to replicate the AIS model, including the United Kingdom, which hopes to overtake us in the medal tally at the 2012 London Games—though, of course, we know the Aussies will prevail in the end. But, as the folks at the AIS remind us, the race for sporting supremacy has no end. It is an ongoing pursuit.

The AIS is not all sports: it is a community, a support network and a family. This shrine of sporting excellence fosters and develops the sporting talents of our young athletes as well as their education. A myriad people—from coaches and training squads, house parents, athletes’ own parents, massage therapists, sport psychologists, sport scientists and administrative staff to chefs—deserve our thanks for their efforts. This professionalism of the sporting talent at the AIS is complemented by the sporting enthusiasm of Canberrans. Whether it is cheering the Raiders, the Capitals, the Brumbies, Canberra United, the Comets, the Canberra Strikers or the Lakers—at the national level—or the Magpies, Ainslie, Eastlake, the Gungahlin Reds, Bel West, Majura Football, Ginninderra Tigers or any of the many other proud local sporting teams, our city loves sports. But we do not just like to watch; we love to strap on the boots and have a go. More Canberrans participate in sports than those of any other state or territory in Australia. Thirty-six per cent of Canberrans participate in sports, with the Australian average being just 27 per cent.

But sport is more than just a game. Our sporting teams are made up of people who are members of our community. For all the negative headlines about sportspeople, there are so many more unwritten stories about the role models, the heroes and the community service.

Sport is a great egalitarian pursuit, a social tool that helps us fight prejudice in our society and understand one another. Late last year, I hosted a gathering of officials from the many sporting teams in my electorate. Among those who attended was John Gunn from Multicultural Youth Services ACT. A few weeks previously, when I visited the MYS to see some of the young refugees in Canberra and the support that MYS was providing them, John told me how sports helped the young kids settle in and how great they were at it. He was astounded not only by their ability but by the happiness it brought, and he just wished there were some way he could get them into the local teams.

At my office, amongst the discussions of successes and challenges faced by the various teams and codes present, John rose to tell the group about the refugees at MYS. Straight afterwards, one of the group, a coach from Gungahlin, piped up: ‘No problem, mate. Send us the names. We’ll give them a pair of boots and a jersey and see how they go.’ He added: ‘After all, North Melbourne just picked Majak Daw as a rookie, the first African migrant to play AFL and someone who came here as a refugee. Who knows, we might have a couple of Majaks here.’

Sport in our nation is not just about the medals or the trophies; it is about much more. Our love affair with sport is about more than the entertainment. We love it because of the opportunities it gives our kids, the contribution sport gives back to the local community and the escape it provides. But we also love it because, on the sporting field, prejudice disappears. All are equal on the field. The team is our team. We all become mates, whether we know the supporter next to us or not. This is why sports give our nation so much pride.

I spoke in parliament yesterday on climate change, responding to a scare campaign by the opposition about electricity prices.

The Economic Challenge of Climate Change
21 February 2011

The globe is warming. Those opposite may not like to admit it, though they did vote for a private member’s bill to this effect last year, but climate change is real, it is happening and it is caused by humans. When I say this I normally pause, because sometimes you get chuckles or shouts from the other side. They like to flirt with the denialists and they like to suggest that perhaps climate change is not happening, or to take the ostrich approach: ‘If we just put our heads in the sand for long enough, maybe climate change will go away’.

But the evidence accrues year after year. Since the 1940s, every decade has been warmer than the one that preceded it. Following this pattern, the past decade was indeed the warmest on record. And you can just look in your own backyard to see this effect. Only a few weeks ago, Sydney experienced a record-breaking seven days in a row of temperatures over 30 degrees. Never in 150 years of record keeping had Sydney experienced seven days of temperatures where the maximum went over 30 degrees, but it has now happened—evidence of climate change in one of our own cities.

Higher temperatures and climate change mean more extreme weather events—stronger and more frequent droughts, floods and bushfires. Dealing with climate change is a big challenge for Australia. That is why we need to start early, and we need to use the most efficient mechanisms available. Over 80 per cent of Australian energy is generated through coal fired electricity sources. Two-thirds of the world’s population emit less than 7 tonnes of carbon pollution per person. Australians emit 27 tonnes of carbon pollution per person. The challenge is real. Putting it off, or pretending it is not there, is not an option.

Dealing with climate change will require a substantial transformation of our economy, and the longer we leave it the more difficult it will be and the more costly it will be. Scientists tell us that climate change is happening and economists tell us to deal with it now—and they tell us that we need to use market mechanisms.

Climate change is going to fundamentally affect Australia. It will affect our energy supply, our water security, our agriculture and our health. It will affect our coastal communities and it will affect Australian infrastructure. That means we have an obligation to future generations to act on climate change now, and to do so in the most cost-effective manner.

In support of this I would cite the words of Rupert Murdoch—not normally a man who is cited in favour of propositions on this side of the House, I have to say. But Rupert Murdoch put it as follows:

Climate change poses clear, catastrophic threats. We may not agree on the extent, but we certainly can’t afford the risk of inaction.

Think of it, if you are sceptical of the science, as an insurance policy. Even if you are not 100 per cent sure that climate change is happening, surely you would want to begin to think about the most cost-effective strategies to deal with it. Thirty-two countries and 10 US states already have in place emissions trading schemes, so it is a fallacy that Australia would be leading the world and going first. That is not the case at all. We would be moving in lockstep with international experts and with many other developed countries.

Whenever I speak at schools, universities and the Canberra Institute of Technology in my electorate, always comes up. Young people in Australia want us to act quickly on climate change, and they want us to use market mechanisms. Frankly, they are astounded that we in this parliament have not yet begun to act. They are astounded that the wreckers opposite have managed to trash an emissions trading scheme. They want us to move on climate change.

Market mechanisms are the most efficient way of dealing with climate change, and that means that they are the cheapest way and the fairest way. If we put in place a carbon price, we will cut pollution and we will drive investment in clean energy. We will let the market decide which clean energies are the most effective, rather than taking the coalition’s approach, which is picking winners—McEwenism back from the grave.

As a Labor government, we will always support those who need help to meet an increase in their cost of living, especially pensioners and the most vulnerable. That is in our DNA. The coalition sometimes use the ostrich solution to climate change but, when they take their head out of the sand and admit that something is happening, they have a direct action policy, an anti-market policy, which is very ironic given that those opposite claim to be the defenders of the free market.

As the Australian Treasury has said of it:

Direct action measures alone cannot do the job without imposing significant economic and budget costs.

To take a tonne of carbon out of the atmosphere via direct action costs more than to take a tonne of carbon out of the atmosphere via a carbon price. So how do you do it if you want the same level of abatement with direct action? You have to raise additional revenue. You have to raise income taxes. In the end, to get the same level of abatement via direct action, you will need a huge new tax.

Over the decade, the Department of Climate Change and Energy Efficiency estimates that the purchase of international permits to make up for the coalition’s flawed policy would cost $20.4 billion, and that is in order to meet the bipartisan five per cent reduction target. So on top of the $12 billion cost of the coalition’s policy we would need another $20 billion to meet that bipartisan target.

In support of market mechanisms, you can quote a raft of experts. Pretty much any economist you turn to will say, ‘Market mechanisms are the most effective way to go.’ Let me, for example, quote Treasury executive director David Gruen:

Well-designed economy-wide market-based mechanisms for reducing Australia’s greenhouse gas emissions are projected to reduce annual labour productivity growth by around 0.1 percent, even for quite deep cuts in emissions (Australian Government, 2008). Of course, were alternative regulatory, or other non-market-based, mechanisms for reducing greenhouse gas emissions implemented, that would be expected to have much more adverse effects on the economy’s aggregate labour productivity growth.

Insurance Australia Group have made similar points. They have noted:

Early action can be achieved at modest cost—

but—

Delayed action would be expensive.

The Australian Business Roundtable on Climate Change have said that, in comparison to early action, delaying action to 2022 would result in lower real GDP growth by an average of 0.2 per cent per annum through to 2050 and concentrate any disruptive shocks over a shorter period.

The Australian Business Roundtable on Climate Change have also discussed jobs. They say that an additional 3½ million jobs will still be created in the economy under the early action scenario over the period 2013 to 2050, equating to 250,000 more jobs than under the delayed action scenario. The coalition’s delayed action scenario will cost jobs.

Of course, this is what we would expect from the party of ‘no’. The member for Warringah has always brought a negative approach to public life. We remember that in 1999 his campaign against the republic referendum was: ‘Don’t know? Vote no’. In 2009 he came to the leadership, beating the member for Wentworth, who seems to be curiously absent in this debate. The member for Warringah won the leadership with one promise: he would say no to any sensible policy to tackle dangerous climate change.

The opposition have consistently taken the same ‘Don’t know? Vote no’ policy in this chamber. They have become the party of ‘no’ when it comes to sensible reforms, such as means testing the private health insurance rebate and introducing a Minerals Resource Rent Tax, giving Australians a fair share of their minerals. I know that there are thoughtful people in the Liberal Party caucus. There are probably people who could make a constructive contribution to the Multi-Party Committee on Climate Change—if their leader allowed them to participate. But, alas, the party of ‘no’ consistently says, ‘Do not get involved.’

The current Liberal Party is a Liberal Party which I fear would probably have said no to some of the great Hawke-Keating reforms. They probably would have said no to the tariff cuts, to floating the dollar, to Medicare and to expanding universities. They would have said it would cost too much and was too risky. They would have said no to compulsory superannuation. I shudder to think what Australia would be like if the party of ‘no’ had been in power in the past.

I spoke in Parliament earlier this week against the current populist campaign to curtail foreign investment in Australian agriculture.

Foreign Investment in Agriculture
21 February 2011

An iron law of populism is that, while Australian businesspeople investing abroad are portrayed as job-creating entrepreneurs, foreign investors in our country are depicted as rapacious robber barons. And so it is with the latest campaign against foreign investment. As sometimes happens, the campaign started in the tabloids. Under headlines such as ‘Chinese buying up our farms’, ‘It’s time to stop selling off the farm’, and ‘It’s time to save our farms from foreign investors’, News Ltd tabloids have recently embarked upon a fear campaign against foreign investment in Australian agriculture. With anecdotes taking the place of statistics, foreign investment has been described by the tabloids as ‘a dramatic global land grab’, fed by ‘a looming global food shortage’.

Most ironic about the recent tabloid campaign against foreign ownership in agriculture is the fact that the newspapers responsible are themselves owned by US citizen Rupert Murdoch. Indeed, if a campaign were to be waged against foreign ownership in the media industry, you would expect these newspapers to be among the first to describe it as economic populism. It is funny what happens when the pitchfork is in the other hand.

Now, the opposition appears to have decided to jump on the populist bandwagon. After a few months in which members of the frontbench have questioned the need for a floating exchange rate, an independent Reserve Bank and a migration policy that does not discriminate by religion, it is perhaps no surprise that the opposition is tempted to campaign against foreigners buying our farms—not surprising, but odd all the same. After all, Australia’s agricultural sector has benefited substantially from foreign investment. In 1855, British investors helped kick-start our local sugar production industry when they established CSR, originally Colonial Sugar Refinery. In 1877, American firm Schweppes opened its first Australian factory—as did Kraft and Kellogg’s in the 1920s. Japanese investment in Australia’s beef cattle sector has been important since the 1970s. Today, the largest foreign investors in Australia are still Britain and the United States.

As a resource rich nation, Australia has traditionally looked abroad to fill the investment gap. On one estimate, one in eight workers is employed by a foreign owned firm. If we were to ban all foreign investment tomorrow, wages would fall and unemployment would rise. An Australia without foreign investment would also risk missing out on the latest overseas know-how. From technology adoption to business practices, foreign firms can often help spur innovation by changing the way that things are done.

In moving this motion, the member for Calare expresses concern over the risks to Australia of ‘foreign investment’. Yet he has previously spoken in favour of greater investment in Australian agriculture. On the floor of this parliament, he has repeatedly called for more investment in the forestry sector, more investment in farm productivity, more investment in agricultural research, more investment in new plant varieties, more investment in rural telecommunications and more investment in rural infrastructure. What he seems to fail to realise is that investment is not a magic pudding. Restricting foreign investment in agriculture will result in less investment in agriculture, and that is bad news for people who are employed by a foreign owned firm or who might have otherwise been employed by a foreign owned firm that is deterred from coming here.

Of course, while Australian investors are playing a role in our economy, our agribusinesses are creating jobs in other countries too. In countries like New Zealand, Papua New Guinea and Singapore, Australian firms are helping to show local companies a new way of doing business. In the process, Australia’s overseas investors are helping to raise living standards in those countries.

As the mover of the motion presumably knows, Australia has long had restrictions on foreign investment. Formalised by the Whitlam government in 1975, the national interest test applies to a wide range of investment classes across the economy. The Foreign Investment Review Board, or FIRB, must approve foreign investment that exceeds 15 per cent where the firm is worth $231 million or more. In the case of real estate, nonresidents cannot buy existing properties and FIRB must sign off any time a temporary resident wishes to buy property. Importantly, FIRB has had a veto right over any investment by a foreign government, including farms. In addition, banks, media outlets, airports, Qantas and Telstra are subject to special rules. FIRB can reject applications outright or provide an approval subject to particular conditions.

In thinking about how strict our foreign investment review processes should be, it is useful to look at how other developed countries operate. While any such comparison is obviously limited, work by the OECD’s Takeshi Koyama and Stephen Golub suggests that Australia’s foreign investment review regime is at least as stringent as, perhaps more so than, the approach that prevails in the typical developed country. For decades Australia’s economic policymakers have recognised that our nation’s prosperity relies on being enmeshed with the world. Since the time of white settlement, immigration and trade have been a part of Australia’s social fabric. Australia has been engaged with our region and the globe and this engagement has helped to shape our society—a nation in which one-quarter of the population are born overseas and exports make up one-fifth of the economy. Integral to an outward-looking Australia must be an appreciation that well-regulated foreign investment brings significant benefits to Australia.

Lastly, I cannot help mentioning the issue of food security. It is one of those slippery phrases that people seem to invoke when they do not want to say precisely what they mean. Since I have not seen anyone, including the shadow minister for agriculture and food security, being clear about this, let me hazard a guess at two possible explanations. One possibility is that when people say that we need to ensure food security they mean we need to ensure that if Australia were cut off from the rest of the world we would not starve. Given that Australia continued to trade with other countries even during the depths of World War II, this is a bit like worrying about whether Dubbo has a plan to protect against tidal waves. But, in case anyone is wondering, the answer is yes. Australia sells more food to the rest of the world than it buys from the rest of the world. So if we were to be cut off from the rest of the world we would not starve.

The other possibility is that food security means we need to make sure that agricultural prices do not go up and down. It is certainly true that in recent years food prices have been unusually volatile. For example, since 2007 some world food commodity prices have doubled, halved and doubled again. Economists are not sure why, but possible explanations include climate change, increasing meat consumption throughout the world, biofuel subsidies and a reduction in food stockpiles. In some developing countries there is a real concern that changing food prices will push people into starvation. For Australia the effects are more modest, but you can still see them in the data. For example, in 2006 food prices grew about four per cent faster than the prices of other goods. In 2010 the reverse was true: food prices grew about one per cent slower than the prices for other goods.

People sometimes make the mistake of thinking that if we imported no food this volatility in food prices would disappear. That is wrong. Australian food prices also move when world prices change because Australian farmers sell into the world market. So, to insulate ourselves from volatility in world food prices, we not only need to stop importing food; we need to stop exporting food. I do not hear anyone calling for that. My fear is that, for at least some people, food security is merely code for a return to protectionism, which would be a great mistake. By all means, let Australia produce the foodstuffs that suit our land and our skills. But it does entrepreneurs and workers no favours to encourage Australian agriculture to expand into areas that do not suit our geography and our talents.

There are plenty of challenges facing Australian agriculture. But, while Labor are focusing on water reform in the Murray-Darling Basin and addressing climate change, the coalition’s plan is to defer water buybacks and pretend that climate change does not exist. At the same time, the shadow agriculture minister is moving a private member’s motion aimed at reducing investment in Australian agriculture. It might feel good to pander to populism, but let us not pretend that it is helping farmers.