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Are subsidies for banana growers an unreasonable cost?

September 19, 2018
Economics
  Economists suggest we may do better to grow something else


​Just as the Australian community's heart goes out to farmers battling the drought, new economic research is challenging the rural sector on a different level.

It seems obvious to support agriculture, which feeds the nation, provides jobs, exports and food security. But economists are interested in the welfare of the whole community – not just farmers.

"Are farmers, a relatively small group, taking advantage of a large group – namely, the rest of us? For the good of Australia, should farmers be doing something else?" asks Gigi Foster, an associate professor in the school of economics at UNSW Business School.

Foster and her co-authors – Paul Frijters from the London School of Economics, and Chia Chiun Ko from University of Queensland – illustrate this point in a paper,  A Tale of Cyclones, Exports and Surplus Forgone in Australia's Protected Banana Industry, which questions the existence of our banana growing industry – and the trade barrier that protects it.

The analysis estimates Australians are subsidising the average banana grower to the tune of $250,000 annually, and that we could all be better off importing bananas from The Philippines.

That would mean we would not be paying up to $15 a kilo for bananas after cyclones wipe out North Queensland crops. Australia could concentrate instead on producing non-tropical crops with which we have a regional competitive advantage, such as mandarins, apples and pears, according to Foster.

"It might seem intuitive that our $600m worth of banana production each year is good for farmers and good for the nation," she says. 

"But this ignores the alternative goods – invisible, because they remain as-yet unproduced – that could have been produced with the inputs presently used to produce bananas. These goods might have been worth even more.

"This is a classic case of opportunity cost: we could be doing something else and getting more from it."

Profitable connections

Australians paying more for bananas because of trade barriers that benefit banana growers are arguably another example of special interest groups getting their way at the expense of the general population.

It's a theme explored in earlier research by Foster and Frijters, which examined the 200 richest Australians on the BRW list in 2009 and found that 80% of them had made their fortunes in industries in which getting rich relied less on technical skill and more on special government favours and exemptions.

The argument was further set out in damning terms in the popular 2017 book, Game of Mates, by Frijters and Cameron Murray. It claims that during the past 20 years well-connected insider elites have exploited their networks and links to government "to rob Australians of half their wealth".

For instance, the retail finance sector charges Australian superannuation firms overhead costs of 1% of their total funds per year compared with Denmark's 0.1%, making the Danes 35% better off than Aussies in terms of accumulated superannuation wealth during a lifetime. 

And ordinary Australians also pay more for health, transport, mortgages, and pay more tax because insiders pay less. This breeds growing inequality, and the mechanism that favours these well-connected special interest groups is so inefficient that the collateral damage along the way comes at a huge cost to society.

'It might seem intuitive that our $600m worth of banana production each year is good for farmers and good for the nation'

– GIGI FOSTER

Export promotion

In this newest research paper, published in The Economic Record, Foster, Fritters and Chiun Ko examine the cost to Australia's economic wellbeing caused by import restrictions on bananas.

They argue it is a classic "rent-seeking" policy – manipulating public policy to increase profits. They model agricultural production under uncertainty and production delays (in this case, regular cyclones and the time lags between banana planting decisions and harvests) and show that Australian banana import restrictions have turned into a form of export promotion.

They estimate the total welfare loss to Australia of the banana import restrictions to be more than $150 million a year, with about 600 growers benefitting from these restrictions.

Bananas were introduced into Australia by Chinese migrants during the gold rush of the 1850s. The industry flourished after the 1960s, with government protection and rail support.

By the 1990s, there was a total import ban on foreign bananas, ostensibly to prevent the import of disease. Filipino banana growers have been trying to challenge this ban via the World Trade Organisation (WTO) since 2003.

The connection of Australia's import policy to actual disease risks was further muddied by the discovery of banana freckle on some Northern Territory banana plants in 2013, and Panama disease in North Queensland in 2015.

Economists have long decried the harmful community-wide effects that can arise from the protection of domestic industries, starting with Adam Smith (1723-90) objecting to wheat import bans.

Yet complicating this, as economist Paul Krugman showed in the 1980s, a mechanism to use import bans to promote exports could shield an industry until it develops world-class costs of production.

'Australian consumers may not want to subsidise exploitation by the Philippines’ oligarchs of local labour'

– TIM HARCOURT

Perverse incentive

Foster and her co-authors suggest there is a new mechanism here at work through which import protection for Australian bananas can lead to export promotion.

Supply shocks in agricultural production arising from natural disasters such as Queensland cyclones, which wipe out a large fraction of the banana crop, push up prices from $2 to $10 a kilo and beyond.

This can lead to producers 'betting' on those future natural disasters by over-planting and hoping their crops escape the damage. They could then cash in on the shortages and higher prices after the cyclone, for 10 months, before new crops come to fruition.

But this perverse incentive causing domestic over-planting means that in normal years domestic producers will make losses. This oversupply in normal years caused by producers' over-planting can be so large that the protected industry exports the surplus, despite the domestic marginal cost of production remaining above world levels.

In this case, the import restriction does not deliver Krugman's benefits of scale or research and development that, in the longer run, would theoretically drive Australian banana prices down to world levels.

For similar types of markets such as pineapples, coconuts, dates and even truffles, import restrictions "could lead to the curious and expensive phenomenon of loss-making exports", according to the authors.

'Growers are leaving'

One banana grower has described the research as 'hare-brained'. Another, Cameron MacKay, the biggest grower in Tully, Queensland, says Australia did not ban imports, but quarantine rules have made it too expensive for growers from The Philippines and Central America.

"The industry has had its three worst years from overproduction," he says. "Growers are leaving. They are getting less than the cost of production. Prices in the supermarket will be increasing in the next year or two to counteract that."

Tim Harcourt, the J.W. Nevile fellow in economics at UNSW Business School, thinks it's worth keeping the banana industry.

"If the Philippine product is a health risk, or if supply might be disrupted by geo-politics (such as a conflict between China and The Philippines in the South China Sea) then that could be bad for consumers," Harcourt says.



"The other [issue] is the structure of The Philippines' industry which has a tradition of exploitation by oligarchs and rent-seeking which means the industry is not efficient. And Australian consumers may not want to subsidise exploitation by The Philippines' oligarchs of local labour," Harcourt says.

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