Public investment in agricultural research and development in Australia remains a sensible policy option

There is evidence that productivity in Australia’s broadacre agriculture (extensive cropping and livestock industries) has been slowing in the past decade. A series of poor seasons has been partly responsible, but an econometric analysis of structural changes in the trend of total factor productivity (TFP) indicates that stagnant public investment in agricultural R&D has also made a significant contribution to this slowdown in TFP. Related econometric analysis of the returns to public investment in agricultural R&D in the broadacre sector confirms that the rate of return to investment remains high. Despite these findings, a recent enquiry by Australia’s Productivity Commission into the financing of rural research suggests that the public sector may be ‘crowding out’ private sector investment in agricultural R&D and recommends a reduction in public support. In this paper I briefly review the econometric analyses to date and the trends in TFP and public R&D investment. While I have not been able to conclusively test the ‘crowding out’ hypothesis, there seems to be little empirical evidence to prefer this hypothesis to a more traditional ‘market failure’ hypothesis. Clearly, stakeholders in agricultural R&D in Australia have to do a better job in communicating the case for public investment in agricultural R&D. Other developed countries are experiencing the same phenomenon and it may become an issue in the future for developing countries in Asia.