Drive productivity through innovation

Bookmark and Share Economics & Deregulation | Darcy Allen
Farm Weekly 28th July, 2016

When digesting the Productivity Commission report into the regulation of agriculture, policy makers should redouble efforts to drive productivity growth through innovation.

Specifically, reform efforts should centre on cutting red tape holding back new technologies.

Agribusiness is fundamentally a global game.

Every year in Australia some 275,000 employees export around two-thirds of their produce to the world.

For farmers, what is critical is maintaining production of internationally competitive and high quality output.

But many threats to farmers remain.

For instance, the Australian agricultural sector is in the midst of a long-term downward trend in the price farmers receive, compared to their cost of inputs.

This trend should be a signal of the importance of productivity enhancements.

And as economists have now long agreed, the key to productivity growth is innovation.

Innovation is a contemporary political cliché.

But the idea that technology is central to agricultural productivity is in no doubt.

There are continuing suggestions that agriculture may well be sitting on the cusp of a technological revolution - from virtual fencing to robots to drones - that was unimaginable even a few decades ago.

To discover precisely how these technologies are commercialised into cost effective market applications,however, requires experimentation. The market process - through trial and error learning - is the only way to discover these uses.

But there is one fundamental friction in this market process: the shackles of unnecessary red tape.

Red tape is the low quality regulations that do little in the public interest, fail to reach their objectives, and are generally slow to change.

There are two ways such red tape stymies the innovative progress.

First, it explicitly prevents farmers discovering new uses and applications. And second, the burden of red tape shifts farmers' gaze from entrepreneurship to compliance.

Let's take one recent example of cutting red tape on technology: unmanned aerial vehicle (UAV) technology, often known as drones.

The potential cost reductions from this technology are remarkable.

And if the burgeoning hype is to believed, drones will outnumber tractors in the near future.

The relationship between regulation and technology have always been in tension.

This is inevitable when regulation is static and back-ward looking, while innovation is dynamic and novel.

And the treatment of drones by regulators has not escaped this problem.

This is especially due to the catalysing effect of widespread cautionary calls in the light of privacy, insurance and interactions with passenger
aircraft.

Back in 2002 Australia was the first in the world to regulate UAVs.

But as is often the case, as the technology got faster, lighter and cheaper, regulation struggled to keep up.

Some recent changes by the Civil Aviation Safety Authority for instance, relaxing the exemption of UAVs under 2kg from various licences - were desperately needed and are welcome.

The changes do keep some strict boundaries. For instance, you still can't fly with 5km of an airport, but also understand the trade-off between safety and growth.

Indeed, Australia should be optimistic that business people, not bureaucrats, hold the local knowledge to make informed decisions about applying new technology.

The most obvious cost of red tape is the time and money spent finding, understanding and complying with all the permits, licences and approvals imposed by governments.

For the adopters of UAVs, for instance, some estimate that the new UAV regulations will save farmers will save up to six months and thousands of dollars in bureaucratic licensing requirements.

Complex regulations imposed across multiple regulators means less entrepreneurship.

Every minute farmers spend wading through red tape is time they don't spend finding new innovative applications for technologies.

Australian industries, and thereby consumers, face a growing red tape problem.

Recent research by the Institute of Public Affairs estimates the economic costs of red tape at approximately $176 billion every year.

That means red tape is the equivalent of 11 per cent of GDP.

That figure estimates the lost economic output from poor quality regulation and policy - the cost of businesses never started and the employees that were never hired because of red tape.

Cutting red tape on agricultural technologies will not only yield huge economic benefits in the long term but should be a simple initiative for
regulators because it means doing less, not more.

If our globally-competitive agricultural industry is to increase productivity through new technologies - regulators must free farmers to make their own decisions.