Productivity growth and the returns from public investment in R&D in Australian broadacre agriculture

Abstract

Investment in R&D has long been regarded as an important source of productivity growth in Australian agriculture. Perhaps because research lags are long, current investment in R&D is monitored closely. Investment in R&D has been flat while productivity growth has remained strong, relative both to other sectors of the Australian economy and to the agricultural sectors of other countries. Such productivity growth, at a time when the decline in terms of trade facing Australian farmers has slowed, may have enhanced the competitiveness of Australian agriculture. The econometric results presented here suggest no evidence of a decline in the returns from research from the 15 to 40 per cent per annum range estimated by Mullen and Cox. In fact the marginal impact of research increases with research over the range of investment levels experienced from 1953 to 2000, a finding which lends support to the view that there is underinvestment in agricultural research. These results were obtained from econometric models which maintain strong assumptions about how investments in research and extension translate into changes in TFP. Hence some caution in interpreting the results is warranted.

Agricultural research: Implications for productivity in New Zealand and Australia

“…Here we confine our attention to the most recent analyses in both countries, those by Mullen (2007) and by Hall and Scobie (2006). The theory and methodology for estimating the link between research and MFP are reviewed in these papers and in Alston, Norton and Pardey (1995).…”

“…The growth in MFP over the whole period was 2.5%. Mullen (2007) concluded that while the Australian Bureau of Statistics (ABS) estimates of MFP at a sector level suggest some slowdown in growth in recent years and ABARE estimates suggest that productivity growth has slowed for specialist croppers, the evidence of a slowdown for broadacre agriculture generally is not yet strong especially given the run of poor seasons since 2000.…”

“…The terms of trade declined at the rate of 2.6% from 1953 to 1990, similar to the rates of productivity growth in broadacre agriculture. However, since 1991 the rate of decline has been just 0.9% (Mullen, 2007). Hence at least through to 1990, while productivity growth in Australian agriculture has likely been higher than that in New Zealand agriculture, Australian farmers have had to contend with more rapidly deteriorating terms of trade.…”

“…The Australian data series used here is that used by Mullen (2007) as assembled by Wang (2006) from Mullen, Lee and Wrigley (1996) and from ABS sources. All expenditure data have been expressed in 2004 dollars using a GDP deflator.…”

“…A key issue has been how best to impose structure on this model to construct the stock of knowledge variable associated with R&D. Typically it is constructed as a weighted sum of past expenditures on R&D. Mullen (2007) following Mullen and Cox (1995) imposed either an inverted V structure over 16 years or a trapezoidal structure over 35 years where the weights representing the impact of R&D in year t first increase and then depreciate to zero after 16 or 35 years. Hall and Scobie (2006) tested some alternative ways of capturing the impact of a capital stock through time including the permanent inventory method (PIM) and the Koyck (1954) and Almon (1965) transformations which conserve degrees of freedom and reduce multicollinearity problems.…”