Full Project Title: Modelling community adjustment to water trading in the Murray-Darling Basin
This project was led by Prof Phil Lewis and Dr Ben Freyens
The project takes as starting point that structural change is unavoidable in the MDB due to the necessity of adjusting water usage to ensure a sustainable and healthy water flows in the Basin. The CRN has produced a vulnerability map, which portrays a large array of communities at different risks of socio-economic decline following (among other factors such as climate change), structural adjustment due to voluntary sell-off of water rights by irrigators. Under this scenario, 'agricultural output' (i.e. any source of local economic activity that is water-dependant and water-intensive) would be expected to decrease with flow-on effects for other local businesses and industries, and for regional labour markets as a whole (especially employment and services).
Agricultural activity generates income and employment for local communities through multiplier effects. Achieving these multiplier effect relies on establishing minimum scale thresholds in agricultural activity. Scale (critical mass) in turn drives the provision and delivery of publicly-provided public goods / private goods and other government and business services in local communities. The loss of community scale through voluntary water trading may therefore lead to losses of critical public services and non agricultural business activity large enough to threaten community existence. The choices facing affected communities may then reside in:
- rebuilding minimum scale through local (bounded) mobility (these choices may be imposed by government-led council amalgamations)
- rebuilding minimum scale through more efficient market operations; or
- accepting the loss of scale and moving out of affected areas completely (unbounded mobility).
In small markets (e.g. a rural community), suppliers of services and products (governments and businesses) face the risk of supplying at high cost (transport, labour and energy resource scarcity, etc) in a market that may be mobile enough to buy in distant, larger and cheaper hubs. Suppliers facing this risk may decide not to supply this market. Alternatively, a supplier that has long been present in the community may decide to discontinue supply if the local market has narrowed beyond a threshold point – as scale economies no longer offset the high cost of supply . This decision in turn imposes an opportunity cost to the rural community, which faces ongoing prospects of having to buy outside the boundaries of the community at higher time and transport cost, For some community members (e.g. with low time value) this higher cost is recovered through cheaper prices in larger adjacent markets, but the community as a whole misses on the flow-on economic benefits from local supply (ancillary services, jobs etc.).
If buyers take a stake in the seller's business (e.g. by buying shares, or by collaborating somehow to production), self-interest then drives buyers to resolve the seller's problem (reducing the risk of buyers not shopping locally). Buyers now have a double stake in the success of the local business or service:
- maximize their return as co-investor
- reduce their opportunity cost of buying as consumers
To succeed, buyers and sellers need to recognize their shared interests and trust each other ('trust' is one of the most important proxies for the elusive concept of 'social capital', and much of the research will focus on this variable).
The project's aims are to model the likely adjustment process for a representative sample of potentially affected communities in the Basin, identify key adjustment variables and formulate policy responses. Adjustment here will be defined in economic terms as either 'rescaling', or 'integration' processes. Both processes aim at compensating affected communities for the loss of scale initially generated through water trading.
Picture courtesy of the Murray-Darling Basin Authority. Effects of drought on farming
Patricia Cirillo hanging out t-shirts with protest slogans highlighting drought impacts at Cos Cirillo's farm at Mildura in Victoria. Image taken in October 2007.
MDBfutures is supported by the Australian Government's Collaborative Research Networks program.