Economic profit impossible if the Murray-Darling keeps eroding

By Geoff Edwards

Tuesday March 12, 2019


Dr Geoff Edwards discusses balancing the economic, social and environmental outcomes of the Murray-Darling river.

Of all the policies that have obstructed progress on Australia’s journey toward sustainability, the 1992 National Strategy for Ecologically Sustainable Development (NSESD) must be deemed a leading villain. Despite it usefully bringing the concept of sustainability into public debate, it also debased the term and crystallised a conceptual flaw into national policy.

The defects in the NSESD came to mind when reading the spirited defences of the Murray-Darling Basin Authority by CEO Phillip Glyde and former board member Professor Barry Hart reported in these pages, in the wake of trenchant accusations by the South Australian Royal Commission of “maladministration”. These leaders claimed the authority has been doing its best to balance the responsibility for environmental protection against the economic needs of irrigators and other users in the Basin.

I won’t critique those defences, but I will simply question whether metrics exist to justify the repeated preference by public authorities for economic development and resource extraction over environmental protection and restoration.

Defects in the sustainability strategy

The major flaw in the NSESD is that it normalised the concept of “balance” between the economic, social and environmental dimensions of policy. A paragraph after the Guiding Principles reads:

“No objective or principle should predominate over the others. A balanced approach is required that takes into account all these objectives and principles to pursue the goal of ESD.”

It is no wonder governments struggle to implement the concept. This qualifier is commonly translated into “striking a balance between the social, the economic and the ecological”. Yet these elements are not co-equal. The environment is fundamental; society is utterly dependent upon a healthy environment for its life support systems; and the economy is a highly adjustable artifice of society that directly and indirectly depends upon a continuous supply of raw materials for commerce. In short, there is no sustainable economy without a healthy natural environment.

When applied iteratively to each successive application for development or extraction, a “balanced approach” is achieved only by repeatedly trading off against the environmental limb. “Balance” does not envisage that an application can be refused. Highly destructive proposals can be justified by declaring that they satisfy all three limbs. The economic limb is appeased by allowing somebody to make a profit; the sociological limb by the associated creation of jobs; and the environmental limb by placing conditions, whether or not any inspectors are likely to be around to enforce them.

The language of balance is popular with leaders in politics and business. It allows them to claim society can have endless economic development—in an environmentally friendly manner of course. It subtly disparages alternative outlooks such as environmental precaution as being “unbalanced” or “extreme”. Balance does not concede that there are absolute limits to the capacity of natural systems to supply resources. The South Australian Royal Commissioner nailed this principle, eloquently.

Setting those criticisms aside and accepting NSESD for the official policy that it is, let’s examine whether the concept of balance can be applied systematically to, say, applications for water extraction in the Murray-Darling waterways. Do we have analytical tools to weigh environmental and economic considerations against each other?

Measuring environmental limits

Hart observed that the goal has been “a sustainable Basin, not a pristine” one. It must be, because the Darling system is nowhere-near pristine, even before the waters arrive at the first cotton pump house. Its resilience is already stressed through stock and domestic access, feral pigs and carp, hardened catchments and a host of other impositions. Every extraction of water adds an incremental burden and risks crossing a threshold of system collapse. Assaults are additive.

Summing the diverse indicators of ecosystem health is complex, so scientists offer proxies such as environmental flow thresholds. Yet even these concessional formulae are being undermined. The penchant for repeatedly compromising environmental standards in favour of economic demands has been on stark display in the past couple of years as the authority1 and responsible governments have lacked the fortitude even to stand by the minimalist 2750 gigalitre environmental return flows embedded in statute, let alone the 3200+ thresholds advocated by scientists.

Measuring economic benefits

At first glance, economics would seem able to furnish many precise measures of economic performance, the economic limb of the notional tripartite balance. Regional GDP, profit, water markets and benefit-cost analysis come to mind. None of these survive scrutiny, although benefit-cost has potential. Let’s review them briefly.

GDP is useless as an indicator of economic vitality. It is a backward-looking flow account, not a balance sheet, and disregards the condition of the productive capital assets. Economic growth is defined as an annual increase in GDP, which implies an accelerating throughput of tradeable materials and energy.2 Economic growth is the antithesis of sustainability; and sustainable growth is an oxymoron.

Profit is a private indicator. Consider a business applying to extract a natural resource. Under globalisation, investment capital is essentially footloose. Profits from growing crops on the Darling floodplain may reappear as flats in Darlinghurst or be repatriated to Darjeeling. For this reason, the prospect of future profit to the cotton investor is a poor criterion for evaluating the public benefit to the national economy.

It is also a poor criterion for the riverine communities, especially when a natural asset’s sustainable yield has already been exceeded. Yes, it may invigorate a township, but at the expense of another. Water extracted to grow cotton upstream denies the opportunity for landholders downstream to grow a few acres of pumpkins or lucerne. Over-extraction expropriates common-law property rights of every person downstream who depends upon the river for sustenance or livelihood.

Tradeable rights granted or gifted to irrigators have been a centrepiece of the National Water Initiative reforms since 2004. Yet these instruments have been aimed at steering water toward its highest value use, which is only indirectly related to “most beneficial use” and favours irrigators wanting to grow high value crops against most other users, including the environment. Further, it grates that taxpayers are now obligated to pay to retrieve water that has been regarded as common property ever since the time of Alfred Deakin, soon after federation.

If benefit-cost analyses, using techniques of proxy valuation well known in economics, were to be conducted systematically and comparatively, they could produce valid insights. But this rarely happens. These exercises typically confine their horizon to a project under study and ignore the comparative paybacks from deploying that resource or investment capital elsewhere.

For example, the West Connex freeway project in Sydney, costing $16.8 billion, is touted as economically productive because the estimated benefits exceed costs—by a ratio of a meagre 1.7. By contrast, the international ecological literature testifies that investment in environmental repair typically repays costs 100 times over, a rough indicator of the economic value surrendered by not maintaining the Darling River in healthy condition.

Enough with the trade-off

For all the legendary mathematical precision of economics, no serviceable economic indicator of the costs of trading off environmental return flows for economic production is known. The trading off seems to be a politics calculation. If so, this seems unworthy of the Murray-Darling Basin Authority, which is supposed to be independent of political influence.

The authority was established to surmount the weaknesses of state administrations and to protect the natural systems from collapse. The ecosystems along the Darling valley are now collapsing.

On top of all that, there is climate change.

Dr Geoff Edwards is President of The Royal Society of Queensland. This article does not necessarily reflect the views of all members of the society.


  2. Some economists argue that it is possible to have growth without an increase in materials and energy, but growth without an increase in real economic production would seem to be simply monetary inflation. Also, I have yet to see an analysis that takes account of the outsourcing of production to other countries’ GDPs through trade.

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