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Eliminating Perverse Incentives

March 6, 2010

When I talk to scientists working on adaptation, I ask them about the biggest adaptation challenges. One intriguing answer:

As long as we are looking at adaptation as something you do to people or places, it won’t be effective.

Another common theme in responses to this question is institutional barriers. We may recognize a variety of sensible changes that would reduce vulnerability, but our policies are just not set up to encourage them.

Both of these ideas emerge in recent news about Australian drought policy. It appears that Australian Agriculture Minister, Tony Burke, has recognized and means to remove one of these institutional barriers: an interest rate subsidy for farmers. This subsidy is meant to help farmers impacted by drought, but many people believe that it harms the industry in the long run by rewarding poor management. In The Weekend Australian, Mike Young explains:

Young thinks the subsidies give those who have not planned for drought an advantage over those who have and who are thus ineligible for the assistance. “Low interest-rate loans are offered to the bad managers, and they go and buy land because they can get access to it cheaply while those who are the best managers can’t compete with them. So the best managers leave.”

I have spoken to a number of researchers who agree that this subsidy is one of many perverse incentives that discourage adaptation in agriculture. There are many ways to help people in times of need, but it can be tricky to do this while also rewarding those who plan for hard times and manage their resources effectively. The same article in the Australian quotes some ideas from Mick Keogh of the Australian Farm Institute:

He would like to see tax incentives for drought preparation and additional sources of income such as environmental stewardship payment.

Vulnerability and risk assessments–the dominant approach to adaptation here in Australia–have their place. But they don’t amount to much unless they can inform the kind of policy discussion described here. These are the kinds of policy debates, and policy changes that can actually stimulate adaptation. Note that this is neither a bottom-up or top-down approach; it’s a mixture of both. It’s a combination of a policy framework conducive to adaptation, and the personal initiative of individuals who may be vulnerable to changing conditions.

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