Why it makes economic sense to grow water-intensive crops in the desert

It's because of the huge variation in growing conditions

In my previous public sector economist life I worked in the Queensland government helping to manage water resources in the state. The question was always this: “How should the rules work to take water from rivers, build dams, and tap aquifers fairly and reasonably to balance economic and environmental outcomes?”

When I entered I had a simple view of the world. Intuitively, growing water-hungry crops like cotton in the desert didn't make sense to me. So I assumed that we should be encouraging some alternative land uses instead.

But here’s the thing.

The issue in Western Queensland is not that there is no water. It is that some years there is an enormous amount of it, and some years none at all. The land of droughts and flooding rains is absolutely the reality in many parts of the country.

So the trick is to do some valuable economic activity when there is water, and nothing when there is not.

In an interview with the Australian Economics Olympiad earlier this year I mentioned how this experience was one of many where I had to drop my preconceptions and understand the important local context to make economic sense of a situation.

Here’s a video of that conversation (make sure to follow the FET YouTube channel).

Today, I want to explain how I came to a better view about the economics of what to grow in the desert, and how that lesson translates into other sectors like energy and housing.

When variation matters

I’ve argued before that food waste is good because it is insurance for unexpected declines in food production that can’t be insured any other way. Producing excess food that is mostly wasted is a logical way of dealing with unexpected variation.

The same applies to farming in Australia.

Yes, there are many dry areas. But they often flood too.

Below is a chart of the Balonne River height at St George. The maximum river height was 12m in 1990, then there was essentially no water in the river for two years before a 6m flood. That happened just a few years after a similar pattern in the 1980s. What do you notice?