The balance of payments and development

INTRODUCTION

THIS booklet consists of a series of published articles that have appeared in publications.  The articles are all concerned with the transcendent issue of Australian economics -- the overseas balance-of-payments problem, which has been with us, in varying degrees of intensity, since 1952 when quantity restrictions on imports were first imposed.  Together, the articles comprise our contribution to thought on this crucial matter.  The problem is yet far from resolved.  Indeed, when this booklet went to press the external payments position was not encouraging and was looming as a threat to Australia's plans for development and the prospects of improving living standards.

It is fair to say that at the time of its publication our analysis of the balance-of-payments problem caused something of a sensation.  Certainly it precipitated widespread controversy in government, business and academic circles.  Some of our views seem to have achieved acceptance.  Others are still the subject of discussion and controversy.

What was the crux of our argument?

It might be summarised in the following propositions: -

1. That the process of growth and development inevitably gives rise to an increased demand for imports.
2. Since this growth must necessarily take place mainly in the manufacturing and related industries, the idea that the expansion of secondary industry as a whole meant greater economic self-sufficiency -- in other words, diminishing reliance on overseas trade -- was a myth.
3. As an increasing intake of imports would be necessary to nourish the growing economy, exports were vital to continued economic development.
4. Since the importance of the traditional export industries was declining relative to the secondary industries (in terms of their contribution to national production) it followed that manufacturing would, in the future, have to take a greater responsibility for the provision of export income.  This implied that the manufacturing industries would need to become "export conscious" to a degree far greater than had been the case in the past.
5. The rate at which we could continue to develop and to absorb migrants could not be divorced from the external payments position.  In other words the limiting factor in the rate of development and migration was the size of our export income.
6. Attempts to maintain an exceptionally rapid rate of development (in the face of a serious decline in export income) would place unbearable pressure on the balance of payments and would compel increasing resort to controls and taxes to limit imports and to channel resources away from consumption into investment for development purposes.

The paper, "The External Trade Problem", on page 25 deals most comprehensively with the theoretical background of this thesis.  The article, "Consumption or Development", on page 36 dealing with the threatening balance-of-payments situation which arose in 1955/6 best illustrates the practical application of the argument.  Other articles elaborate specific aspects of the argument.

* * * *

WITH the fall in international reserves approaching danger levels around the middle of 1955/6 the Commonwealth Government introduced a series of emergency measures in the interim Budget of March, 1956.  These measures -- comprising increased taxes, an intensification of import restrictions, tighter lending policies and higher interest rates -- were designed, in the main, to maintain expenditure on development, but reduce expenditure on consumption.  Admittedly, some small reduction in the migration target was made -- it was hoped to maintain net migration at around 100,000 per year -- but the main emphasis of policy was on the restriction of consumption.  We expressed the view that the migration target was too high and that attempts to achieve it would expose the economy to serious dangers and to increasing government controls.

These dangers did not immediately eventuate.  This did not prove, however, that our argument was invalid, as some people were inclined to assert.  The fact was that 1956/7 produced an all-time record export income of nearly £1,000 million.  This was entirely unexpected at the time of the emergency Budget in March, 1956, when an export figure of around £750 million was being freely canvassed.

But despite the unforeseen bounty of a record export income and an addition of £212 million to overseas reserves in 1956/7, the net intake of migrants at 86,000 fell below the Government's target of around 100,000.  In the following year, 1957/8, export income fell by £163 million to £831 million and, with an easing of import restrictions, imports increased by £73 million.  Despite a heavy inflow of capital, we were forced to draw on our overseas reserves to the extent of £42 million.  Net migration fell again substantially to 66,000 -- partly due to an increase in the number of permanent departures, but influenced, doubtless, by the tightening economic position.  This was nearly 35,000 below the Government's hoped-for target.

This year, 1958/9, the balance-of-payments outlook is obscure.  Earlier forecasts of a large deficit of around £130 million have had to be modified because of an unexpectedly heavy inflow of capital.  The deficit will still be substantial, but probably much below the estimates which were current some months ago.

Unless there is a big improvement in export income in the coming financial year, a further drain on overseas reserves seems likely.  Under these conditions, it would be difficult for the Government to refrain from imposing additional restrictions on imports, although it would no doubt prospect every alternative, including borrowing from the International Monetary Fund.

* * * *

EVENTS over the last three years strongly suggest that the Government's net migration target of 1% of population was, from an economic standpoint, too ambitious.  This was what we contended at the time, for which we were taken severely to task in many quarters.  In many minds this contention made us an opponent of the migration programme and, even more, of migration generally.  This, of course, was not true.  We have never failed to recognise that immigration is of critical importance to Australia.  Our belief in the value of migration, however, did not lead us, "ostrich-like", to turn our backs on its undoubted economic consequences.  We have always held that immigration should be maintained at the highest figure compatible with internal stability and a sound external balance-of-payments position, in other words with a strong and well-balanced economy.  Events of the last two or three years have, we believe, confirmed both the broad validity of our analysis and the conclusions we drew from that analysis.

Anyone engaged in the field of economic debate would, of course, be foolish to claim 100% validity for his argument.  We claim no more for these articles than that they represent a contribution to the controversy on the balance-of-payments weakness of the last few years and its relationship to Australian development.  They do, however, put forward a viewpoint which was in grave danger of being overlooked.

What the future holds no one knows, but the views advanced in the articles in this booklet may not be without relevance or interest to those concerned in trying to assess our immediate developmental prospects.

The reader will notice some repetition in the articles, but we thought it best to leave the original text unaltered so that, taken together, the articles would stand as a record of the development of our thought on a question of critical importance to Australia.

March, 1994.

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THE OVERSEAS DEFICIT

(First published, June, 1990)

AUSTRALIA has had a chronic balance-of-payments problem since early 1952, when quantity import restrictions were first imposed.  But for exceptionally good prices for exports, particularly wool and wheat, in the early post-war years, and the large capital inflow stimulated by these prices, the weakness in the overseas position would probably have revealed itself even sooner.

The weakness arises from the greatly increased demands of the Australian economy for imports, without any improvement -- and perhaps some decline -- in its capacity to export.  In 1953/4 Australia imported, in physical terms, about 55% more than the average of the three pre-war years 1936/7 to 1938/9.  This increase is only partly accounted for by the growth in population.  Australia was also importing substantially more per head of population.  Per capita imports, in volume, were something like 20% greater in 1953/4 than before the war.  Nor does this rise fully reflect the true increase in the demands of the Australian economy for imported goods for it has been held in check by restrictions and by exchange controls over goods from dollar sources.

Indeed, with some easing of import restrictions in the current year 1954/5, imports have increased markedly.  Preliminary estimates suggest that the volume of imports will be 80% above pre-war -- or 40% per head of population.

On the other side, the increase in the volume of exports, since before the war is only around 22% (1953/4 over 1936/7 to 1938/9).  Per head of population, exports have declined by 6%.  Thus, along with an increased per capita demand for imports averaging about 30% over 1953/4 and 1954/5 has gone a decline in real exports per head of 6%.  No wonder Australia has run into heavy weather with its balance of payments!  Moreover the difficulties we are now experiencing in paying our way would have been intensified had not the terms of trade moved in our favour.  The prices we have been getting for our exports have risen by 400% compared with a 280% increase in the prices we have to pay for our imports -- in other words we can now obtain a given quantity of imports for a smaller quantity of exports than before the war. ⁽¹⁾

The greater per capita demands for imports are a natural consequence of full employment (in the pre-war years unemployment averaged about 9%), higher average standards of consumption, and a more-than-normal rate of development in both private and public projects.  But the difficulty of achieving a balance in our overseas accounts arising from these basic causes has been aggravated by the rapid inflation of money incomes and production costs, especially over the last five years.  It would be fair to say that these reasons, between them, embrace the generally accepted explanations of the post-war balance-of-payments problem;  although there are varying views as to the importance to be placed on the different factors.

* * * *

FURTHER light can be thrown on the problem by adopting a rather different approach.  What is insufficiently stressed in the currently accepted explanations is the fundamental structural change in the economy over the post-war years, and the relationship of this change to the overseas deficit.  An understanding of this would help to clarify present notions of whether the problem is likely to be temporary or long-lived and of the lines along which a satisfactory solution is to be found.  The adjective "satisfactory" is used advisedly.  One way to solve the balance-of-payments problem would be to drastically reduce effective demand.  This would mean a serious lowering of Australian living standards.  Such a solution would be far from "satisfactory".

Over the last 20 years the Australian economy has changed in basic character.  It has become highly, even intensively, industrialised.  Before the war, in spite of substantial manufacturing development, we still thought of ourselves as predominantly a primary producing country.  If this were true then, it is certainly not true now.  A transformation of immense significance has occurred.  There are today nearly twice as many people engaged in manufacturing as in primary production -- 1,080,000 as against 550,000.  At the 1933 Census the figures were 550,000 manufacturing, 670,000 primary industry.  Since 1938/9 real output in the rural industries has risen by just over 20%, in manufacturing by possibly 100%.  In 1933, of the total employed population manufacturing comprised 20%, primary industry 24%;  today, the proportions are manufacturing 30%, primary industry 15%.  The degree of industrialisation in Australia is indicated by the fact that in the United States official statistics show that 26% of the employed population are engaged in manufacturing. ⁽²⁾

This far-reaching change in the structure of the economy has given rise to a dangerous fallacy in our economic thinking.  This is the view (where it is not specifically argued it is often tacitly assumed) that the expansion of manufacturing has made us less dependent upon imports and has brought Australia a long step toward "self-sufficiency".  In fact this is the reverse of the truth.  The increased dependence of the economy on imports is indicated by the fact that the quantity of imports per head -- in spite of import restrictions -- is now about 30% greater than before the war.  Moreover, this has been accompanied by a reduction in the real capacity to pay for imports since the quantity of exports per head has fallen by 6%.

The economic growth and progress of Australia since the end of the war have been of such a nature as to swell the demands of the economy for imports without contributing in any material degree to its overall capacity to export.  The great expansion of manufacturing has been one of the most striking features of this progress and has itself increased the import requirements of the economy (not merely in absolute quantity but per head of population).

This should not be taken to imply any criticism of the main body of the development in secondary industry since the war.  This expansion has been in part a response to deliberate government policy to foster secondary industries and national development, and in part a response to the very high level of post-war incomes and phenomenal prosperity in the primary industries.  These high incomes have led directly to heavy imports of consumer goods and of motor cars, parts and petroleum.  But they have also swollen the demands for the products of Australian secondary industries which, in turn, have had to purchase abroad specialised equipment and materials and component parts which either cannot be obtained locally or can be made here only at excessive cost.

It is clear that the extraordinary post-war growth in secondary industry can be sustained only by a continuance of high living standards or, in other words, by a high level of incomes and spending power.  But these incomes, as we have seen, will swell the demand for imports both directly for consumption and, more important, by increasing the need for overseas equipment, materials and parts for local industry.

It is true of course that we can now produce many things in Australia that were not produced here before the war.  Motor vehicles are an outstanding example.  But the production of motor vehicles, and of many other products, has set up new and heavy demands for imported materials, parts and productive equipment.

It is now becoming more widely known that the main bulk of Australian imports consist not of "over-the-counter" goods but of materials, parts and industrial and transport equipment for use in local industry.  Finished consumer goods over the last few years have comprised only around 15% of all imports.  Since before the war all these categories show substantial increases.  Here are some comparisons (in 1936/37-38/39 £'s per head of population): -

IMPORTS	1936/7-33/9 £'s per head	1951/52 £'s per head	1953/54 £'s per head	1954/55 £'s per head (estimated)
Producers' Materials -- Manufacturing	6.6	8.1	7.1	8.5
Producers' Equipment	1.8	3.9	3.5	3.5
Motor Vehicles and Parts	1.7	4.3	2.1	2.5
Fuel and Oil	1.3	2.8	2.6	2.25
Consumer Goods	3.1	4.1	3.0	4
All Imports (including miscellaneous)	16.6	29.2	19.8	23

Source:  Import figures in Monthly Review of Business Statistics,
deflated by the Commonwealth Bank's Index of Import Prices --
Commodity Groups as published in "The Australian Balance of Payments".

Imports of producers' materials for use in manufacturing have risen, per head of population, since before the war.  Also some part of the increase in producers' equipment, together with a proportion of the increase in motor vehicles and parts, oil and other items, must be attributed to the expansion of local manufacturing industries.

Perhaps the notion that the post-war development in manufacturing has led to greater national self-containment has resulted from confusing the structure of Australian manufacturing with that of the United States, whose economy is largely self-sufficient.  It is true that Australia now employs somewhere about the same proportion of its population in manufacturing as America.  But in spite of a growing dependence on imports of certain strategic materials, the manufacturing structure of the latter is largely self-supporting.  The United States imports only a comparatively minor proportion of its raw or processed materials and practically no parts or capital equipment.  Australian manufacturing is fundamentally different.  It is compelled to import a substantial proportion of its materials, a large volume of component parts and a good deal of important productive equipment.

Many new developments in manufacturing in Australia thus set up additional demands for imports and throw an increased strain on the balance of payments.  Moreover this situation is unlikely to alter greatly in the foreseeable future.  Australian manufacturing is supported at present by heavy imports.  Without these imports it could not operate at its present scale and level of efficiency.  Unlike the manufacturing structure of the United States, it is far from being self-contained.  In its reliance on imports it bears a much greater similarity to the United Kingdom, which is dependent on the large-scale importation of raw materials without which its industries cannot function.  To obtain these essential requirements the United Kingdom must be able to export a high proportion of the finished products of its factories.  Australia, fortunately, is not in this position.  It can still pay for the major part of its import needs by exporting its surpluses of wool, wheat, meat and other primary products.  But the continuance of import restrictions since 1952, in spite of good export returns, strongly suggests that the traditional export of primary products is no longer, by itself, sufficient to pay for Australia's requirements of imports, at its present standard of living and level of employment.

This can only mean that if Australia is eventually to dispense with import restrictions and achieve a more or less permanent equilibrium in its overseas trading it must supplement its traditional exports of primary products with increased exports of the manufactured goods now being produced by its enlarged industrial structure.  At present Australia is exporting manufactured goods to the value only of about £40 million to £50 million a year, or about 2% of its total manufacturing output.  If we are to pay our way in overseas trade, without the aid of import cuts, this figure would have to be raised to something of the order of £200 million a year -- probably more rather than less.  It is not suggested that this objective can be achieved in the near future.  We are concerned only to establish the point that unless and until it, or something like it, is achieved, Australia will in all likelihood be compelled to suffer the continuing inconvenience, indignities and economic drawbacks of large-scale import restrictions.

This conclusion rests on two important assumptions which should not be overlooked: -- First, that income from the export of primary products will continue somewhere around present levels, i.e., about £700 million a year.  If anything this assumption may err on the optimistic side.  If export income from primary products fails to maintain this level, that would increase the need for exports of manufactured goods.  The second assumption is the continuance of Australian standards of living not greatly below the present standard and the maintenance of high employment levels.  A reduction in Australian living standards or in employment would of course lower the demand for imports.  It would also, of course, reduce the demand for the products of local manufacturing industries.

* * * *

IT seems clear that Australia can no longer look to its traditional exports of primary products to pay for the imports required to support accepted standards of living and employment, and rapid large-scale development.  Until we have developed a sizeable export market for manufactured goods, the balance-of-payments problem is almost certain to continue.  Australia is today a highly industrialised nation, with the production of secondary industry contributing more to national income than that of primary industry.  Under these conditions, it is hardly realistic to expect to achieve a balance in overseas trade unless a reasonable proportion of this production contributes to export income.  Looked at from this perspective, it seems rather obvious that a country such as Australia, in which a rapidly declining proportion of its total work force is engaged in the traditional export field and a rapidly increasing percentage in manufacturing, whose exports are insignificant, would run into trouble with its overseas trading.

If these conclusions are correct, it follows that the level of costs will in the long run be the decisive factor affecting the balance of payments.  For the development of a large export market for Australian manufactures depends almost entirely on producing at costs competitive with the rest of the world.  It looks as if the despised classical economists were not so far wrong as some post-war economists have rashly assumed.

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CURRENT FALLACIES

(First published, September, 1990)

EACH decade seems to bring forth its own particular crop of economic fallacies.  We, are not referring to the cranky notions of the few inevitable crackpots;  but to ideas that gain a wide credence and exert a powerful influence on thinking in high places.  These ideas become a kind of prevailing mode, the dogmas of the moment.  They tend to underlie discussion at learned societies and in lecture rooms.  Often they play a not inconsiderable part in determining the shape of economic and financial policies.

Ten years ago the popular fallacies centred around government planning.  Detailed economic planning was the master-tool which was to do away with all the ills inseparable from the pre-war laissez-faire economy.  The continuation into peace of government controls introduced for war purposes;  bureaucratic interference with the free choice of what should be produced;  the national ownership of large-scale industries;  massive government spending on social security, and the such-like, were to bring about, in short time, an economic Heaven here on earth below.  Many of the fancy notions then held with such conviction have since gone by the board.  They have failed to stand up to the acid test of experience, to later -- and more sober -- reflection, and to intellectual assaults by leaders of economic thought in many countries of the world.  They no longer command a wide public acceptance, nor the support of a consensus of expert opinion.

But, in Australia, they have now been replaced with a series of other ideas just as tenaciously held and with just as wide a currency.  Many of these present-day notions will, in another ten years, almost certainly have gone the same way as their predecessors.  But, for the time being, we are inflicted with them;  they are holding sway in important places of thought and are exerting a by-no-means negligible influence on government and business thinking and policy.

Many of the current fallacies arise from the magnificent, if foolish, refusal to recognise any limitations on the rate at which the Australian economy can expand.  If expansion is being pushed too rapidly -- which means simply that we are trying to do more than we have resources to do it with -- the economic warning-signs show up in several ways.  Labour becomes scarce.  Materials and productive equipment become inadequate.  Loans subscribed for public projects fall short of the intended amounts.  Prices and costs threaten to rise further.  And, most important of all, the balance of payments becomes seriously adverse.

All these are symptoms of deep-seated stresses and strains in the economy.  But to many people the symptoms are unpalatable.  They turn their backs on them.  They refuse to recognise them for what they are -- the danger signals of an over-strained economy.  How can the rate of development and expansion of a country be too rapid, they say?  If labour is scarce, then import labour by stepping up migration.  If materials and equipment are in short supply, then import more, or, better still, where possible make more at home.  If internal finances are inadequate, then borrow money overseas.  If prices and costs continue to rise, then does it matter anyhow?  If overseas earnings fall short of overseas commitments, run down overseas reserves or impose restrictions on imports, particularly of consumer goods.  And if the balance of payments is obstinate and refuses to right itself, and the reserves dwindle, then we can always fall back on that unfailing weapon of last resort, exchange depreciation.

Here we have quite a harvest of fallacies, expressed or implied.  We will discuss five of them.

1. That migration can in all circumstances be used to cure a general labour shortage.
2. That overseas borrowing will ease the difficulties associated with an adverse balance of payments.
3. That costs don't matter.
4. That exchange devaluation will, by itself, correct a chronic deficiency in the balance of payments.
5. That drastic cuts in imports of consumer goods will solve the balance-of-payments problem.

1. Migration and a Labour Shortage.

   If there are, say, 40,000 unfilled jobs in the community then it may at first sight seem that the obvious way to fill them is to import 40,000 workers from overseas.  There is a flaw in this idea.

   It arises from the fact that migrants bring not merely a pair of hands to work, but a mouth to feed, and a body to clothe and shelter.  Migrants don't only produce, they also consume.  They therefore set up immediate claims on the production of the community -- on its supplies of food, of clothing, of housing accommodation and furniture, on its transport facilities, on its water supply, gas, electricity, sewerage, postal services and a hundred and one other things.  These fresh demands create fresh jobs and the need for still more labour.

   To this, the objector might be tempted to reply that the additional worker should consume no more than the equivalent of what he adds in the way of production.  But this overlooks the fact that many of the demands of the migrant on the community's production run in advance of his own contribution to it.  For instance, he makes an immediate demand for accommodation (and all that goes with it) which he may be able to pay off out of the product of his work only over a long period of years.

   All in all the net effect of migration is to create more jobs than it fills.

   
   

2. Overseas Borrowing will Assist with Our Balance-of-Payments Difficulty.

   The doctrine that more overseas capital is the answer to Australia's balance-of-payments weakness has many adherents, even in high political and financial circles.

   The effect -- and intention -- of overseas investment in Australia is to promote development in both public projects and private business and to provide the basis for increased population.  The investment takes two main forms: -

   1. Government borrowing chiefly from the International Bank for Reconstruction and Development.
   2. Investment by financial interests abroad in Australian enterprises.
   
   

   Loans from the International Bank are ear-marked for the purchase of specific dollar goods which would not otherwise be obtainable.  The immediate impact on the balance of payments is neutral since the importation of the capital equipment is exactly counter-balanced by equivalent dollar grants.

   But the more rapid development, made possible by the loan, increases imports of consumer goods (because of the additional employment provided) and also of materials, parts and equipment of Australian industries which expand as a consequence of the development.  The effect on the balance of payments is, therefore, unfavourable.  The only circumstances in which this would not be true would be where the development is of such a type as to increase the capacity to export faster than it raises the demand for imports.

   Investment by private interests abroad, mainly in the manufacturing field, has the same train of consequences.  It promotes development, increases employment and thus the demand for imported consumer goods, and materials and component and replacement parts for the new industries.

   Overseas borrowing and investment make possible a higher rate of development without immediate detriment to the balance of payments, possibly even a short-run saving if they are devoted to "import-replacement".  But the higher rate of development before long must raise the over-all demand of the economy for imports, and thus place increased pressure on the external balance.  Some economies in a stage of rapid development, notably Canada, have been able to avoid the dilemma in which Australia now finds herself.  The Canadians have kept internal economic activity at a lower level than in this country, and thereby, avoided a spilling-over of excess demand into imports.  In addition, most of the overseas capital has been invested in export production, for example, wood pulp, oil, and minerals, rather than in import-generating local industries.

   Overseas borrowing is necessary for the rapid development of Australia;  but let us not delude ourselves that it provides the way out of the balance-of-payments impasse.  As Australia's population grows its appetite for imports will increase.

   
   

3. Costs Don't Matter.

   There are a number of variations of this theme.  One is that costs have little or nothing to do with the adverse trade balance, which is due to quite other causes.  Another is that our costs, by and large, are not high anyway;  that they are still generally competitive.

   The idea that costs don't matter represents a complete rejection of the doctrines of the old classical economists to whom costs were all-important.  It is Keynesianism run wild.  It is inconceivable that Keynes himself would ever have countenanced such absurd notions.

   It is, of course, impossible to tell to what extent the external position has been adversely affected by the rapid rise in Australian costs over the last five years.  Certainly it has not been assisted.  Some of the fringe exports -- certain dairy products, some canned foods, for example -- are rapidly losing ground in overseas markets.  Markets for manufactured goods, established after the war, have been lost through inability to compete.  To what extent imports have been encouraged because of high costs of home production cannot be known.  It would probably be considerable.

   The most extraordinary perversion of this general idea is that costs are not high anyway.  Some economists and statisticians have been prepared to resort to the use of remarkable data to prove that this is so.  What is more surprising is that their arguments seem to have been accepted in some official quarters.  However, one has the feeling that the contention that costs are not high is argued without conviction by its own advocates.  Why it is argued at all is difficult to understand.

   In a self-sufficient economy, it is true that the general level of costs would not matter very much.  Costs are no more than incomes in reverse.  If costs and prices are high, incomes are correspondingly high.  But Australia is not self-sufficient.  It is one of a large number of nations competing with one another in world markets.  Under these conditions the level of costs becomes vital, because it influences how much we can sell abroad and how much of our home market we can retain for ourselves.

   The people who most strongly incline to the view that costs are not very important seem to imagine that the Australian economy can, when necessary, protect itself against the consequences of a high-cost structure by a variety of devices -- restrictions on imports, tariffs, subsidies, and exchange-rate adjustments.  Unfortunately such a "barricadoed" economy is possible only within narrow limits.  For all these devices, which are designed to procure trading advantages for Australia, tend to be to the disadvantage of other countries.  They are led to protest.  International institutions register disapproval.  These countries and institutions become less inclined to friendly co-operation.  Overseas financial assistance becomes harder to obtain.  Other nations are provoked into retaliation.  The whole climate of international economics would rapidly become less favourable to Australia.

   These things are so obvious that they should hardly need to be stated.  But they are overlooked by some of the modern thinkers, who appear to believe that Australia has an unqualified right to manage its own affairs in its own way without regard to the effects of its policies on other countries.

   
   

4. Exchange Depreciation Will Correct a Chronic Deficiency in the Balance of Payments.

   This is one of the most common, and, incidentally, one of the most dangerous, fallacies abroad at the present time.  If one asks the rather unpopular question:  "What will Australia do if the deficit on overseas transactions persists to the point where it threatens to exhaust our overseas reserves?", the answer almost invariably is:  "Oh, in that case we would depreciate the exchange."  It seems to be assumed that the simple act of depreciation would restore balance and maintain continued health in the Australian economy without the need for any other action on our part.  If it were as simple as that we would certainly have nothing to worry about.  Unfortunately it is not so simple.

   Those who view the situation so complacently usually have somewhere at the back of their minds Australia's experience during the depression of the 'thirties when the Australian pound was devalued from parity with sterling to £130(A) = £100(E).  At that time we had an ominous balance-of-payments deficiency;  but there, any similarity with the present position, or the position which might conceivably face us some time in the near future, begins and ends.  In the Great Depression, the difficulty with the balance of payments arose from a steep fall in the prices for Australia's main exports caused by a world-wide economic collapse.  Our present external troubles are not caused by any major recession in prices for exports, which, on the contrary, have been remarkably well maintained.  They are caused by an excess demand for imports which is the result of the internal policies being pursued.  This is the essential difference.  In the de-

   INSERT PAGES 22 & 23

   of consumer goods would be highly unpopular in other countries, and would invite retaliation to the detriment of our export income.

   Money spent on imports of consumer goods helps to raise, or maintain, immediate standards of living.  Money spent on capital goods promotes development and growth, and development and growth increase the demands for imports.

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THE EXTERNAL TRADE PROBLEM

(This is the text of a paper given to the Economics Section of the Australian and New Zealand Association for the Advancement of Science -- August, 1990.)

THERE is no need for me to recall the statistical facts of the Australian trade problem.  They are well known.  The broad picture is that after some years -- from the end of the war up to 1950/51 -- of comfortable, and sometimes more-than-comfortable, surpluses in the balance of payments, we are now striking difficulties in balancing our overseas accounts.  These difficulties have not arisen, as so often in the past, from any serious decline in export income brought about by a collapse in commodity prices.  They have arisen from a persistent tendency to import substantially more than our receipts from current earnings and net capital inflow will pay for.

When import restrictions were first introduced early in 1952 it was generally believed that the external difficulty was a temporary passing phase, that it had been brought about by an unusual combination of circumstances that were unlikely to recur, and that the economy would soon again be on an even keel.  Certainly this was the impression given by official statements at that time.  Today we are sadder, if not wiser.  At the present time the accepted view is that import restrictions will be with us for some considerable time, and that there is certainly no prospect of their early removal.

There is still, however, a feeling that the trouble is not really serious and that, with reasonable good fortune, we can get by with nothing more drastic than the continuation of import restrictions of varying intensity but not-too-great severity.  And, as a last resort, there is always exchange depreciation.

Now I believe this approach reveals a grave misconception of the true nature of the balance-of-payments problem, that it ascribes the difficulty to causes which, though important, are not fundamental and which, if necessary, can easily be brought under control.  It assumes too, I think, that the great post-war expansion of manufacturing industries will, as time goes on, render Australia less dependent on imports;  in other words, that this expansion has, in sum, a net import replacement benefit.

I cannot accept this view of the balance-of-payments problem.  I propose to suggest that the reasons for the external unbalance can be traced to deep-seated changes in the structure of Australia's economy, and therefore in its economic relationships with the outside world, and that the economy, far from becoming less dependent on imports, is becoming steadily more dependent.  If this conclusion is correct it follows that the trouble is unlikely to yield to simple, painless methods of treatment, even with the assistance of import quotas of moderate proportions.  Import restrictions of immoderate proportions would clearly lead to grave dislocation of the internal economy.  In other words, though you may safely use import restrictions in reasonable doses to relieve an adverse balance-of-payments position, it is not at all clear that you can increase the doses indefinitely without dire effects on the patient.  In 1952, the import cuts then introduced were severe enough in all conscience, but you will remember that at that time we had built up an enormous surplus of stocks.  It would be unwise to assume from that experience that import restrictions of a similar intensity could be applied where the stock position was more or less normal without giving rise to widespread difficulties.

Now what are the reasons most commonly advanced for the balance-of-payments deficit?  There are, I think, three.  These are: -

1. The increased demands arising from full or over-full employment and higher living standards.
2. An over-rapid rate of development.
3. A cost structure out of line with overseas costs.

These reasons are all partly valid.  They do not, however, in my view, at any rate in the form which they are usually advanced, go far enough.

It is clear that if the excess pressure on resources arising from over-full employment were removed the demand for imports would be reduced.  But the reduction that would occur would not, I think, be nearly sufficient to right the external balance under normal trading conditions -- that is without resort to import restrictions.  I am prepared to admit, too, that if our costs were lower the balance-of-payments problem would be less acute.  And I would go so far as to say that if they could be reduced to a sufficiently low level it might disappear altogether.  But a "sufficiently low level" would be a long, long way below the present level, indeed so far below that such a transition would be totally beyond the bounds of reasonable economic and political possibility.

Finally, I am willing to concede that some reduction in the rate of development, and its accompaniment, migration, would assist the balance-of-payments position;  but for reasons which I shall shortly try to make clear, so long as development is proceeding on a large scale, I doubt whether a mere reduction in the rate would effect any notable, or indeed lasting, improvement.

Nevertheless, those economists who stress development as the major reason for the overseas deficiency are, I think, nearest to the truth -- that is, so long as the term "development" is taken to comprise the general growth and progress of Australia and not merely major governmental projects, such as are taking place in the Snowy River area, at Eildon Weir and Yallourn.  Under this conception, development would, of course, include much of the spectacular expansion occurring in manufacturing industries and related activities such as transport.  This expansion is especially important.  A nation in which the proportion of total working population that is engaged in manufacturing activities increases in two short decades from under 20% to around 30% has clearly undergone a transition, a fundamental structural change, of the utmost significance.  The implications of this great change have, I think, been both seriously under-rated and seriously misconstrued.

In discussions of the trade problem there is a tendency to think of the Australian economy as it was before the war -- that is, when despite a considerable development of manufacturing, primary industry still contributed the major proportion of physical production, and when the exportable surpluses of the primary industries were generally sufficient to

INSERT PAGES 28 & 29

ment has clearly added to the demand for imports, by comparison with pre-war, the basic cause of the increased demand is to be traced to the mere fact of growth, to the simple fact that the economy is rapidly becoming bigger and its appetite for imports correspondingly larger.

Now it will no doubt be contended that this argument, and also what I have said on the failure of manufacturing to make the economy more self-sufficient, entirely overlooks the import-replacement aspect of much of the development that has occurred.  It may be said, for instance, that while it is true that many of the new manufacturing developments increase the need for imported materials, parts and equipment the value of these imports is necessarily less than the value of the finished goods which they produce and therefore of the imports they replace.

Is this so?

Let us assume that a new manufacturing industry is established and that this industry employs say 10,000 additional workers.  It is immaterial to the argument whether these workers are supplied from migration or from the natural increase in population.  At first sight the value of the imports saved might seem to be represented by the equation: -

Net value of imports saved = value of finished goods otherwise imported - (the value of imported materials and parts + an annual valuation of imported capital equipment).

This is the sort of argument, reduced to mathematical terms, advanced by the numerous people who claim that new or expanded manufacturing industries must necessarily have a net import replacement benefit and therefore a favourable net effect on the balance of payments.  Unfortunately the argument is invalid.

The demands for imports which result from the establishment of the new industry do not stop at the materials, parts and equipment required by the industry itself.  The industry sets in train a whole series of additional demands for imports.  In the first place, there is the increased population represented by the 10,000 people employed in the industry.  These people drink tea and coffee.  They smoke cigarettes.  They may prefer certain items of imported clothing to the home-produced products.  And it does not stop there.  On present statistics the 10,000 employees will buy 4,200 motor cars and 3,000 washing machines.  Admittedly, these may be made in Australia, but the additional motor cars and washing machines produced may require certain imported materials and parts and perhaps additional imported machinery.  They will also increase the demands on Australian steel and the increased output of the steel industry will in turn add to the import requirements of that industry.  They will increase the demands for power and for oil and for rubber and this will necessitate additional imports.  Moreover this is not all.  The 10,000 people employed in the new industry must be fed and clothed.  Their requirements of food and clothing will reduce the surpluses of primary products otherwise available for export and will thus affect the balance of payments unfavourably.

In these many ways an expansion of new manufacturing industries, which is part of a general programme of rapid development and increased population, will swell the demand for imports, and may at the same time reduce the economy's capacity to pay for those imports.

In a country whose economy is expanding and whose population is increasing rapidly, it is clearly not true that the development of new manufacturing industries will, on balance, have a net import replacement benefit.  Many new developments, pursued in the vain hope that they will reduce imports and ease the balance-of-payments position, may turn out to have the reverse effect.  In a country such as Australia, as development continues and the economy grows, there seems no escape from the fact that the demand for imports will also grow.  The mere fact of growth and expansion increases the requirements of imports.  It is this fact of growth and expansion that constitutes the basic cause of the balance-of-payments problem.  As we grow bigger, our appetite for imports will increase.

If this is true, it follows that it will not be sufficient, in order to solve the balance-of-payments problem, to slow down the rate of development.  It does not matter whether the rate of development is slow or fast.  A slower rate of industrialisation will only mean that import requirements will not increase so rapidly as with a faster rate.  But they will still increase.

Nor, so long as the economy continued to grow rapidly, would a mild deflationary policy give more than temporary relief.  Let us assume that such a policy were applied to produce a more or less permanent excess of workers over jobs of, say 125,000, or unemployment of around 3 or 4 per cent. -- undesirable as this could be from the social and human standpoint.  At the present rate of increase of population, it would need little more than a year to restore the economy to its previous position so far as the total numbers employed were concerned.

Nor is the way out to be found in additional overseas borrowing, even if ample funds were readily available -- which they

INSERT PAGES 32 & 33

position, and the problem of the balance of payments less acute.  The classical law of comparative advantage or comparative costs seldom appears in modern economic thinking, but it is not yet ready for the rubbish tip.  It is still good economics for a nation to devote its energies to those things it can do best and in which the resources used bear the most economic ratio to the value of the product produced.  The fantastic idea that all expenditure is good, so long as it gives employment, regardless of whether the expenditure is directed into the most economic channels, will rapidly become discredited.  In the end it may destroy more opportunities for employment than it creates.

I was recently reading a book comprising a series of lectures on international trade given to the University of Brazil in 1952 by one of the greatest of American economists, Jacob Viner, of Princeton University.  In it is this pregnant statement: -

"The opportunities open to an undeveloped country in the foreign trade field are certain to be a vital factor in determining the rate at which it can make economic progress.  No country except the United States has attained a high level of per capita income which has not maintained a high rate of imports to total national product, and no country, except possibly Russia, can in this respect make the United States its model without courting perpetual poverty."

The words "perpetual poverty" may be rather too strong to apply to the happy land of Australia.  But "poverty" is after all becoming more and more a relative term and if Australia wishes to continue its development without seriously sacrificing its present standards, then we could with advantage pay heed to Viner's words.

In the post-war years we have indulged in a great deal of self-delusion.  It is late, but I hope not too late, for us to realise that no country in a stage of rapid growth and great development -- and particularly a country such as Australia, where many essential industrial resources are lacking and where much technical and scientific "know-how" must be imported -- can avoid, or should by deliberate purpose attempt to avoid, an increased economic dependence on the rest of the world.  Australia, because it is small, because it is young, because it must grow up economically as fast as possible, is peculiarly unsuited to doctrines of self-sufficiency.  It can achieve its destiny only through the steady expansion of its external trade and with the maximum of economic, financial, scientific and technical assistance from its more highly-developed friends.

There is no easy path to the goal of national economic greatness, of greatly improved standards of life for all and a population approaching 25 million by the end of the century.  It cannot be attained out of the products of the work of other countries, or by "soft" internal policies too often dictated by narrow political motives.  It needs great enterprise, immense labour, a "tough" economy closer to the American model, and a restraint and discretion in the management of our internal economic affairs which we have not exhibited since the war.  Our supreme delusion has been to suppose that such a goal could ever have been easy of attainment, or could be achieved by the self-regarding doctrines of economic self-sufficiency with which we have been infested since the war.  Unless we can dramatically and greatly increase the capacity to export, the vision of Australia as another United States -- in the economic sense -- will almost certainly remain an idle dream.

---

CONSUMPTION OR DEVELOPMENT?

(First published, December, 1990)

WHEN the Prime Minister addressed the House of Representatives on the 27th September (1955) on the economic situation he was contending with one of the most baffling, although, in the intermediate sense, not one of the most critical problems in Australian economic history.

The position has been compared favourably with the balance-of-payments crisis of 1952.  In fact the situation is much more intractable and deep-rooted than in 1952.  The crisis of 1952 arose, at least partly, from temporary causes -- the collapse in wool prices from the abnormal levels brought about by the Korean outbreak, and the unexpectedly rapid fulfilment of an excessive volume of import orders, tacitly if not actively encouraged by the Government itself.  At that time there were hopes, reasonably founded, that export prices would shortly show some recovery and that imports would, of themselves, stabilise at a lower level.  In the present situation such hopes could not be confidently entertained.  There seems little prospect of any marked upward movement in export income; ⁽³⁾  nor does there seem much likelihood that the flow of imports, if left to itself, would show any substantial decline.

The policies which should be adopted to arrest the fall in overseas reserves will naturally depend on a right diagnosis of its causes.  On this it is possible to take two fundamentally different standpoints.

One standpoint is that the excess of imports is attributable, in the main, to a more or less sudden splurge of spending on consumption goods.  This is the view which has been taken by the Government.  The other is that the balance-of-payments deficit is to be traced to something much more fundamental than a temporary boom in consumption spending;  that it is due rather to deep-seated forces which have been at work in the Australian economy for some years.  In this view, the difficulty arises from structural changes in the size of the economy and in the pattern of employment of its resources.  It attributes the balance-of-payments problem largely to the unprecedented growth and development of the economy in recent years.  This development has greatly added to import requirements but it has not resulted in any material increase in the capacity to pay for imports -- that is, the capacity to export.  The effects of these changes on the balance-of-payments have been masked by highly favourable terms of trade, but they are now becoming clear as export and import prices settle down to a more normal relationship.  This might be called the "development" diagnosis as opposed to the "consumption" diagnosis advanced by the Prime Minister.

The core of the Prime Minister's analysis is to be found in the following sentences:  "Our prosperity, for the most part, is well founded insofar as it springs from high levels of employment, active industry and improving standards of production.  But it is ill-founded to the extent that it is eating into, largely for consumption purposes, our vital international reserves." -- "This makes it perfectly clear that the present condition is much more accurately described as a consumption boom than as a developmental boom."

To substantiate this diagnosis of the problem the Prime Minister quoted various statistics, all of which suggested a large, and some a staggering, rise in consumption expenditure in recent years.  The critical figures were: -

1. An increase, since 1952/3, in personal consumption spending (excluding cars and houses) of 22%.
2. An increase in private expenditure on cars and houses of 41%.
3. An increase in imports of consumer goods of 172%.

Unfortunately it is impossible to accept these figures as giving an accurate reflection of the true increase in consumer spending.  The Government's statistical advisers have erred in three important respects, and these errors combine to give a highly magnified picture of the rise in expenditure on consumption goods.

The first error lies in the selection of 1952/3 as the base year.  It is an elementary principle of statistical method that the base year or period from which economic trends are assessed should reflect a more or less average or normal position in which the magnitudes are not distorted by factors of an exceptional or temporary character.  In 1952/3, imports of consumer goods were abnormally low because of the stringent import restrictions which came into effect in March, 1952, and which fell with particular force on consumption items.  Moreover, 1952/3 was a year of comparatively depressed business activity with slight unemployment and, in fact, total spending on personal consumption was, in physical volume, less than the preceding two years, despite a substantial growth in population.

In the second place, in order to give a true picture of increases in consumer spending, it is necessary to make allowance for price increases.  These have been disregarded in the Prime Minister's statement.

Third, since 1952/3 population has increased by nearly 400,000.  Under these circumstances an increase in total spending on consumption goods is naturally to be expected.  But it is clearly wrong to take the increases on this account as being in any way indicative of a consumer spending "spree". ⁽⁴⁾

If spending on consumption goods in 1954/5 is related to an acceptable base (we have selected the yearly average of the period 1950/1 to 1952/3) and if adjustments are made for price changes and population increase, the picture becomes strikingly different from that painted in the Prime Minister's statement.  The increase in imports of consumer goods becomes 23%, not 172%, and in personal consumption spending (excluding houses and motor cars 7%, not 22%.  The increase in expenditure on motor cars becomes 32% as opposed to the Government figure of 64%.  On houses there is no change, not a 25% increase (the increase denoted by the Government figure of £40 million).

For convenience the comparison is set out in the following table: -

Increased Spending on Consumer Goods

	Government's Figures	Our Figures
Imports (1)	172%	23%
Total Consumer Spending (Excluding cars and houses) (2)	22%	7%
Motor Cars (3)	64%	32%
Houses (4)	25%	No Increase

Note:  In addition to adjusting the figures for population increase, they were reduced to "real" terms as follows: -

⁽¹⁾ By an import price index specially constructed from the various commodity groupings in the Commonwealth Bank's Import Price Index.

⁽²⁾ By the "C" series price index.

⁽³⁾ From actual registration figures.

⁽⁴⁾ By average costs per completed dwelling unit, derived from data in the Commonwealth Statistician's Quarterly Survey of Building Statistics.

WHEN account is taken of improvements in productivity over the last four or five years (and which have frequently been pointed to with pride by Cabinet Ministers) the increase in consumer spending indicated by our figures could hardly be regarded as excessive.  Admittedly, the increased spending on motor cars has been substantial, but it needs to be borne in mind that this is partly due to the greater availability of cars;  also to a return to normal hire-purchase facilities, consequent upon the removal of capital issues controls -- in which the Commonwealth Bank itself has actively participated -- and the modification of bank advance policy.  Housing has been rightly regarded all along as a special social problem and, in any case, the purchase of homes has been strongly encouraged by governments themselves through the provision of easier credit facilities.

All in all, the evidence is hardly sufficient to substantiate the view that there has been, all of a sudden, a terrific boom in personal spending, particularly on consumption goods.  This does not mean that the level of consumer spending carries no responsibility for the external difficulty.  But it does mean that if consumer spending is taking place at a much higher level than the economy can sustain, then this is not something which has arisen in the last two years;  it has been with us for a considerable period.

The important point is that people don't suddenly indulge in a splurge of spending just for the "sheer hell of it".  With rare exceptions, the spending of most people is carefully controlled in accordance with their present and prospective income and commitments.  True, in times of financial buoyancy, too many take an over-optimistic view and spend more than they should, thus mortgaging to too great a degree their future earnings.  But the majority are usually pretty canny judges in their own case.  If the level of consumer spending in relation to the needs of the economy is excessive, then it is, in the main, only so because incomes and standards of life are greater than the economy can afford.  But the "excess" portion of these incomes is in turn, to a large extent, the resultant of government policies and decisions of industrial tribunals.  Indeed the strongest single influence on total consumer spending in Australia today is the development and migration programme of the Commonwealth and State Governments.  It can surely not be denied that the foot on the accelerator which regulates the tempo of spending through the economy belongs to the Government.

The call for voluntary restraint in spending, insofar as it applies to the individual in a personal capacity, is hardly likely to be effective.  People do not regulate their spending -- and cannot be expected to -- on any assessment of national needs but solely by reference to their personal desires and the resources available to them to satisfy those desires.

* * * *

If the trade crisis cannot be properly attributed to a sudden surge in consumer spending, to what then is it primarily due?

The Prime Minister rejected the idea that a development boom was mainly responsible.  Certainly, in the last year or two, there has been no sudden rise in developmental expenditure which could justify the title of "boom".  But what the Prime Minister's advisers have chosen to ignore is that there has been a continuing developmental boom in Australia for a good part of the post-war period.  Indeed at no time in Australian history, except perhaps in the gold rush days of nearly a century ago and for a few years in the late 1920's, has there been a period of development remotely approaching the present.

The rate of population increase has been faster than that of any comparable country and the proportion of resources devoted to investment one of the highest in the world.  Each year we are now adding nearly a quarter of a million people to the population. ⁽⁵⁾  This demands a corresponding concentration of resources on investment to provide employment, houses and a wide range of community services.  Over the six years since 1948/9, public and private capital expenditure have together averaged around 25% of Gross National Product compared with about 18% in the six years preceding the war.  Government expenditure on public works has been of the order of 9% compared with less than 7% before the war.  The expansion in manufacturing has, by any standard, been extraordinary.  Since before the war the numbers employed in the manufacturing industries have nearly doubled and output has possibly more than doubled.  It is worth noting that since 1948/9 the proportion of Gross National Product devoted to consumption purposes has been substantially lower than in pre-war years.

* * * *

THE maintenance of a high ratio of investment to national product -- in other words, the rapid pace of development -- has pressed heavily on resources and has been a major factor in the post-war inflation and the almost chronic condition of labour shortage.  This has given rise to over-award and over-time payments, because of manpower shortages, and thus to heavy consumer spending which, in turn, has encouraged further industrial expansion.

The rapidly growing population has added, year by year, to the nation's requirements of imports of essential consumer goods, materials and parts for the new and expanded industries, and of capital equipment of many kinds for both private and public projects.  But this great expansion, while increasing the need for imports, has not added correspondingly to the capacity to export.  Here lies the basic reason for the chronic inability to balance overseas expenditure with export earnings.  Had not the terms of trade been so favourable to Australia in the post-war years, the rate of development which has been maintained would clearly have been impossible.  Now that the terms of trade are moving against us, is it feasible to think that we can persist with development and migration on the same scale as previously?

In 1954/5, notwithstanding restrictions, imports amounted to nearly £100 per head.  With population growing at the rate of 230,000 a year, this would imply an addition to our import bill every year of nearly £25 million or, in four years, £100 million.

The import cost of the migration programme presents a special problem.  The migrant sets up immediately a demand for capital which has been variously estimated at from £2,000 to £3,000 per head.  Taking the lower figure it can be shown that the additional imports -- that is over and above what they would otherwise be -- necessitated by the present migrant intake of 100,000 a year would average out over a ten year period at something like £87 million a year. ⁽⁶⁾  Admittedly, these figures can be estimated only in the most approximate terms, but, whatever the estimate, there can be no shadow of doubt that the migration programme is one of the most powerful contributing factors in the balance-of-payments difficulty.

If the trade problem arises fundamentally from the development and migration programme, and not from a sudden consumption boom, it follows that attempts to maintain the scale of the development must aggravate the overseas position.  If population increase continues at a rate approaching a quarter of a million people a year, and an investment programme of the size needed to absorb such an increase is maintained, the balance-of-payments problem must become progressively more acute.  In 1956/7, imports are to be licensed at the rate of £650 million a year.  (This would be equivalent to just under £70 a head.)  As population increases, the severity of the restrictions necessary to achieve this figure will increase, too, unless there is a recovery of export income.  Is it likely that Australians will be content to put up with a progressively increasing burden of import restrictions once they begin to feel the impact of these restrictions on their everyday convenience and comfort -- as soon they must?

* * * *

THE continuation of development and migration on its present scale will place unbearable pressure on the balance of payments.  The attempt to maintain the rate of economic expansion in the face of a chronic and increasing balance-of-payments difficulty must result in the imposition of more and more government controls designed to divert resources to developmental projects and away from immediate consumption, and would eventually lead back to a tightly controlled economy resembling that of the war and immediate pre-war years.

Fortunately, such a train of consequences is not likely to come about, because both economic circumstances and political pressures, arising from the desire of people to satisfy their demands for consumption goods, would soon compel a reversal of such a policy.  There is no escape eventually from a sharp cut-back in development and migration.  It may not be hard to understand why the Government is reluctant to do this and why it is prepared to gamble to the last on a recovery in export prices.  It is more difficult to understand why its advisers have been so keen to shift responsibility for the external unbalance from its fundamental cause.

A reduction of the developmental programme would automatically check the rise in consumption spending.  In addition, an educational drive, combined with special financial inducements, to persuade the people to save more might help the Commonwealth Government to secure a real budget surplus, where increases in tax would almost certainly fail.

While the diagnosis advanced by the Prime Minister is regrettable, some of the cures he has propounded, although no more than stop-gaps, must be applauded.  The import cuts were inescapable even though the prospect of any lightening of the cuts under the Government's present policy is remote indeed.  A tighter monetary policy was an obvious and necessary step.  The cut in Commonwealth expenditure on public works of £10 million, while small, sets an example which should be -- but will not be -- followed voluntarily by the State Governments.  The strong emphasis which the Prime Minister gave to the need for a great expansion in the export field is far-sighted and is clearly the only route which offers a constructive way out of Australia's difficulties.  But it is a long-term solution which cannot be achieved in a day.  In the meantime Australia has no alternative but to cut its coat according to its cloth and restrict the development and migration programme to what the economy can afford.  Otherwise we will soon run into difficulties infinitely worse than the present.

No commentary on the Prime Minister's statement of policy would be complete without commending, in the strongest terms, the Government's intention to issue periodically a Government paper setting out the basic facts of the economy and to present a yearly economic report to Parliament on the state of the nation.  This should bring Australia into line with governmental practice in other modern communities and should help to prevent in the future the occurrence of unpleasant economic dilemmas such as that in which we now find ourselves.

* * * *

AUSTRALIA has reached one of those historic turning points in its economic evolution, which, at some time or other, come to all nations.  A quarter of a century ago we confronted such a turning point in the Great Depression.  Now we are at another.  No one can clearly see the paths ahead or predict with confidence how the serious, and apparently chronic, deficiency in the balance of payments will affect our internal economic condition or the prospects of continued large-scale development.

It is time to bring to bear on these great questions the best available intellects to study them with fresh and open minds, free of the economic and political dogmas which have shaped our thinking over the post-war decade.

What is wanted is a small commission of the best economists and industrialists, unencumbered for a short period by the distractions of departmental and business duties, to give undivided attention to the problem.  Such a commission might clear the air of much of the superficial stuff and nonsense which these days passes for thought, establish the basic economics of the new, industrialised Australia and provide the nation with a set of signposts for the future.

APPENDIX

The Effect of Migration on the Demand for Imports and the Balance of Payments

IN 1954/5 Australian imports were divided broadly into:

Capital goods	40%
Consumer goods and others	60%

It is impossible to assess Australia's import requirements under conditions of comparatively free importation.  In 1954/5 imports averaged £94 per head.  Recent restrictions are designed to reduce imports to a rate of £650 million a year.  For a population of 9,400,000 -- likely at the end of 1955/6 -- this equals just under £70 a head.  It seems fair to take a figure of at least £100 a head as a reasonable estimate of the level of imports under conditions of comparatively free importation.  Imports of consumer goods (including producers' materials to be made up into consumer goods) would comprise about £60 and capital goods £40.  The capital import figure is the overall national average.  But the main demands for capital arise from the needs of the additional population brought about by natural increase and migration, and the great part of capital imports are, of course, to cater for the needs of the added population per year.

The demands set up by migration for imported capital can be calculated as follows: -

We have assumed that each migrant requires £2,000 of capital to cover his needs for housing, community services (such as roads, transport, electricity, sewerage, education, etc.), and productive equipment and buildings to provide for his employment.  In 1954/5 imports of capital goods approached £340 million (i.e., 40% of total imports of £846 million), and therefore comprised about 27% of total capital expenditure of £1,245 million.  If the migrant's total capital requirement is £2,000 it is reasonable to assume that 27% of this must be imported, i.e., £540.

Total import requirements of migrants per head would thus be: -

Capital goods	£540
Consumer goods, etc	£  60
	£600

On a net migration figure of say 100,000, the total import bill in the first year could be increased by approximately £60 million.  In the short run it would be possible to get by with a lower level of capital imports, but eventually capital will have to be kept up to customary standards.  Over a ten-year period and on the above basis, capital imports would average £54 million a year, consumer goods imports £33 million, and the total for all imports £87 million.  Capital imports, of course, remain at £54 million per annum, but imports of consumer goods rise by £6 million per annum as each 100,000 migrants are added to the population.

It may be claimed that this calculation makes no allowance for the contribution which the migrant may make to the replacement of imports and to the increase of export production.

So far as import-replacement is concerned, this has already been allowed for in the calculation.  The level of imports of consumer goods (i.e., £60 a head) is that which the Australian community is already taking under the existing pattern of production, which, of course, includes production replacing imports.  It cannot necessarily be assumed that additions to the population will have a greater import-replacement factor than the existing producers.  The only reasonable assumption to make is that it would be roughly the same.  The same considerations apply to the import of capital.  In 1954/5 Australia's capital imports comprised about 27% of all capital expenditure.  This is the ratio under the present pattern of production and includes the contribution of that pattern in replacing imports.  Again, there is no particular reason to suppose that the ratio of imported capital to total capital expenditure will alter greatly with additional population.

It cannot be claimed that migrants have added anything substantial to export production, which consists mainly of the primary industries.  Production in these industries has risen about 20% since pre-war, but the numbers employed have declined.  The increased output has been achieved as a result of better farming methods, mechanisation and pest eradication, and not as a consequence of the employment of additional manpower.

Indeed, on the export side the only conclusion which can be reached is that migration, along with the natural increase in population, has tended to reduce surpluses available for export below what they would otherwise have been and that its effect on the balance of payments is therefore adverse.

---

THE IMPORT REPLACEMENT THEORY

(First published, December, 1990)

THE theory of import-replacement is one of the most serious fallacies in Australian economic thinking since the war.

The theory is based on the assumption that the great development taking place in the manufacturing field will reduce the dependence of the economy on imports.  With one or two exceptions it is admittedly hard to find explicit affirmations of this idea.  But that it has been implicit in much of our economic thought and policy there can be no doubt, and, in the years following 1952 when import restrictions were first introduced, import-replacement almost assumed the proportions of a national dogma.  It was widely believed that a solution to the balance-of-payments deficiency could eventually be achieved by the progressive substitution of local production for imports.  Under the influence of this notion, the test to be applied to a projected new industrial development was not so much the basic economic criterion of cost as the technical feasibility of producing the article in question in Australia.

But over the last few months there have been signs thai opinion is shifting and that the hopes which were held thai the external problem could be solved by the process of substituting home production for goods previously imported, are being abandoned.  The Prime Minister himself, and at least one of his senior Cabinet Ministers, have expressly stated that a programme of industrialisation far from reducing the total import requirements of the economy, inevitably increases them.  In November, addressing the South Australian Chamber of Manufactures, the Rt. Hon. John McEwen, Minister for Commerce and Agriculture, said:  "There is no record in history of any nation which has expanded its industrial structure without at the same time constantly increasing its import demands.  That goes for the United Kingdom, the United States, for Germany, for Japan, and for every modern industrial nation."

Economists, too, are today less confident in the doctrine of import-replacement than they were a comparatively short time ago.  Confidence in the doctrine is being destroyed by the hard fact that despite a doubling of output and the employment of 30% of the working population in the manufacturing industries -- as against 20% two decades ago -- Australia's imports, in quantity, have risen by nearly 100%.  Even on a per capita basis, imports, in 1954/5, were around 40% greater than before the war.

There are, admittedly, two, although extremely limited, senses in which the doctrine of import-replacement may be said to be valid.  The first is the obvious one that if a nation launches the production of a certain article, previously imported, on a scale sufficient to supply all or a good part of the total demand it has thereby reduced or removed the need for importing that article.  If, for instance, as a consequence of developments since the war we were now meeting our entire requirements for, say, domestic refrigerators from our own production, then it follows that we would have removed the need to buy refrigerators from other countries.  In the narrow sense, import-replacement would have occurred.  We would have replaced imported refrigerators by the product of local factories.  It is wrong, however, to deduce from the simple technical fact that we are now making something we did not make before, that we have thereby necessarily rendered the economy as a whole less dependent upon imports.  With some forms of production there may be a real net saving of imports;  but with others, particularly perhaps those which have to import the major part of their raw materials and components, this may not be so. ⁽⁷⁾

There is a second limited sense in which import-replacement may be said to have taken place.  This is where, as a consequence of our manufacturing development, we are meeting the demands of our greatly expanded economy for a commodity or material which we would otherwise have to import, or to import in greater quantity, than is, in fact, the case.  For instance, the Australian economy today requires a great deal more steel than before the war.  If, in the interim, steel production had not been increased by around a million tons a year, then to maintain the present level of the economy's requirements of steel, we would have had to import an additional million tons.

* * * *

IN this sense, import-replacement has, of course, occurred over a wide field.  Indeed, it is on this aspect of import-replacement that the supporters of the doctrine have largely rested their case.  They have pointed out that if the capacity of Australian manufacturing had not been vastly expanded then we would have been compelled to import in infinitely greater volume to sustain the present population at its existing standard of living.  This, of course, is indisputable.  Unfortunately for its advocates, the argument is wholly beside the point.

From the standpoint of achieving a balance in overseas trading, the only test of import-replacement that matters is whether the industrialisation that has occurred has resulted in an over-all reduction in the economy's import requirements.  On the facts -- to which we drew attention above -- it is perfectly clear that industrialisation has not produced this result.  It has not produced it in terms of absolute quantities of imports, nor has it, so far, produced it in relation to the general size of the economy.  Imports, and related payments, today amount to over 25% of national income (even with restrictions) as compared with under 20% in the pre-war years.  The only test of import-replacement that means anything, so far as the balance of payments is concerned, is whether, at this point of time, we require less imports than we did last year, or five years or ten years ago.

* * * *

THE supporters of import-replacement have overlooked three vital considerations.

First, as Australian industry must import quite a large proportion of its requirements of raw and semi-processed materials, essential component parts and capital equipment, the direct net gain, if any, in replacing imports by home production is not nearly so great as it may at first sight seem.  To take the example of steel again:  It is wrong to claim -- as the advocates of import-replacement sometimes do -- that because steel production has expanded by one million tons we are thereby saving each year imports to the value of one million tons of steel.  To get the true direct import-saving there has to be deducted the additional imports of materials and equipment made necessary by the expansion of the capacity of the local industry.  Moreover, even this only covers the position in the industry itself.  What is frequently over-looked is that to produce, or expand, the production of a given article in Australia requires not only the establishment of a factory to manufacture it, but a whole range of auxiliary activities -- for instance, other local industries must be expanded to provide equipment and materials, transport, power and other services.  An expansion in the capacity of an industry such as steel leads to an increased demand for the products and services of all the other industries on which the steel industry depends.  To cater for these increased demands, these industries must in turn expand their capacity and, in the process of doing so, they will add to their requirements of imports.

Second, the additional demands on imports made by the increasing population, a big proportion of whom are employed in the "import-replacement" industries themselves.  This increased population gives rise directly to increased demands for imports of consumer goods not produced in Australia;  and indirectly, by encouraging an expansion of investment and output in local industries, it leads to additional imports of the equipment, raw materials and parts required by the enlarged industrial structure.

Third, the increasing demands for imports as real incomes and living standards rise.

A good example of these processes is to be found in the manufacture of locally-produced cigarettes and tobacco.  In 1954/5 we produced 44.8 million lbs. of tobacco and cigarettes, as against 23.3 million lbs. in 1938/9.  Over the same period the increased local production necessitated an increase in imports of unmanufactured tobacco from 23 million lbs. in 1938/9 to 43 million lbs. in 1954/5.  Even so, in spite of the greatly increased local production, the greater population and higher standards of consumption per head gave rise to an increase in imported cigarettes and tobacco from ¾ million lbs. in 1938/9 to over 3 million lbs. in 1954/5.

Indeed, over a wide range of commodities, examples of which are given in the two Tables, a similar process has taken place;  a considerable expansion of local production has been accompanied by a rise in imports (see Table I).  Table II gives examples of how increases in local production have compelled large increases in imported raw materials.

TABLE I. Imports and Local Production in Australia -- Pre-War & Today

	Unit	1938/9		1954/5
		Local Prodn.	Imports	Local Prodn.	Imports
Copper -- refined	tons	17,500	72	31,800	28,000
Newsprint	thous. tons	-	178	73.1	214
Steel Bars & Rods	thous. tons	387	5.9	416 †	74.5
Steel Sheet -- plain	thous. tons	138	39.9	230 †	116.2
Electric Motors	thous.	32	146	1,185	261
Cotton Cloth	mill. sq. yds.	5.4	198.1	35.1	305.7
Cotton Yarn	mill. lbs.	11.7	4.8	41.2	6.4
Cigarettes & Tobacco	mill. lbs.	23.3	0.7	44.8	3.2
Gloves	thous. doz. prs.	62 *	437	330	510
Socks & Stockings	thous. doz. prs.	3,800	40	5,200	501
Whisky	thous. gals.	271	523	451	609

* Excluding dress gloves which, in 1954/5, were nearly ⅓ of total output.
† 1953/54.

Sources:  Production and Oversea Trade Bulletins.

TABLE II. Output of Finished Products and Related Importation of Raw Materials

INDUSTRY	Unit	1938/9	1954/5
Motor Vehicles   New Vehicles -- registered	thous.	79	233
Imports   Built-up Vehicles   Motor Bodies   Unassembled Chassis   Parts   Motor Spirit Produced   Crude Petroleum Imported   Rubber Tyres Produced*   Crude Rubber Imported   Tobacco Manufactured   Imports Unmanufd. Tobacco   Paper Produced   Pulp Imported	thous. thous. thous. mill. lbs. mill. gals. mill. gals. mill. thous. tons mill. lbs. mill. 1bs. thous. tons thous. tons	2 1 75 4.1 23 54 2.2 15 23 23 42 64	43 38 124 51.4 325 927 3.5 44 45 43 79† 107
Fertilizers & Chemicals   Superphosphate Produced   Sulphuric Acid Produced   Imports -- Phosphate Rock   Imports -- Sulphur   Cement Sheets Produced   Asbestos Imported   Wirelesses Produced   Wireless Valves Imported   Cotton Yarn Produced   Raw Cotton Imported	thous. tons thous. tons thous. tons thous. tons mill. sq. yds. thous. tons thous. thous. mill. lbs. mill. lbs.	1,119 490 800 115 9.5 92 164 496 11.7 11.9	1,964 827 1,084 193 27.8 132 444 905 41.2 52.2

* 1938/9 figure includes bicycle tyres;  1954/5 figure is motor vehicle tyres only.
† 1953/54.

Sources:  Production and Oversea Trade Bulletins.  Petroleum Information Bureau.

* * * *

THE astonishing post-war manufacturing development is something of which all Australians can be greatly proud.  It has been a magnificent achievement which bears witness to both the enterprise and high technical competence of Australian management and the skill of its workers.  That we are on the verge of a great industrial future there can be no doubt.  But this future will be the more assured if we concentrate our efforts on those things we can do most efficiently and where our natural advantages are most pronounced.

The final test of whether Australia should attempt to produce commodities or materials previously imported, boils down to a question of real costs.  It is not sufficient to have the human and physical resources and even the technical know-how to produce a certain article.  The root question is whether we can produce it at a cost which is comparable, or has prospects of becoming comparable, with overseas costs.  To squander resources in directions in which there is little hope of achieving near-world levels of productivity would only make the balance-of-payments problem still more intractable as well as reduce the Australian standard of living.

The important thing for Australia now is to make up its mind what things it can do best, to concentrate its efforts and resources in those directions, and to vigorously prospect the export field.  Nations much poorer in natural resources than Australia, notably Switzerland, have achieved a high standard of living by realising their own limitations.  It should be clear by now that to spread our efforts over too wide a range of production in an attempt at "import-replacement" is to chase a dangerous "will-'o-the-wisp" which would land us in Argentinian economic swamps.

---

DEVELOPMENT DEPENDS ON EXPORTS

(First published, June, 1991)

IT is of the greatest conceivable importance for Australians to realise that the rate at which the development programme can be continued will be largely determined by the rate at which export earnings can be expanded.  We could with advantage adopt the slogan:  "Development depends on exports".  Theoretically it might be possible to maintain a rapid pace of development by progressive cut-backs in living standards.  But it should hardly be necessary to emphasise that this process could not in practice be taken very far.  From any practical point of view, development means development without any noticeable reduction in customary standards of life.

An alternative route to development by the expansion of exports is being strenuously advocated in certain quarters.  This is development by the replacement of imports.  In other words, since there are obvious difficulties in the way of rapidly expanding exports, we should concentrate on reducing imports by producing in Australia things we are at present importing.

Naturally enough, this conception has a powerful appeal.  Technically it is perfectly possible to manufacture (or even, possibly, to grow) in Australia a large number of things at present imported.  The accelerated industrialisation necessary to achieve this would provide the means of employment for the growing population.  Moreover, so the argument runs, by reducing our dependence on imports, it would make the economy less exposed to the sudden, and often severe, fluctuations in internal economic conditions brought about by changes in export price levels.  Finally, the prospect of the rapid expansion of existing industries, and of great new industries springing up on every hand, presents an undeniably attractive physical picture and one that appeals to the patriotic instincts of every good Australian.

But, so far as the balance of payments is concerned, the picture can be treacherous.  It does not follow that because certain imports are replaced there will be a net saving of overseas exchange.  In the first place, in the process of replacing the import of a given commodity, additional demands are likely to arise for other imports -- for materials or components or capital equipment for the new import-replacement industry.  In the second place, the additional population employed in the new industry, because of their expenditure on consumer goods, will give rise to added demands for imports;  both directly for such things as tea and coffee, and, indirectly, by their purchases of home-produced consumer goods they will add to the import needs of the industries producing those goods.  Thirdly, the additional people employed in the import-replacement industries will tend to cut into the surplus of primary products otherwise available for export -- for example, wheat, flour, meat, wool -- and thus reduce export proceeds.  Fourth, no manufacturing industry is self-supporting.  It needs the financial services provided by banks and insurance offices;  it needs transport for its raw materials and finished products;  wholesalers and retailers to distribute its products to the final consumer;  power to drive its machines;  and even the expansion of other manufacturing industries to make the machines and provide the needed materials or components.  Moreover, various other activities will tend to expand to meet the needs of the added population employed in the new industry -- community services such as hospitals, roads, schools, and privately provided services such as hotels, restaurants, entertainment and the services afforded by professional men.

* * * *

THE expansion of all these activities in sympathy with the growth of the new industry will, in one way or another, lead to additional demands for imports.  The establishment of a new "import-replacement" industry, thus, has what economists might describe as a "multiplier" effect.  It leads automatically to increased expenditure in many other directions and part of this expenditure will find its way into the import field.

Thus, every additional person employed in factory production might be said to entail additions to other activities as follows: -

• power
• transport, including roads
• building and construction (i.e., houses, office buildings, public works, etc.)
• social services such as hospitals and schools
• professional services -- medical and other
• retail and wholesale trade
• restaurants and hotels
• banking and other financial services
• food and raw material production for home consumption
• and others.

What is a reasonable ratio to take?  For every person employed in an "import-replacement" industry how many people will be needed in these other activities?

At present about 1,100,000 people are engaged in manufacturing out of a total number of employed persons of 3,800,000.  At first sight this suggests a ratio approaching 1:3.  However, the establishment of the new manufacturing industry will lead to the expansion of other manufacturing activities to provide machinery and equipment, materials or components for the new industry and processed foodstuffs to meet the needs of the increased population which the new industry supports.  A ratio of 1 to 4 might be reasonably assumed.  In other words every person employed in a new manufacturing industry will lead to the addition of four people to other activities in the community.

It should be noted that these activities, because of their nature, cannot in the main, contribute either

1. to exports;  or
2. to the replacement of imports.

With this ratio it is possible to construct a hypothetical model showing the net effect on imports of the establishment of a new industry to produce goods previously imported.

* * * *

LET us suppose that the output of the new industry is £1,500,000 and that this replaces imports to the value of £1,000,000 -- the difference being attributable to the higher costs of production in Australia.  Let us suppose further that the capital employed in the industry is £1,000,000 and that the work force numbers 500 (i.e., output per person would be £3,000 which corresponds roughly with the general average for manufacturing industry).  The materials used in the industry could be put down at £900,000 (i.e., 60% of output which also corresponds roughly with the average for manufacturing industry).  A proportion of these materials will have to be imported.  We have assumed £300,000 or ⅓.  The proportion of materials imported to total materials used over the whole of manufacturing is about ⅕ but this includes the production of power and also the food-processing industries where output is high and where a large proportion of materials are locally produced.  Of the £1,000,000 capital we have assumed that 50% or £500,000 will be imported.  The proportion of imported capital to total capital formation is running at about 27%, but for manufacturing industry the proportion would be substantially higher.  The annual charge for capital imported (spread, say, over 10 years) would then be £50,000.

The direct annual saving in imports as a consequence of the industry's operations would then be:-

                                                     £1,000,000 - (£300,000 + £50,000) = £650,000.

For reasons stated above, this figure would not, however, represent the annual saving in overseas exchange to the whole economy.  An additional demand on imports will arise because of the expenditure of the people employed in the industry and of the additions to other activities caused by the establishment of the industry.

On the basis of a manufacturing -- "other industries" ratio of 1 to 4, this can be calculated as follows: -

                                                Total Addition to Employed Population = 2,500.

In 1954/5 imports amounted to nearly £100 per head of population of which about 60% were consumer goods and 40% capital goods.  If we assume that the ratio of employed persons to others is about 1 to 1½ then 2,500 employed will add to annual imports of consumer goods: -

                                                                                       6,250 X £60 = £375,000
                                             Assuming capital per head of population = £2,000
                                                         Total additional capital required = £2,000 X 6,250
                                                                                                         = £13,500,000
From this must be deducted capital directly allowed for in new industry = £1,000,000
                                                                         Net additional capital = £12,500,000

In 1954/5 imported capital goods comprised 27% of total capital expenditure.

                                    Therefore, additional imports of capital goods = 27% of £12,500,000
                                                                                                         = £3,375,000
                                                               Annual Charge on 10% basis = £338,000

Therefore, Net Loss in Overseas Exchange as result of establishment of new industry

                                                                                       = £650,000 - (£375,000 + £338,000)
                                                                                       = £650,000 - £713,000
                                                                                       = -£63,000.

This method of estimating the saving (if any) in foreign exchange of an "import-replacement" industry also serves to illustrate the importance of comparative costs and of concentrating development on those avenues where efficiency is greatest, that is, where the highest returns can be obtained for a given application or "input" of materials, labour and capital.  If, for example, in the illustration given, it required 750, not 500 workers to produce the given output, then the total addition to the country's work force (i.e., on the 1 to 4 ratio) would have been 3,750 instead of 2,500.  This would clearly greatly lessen the likelihood of achieving a net saving in overseas exchange from the establishment of the industry.

There is an alternative method of estimating the net effect on imports of a new "import-replacement" industry which is more acceptable from a scientific standpoint.  This gives a very different result from the first method which, however, has its uses in serving to show, in concrete terms, the nature of the expansion which occurs as a consequence of the establishment of the new industry.

The new industry will lead directly to an additional expenditure in Australia each year of £1,150,000 -- i.e. £1,500,000 (the value of output of the new industry) less £350,000 spent abroad on imported materials and equipment.

Indirectly, this expenditure, as a consequence of the new incomes it creates, will lead to further expenditure.  This is the "multiplier" effect of the injection of new additional income into the economy.

What proportion of this additional expenditure will be imported?  This will depend on the marginal propensity to import (i.e. the demand for imports arising from each additional £ of expenditure).  This will be considerably more than the average propensity to import (about 20% of total expenditure) possibly 33⅓% or even 50%.

The "multiplier" will also depend on the marginal propensity to import.  With a marginal propensity to import of ⅓, the "multiplier" in a fully extended economy works out at about 3.  If the marginal propensity to import is ½, the "multiplier" is 2.

In addition to the direct imports of materials and equipment for the new industry, there will thus be a secondary addition to imports.

No matter what the marginal propensity to import, this will be equal to the domestic expenditure of the new industry -- £1,150,000 (i.e. £1,150,000 X "the multiplier" X the marginal propensity to import).

The net addition to imports will then equal £1,150,000 less the direct import saving of the new industry = £1,150,000 - £650,000 (i.e. £1,000,000 - £350,000) = £500,000.

Suppose now that two-thirds, not one-third, of the materials used by the new industry are imported.

Then direct saving in imports = £350,000 (i.e. £1,000,000 - £650,000).

But in this case domestic expenditure of the new industry = £1,500,000 - £650,000 = £850,000.

Then secondary addition to imports = £850,000 X "the multiplier" X marginal propensity to import = £850,000.

And Net Addition to Imports = £850,000 - £350,000 = £500,000.

This analysis suggests that the only case where there can be a net saving in overseas exchange or, in other words, a real reduction in imports, is where the import-replacement industry can produce at lower costs than the imported product.  If costs of local production are roughly equal with overseas costs, then imported requirements will remain the same and no saving in overseas exchange will be effected.  If the local cost is higher than the imported cost then there will be a net loss of overseas exchange roughly equal to the difference between the two costs.  The balance of payments will, therefore, be adversely affected in all cases where the cost of producing the product locally is higher than the cost of the comparable imported product.  It should be noted that this is true, regardless of the import content of the local industry, which, paradoxically, does not affect the position.  In other words, the establishment of an industry with a low import content may be equally disadvantageous, so far as the balance of payments is concerned, as an industry with a high import content.

If this analysis is valid, it follows that neither the marginal propensity to import nor -- and this is opposed to all prevailing ideas -- the import content of the new industry has any effect on the position.  The sole consideration is the level of costs in the new industry.  This emphasises the great importance of concentrating development in those industries where we are most efficient and where relative costs are favourable.

* * * *

The figures used in this analysis are not meant to be taken in any literal sense.  While based on broad assumptions which appear to be reasonable, they are meant to illustrate methods, rather than to give any precise or even approximate mathematical estimate.  By varying the assumptions it is, of course, possible to obtain different results.  What they do show, however, is, first, that the saving in overseas exchange achieved through an "import-replacement" industry (where it does occur) is very substantially less than is commonly thought, and, second, that because of the high level of domestic costs there is probably, in most cases, a substantial net loss of overseas exchange.

This, of course, should not be taken to imply that the manufacturing industries are responsible for our present plight -- far from it.  It is simply meant to show that the process of growth and development itself, wherever it occurs -- and obviously it must occur to a large extent in manufacturing -- will tend to increase the overall demands of the economy for imports.  It follows that if development is to be maintained, exports must be expanded.

* * * *

OF all types of development, except those which directly increase export production, efficient manufacturing industries probably impose the least strain on the balance of payments.  In spite of the heavy demands which they make for imported equipment during the phase of establishment and expansion, and for imports of materials and components thereafter, unlike other forms of development, manufacturing industries often contribute to some direct replacement of imports.

It is perfectly true that many manufacturing developments tend to cut down imports below the level which they would be for a corresponding development in other forms of activity. Where they limit their claims to this proposition, the advocates of import-replacement are on fairly sound ground.  What is not true is that the new manufacturing development necessarily brings about an absolute reduction in the overall import requirements of the economy.  Indeed, with the present high levels of Australian costs, this is most unlikely.

---

ENDNOTES

1.  During the first half of 1954/5 import prices rose slightly while export prices fell back from 400% to 360% above pre-war.

2.  The Australian and American figures are not strictly comparable since U.S.A. excludes some service industries which are classed as manufacturing in Australian statistics.

3.  This proved to be wrong, but it was the view generally held at the time.  1956/7 produced a record export income.

4.  The Prime Minister's statement pointed out that there are now 200,000 more people in employment than in 1952/3.

5.  It was pointed out last May by the Australian delegate to the Economic and Social Council of the United Nations, Mr. William Forsyth, that few countries in the world could show as rapid an increase in recent years, or, indeed, at any time.

6.  See Appendix.

7.  Later we were disposed to modify this view.  In the article "Development Depends on Exports" we argued that, so far as saving-foreign exchange was concerned, the proportion of raw materials and equipment imported was immaterial.