INDICATIVE PLANNING - AN ALTERNATIVE VIEW

JOHN BRUNNER

That the case for national economic planning should be receiving such an indulgent press at present is not altogether surprising. At any time it has a superficial attraction. If individuals try to plan their lives, and companies even more so, why shouldn’t the nation do likewise? The case always seems all the more persuasive after the stop phase of the stop/go cycle when businessmen feel their already difficult life has been made all the harder by supposedly unnecessary fluctuations engendered by government policy or, as they sometimes see it, lack of government policy. On such occasions so-called indi- cative planning is presented as rational, coherent and purposive, and to express scepticism about it is to appear incorrigibly obscurantist. It will be the burden of this paper that it is in fact the support for indicative planning which is irrational, incoherent and evidence of a serious lack of individual purpose.

In all such discussions it is obviously desirable to try to agree on what we are talking about even if we can agree on little else. Let me say therefore that I am defining indicative planning as a concerted attempt by government and industry to project and enable industry to meet future demands for its output. I would emphasise the words “concerted”, “project” and “enable” which, as I understand it, dis- tinguish indicative from imperative planning. “Concerted” suggests that the endeavour is a joint as well as orchestrated one, “project” implies that forecasting has some part in the exercise, and “enable” indicates some degree of permissiveness, although the whole operation would seem fairly pointless if no onus was placed on anyone to make the projections in question come true.

The other point of departure from which, hopefully, we can all start out concerns the object of the operation. Until recently there was little dispute on this score. Indicative planning was required to raise the rate of economic growth. Of late I have heard it seriously suggested that such planning should be designed to slow down the rate of growth of G.D.P. This, however, I imagine would still be regarded as a somewhat eccentric viewpoint and the vast majority of indicative planners would at least seek to increase the rate of growth of net economic welfare (measurable or not as it may be) whatever their misgivings about G.D.P.

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The Plan Qua Forecast The first point of difference which separates believers in indicative

planning from unbelievers concerns the reliability of economic fore- casting and the scope for improving it. Admittedly the faithful when embarrassed on this account will often point out that indicative planning is not just a glorified market research operation. But part at least of their case rests on what they see as the superior forecasting ability of government and industry working in close consultation. It seems to me that this claim contains a large element of wishful thinking compounded of faulty analysis.

For a start it assumes that government is better placed to forecast demand for an industry’s product than are the firms in that industry. Not only is there no evidence, either here or abroad, of government’s superior ability, and I say this regretfully since industry would be only too happy to have the accuracy of its forecasting improved: there is a very real reason why official forecasts are likely to be less reliable than those of outsiders.

There are many eventualities which may be all too likely and yet which no government forecast can entertain-rates of inflation, changes in parity, declines of particular industries are a few such examples. No government can possibly announce that it is contem- plating a long-term rate of inflation of, let us say, 6 per cent, or a rate of appreciation or depreciation of its currency of, say, half as much, even when its expert advisers believe that such assumptions are the most realistic or at any rate least unrealistic possible.

This is not just a theoretical argument. It is only necessary to look at the ill-fated British National Plan to see how government avoided all reference to the parity in it, although the weight of expert opinion at the time it was drawn up was that devaluation of sterling was inevitable during the period covered by the plan, and this of course duly transpired half-way through this period.

And it is not only government which is inhibited from telling the truth as it sees it in such forecasting confrontations. Industry too must have its reservations both in relation to what it tells government and in respect of what it tells its competitors. For in such circum- stances any prediction it offers to government is liable to be taken down and used in evidence against it. Industry can thus be hoist with its own petard. On the other hand, a nicely pitched forecast may also produce some desired response from government anxious to see it or some other figure reached. The forecast therefore becomes a highly political figure.

Forecasting is also a competitive weapon since a major element in business success has been and is the ability to forecast more accurately than one’s rivals. Companies therefore participating in collective forecasting will be reluctant to disclose their full hand if they have reason for believing that they are thereby telling their competitors something they may not have appreciated otherwise.

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For all these reasons the figure an individual company proffers in these circumstances is highly suspect, and such is the uncertainty attached to all such forecasting that it will be impossible to prove ex mte that the figure is wrong. Let me give an illustration.

In recent years a wide disparity has existed in the forecasts of demand put forward by the major companies in the Japanese steel industry. Roughly speaking, these forecasts of demand and hence of output and capacity in 1975 ranged from a high which implied that two-thirds more steel would be required four or five years hence to a low of only a one-third increase. The difference amounted to 30 million tons of raw steel. It was no coincidence that the higher forecasts came from companies anxious to expand and the lower from those wanting to consolidate their predominant position. It is still not clear which forecast will turn out the more accurate.

But leaving aside these special inhibitions placed on government and industry when swapping forecasts, economic history provides no evidence that forecasting accuracy is a function of the numbers employed in making the forecast or the formal skills possessed by the forecasters.

It is sometimes assumed that assembling large numbers of pro- ducers and customers in an industry is a condition of improved forecasting. This, however, neglects the fact that already large-scale industries at least go to considerable trouble to gather information and form a view on long-term demand for their product (with or without benefit of outside consultants) and if they do not always get it right, this is seldom because of any unnecessary ignorance of their customers’ current intentions.

Nor does assembling so-called experts provide any guarantee of forecasting accuracy. Formal expertise in economic prediction is largely associated with ability to explain past trends and the past is at best a very approximate guide to the future, at least where long-term economic forecasts are concerned. Any econometrician worthy of the name can find equations which provide good fits to explain the past, but this is no proof that the equation will hold good in the future. Moreover, as any statistician knows, it is often possible to derive several trend lines, all of which are compatible with past experience and yet which, when projected into the future, provide wildly different forecasts.

There is thus a large component of judgment called for in all long-term economic forecasting and this judgment tends to be very much influenced by the mood of the moment. Collective forecasting, therefore, however much those involved would like to think of them- selves as being objective and independent, will do little more than represent the consensus of the time and we all know how shortlived such a consensus can be. In this respect, alas, there is no safety in numbers.

And yet another reason why collective forecasting can go so wrong 23

is that, since the end product is usually a widely publicised forecast, it is liable to have a feedback effect which upsets it. A private fore- cast by contrast is at any rate unlikely to prove its own undoing. An area where negative feedback is common is commodity fore- casting, predictions of gluts and shortages almost invariably being self-defeating. Other forecasts, it is true, can be self-fulfilling, particularly those related to parity changes, but either way the widely promulgated forecast not only involves predicting what would have been the out-turn but also the effects of its own publication on the out-turn.

The Plan Qua Target As I suggested earlier, at this point believers in indicative planning

tend to fall back on the argument that forecasting accuracy is not really essential for such planning because the future levels of demand, output, etc. stipulated in the plan are targets, not forecasts. This only raises further difficulties, however. What then is the basis of the targets and how, for instance, is industry going to be persuaded to shoot for them if they differ significantly from what might have been expected to happen anyhow?

For traditionally the main purpose of the plan has been to produce an improved economic performance. The main objective wil l be a more satisfactory rate of economic growth, but subsidiary targets might include an improved balance of payments or higher level of employment or lower rate of inflation. The targets for individual industries are set as necessary to the achievement of these overall aims. But what if industry doubts the economy’s ability to reach the desired growth rate or questions the assumed relationship between its own output and that of the economy at large or disputes the share indicated for exports and imports? In these circumstances there is no reason for thinking that industry will cooperate unless the plan has teeth. Sticks and carrots will be necessary to make certain the desired amount of capacity is installed and then, if the plan is to retain its credibility, demand may have to be underwritten.

The underwriting of the plan is easier said than done. The public sector can no doubt be ordered to behave in conformity with the plan, with what possibly devastating results can be seen from the experience of the British electricity industry. The latter was forced to install enough plant to meet the government’s 4 per cent per annum economic growth target and has been landed with surplus capacity ever since. The private sector, however, tends to be less amenable. (It is partly because it is not an arm of government that the analogy between planning by industry and indicative planning breaks down.) It has responsibilities to others besides government. Private industry cannot just sit on its hands and blame the plan if the latter turns out to have been misleading. The underwriting therefore has to be pretty convincing, if necessary involving such earnests of government inten- tions as subsidies or tax reliefs to customers and restraints on imports.

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For industry to be convinced, it will want to be assured that government is committed to its plan as long as firms are stuck with the investment they put in on the strength of the plan. In fact they can never be thus assured since no democratic government can bind its successor in this way and even governments of the same persuasion have a certain tendency to eat their words.

And there is an even more fundamental and commonly overlooked probIem than this. While planners talk about industries and what this or that industry should be able to produce, industry itself thinks, produces, sells and invests at the level of the firm. With certain notable exceptions the firm and industry are by no means the same thing.

Industries are, after all, little more than statistical categories of no great significance in this context. It is the individual company often spanning several of these categories which counts and whose behaviour has to be influenced for the plan to work. Individual firms as members of this artificial entity called an industry can pay lip service to whatever figure is agreed on as that industry’s target level of investment or output, but what they as companies do about it is a quite different matter.

Ensuring an industry’s full compliance with the plan thus entails allocating new capacity and markets among the various firms in it. This in turn involves the establishment of legalised cartels, something which most of the more dedicated followers of planning fashion would normally be expected to regard with distaste.

Even in a country such as Japan, with a 1 ~ n g history of intimate relations between government and private industry, legalised cartels are regarded as purely temporary arrangements calculated to provoke the wrath of the Fair Trade Commission if kept in being too long. In France with its strong dirigiste tradition the Commissariat du Plan has frequently found itself in situations where the whole and the sum of the parts differed because the capacity planned by individual firms has no resemblance to the total envisaged for their industry in the plan. The leading member of the awkward squad in France has been the automobile industry. In Britain, the National Plan was abandoned before reaching the point of trying to allocate market shares. In all the Anglo-Saxon nations, however, the restriotive practices legislation in force makes market sharing arrangements illegal and governments view them as inimical to economic growth. Underwriting the plan by guaranteeing firms’ markets against com- petition may be a condition of getting it implemented, but it is not a step to be taken lightly with its obvious risk of featherbedding for existing producers, never mind the discouragement to new entrants.

And there is another and more general reason why government must be very chary about underwriting the plans of large sectors of the economy. Inevitably at some stage or another it will be blown off course. With the best of economic forecasting and management, something, maybe of overseas origin, will happen sooner or later to

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discomfit the planners and, if they have undertaken not to disturb much of the economy, the rest will suffer inordinately in the necessary process of adjustment. The price of stability for some is greater instability for others.

From all of which I conclude there is nothing particularly rational about trying to gear an entire economy to an agreed set of targets when there is no reason in theory or practice-look at the record of national plans round the world in both developed and underdeveloped nations-for expecting these targets to be fulfilled and no acceptable method of getting people to abide by them. For everyone to work on the same set of assumptions merely makes it harder to adapt to unforeseen circumstances and take advantage of unexpected oppor- tunities when they arise. To ensure that people act on the same set of assumptions requires a degree of control over the economy which is quite incompatible with the idea of indicative planning as it is generally understood.

It would, paradoxically enough, be easier to justify such a degree of control if we had sufficient foresight to be able to predict demand with complete accuracy, for then the economy would become hope- lessly unstable in the absence of complete control over supply.

Only so long as parents cannot predict and determine the sex of their children can a laissez-faire policy be afforded. The moment parents have this ability, the state may have to intervene. Likewise with the economy, though here one is on safer ground in suspecting that perfect foresight will never be vouchsafed to us.

Indicative Planning for Australia? All this may seem a bit remote from the Australian scene. Yet I

believe it is in fact extremely relevant to the local debate. Moreover, there is nothing peculiar to Australia which makes indicative planning a more realistic affair here than elsewhere. If anything, it is still less viable in the Australian context.

One of the most common proximate causes of the undoing of national plans is the foreign balance, and the more open an economy, the more serious the problem. Australia has a relatively high degree of dependence on overseas transactions. Exports as a percentage of G.D.P. are much higher in Australia than in the U.S., somewhat higher even than in Japan and not all that much lower than in Britain. In addition there are substantial capital inflows and invisible out- goings. The former may be falling as a percentage of G.D.P.; the latter are not. A large slice of the economy therefore is more or less outside government control.

Australian exports are also highly volatile as a result of their large commodity content. This makes it particularly difficult to predict their values as we have seen in the last year, but even commodity export volumes are subject to sharp fluctuations in response to stock changes, etc. And it is not only export forecasting which is compli- cated by Australia’s dependence on primary production. In the short

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run the whole level of economic activity can be significantly affected by the vagaries of the weather; in the longer run the prospects for economic growth will depend materially on a highly unpredictable factor, the success or otherwise of mineral exploration.

The current hankering after a national energy policy illustrates some of the problems which indicative planning is up against in a country such as Australia. We are blessed undoubtedly with copious supplies of the main fuels. But what demand is or should be for the various fuels at particular dates in the future will depend on the precise price of the different fuels at particular locations. Availability, however, will in turn depend on demand, so forecasts in this area are to a large extent circular. One might add, so is the national energy budget. Exports, we understand, will depend on the proving of reserves, themselves a function of price. But the proving of reserves in turn depends on the likelihood of markets being available in the event of success. To go on proving up reserves merely to add to the sum of human knowledge is hardly a sensible use of resources. Thus is a national energy policy largely chimerical, as other nations with few of Australia’s problems in this regard have found. The British have been yearning for such a policy ever since the last world war. They have never succeeded in forecasting the market shares of the various fuel industries correctly; last time they tried they even forecast the total demand for energy quite wrongly.

Nor at the political level is Australia at all well suited to indicative planning. Politicians may be fickle at the best of times, but certainly the continuity which is basic to all such planning is not facilitated by three-year parliaments. Nor again is the Federal system conducive to unity of purpose and consistency of approach, particularly when the division of power between the Federal and State governments is itself subject to dispute and revision.

It would be idle therefore to imagine that Australia is likely to succeed where others have failed with indicative planning. Certainly the forecasting record of the Vernon Committee provides no grounds for optimism on this account, but then it was precisely the sort of factors I have outlined, e.g. mineral exports, which proved their undoing.

Some Alternative Suggestions These observations will no doubt strike supporters of such planning

as somewhat negative, not that there can be any obligation to support ideas which involve a significant use of resources for no apparent benefit. It might be appropriate therefore to end on a rather more constructive note. In doing so, one asks: what exactly is indicative planning in Australia designed to achieve?

If the answer is as suggested earlier “a higher growth rate”, there are surely many more direct methods of achieving this end than by going through the rigmarole of indicative planning. For economic growth is compounded of numbers employed and output per head.

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Unless it can be shown that the faster the rate of growth of the labour force, the slower the rate of growth of productivity, then it would seem to be ludicrous to be contemplating a long-term reduction in immigration while seeking to jack up the rate of growth of output.

As for increases in per capita output, there is much that could be done directly to accelerate the rate of productivity growth. In par- ticular a higher rate of investment in industries where Australia enjoys comparative advantage would seem to be indicated. This first of all requires a more rational tariff structure so that the more efficient industries are encouraged to expand at the expense of the less efficient. The Tariff Board’s move towards a uniform effective rate of production is clearly conducive to this end, although the Board does not always seem to be aware of the contradiction which can arise from simultaneously advocating a uniform effective rate and the removal of unused protection.

The poor rate of increase of labour productivity in Australian manufacturing industry is only partly due, however, to the pattern of investment. The level of investment has also been inadequate and here the most suitable remedy would seem to be to allow plant and equipment to be written off much more quickly for tax purposes. Australia has one of the most illiberal tax structures in the world from this point of view. As a result, manufacturers are encouraged to keep their plant in operation for excessive periods of time to the detriment of labour productivity, which suffers twice over from low operating productivity due to lack of capital per man and excessive employment in repair and maintenance.

There are of course many other measures which could usefully contribute to a higher rate of economic growth. Further encourage- ment to competition, not only in secondary industry, but also in the flabby tertiary sector of the economy, would be one of them. I hope, however, enough has been said to establish that it is a non sequitur to argue that, because we have only a moderately fast rate of growth, we must needs introduce indicative planning. There is no evidence that such planning has accelerated the rate of economic growth else- where. (The record of France, for instance, is no better than that of West Germany, and in so far as the French economy has performed well since the last world war there are plenty of more plausible explanations.) And there is, as I say, no reason for expecting Aus- tralia to be the exception.

Alternatively, indicative planning may be viewed primarily as a means of overcoming uncertainty. While the present penchant for indicative planning among Australian businessmen may be thought to reflect rather discreditably on those concerned-they are after all paid to exercise judgment in conditions of uncertainty-there is no need to make their task still harder. Again, however, it is far from clear that indicative planning is going to help them.

It does not, for example, require such a plan to mitigate the stop/go cycle. What this basically requires is a bit of political

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courage at the moment in the business cycle when the economy 1s on the upturn but there are still resources under-employed. Every stop is the product of the previous (over-exuberant) go and it is a truism of economic management that by the time all the necessary indicators are in and it is crystal clear what needs to be done, it is already too late. By the same token, sharp and demoralising changes in the exchange rate are the result of failure to make more modest variations in good time, variations which this country is ill-equipped to make through its adherence to a fixed exchange rate.

Another practical step that Canberra could take to make at any rate short-term forecasting easier would be to improve the forward indicators available for the purpose. At present this country is poorly served in this respect with the lack of order figures, both new and outstanding, a particularly glaring omission.

Looking rather further ahead, government could do something to illuminate the future by enumerating its plans for the public sector more than a year ahead. While this would be of some value, however, particularly to those industries which sell largely to government instru- mentalities, it would be unwise to set too much store by such a reform in view of what was said earlier about government’s limited ability to deliver.

Finally, and to those who support indicative planning as a step in the direction of imperative planning, I would suggest that so far from furthering their aims, indicative planning if implemented is likely to bring the whole concept of planning into disrepute. So far from representing a happy mean between market and socialist econo- mies, it would be truer to say it combines the worst features of both. Also liable to be brought into disrepute, incidentally, is the standing of the economics profession. While indicative planning tends to inflate the demand for (and egos of) economists, their reputation will get a bit tarnished when disenchantment sets in, if British experience is anything to go by.

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