INDICATIVE PLANNING FOR AUSTRALIA

by

N. R. CONN

1. Introduction The first draft of this paper was written some years back during

a period in which 1 was employed as a temporary Public Servant.’ I was just a little hurt at the time that it remained simply a first draft, although the good-natured arguments that it provoked did much to help my understanding of the realities of policy-making, the predelictions of policy-makers and the rather greater difficulties attached to the practice (as distinct from the preaching) of economic policy.

1 would hope that a similar paper prescnted today would get at least to the second draft stage. The ideological base of economic policy has changed with the government in Canberra, and there has been a flurry of demolition and innovation in that field since the Labor Party took office. Although I will be making some reference to those changes towards the end of my paper, I have assumed that my prime task as pipe-opener to this Forum is to canvass the issues surrounding indicative planning in a fairly academic way. I hope you will forgive me, therefore, if I occasionally state the obvious and spend some time fighting battles that were probably won on Decem- ber 2.

My starting point will be the proposition that nowadays no one seriously denies the need for the government to intervene continually in the workings of the market economy. In fact, it is undoubtedly the obligation of governments to alleviate the stresses which periodically arise through the collective miscalculations of the public and private sectors or through the appearance of strains generated externally. While this proposition has only achieved its present respectability since Keynes, the recognition of the function of the government to provide the community with a large and growing volume of collective goods and services probably dates from Adam Smith. The modern government has gone on to assume various other responsibilities with respect to the distribution of income, the allocation of resources and the rate of economic growth, a task usually conveyed through a phrase like “the welfare, prosperity and economic development of the nation”. Whether this fabric of government responsibilities repre- sents a conscious accession to the expressed will of the community

.- __ 1. In view of the fact that I will be a temporary Public Servant again as from

next week (but at a dBerent address), I should stress that the views expressed in this paper are entirely my own.

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is somewhat beside the point, since acceptance of the need for action on any one of the policy fronts nominated almost certainly emerges as an influence elsewhere-for example, taxation changes designed to achieve price stability of necessity reallocate resources and redis- tribute income between the public and private sectors, and probably within the private sector as well.

The government’s general responsibilities are of course well known, just as it is recognised that the various areas in which economic policy operates overlap extensively and that policy measures designed to achieve a particular end may have repercussions in other areas. It is from this point that opinion and argument rapidly polarise on the degree of government intervention in the normal market processes which should be permitted, and the means by which that intervention should be carried through.

The proponents of planning typically question the efficacy of the price mechanism and assert that the government should go a lot further in its attempts to secure co-ordination and cohesion in the infinite variety of economic decisions made throughout the economy. They go on to maintain that the adoption of a formalised plan of development, along with suitable instruments for putting that plan into effect, will lead to a faster rate of economic development, a higher national income, a narrowing of the gap between the economy’s potential and its performance, and so on.

The opponents of planning are inclined to retort that the “planner’s” conception of progress tends to be artificial and over-materialistic, that the government’s flexibility in its approach to short-run problems would be dangerously restricted if not eliminated, that it is not necessary to have the restrictions on freedom of enterprise required by a formal plan since obstacles to growth can be removed within the context of an unplanned economy anyway, and that the un- obstructed “invisible hand” will cause the emergence of an adequate rate of growth.

The position of a moderate in this argument is a fairly lonely one. He might for example point meekly to an apparent inconsistency in the opposition of the “anti-planners’’ to the concept of a plan and their simultaneous (although not of course unanimous) pressure for higher tariffs, government-sponsored development of the North, more aid for tertiary education; or he might quaveringly doubt whether the talk of free enterprise, competition and market forces has much validity in an economy with many highly concentrated industries, restrictive trade and trade union practices, substantial oversea control of industries and the like. On the other hand (like any good econo- mist, he is up to his elbows in “hands”) he might query the wisdom of officially sponsored targets for the development of particular industries, since the outfitting of a massive bureaucracy with the armoury of policy weapons required to fire at those targets might lead to an unacceptable uddition to the degree of interference in the free choice of the market, with the attendant risk that bad market-place

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decisions might simply be replaced by bad bureaucratic decisions. In rebuttal, the “planner” could argue that since the government

already wields so much influence, both directly and indirectly, in the day-to-day functioning of the economy, it is but a small step to extend this influence beyond the confines of the Budget and the Budget-year. The moderate might be heard to mutter that in view of the apparent difficulty in evolving and co-ordinating plans wirhin the public authority sector it could be rather difficult to do so beyond that sector.

It is tempting to try to resolve the argument by referring to the experience of other countries. Leaving aside for the moment the problems of comparable statistics, differing economic and political organisations and the different stages of development already achieved, it is worth spending a little time recalling the French and British experiments with indicative planning.

The French system is usually held up to the unbelievers as a shining example of how target planning can be successful in a basically free-enterprise economy. A thumbnail sketch of the French procedure would run as follows: the public and private sectors of the economy co-operate in the preparation of a plan of development which is detailed by sectors, industries and regions. This plan is then promul- gated in the form of four-year targets for the key economic variables and their component items. A combination of enthusiasm, co- operation, confidence in the plan, market forces and, in delicate Gallic phraseology, “encouragement procedures” by the government then leads to the plan’s fulfilment.

Although the French regard this as basically indicative planning, it is hard to avoid the conclusion that it is, in fact, closer to a “blueprint” model. Two facts encourage this belief:

( i ) the very substantial share that the government commands of the economy’s resources, both through its ownership of public enterprises (including the large nationalised industries) and through its position as a major purchaser of many key com- modities (for example, 70/80 per cent of the output of the electronics industry). It has been estimated that public authorities and enterprises account for over half of the total tixed investment in the French economy; moreover, substantial influence must exist over the remaining half through

(ii) the government’s extensive controls over the raising of funds on the capital market and their subsequent use. For example, taxation concessions on share raisings are held out to com- panies whose investment programmes conform to the needs of the plan.

In other words the government has considerable control over the sources of funds and the uses to which they are put, not least because it spends a large part of those investment fund6 itself; it is clearly not necessary to establish that its powers over private investment

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have been used in order to demonstrate that they have been useful in securing the desired volume and pattern of investment expenditure.

By way of contrast, the opponents of planning tend to point to the unhappy experience the U.K. had when it experimented with ‘“eddy”. The argument about the reasons for the failure of the British economy to achieve the target set by the N.E.D.C. in the early sixties revolved around three main points:

( i ) the lack of an objective basis for the proposition that the economy could achieve and sustain the 4 per cent rate of growth set as a target;

( i i ) even when discredited the 4 per cent rate was left propped up, for it would have been unthinkable for the Conservative Government of the time to slaughter the sacred cow on the eve of an election, in the face of Opposition fulminations that even 4 per cent was unambitious; and

(iii) the fact that the 4 per cent target was not adequately incor- porated within the framework of government policy.

While there are lessons for Australia in the experience of both of these countries (and some of these lessons have been hinted at in the brief comments made above), it does not resolve the basic question: have these economies become demonstrably bigger and/or better than they would have if no planning frad been attempted? More specifi- cally, did France grow at an admirable rate because of, or in spite of, indicative planning? Would the U.K. have grown faster, or even slower, if indicative planning had not been attempted?

I am sure that you find the temptation to answer these questions as difficult to resist as I do. The sobering fact is that we do not really know and, even if we did, the relevance of our answers to the task confronting the Australian policy-makers would be strictly limited. Equally sobering for some is the realistic expectation that more formal planning for Australia is now inevitable: the ensuing sections of this paper canvass the possibilities and the issues in what is, I hope, a reasonably methodical and suitably provocative way.

11. The Ends to be Achieved It is conventional to distinguish six main areas in which economic

policy operates. It hardly needs stating that a division in this way is necessarily somewhat artificial because of the obvious overlap and interdependence of policy areas which include :

( i ) the level of prices; (ii) the levcl of employment;

(iii) the balance of payments; (iv) the distribution of income; (v) the allocation of resources; and

(vi) the rate of economic growth. The government is expected to wield its influence in these fields to

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achieve certain objectives. It could receive, or perceive, its directions as follows: “Foster a steadier rate of growth of total demand (and hence G.N.P.) sufficient to ensure full employment of the growing workforce (with migration) at rising levels of output per man (sub- sumes efficient allocation of resources) and with an equitable distri- bution of the fruits of this production (hence rising living standards), with price stability and balance of payments equilibrium.”*

As a prescription for policy-making this is as useful as it is modest. An implicit assumption is of course that all these goals are consistent - o n e might query whether the existing structure of the economy, or our state of knowledge about it and the instruments of economic intervention so far devised, permit the delivery of such a portmanteau direction. Great difficulties are posed, too, by the appearance of words like “equitable” and “efficient” in the list of directives. Clearly, behind any statement of national objectives lies the amorphous notion of the “national interest”, a concept quite undefinable on economic grounds alone, if at all. Equally clearly, action taken to improve the well-being of one section of the community will often reduce the well-being of another-a justification for that action (for example, progressive income taxation) being that the loss of well-being suffered by one group is more than offset by the gains elsewhere. Thus, the community as a whole, or on average, is said to be “better off’. Similarly, the diversion of resources from one section of producers to another by, for example, selective sales taxes and subsidies may be defended on the grounds that the loss of production in the taxed industry is more than offset by the gain in production in the sub- sidised industry,

It is not necessary here to go into a recitation of the list of qualifications, provisos and implicit assumptions which prop up these elementary exercises in welfare and allocational economics, or the problems of measurement and identification they necessarily entail; it is sufficient to observe that there are groups which benefit from rising prices and groups which suffer, sections of the community which gain from a more egalitarian distribution of income and sections which lose, and so on. At any time a large number of groups will be pressing their claims, ranging through the highly experienced and continually active industrial and commercial pressure groups to the general electorate which exerts its pressure triennially. The outcome of this combination of (often conflicting) pressures is reflected in the adoption of certain economic objectives-that is to say, the goals of economic policy. It is important to note that this is nor the question of the theoretical consistency or inconsistency of a set of broadly defined objectives, but an explanation of the fact that the relative weights assigned to each of these goals, and hence the amalgam of more precisely defined objectives which we can call

2. H. R. Edwards National Planning: An Zntroductory Survey (A.N.Z.A.A.S., 1962), p. 4, quoting “the now commonplace textbook composite”. A further example IS the preamble to the Terms of Reference of the Vernon Committee.

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Policy, is in the final analysis a political decision. One is not entitled to expect that this is always the best decision on economic groundsJ

The precise weighting given each of the broad areas of economic policy will vary from time to time and, as we are currently observing, from government to government. Further consideration of those areas suggests a useful distinction: the first three are concerned with essentially short-term objectives, whereas the latter three are essen- tially long-term in nature. Further, it is possible to define with reasonable precision the objectives which are being, or should be, pursued in the first three areas. It might even be asserted bravely that the means for achieving those “short-term” objectives are better established, and that the problem of forecasting their effects appears somewhat easier, simply because the problems are short-term.

The administrators of economic policy are usually the first to agree that the comparative ease of short-term policy construction and implementation is more apparent than real. In particular, short-term forecasting (an essential ingredient of the process) is more reliable than longer-term forecasting only to the extent that short-term changes are seen to be occumng at the time the forecast is made and that the currently announced intentions of, say, businessmen are carried through. This is quite apart from the problem facing any forecaster, be he short-term or long-term, that unexpected shocks can be adminis- tered to the economy at any time, particularly an economy with a sensitive balance of payments and a highly integrated but often unpredictable system of wage determination.

It is generally agreed that when the policy-makers lift their sights to the group of “long-term” policy areas the problems become even more acute. A basic difficulty is that the objectives here are much less clearly defined-particularly with respect to the distribution of income and allocation of resources-probably because there is a far greater diversity in community opinion accompanied by active but conflicting pressures on the framers of policy. In these circumstances the policy-makers have to assess where the weight of opinion and argument lies, and institute that mixture of policy measures which appears to give the greatest chance of satisfying the group of objectives so perceived.

At this point it is possible with some heroic simplifications to highlight a fundamental difference in attitude between the “planners” and the “anti-planners”. On the one hand the “anti-planners” argue that, providing adequate attention is given to the shorter-term objec- tives of price stability, full employment and balance of payments equilibrium, the somewhat longer-term objectives of equitable income distribution, efficient allocation of resources and adequate rate of economic growth will emerge naturally through the unconstrained

3. S. J. Butlin goes further: “The difficulty is not the theoretical ceordination of the . . . instruments of policy; it is the political problem of making I! work, when each instrumentality is one of the routes through which conflicting interests express themselves”: “The Role of Planning”, Economic Papers No. 15, p. 10.

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workings of the market mechanism. The problem of defining these latter objectives is, therefore, avoided.

On the other hand, the advocates of planning usually maintain that the adoption of a plan of development which pays detailed attention to the allocation of resources, distribution of income and rate of growth almost guarantees that the shorter-term problems are eliminated. They are usually realistic enough to allow for the occasional disturbance generated exogenously, and their solution is often a periodic revision of the plan when these disturbances are severe and prolonged. They are persuasive in their arguments that a planned rate and pattern of progress could reduce the sensitivity of the economy to these disturbances-perhaps by bringing some of them within the ambit of the plan-but rather less convincing when maintaining that the effectiveness of the plan remains unchanged by revisions.

It could be quite wrong, of course, to assume that rejection of economic planning necessarily means a short-term outlook. A great deal of forward-looking is, or should be, taking place continually within any government and its agencies. At the same time, one might hope that the longer-term aspects of short-term policies are con- tinually under examination therein. There is, as I have said, little real difference in opinion over the broad outline of objectives which should be pursued by any Australian government; the differences arise primarily over the relative weights or priorities which should be accorded the groups of objectives I have described rather loosely as short and long term, and over the means by which those objectives should be pursued. The advocates of planning maintain that their approach to the problem gives a greater chance of achievement of those objectives, and it is unfortunate that much of the argument about planning as such is thoroughly mixed with judgments as to what specifically those goals should be. Similarly, the dificulties of plan construction often masquerade as criticisms of planning-for example, the difficulties of long-run forecasting are sometimes held out as insuperable obstacles in the path of the planner. As I have taken pains to point out, the first question is largely a political choice; the second is more a technical problem of plan construction which is shared to a considerable extent by the framers and administrators of policy in an “unplanned economy”. It should be possible to overcome more of the purely technical difficulties as our knowledge of the economy with all its complex interrelationships improves and as our forecasting techniques are refined. The proper place for debating the choice of goals is the political arena (with, we must hope, the economist in constant attendance to point out the economic impli- cations of the choices open).

Of course, it would be absurd to pretend that the detailed objec- tives which should be pursued by the government are always clearcut and obvious, and equally naive to assume that, even when they are, they always represent the best solution to an economic problem.

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Further, it needs to be pointed out that a policy firmly embedded in the machinery set up to administer it may be singularly difficult to change when it becomes clear to all but the administrators that circumstances have altered priorities. As I have presented it, the “national interest” emerges from a conflict of pressures and you can include the administrators on the list of pressure groups if you like, along with all the associations, authorities, boards, chambers, com- missions, States and unions already there. Just in case you are losing the thread of this paper, I might interpolate that a semi-autonomous planning agency, with its task the disinterested assessment and publi- cation of claims for a niche in official policy, could be a welcome addition to that list.

After due recognition of the difficulties, we must assume that we have a clear and reasonably detailed statement of the set of objectives to be pursued over a four- or five-year period, if we are to talk at all about planning. The goals selected will certainly not in practice receive unanimous approval (for “selected” read “subordinated”, if your own interests are not adequately protected or advanced!), and, at the initial stages, they will probably be framed in general, quali- tative terms rather than as specific quantitative targets-as I envisage a viable type of planning, this more precise specification must come at a later stage when the implications of various alternative rates of growth, regional development and so on have been explored and the inherent structural problems identified. Nevertheless, the starting point must be something more than a generalised statement of good intentions and pious hopes.

Given this statement of objectives (what we would like the economy to become), the logical steps in drawing up a plan would seem to be somewhat idealistically:

(1 ) An examination of the present structure and state of develop- ment of the economy, including the knowledge we have of structural relationships and parameters (what the economy is now).

(2) Detailed forecasts of likely developments in the economy, given present tendencies and policies (what it is likely to become without further intervention).

( 3 ) Translation of the objectives to be achieved into a set of quantitative targets (perhaps with considerable prior experi- mentation to determine which set of targets best balances the multitude of interests involved).

(4) Determination of the policy measures which will eliminate the gap between the forecasts and the objectives (how the economy is to be mode what we want it to b e ) .

While the first two steps must necessarily be taken by the govern- ment in both planned and unplanned economies, and even the third is taken to a certain extent in the unplanned economy, it is on the final stage that the “planners” and “anti-planners” clearly part company.

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Before turning to a discussion of this vital stage it would be profit- able to spend a little time discussing the largely technical questions involved in the first three stages and the often considerable extent to which the problems there are shared by both planned and unplanned systems.

111. The Existing Structure of the Econoay There are two principal problems here, one primarily analytical

and the other one of measurement, both of which can be illustrated by seiecting a specific goal of policy.

Let us assume that one of the broad objectives chosen is an increased rate of growth in G.N.P. The analytical problem arises because we simply do not know enough as yet about the causes of economic growth. We know that it must be basically the outcome of growth in the workforce (adjusted for hours of work) combined with growth in capacity output per worker, adjusted in turn for the degree of capacity utilisation. We further know that growth in capacity is linked to the volume of investment in the economy.

Our reasoning may then proceed as follows: assuming that the rate of growth of the workforce is given within fairly narrow limits over the next few years, all we have to do is determine the volume of investment which will take place in that time in order to calculate the rate of growth in production, and hence incomes, which may be expected to take place. If a higher rate of growth is desired this becomes a policy directive: increase the rate of investment.

It is pa’tently obvious that this is wrong at several vital points, the most important omission being that it ignores the “quality” of both capital and the workforce. We may, perhaps, reasonably assume that improvements to worker skills through education will be negli- gible over a four- to five-year period and even that major contri- butions to technical progress by research during the period may be ignored. It would be going too far to assume that the dissemination of existing technical knowledge would not result in a significant increase in productivity over the period. The problems of measuring, much less anticipating, technical progress are well known; not only are statistics of net investment almost completely meaningless, but the replacement component of gross investment almost certainly embodies a considerable amount of capital more efficient than the equipment it is replacing.

In other words, although we can talk at length about the factors which must have influenced the rate of growth of output in the past, we cannot determine their specific contributions to the final outcome. This makes any anticipation of their combined future contributions understandably difficult.

The problems do not, of course, end there. The inability of a measure like G.N.P. to reflect desirable, or undesirable, changes in the quality of life is increasingly under fire. One obviously cannot

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allow for the arrival of completely new products at the market place. But these are, after all, problems which have to be recognised by a government of any political complexion once it accepts the respon- sibility to intervene significantly in the workings of the economic system. It might even be claimed that one of the advantages of planning is that it forces the planners to face these questions head-on rather than allowing them to assume that “the market” will take care of them, in the national interest, in due course.

Planning difficulties are further compounded by the second funda- mental problem, namely the accurate measurement of past perform- ance. The policy maker has to use, as a raw material, statistics which purport to measure the variables crucial to his planning of policy measures. In order to check whether past policy measures have been successful, or to determine when new policy decisions are necessary, he must use official statistics and, thereby, run two grave risks. The first is that the statistics available, collected sometimes with another purpose in mind, are questionable reflections of the variables in which he is interested.

This is not to say that he would be ignorant of the fact, but plain necessity and the absence of statistics precisely designed for the problem in hand may force the use of the next best thing. In many cases, of course, the concepts he uses may just not be measurable (for example, the freely used concept of “real gross national product”, to be distinguished from gross national product at constant prices). Apart fromm the conceptual problem, there is the very real likelihood that the statistics he uses may be inaccurate, in the sense that later information received by the official Statistician leads to substantial revisions of preliminary estimates of crucial variables. Now this rarely matters to anyone other than the policy-maker-it may be annoying to find that your survey in the Economic Record is partially invalidated by revisions to the statistics on which you based your findings, but that’s all, and everyone understands anyway-but to the policy-maker it is crucial, since the implementation of policy requires the correct action taken at the right time. A departure of measured performance from agreed policy requires correction, and if this is inappropriate because the statistics have been misleading (for example, a preliminary estimate of a substantial part of private fixed capital expenditure which shows a substantial decline, subsequently revised to almost no change at all) nobody, but nobody, understands. This is by no means a criticism of the generally excellent and continually improving body of statistics prepared officially in Australia, but often the desire for complete accuracy must bow to the need for immediate information.

A key economic variable like investment, to return to my hypo- thetical example, is obviously of crucial importance to the policy- makers whether they are operating under the direction of a plan or not. One solution may well be to concentrate on providing an economic atmosphere in which investment will naturally proceed at

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an appropriate rate and the discovery and utilisation of technical knowledge will be suitably promoted, The advocates of target plan- ning usually argue that the best way to do this is to provide entre- preneurs with a picture of future demands for their products so that they may confidently plan their investment expenditures; the “anti- planners” attitude would be that by concentrating on the shorter-term objective of maintaining a stable rate of growth they foster optimistic expectations, the operation of plant at closer to full capacity and hence a larger national income, higher investment and so on. Both attitudes assume, of course, that planned savings will be adequate to finance that investment.

There is one further structural feature of the economy which must be considered before moving on to the question sector in the economy. Quite apart from the controls already exercised by the government over the private sector (and hence the length of the additional step that must be taken in order to “plan” the economy), there is the question of the extent to which the government is itself an active participant in the commodity and financial markets, both as a buyer and seller of goods and services, and as a borrower and lender of funds.

Substantial and growing government expenditure, in a number of vital areas, is a fact of life. Governments make expenditure commit- ments on the basis of needs they foresee and developments they deem desirable-and that, after all, is what planning is all about. The larger the government sector in relation to the private sector, the more “planned” that economy may be said to be, particularly if the government lets the community know the details of its forecasts, against which the private sector can frame its own view of the future. And it would seem likely that a government’s plans for its own sector stand a greater chance of achievement, partly because the decisions are made and co-ordinated by a relatively small and concentrated group of decision-makers and partly because it has the powers to construct its short-term policy measures with at least part of an eye to the future. It may be argued, I suppose, that these factors point equally to the likelihood of colossal, cumulative blunders by the government in its management of the economy simply because the intricate forces of the market are being replaced by fallible humans. Nevertheless, such replacements have been made already in the Australian economy, and it would be labouring the obvious to say that the Australian economy is not of the unplanned, free enterprise type. Some opponents of planning do a respectable case more harm than good by advancing arguments, particularly with regard to the allocation of resources, based invalidly on the assumption of a laissez-faire economy. Their case should be, instead, that the in t r e duction of target planning would at best be ineffective and at worst an unacceptable and damaging extension of the already substantial powers wielded by the government as an intermediator and through its active participation in the markets for goods and services.

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IV. Forecasts

The second step in the planning process I suggested earlier involves the preparatioa of forecasts. Some “planners” and most “anti- planners” are inclined to dismiss this step, but for rather different reasons.

To the true believer, his plan is the future, so the need to forecast in the usual sense disappears. Unfortunately his calculations are prone to be upset by the unforeseen exogenous disturbance-for example, a worldwide shift in the pattern of exchange rates-and it is only realistic to expect that those calculations must be revised periodically. This is where forecasting has its role to play, since it shows the planner where the economy is likely to proceed without further intervention by the government or its agencies. It may turn out that existing policy measures will serve to push the economy back on to its original path, or that corrective measures are required, or even that the path itself needs to be changed. Perhaps a new set of signposts may be sufficient. Whatever the decision, the prepa- ration of forecasts is a necessary prerequisite.

The “anti-planner”, on the other hand, tends to be profoundly sceptical about his ability to make long-term forecasts with that degree of reliability sufficient to warrant anticipatory policy measures. He prefers to leave the solution of long-term problems to the workings of a market mechanism assisted, as far as possible, by the preser- vation of full employment, stability in prices, stability in the balance of payments, and the systematic (planners read “piecemeal”) removal of impediments to the workings of that mechanism. This is done against the background of a sometimes detailed and sometimes blurred picture of desirable long-term developments.

It is, of course, true that there are enormous difficulties attached to the preparation of long-term forecasts. To take but one example, the detailed anticipation of developments in the consumer-goods industries must be frustrated by our present lack of knowledge about the determinants of the level of consumption expenditure, much less the pattern of that expenditure which is in a continual state of change, including adaptation to the appearance of new commodities and the disappearance of old ones.

It is also somewhat beside the point. A great deal of forecasting does, indeed must, go on regardless within any government, whether it chooses to plan or to plot its involvement in the workings of the economy. The introduction of policy measures must logically follow the discovery of a discrepancy between that profile of the economy defined by the objectives of policy and that which, on present indi- cations and with present policy measures, it would otherwise become. The leading example of officially sponsored forecasting is probably the Netherlands where a sophisticated econometric model of the economy is used to guide the government in its policy deliberations. It would be unrealistic to regard this as a purely permissive form of

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background setting, except in the unlikely event that the forecasts prepared show no impending economic problems requiring corrective action by the authorities (though, even here, the assumption of no action means the continuation of existing policy memures). In practice, the Dutch procedure must be regarded as a guide to action, if not a plan in the strict sense of the word, and it should be noted that the model-builders do, in fact, go on to work out a system of directives and forecasts centred on the objective of “optimum” growth. The Dutch economy is undoubtedly planned to the extent that the government draws a programme of action from its detailed forecasts.

In Australia, a great deal of effort has been devoted by the Commonwealth Treasury in recent years to the collation and publi- cation of forward estimates of two of the key economic variables, namely public authority expenditure and receipts. Although some difficulties remain in achieving adequate coverage of bodies on the “fringe” of the sector such as local authorities, this information obviously provides a substantial foundation on which to base forecasts for the Australian economy.

This is not to say that the accuracy or rigidity of such projections is, or should be, beyond question. An excellent illustration of a government’s difficulty in anticipating even its own expenditure was given in a paper presented to the U.K. Parliament in December, 1963, in which public expenditure over the period 1963-64 to 1967-68 was estimated. Included in the forecast increase (in 1963 prices) of f 1,9 15 million over four years was a “contingency allowance” of €250 million, introduced because “forward estimates put too low a figure on the eventual cost of implementing present policies”. While posing a problem of interpretation, in view of the assumption of constant prices, it clearly demonstrated the government’s lack of confidence in its own forecasts (and forecasters?). To put this allow- ance in perspective, it is worth noting that it catered for an increase greater than under any other head of expenditure with the exception of Defence, Education and Benefits and Assistance; an incidental effect was to increase the average annual growth in public authority expenditure from 3.6 per cent to 4.1 per cent. One might speculate on the contrived appearance of the mystical 4 per cent again, in view of the fact that this was the annual growth target set by N.E.D.C. at the time.

So far as the forecasting of other major expenditure components is concerned, it should be remembered that the models of the Aus- tralian economy being built by the Reserve Bank, the Treasury and the Institute here in Melbourne are feeling their way towards pro- viding us with the greater understanding of economic relationships we need in order to refine our forecasts and, for that matter, to determine the efficacy of policy measures adopted in the past. While the builders of those models would probably be the first to discount any extravagant claims made about their accuracy in forecasting, 1

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would hope that they would not be so modest as to suggest that no progress has been made at all.

In short, official forecasting is attempted, because it must be, in both the planned and unplanned economies. One is not entitled to use the difficulties of doing this as an indictment that economic planning must be unsuccessful. In practice, the question of fore- casting is often confused with the difficulties of setting useful and realistic targets, which is quite a different matter.

V. The Setting of Targets The third stage 1 nominated for the planning process was the

setting of targets for the appropriate economic variables. Technically, this involves finding the solution (or solutions) to a problem in general dynamic equilibrium. It requires an explicit initial statement of objectives, a subject that I discussed earlier. It could well involve the building of a complete econometric model of the economy, which poses some additional difficulties quite apart from the sheer technical problems involved in such a task.

An econometric model must be fed with quantitative data and quantifiable assumptions, and it hardly needs stating that there is a number of intangible political and social objectives which simply cannot be served up in that way. About the best that can be expected from such a model would be the production of a range of alternative paths towards the quantifiable goals, so that a choice remains for the selection of that path which appears to satisfy best, or do least violence to, those goals which could not be comprehended by the model.

Further, the relationships which jointly form any econometric model must be assumed to remain stable during its currency, and there is the risk that they will not. It is conceivable that the intro- duction of planning may itself cause some of those relationships to change. Indeed, if one accepts the claim that short-term stability is promoted by the promulgation and achievement of long-term targets, some such changes must be anticipated. A similar point may be made about the publication of official forecasts, whether or not they are accompanied by official policy measures, in the sense that they affect the expectations of other decision-makers in the community. It is frequently claimed, too, that the adoption of targets and a demonstrated commitment to those targets by the government and its agencies stifles the urge to innovate by providing a comfortably predictable environment for potential innovators, and that it reduces competition by bringing potential competitors together in the formu- lation of the plan which provides those targets.

I am drawn back once more to the position that these are not problems peculiar to the planned system. The community in a modern mixed economy surrendered a great many of its options when it insisted that its government act as mechanic to the economic system. It surrendered more of those options as it gave its government a

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growing number of specific engineering tasks to perform. Having given that commission, the community should at least be shown the plans which result and, at best, participate more fully in their con- struction.

The French system of indicative planning would seem to be the most workable approach developed so far. Briefly stated, it approaches the calculation of its targets by successive approximations which start from a range of broad objectives and, through a process of discussion, recalculation and more discussion, eventually reconcile the plans and forecasts of representatives of all branches of economic activity. The resulting profile of the economy is then tested for internal consistency (e.g., the goals for foreign trade are compared with planned expen- diture and production flows; the demand for labour derived from production plans is compared with the supply of labour in total, by industry, by skills required and by regional distribution), and finally summarised in the form of “targets” to be achieved.

The French approach, therefore, acknowledges that planning is carried out in varying degrees and with only partial knowledge in all parts of the economy, and makes use of this to attempt a detailed public reconciliation of these plans into a consistent whole. Its sheer consistency, together with the spread of knowledge and the confidence it creates, is held to guarantee the achievement of the targets it defines.

While consistency in its structure is obviously not a sufficient condition for a plan’s success it is, equally clearly, a necessary con- dition. Another necessary condition, particularly in the context of indicative planning, is that the community be reasonably confident that the plan will succeed. The U.K. experience referred to earlier suggests strongly that any target set must not only be realistic but also appear to be realistic. There may be some response to the adoption of a purely indicative plan, even without the accompaniment of official policy measures, providing the private sector (and the public sector for that matter) believes that it has a real chance of fulfilment. Conversely, a faint-hearted commitment to unrealistic goals is almost certainly doomed to fail. In short, confidence in the target must be an indispensable part of the environment in which it is to be achieved: a spreading scepticism about the probability of hitting the target virtually guarantees that it will be missed. A natural corollary would be that, having missed the target once, a purely indicative planning mechanism is rendered ineffective for a con- siderable time thereafter.

While the French system of planning has some obvious theoretical appeal it also poses some fundamental practical problems. For example, even if we could assume that businessmen normally prepare medium- to long-term plans in detail sufficient for their airing at a public reconciliation attempt, at what level should we proceed to reconcile them and identify the inconsistencies? We can clearly discard as quite impractical the notion that plans should be framed

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at the level of individual enterprises: output targets must, therefore, be framed at an industry level or by product. In the case of monopoly firms, of course, a whole new set of problems is posed. The diffi- culty I have in mind here is that a given industry may produce several different products (often utilising capital equipment which can be switched easily from the production of one commodity to another), while a given product may be produced within several industries. In the case of many basic commodities with clearly separable pro- duction techniques and highly specific capital equipment, this is not a real problem; it is more likely to be an obstacle in the way of framing targets and calculating investment requirements for the consumer-goods industries. Even if it were possible, following a dramatic increase in our knowledge of the determinants of consumer behaviour, to accurately predict the level and composition of final consumer demand, there is no guarantee that supplies to that exact amount would be forthcoming. Presumably each firm within an industry would make an assessment of its likely share in that demand and calculate its output and derived investment requirements accord- ingly. It is highly likely that, at a time of boom psychology, the sum of firms’ expected market shares would be more than one; in the event that their expectations were generally pessimistic, there is every reason to expect total output to fall short of the demand predicted.

Another aspect of this “aggregation” problem was noted earlier in the assertion that the adoption of targets could stifle innovation and competition amongst the firms which co-operated in their calculation. Against this it might be argued, perhaps a trifle naively, that the sharing of existing technical knowledge could be promoted by the planning process and that the frontiers of knowledge might, in fact, be pushed further by co-operation on mutual problems. Nor is competition between firms to secure a larger slice of the cake neces- sarily inconsistent with the setting of an aggregate target for the industry they constitute or the commodity they severally provide. Before you dismiss these assertions out of hand, I invite you to draw the parallel with the usual justification offered for the industry asso- ciations which abound within the business world.

The really spirited argument about target-setting revolves around the issue of flexibility. I have just argued that one of the necessary conditions for successfuf indicative planning is that it should be widely regarded as a firm commitment for a considerable period of time. Planners must nevertheless be prepared for changes in the com- munity’s objectives, particularly those I have described as short-term, and hence for changes in their plan. This might require the intro- duction of new policy instruments or, at the very least, fresh settings for those already in action. There is a very real danger that the plan’s custodians, firmly entrenched in the application of existing policy measures to the achievement of the old goals, might be slow to perceive those changes. It could be the case that, even when they do, they are slow to react, not necessarily because their reflexes arc

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retarded, but because they are very much aware of the central roles played by government commitment and public confidence in the planning system. Their problem is doubly difficult when short-term problems arise, for then they must tread a very narrow path between correcting those problems and doing violence, not only to the long- term objectives of policy, but also to whatever faith the community has in the system itself.

For many years the Australian policy-makers have in fact concen- trated primarily on the solution of the short-term problems, sustained by a conviction that desirable long-term developments would emerge naturally from the favourable economic environment so promoted. Obstacles to such developments have been considered for removal as they appeared or were better recognised (for example, legislation against restrictive trade practices, modifications to the income tax schedule), and od hoc improvements have been made to smooth the path (for example, housing loans insurance, the Commonwealth Development Bank, beef roads in the North). To revive the analogy I employed earlier, the approach has been basically mechanical repairs with the occasional engineering refinement.

The general drift which should have emerged by now from the generalities of this paper is my conviction that this approach to economic policy has, for the moment at least, had its day in Australia. Despite all the enormous difficulties associated with indicative plan- ning, I cannot see any real alternative for the Australian policy- makers over the next few years. The concluding section of this paper offers some of the observations which sustain that belief.

V1. The Means of Achievement Notwithstanding all the problems 1 have discussed, the French

planners at least have obviously found it possible to frame their objectives and calculate their targets. The really contentious issues in the planning controversy involve the means by which the plan is to be fulfilled. The exact mixture of confidence, co-operation and coercion which each “planner” sees as necessary to the fulfilment of his plan varies enormously, ranging all the way from the small carrot proffered by the U.K. planners to the big stick wielded in the socialist countries.

Undoubtedly the process of drawing up a plan would give the community a forcible reminder of the need for choice in economic objectives, and introduce some greater purpose into the often rrd hoc evolution of policy. It is noteworthy, too, that the concentration of certain Australian industries is both a reminder that “free market forces” is something of an illusion and a factor which would ease the problems of planning and control.

On the other hand, it may shift too much power from the Parlia- ment to the administraton of the plan or, looking at it the other way, the administration of the plan may bog down through continual political interference. It is also quite possible that the formation of a

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planning organisation may, unless representation thereon is rigidly controlled somehow, provide powerful pressure groups with an even better platform from which to make their claims. The confidence and co-operation of the less well-represented groups on which the plan must equally depend could in these circumstances be more difficult to achieve. In short, the need to make the planning organi- sation eflective may bring with it even greater problems. The arith- metical elimination of inconsistencies is, after all, but one stage in the development of a plan.

Obviously the planning method used must depend intimately on the structure of, and attitudes in, the planning country. While one cannot fail to be impressed by the enthusiastic claims of the French planners that the sense of cohesion and purpose engendered by the plan was the prime reason for its past successes, one is not entitled to assume automatically that this approach would be effective when translated here. Australia has had, in wartime, some experience of wide-ranging and detailed government intervention, but this is hardly a guide to the likely acceptability or success of detailed planning in peacetime, since, for one thing, objectives and priorities are much more clearcut then (as they undoubtedly have been in European economies recovering from near-total wartime devastation, and un- doubtedly are in the underdeveloped countries of the world). The argument that a purely indicative plan will, by creating confidence in all sections of the community, achieve itself without further inter- vention is questionable when one considers that there will inevitably be groups which will not conform, either because they see an oppor- tunity to advance their own interests while competitors feel con- strained, or because influences from outside the economy violate some of the basic assumptions of the plan. For example, a basic assumption of the N.E.D.C. target for the U.K. economy referred to before was the adoption of an incomes policy; this did not eventuate and doubtless contributed to the failure of the balance of payments assumption involved in that calculation. In Australia, one might speculate on the likely success of a plan which involved, say, export targets for oversea-owned companies.

Once again, all this makes the task of economic policy-making difficult, but does not eliminate the need to make it. An editorial in the Australian Financial Review of 14th March, 1973, put it rather eloquently:

“A great weakness of previous Governments in the making of economic policy was the tendency to compartmentalise decisions. Even when sensible and justifiable in themselves, they rarely seemed designed to dovetail with policies in other areas. The result was a mixture of good and bad, positive and negative, political and commercial, which added up as often as not to confusion.”

The new Government has already shown a welcome awareness of the dangers of compartmentalising decisions. The urge to better

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integrate its policies and actions is evident, for example, in its proposed4 Australian Assistance Plan (to “develop and co-ordincfle welfare services provided by government and private agencies” 1, Its National Commission on Social Welfare (to “integrate nation+ pr* grams”), the National Hospitals and Health Services Commisslon (to “develop regional co-ordination of health care delivery”), the proposal for Commonwealth-State Land Commissions (to “co-operafe with State and local government authorities in achieving a more rational and economic form of urban development”) and in its plans to improve public transport systems (“in co-operation with the States”).

The Minister for Secondary Industry foreshadowed in January, during an address to the Australian Textile Conference, that the Government would

“develop industry planning across the whole range of industry, both secondary and primary, with all sections of the community -especially including unions and consumer interests-partici- pating in this planning”

and the establishment of a separate Department of Secondary Industry must be considered one of the first steps towards this objective. The Minister for Labour has promised better workforce planning, Cabinet now possesses a Forward Estimates Committee, and there is an Inter- departmental Committee working with some urgency on the problems associated with structural changes in the Australian economy.

At the same time, the Government has been busy building quite a few “compartments” of its own. It is not at all clear, to pick a few random examples, how innovations such as the National Pipelines Authority, the Department of Northern Development, the Commis- sions for Schools, Pre-Schools and Cities, and decisions such as the recently announced controls on mineral exports have been designed to fit into the scheme of things. The construction of Senate Select Committees and Committees of Enquiry remains one of the big growth industries under the new administration, and the products of these investigations will sooner or later have to be held up against a background of economic objectives for consideration and action.

There are some disquieting features of the new Government’s short-term policies, too, the most notable example being the resusci- tation of the Statutory Reserve Deposit as an instrument of monetary control. As the Reserve Bank has pointed out in its singularly well- timed Occasional Paper “Some Principles of Economic Policy”, such a move has clear long-ferm implications for the development of that part of the financial system outside the banking sector. A recent press statement by the Acting Treasurer fulminated fiercely on Australia’s trade surplus, inflation and related matters in terms which suggested that this particular set of problems had not yet been recognised, much less acted upon (or, worse, that a .ryrnptom of

4 Quotes from the Governor-General’s Speech at the opening of Parliament.

19 27/2/73. (My italics.)

imbalance in the economy was still seen by someone as providing an end in itself).

Taken together, these observations suggest that, while the desire for better planning and integration of economic policies is certainly there, fulfilment is yet to come. Interestingly, the early initbtive to bring together the rapidly multiplying strands of economic policy is reported to come from the Attorney-General’s Department, which has been instructed by its Minister to “establish machinery to har- monise and coordinate the range of economic regulatory legislation coming before the Parliament this session”.6 Although this is clearly a necessary task (constitutional considerations alone guarantee that), it is to be fervently hoped that it is timed to follow, rather than precede, the co-ordination of fhe Government’s policies on economic grounds. That is where, in my view, indicative planning has its role to play in Australia today.

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5 . Australian Financial Review, February 1973.

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