LONGER-TERM PERSPECTIVES ON DEVELOPMENT ISSUES

LONGER-TERM PERSPECTIVES ON

DEVELOPMENT ISSUES

JOHN BRUNNER

As something of a sceptic where the value of long-term forecasting is concerned I approach the task of talking about longer-term perspectives on development issues with some diffidence. There is after all no remotely scientific process by which we can determine the shape of the economy 20 years hence and to pretend there can be is but a form of modern superstition.

When we look that far into the future all we are typically doing is superimposing the prejudices and perceptions of the present on the perceived trend of the more or less recent past. Even the perceived trend of the past is highly subjective partly because the length of the relevant time series is so arbitrary and partly because the equations we use to explain what has happened so frequently derive from relationships which are commonly no sooner established than they cease to hold. (This problem incidentally is one which afflicts the so-called social sciences in general and economists only suffer more to the extent that their mathematical pretensions and claims to be value free are even more exaggerated than those of their fellow social scientists.)

What we should be doing when we look ahead 20 years therefore is not so much pretending to be involved in a scientific exercise as embarking on a flight of the imagination. It is the poverty of their imaginations which has invariably been the undoing of long term forecasters, witness the 1975 forecast of mineral exports proffered by the Vernon Committee (€169 million at 1963 prices or about $1000 million at 1975 prices against an outturn of almost $2500 million). Unfortunately none of us can really give free rein to our imaginations. Our view of the future is necessarily coloured by our own experience, but in one respect at least I think history is a good guide-the unexpected more often than not comes from abroad. No land is an economic island, not even an island continent.

This said, how precisely the outside world will impinge on Aus- tralia is anybody’s guess. One possible scenario is that some international catastrophe will envelop this country; another that some such catastrophe will engulf much of the rest of the world but not Australia; a third is for a situation in which Australia finds itself as isolated as South Africa today. The fact that these are more or less

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distasteful possibilities and that doomsayers who have given vent to them have hitherto been dismissed as crying wolf doesn’t make these scenarios any less likely to eventuate in future. Nor does it make economic forecasts which ignore them any more realistic even if professional respectability requires that economists banish such thoughts from their calculations.

But the particular point in mentioning such possibilities in this context is the material impact they could have over a period of 20 years on our industrial structure. In particular they could encourage a much more determined drive for self-sufficiency. I say more determined because there have long been suggestions from the more obviously defence related industries that they should be supported as a form of strategic insurance and more recentIy, in this country as elsewhere, self-sufficiency in energy has been seen as a necessary insurance against OPEC embargoes. But so far the former type of autarchy has been largely confined to a few off-set purchases and research contracts and the latter is some way from being taken seriously when crude from existing domestic sources is still sold far below import parity. It is symptomatic of national schizophrenia that we should at one and the same time be selling domestic crude and natural gas at well belaw their opportunity cost while solemnly contemplating immensely expensive and often unproved schemes for turning coal into oil and gas.

However, it is no coincidence that the leaders in this roundabout method of providing hydrocarbons have been Germany, which developed the Fischer Tropsch process during the last world war, and South Africa where the process has been adapted in the so-called Sasol plants largely in response to the laager mentality. It would be foolish to dismiss the possibility that such a mentality might ulti- mately prevail here and if it did its implications could extend well beyond hydrogenation plants and armaments. All sorts of items, e.g. machinery and chemicals, which we are currently importing would now have to be made here. All sorts of other industries already manufacturing here would be the gainers or losers as a result. The standard of living would suffer but if survival were felt to be at stake, this might be seen as a minor sacrifice.

One hopes that this sort of scenario will not eventuate indeed that the need for such policies will be obviated by exactly the opposite policy. There may be an element of wishful thinking in assuming that Australia’s ultimate salvation lies in making itself so indispen- sable to the resources short nations of the world that none of them would want it to fall into the hands of the others. But certainly this assumption is more appealing in general terms as well as to most economists than the scenario which points inexorably to the siege economy.

The idea that natural resource development can be expected to provide the main dynamic of the nation’s economy, not to mention its diplomacy, is not of course an original one. Indeed it is very

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much part of the conventional wisdom deriving as it does from the recent strides made by the Australian mining industry. For that reason alone it needs examining critically. There is, for instance, no necessary reason why an industry sector should go on increasing its share of GDP just because it happens to have done so in the recent past. If we go back 20 years and contemplate the immediate pre- ceding period (always a salutary experience for a long-term fore- caster) we observe that between 1952-53 and 1957-58 the share of mining in GDP fell from 2.4 to 2.1% while that of manufacturing rose from 25.7 to 29.4%. Such trends are obviously quite capable of being reversed.

But quite apart from the foreign policy imperatives, there do seem to be persuasive economic reasons for believing that mining’s share of Australian GDP should continue to grow. Although this may long have been an industry in which Australia has had comparative advantage, a number of factors have helped to reinforce this in recent years. The development of open cut techniques has made mining more economic in a high wage nation. The scaling up in the size of bulk carriers has given Australia access to distant markets for its coal and ores which would not otherwise have been conceivable. The progress made in exploring for and producing oil offshore is of particular benefit to a nation most of whose hydrocarbon reserves are likely to be found there. And the rise in the price of oil has itself been of value to a country so well endowed with reserves of alter- native fuels. Even mounting worldwide concern for the environment could be of some differential benefit to mining, pace the beach sand miners, in such an underpopulated land.

Nor can the upsurge of the Australian mining industry be dismissed as a shortlived phenomenon associated with the rapid growth of the Japanese economy in the 60s. Even if economic growth in Japan does now proceed at a more sedate 6% p.a., the impact on the Australian economy could be almost as great as that of 10% growth in the earlier period, if only because our trade is starting from such a very much higher base. Moreover, there are several mini Japans elsewhere in east and south east Asia which together could greatly add to demand for Australian minerals. Competition throughout the area will be stiff, not least from the U.S.S.R. and China, but mining certainly should be able to increase its exports and output more rapidly than the rest of Australian industry.

I say should rather than will because the nation has already displayed an unfortunate tendency to cut off its nose to spite its face where its mineral wealth is concerned. Thus expansion of the mining industry has been held back by unfavourable tax arrangements, by discouragement of overseas investors and by persistent industrial disputes. These essentially self-inflicted wounds could act as a considerable drag on mineral development in future particularly if they appear to derive intellectual respectability from the so-called Gregory thesis.

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And another cloud on the horizon is Australia’s participation in international cartels. If these are to be at all effective, they must be accompanied by production controls which almost invariably tend to hold back expansion by the more efficient producers. In the case of a private cartel membership is up to the individual producer and it can be assumed that if he thought his chances of increasing his market share were likely to be prejudiced by joining, he would desist from membership. Where government cartels are concerned, however (and if the North South dialogue is to get anywhere they are likely to gain increasing prominence), the interests of an efficient mining producer may be subordinated to what his government believes is the wider national interest.

For all these reasons then the expansion of the mining industry could be frustrated, but if so it will be in defiance of the facts of geology and technology as well as economics.

Turning to the rest of the natural resource sector, the food and fibre industries, one is faced with industries whose relative importance in the economy has been shrinking for a considerable number of years. Farm output as rl proportion of GDP, already down to 9.3% in 1965-66, declined to 5.3% by 1975-76. However, this reduction has been largely due to the fall in the real price of farm output. in volume terms farm output has almost kept pace with the rest of the economy growing by 54% over the decade in question against a 57% rise in non-farm product. If therefore farm prices were now to match non-farm prices, the rural sector would cease shrinking and could actually expand its share of total output.

It is of course far from certain that such a reversal of economic form will occur. On the other hand as populations continue to grow and the supply of land remains largely fixed, it would not be sur- prising to see demand for food outrunning supply at last, particularly if a more equal distribution of the world’s wealth enabled the poorer countries of the world to raise their nutritional standards. Hitherto the increase in effective demand for food has been matched by the remarkable increases in rural productivity. This has certainly not come to an end with the green revolution being followed with growing interest in double cropping, but rising productivity on the land seems likely sooner or later to come up against the increasing cost of petroleum based fertilisers and thus depend for its continuance on rising food prices.

If world food markets are going to improve, Australia should be in a good position to take advantage of the fact. The rural sector, as the LAC has rightly observed, has shown a refreshing adaptability and the last decade has witnessed dramatic increases in output of such commodities as sorghum, oil seeds, cotton and rice. There is still ample well watered land available and though developments in the most obvious such area, the Kimberleys, have hitherto been dis- appointing, a fast growing and labour saving crop such as kenaf could well come good there within the next 20 years as a major

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source of paper pulp. Thus although the rural sector as a whole will undoubtedly have

many ups and downs during this period, its long-term relative decline could well be near its end provided it can control its costs. The rising cost of fertilisers will certainly be a problem and Aus- tralian farmers are also vulnerable to higher fuel costs, but these items apart variable costs remain low by world standards.

The decline in the share of manufacturing industry has been the subject of much comment of late being largely debated in terms of its effect on employment. Unless one takes the view that all the economics one was brought up to believe in now needs to be aban- doned (admittedly a lot of it does) this seems to me much of a red herring. If governments can restrain inflation, traditional fiscal, monetary and exchange rate measures are surely still able to main- tain demand at whatever level is required to ensure full employment and if governments are having difficulty restraining inflation, it is certainly not going to help seeking to ossify the economy by main- taining the shares of the existing sectors.

This said there seems to me no necessary reason why manufacturing industry’s share of output as opposed to employment should go on dropping sharply. Considerable scope exists for a re- allocation of resources within manufacturing industry from the labour to capital intensive industries. Even with a continuing rise in mineral exports there are many manufacturing industries in Australia capable of competing if they and their suppliers put their houses in order. Certainly they need to improve their industrial relations, certainly they need to step up investment and here the Government can help by providing capital allowances more comparable with those available overseas, but provided the industries servicing manufacturing can operate efficiently there are many sections of it which should be viable.

The three such service sectors which particularly concern those sections of manufacturing with the greatest potential are transport, energy and building. Domestic transport is a matter of comparative indifference (one or two mining rail lines aside) to primary industry since most of its output is exported. Manufacturing on the other hand is highly sensitive to domestic transport costs, as they affect the delivered cost both of its raw materials and finished product, and this specially applies to the processors of indigenous raw materials. For it is they rather than those manufacturers using imported materials or operating in the more labour intensive industries who make particular use of domestic transport. Any view of the long-term outlook for Australian manufacturing must take account therefore of likely developments in domestic rail, road and sea transport. From the perspective of 1977 the outlook for industries dependent on domestic transport and particularly coastal traffic is somewhat murky. But at least the problems are coming to be recognised even if their particular significance in the context I have been dis-

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cussing has not been adequately grasped. By comparison less attention has been given to the efficiency of

Australia’s energy industries, but again it is a matter of prime concern to many ot‘ the manufacturing industries whose prospects might be seen as brightest and in particular the mineral processors. The price of electricity would appear to be high by international standards and Tasmania aside the costs of electricity to industrial users are further inflated by a tariff structure whose main aim seems to be to keep down the price of electricity to the domestic consumer. Primary fuel costs remain low, but unfortunately industrial users do not always obtain the full benefit of this fact.

The third constraint operating on manufacturers, and especially the more capital intensive and potentially viable sections of secondary industry, is the efficiency of the construction industry. While it would seem to make economic sense for a high wage economy to concen- trate on capital intensive industries, this does presuppose that the cost of capital goods is not excessive. Unfortunately this proviso is a serious one in Australia as the ABS figures of construction productivity in the early 70s demonstrate all too clearly. Although this series doesn’t extend beyond 1972-73, there is unfortunately little reason to expect much of an improvement since.

The long-term prospects for manufacturing then are critically dependent on these three service sectors. In each there is no necessary reason why costs should not be competitive with those elsewhere in the world. They themselves are not for the most part particularly labour intensive nor are they seriousIy inhibited by the size and dispersion of the local market, at any rate outside the electricity industry where, as I say, there should be compensating advantages in the form of cheap (often open cut) fuels. It is far from inevitable therefore that they should prejudice the chances of their major customers, manufacturing industry, and by the same token it is far from inevitable that manufacturing should continue to contract.

Those who are still with me may have anticipated the conclusion which follows from what I have been saying, namely that the con- tinued relative growth of the service sector is not perhaps as pre- ordained as is generally assumed. If the mining industry’s share is to go on increasing and the declining share of the rural and manufacturing sectors is going to level out shortly, then the scope for the service sector to go on expanding is fairly limited. What evidence is there for this heresy?

Certainly the historical trend here and abroad is against it, but as I suggested earlier such trends can well be reversed. For this one to be reversed one would have to point to changes in some of the under- lying factors which have given rise to the growing importance of services hitherto. Such changes in my view are by no means incon- ceivable despite the strong almost moral prejudice which many hold in favour of services rather than goods on materialistic grounds.

One change which would seem to have been closely associated 34

with the growth of the service sector in industrial countries in the last two decades has been the increase in the relative importance of the public sector. This shows up in the particularly rapid growth rates of the community services (health, education etc.) and public administration employment groups. While renewed growth in the relative size of the public sector cannot be ruled out in the next 20 years, it is unlikely to be seen in quite as uncritical a light as it appeared in the 60s and early 70s. It will be a long time before the western world gets over the inflationary shock it received in the mid-70s and rightly or wrongly many people believe the acceleration of inflation had some connection with this growth in the size of the public sector. This particular boost to the service sector may therefore have lost some of its momentum.

Another trend closely associated with the growth of the service industries has been the rise in the female participation rate. This of course has had effects both on the demand and supply side, but certainly on the supply side it would seem likely to have facilitated the expansion of service output. It has now in many countries, Australia included, reached a point where the scope for any further increase in the rate is limited.

A third feature of the western world from the end of the war till the rise in oil prices was the favourable trend in the terms of trade. The great deterioration in the west’s terms of trade resulting from the rise in oil prices has made it necessary to increase the volume of exports to provide for a given volume of imports. (The west’s scope for substitution of imports from non-western sources is not very great.) While some part of these additional exports can take the form of services, the great bulk will be goods. Resources in other words will have to be switched from consumption, much of which consists of services, to exports in which they have a relatively modest role. This will be all the more significant a trend if other commodity producers succeed in emulating the example of OPEC.

While this last development is not one which will be of any concern to Australia, indeed it could gain from it, there are two respects in which services have received particular encouragement in this country, at least in contrast to Western Europe. One is the absence of a value added tax which does not differentiate goods from services. If a VAT was introduced here in lieu of the sales tax, the price of services could be expected to rise relative to that of goods.

The other factor which has tended to encourage demand for services in Australia at the expense of goods is the level of protection. Prices of manufactured consumer goods in this country have been inflated by the level of tariffs both on imported finished goods and on the inputs of locally made goods. Reduced protection, therefore, which is not necessarily inconsistent with a levelling out in the share of manufacturing if accompanied by improved capital allowances, could encourage substitution of goods for services. There is, after all, plenty of scope for such substitution. Consumers of cars, household

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appliances, textiles etc. are commonly faced with a choice between replacing and repairing and with servicing costs continuing to climb even faster than the costs of goods, a further reduction in the relative price of goods would encourage a shift from services.

While it certainly doesn’t prove the point that the share of service output is a function of the tax and tariff structure in this country, it is at least suggestive that the only countries with higher shares would seem to be those with relatively small rural sectors and similar taxation systems. If for the reasons mentioned earlier it is realistic to expect the swing to services to slow down or be reversed elsewhere-and it is interesting in this connection that a recent study of Japan anticipated no growth in the services share of output between 1975 and 1985-then a fortiori in Australia.

I have so far discussed the shares the various sectors might have in GDP without discussing its size or long term growth rate. However, the two are closely interrelated. The total depends on the shares just as the shares depend on the total. If resources are allowed to flow to the more productive sectors, there is no reason why the long term growth of the economy should not return to the sort of rates achieved prior to the present recession. In the current mood of pessimism these may seem almost fatuously optimistic sentiments, but what are the grounds for this pessimism?

It appears to be based partly on a quite imaginary concern for the finiteness of natural resources, belief in which is a measure of the failure of economists to educate public opinion in the most elemen- tary of economic principles, that if demand tends to outstrip supply the price will rise. To the extent that it was true that economic growth in the world was likely to be held back on this account Australia would be a major beneficiary, since quite palpably this country possesses large reserves of minerals which will not run out even at present prices.

The doomsayers also derive much discouragement from the macro- economic bind in which the world’s economic managers find themselves. Without wishing to minimise this bind I would suggest that it is entirely manmade and therefore perfectly capable of solution well within the next 20 years. At the risk of oversimplification I would suggest it is essentially a problem of reconciling acceptable rates of price increase with acceptable levels of employment. A generation of economists was brought up to believe that one particular rather opaque British economist had found the solution to this dilemma thereby making it that much harder to resolve. At the very moment that western society was beginning to realise that the problem hadn’t been solved it suffered a dramatic deterioration in its terms of trade. This meant that it either had to accept a sudden once and for all drop in its standard of living or that the annual increases it had come to expect were temporarily at an end. The more socially cohesive nations chose the former policy, the more divided prolonged the agony by opting for the latter. Both, how-

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ever, are well on the way to dealing with the problem created by the OPEC demarche-even Italy’s balance of payments is forecast to be back in the black next year. As for the longer term problem-the trade off between price stability and employment-history suggests that society’s perception of what is tolerable is extremely fluid and if the idea that there is a natural rate of unemployment which varies according to circumstances gains ground, then the western world may come to live with a rate higher than in the 50s and 60s, if somewhat lower than at present. As far as economic growth prospects are concerned it shouldn’t be necessary to remind this audience that long term economic growth of 5 % p.a. is as compatible with 4% unemployment (however measured) as 2%.

Another and special reason for economic doomsaying in this country is that the rate of population growth is seen to be slowing down. Anyone who knows anything about the forecasting record of demographers-and for a short account of the post-World War I1 record of British population forecasters one need look no further than the June 4, 1977, issue of The Economist-would see the absurdity of allowing oneself to be depressed on this account. Populations defy prediction and not just because of the vicissitudes of migration policy. (A propos which it would seem to me as good a prediction as any other that well within 20 years Australia will have a felt need for more migrants and not just on economic grounds.)

As so often with economic forecasting the wish in respect of long term growth rates may be father to the thought. Many of the doomsayers are antipathetic to growth, or at least think that they are. But as one who made himself unpopular in another land in the early 60s for wondering whether the preoccupation with low rates of economic growth was much more than a fad, I would be equally inclined to doubt the genuineness of the recent support for zero economic growth and for the same reason. People’s actions are invariably a better guide than their words and there is precious little concrete evidence that the electorates of industrialised countries are any less keen on the fruits of economic growth than they ever were and the same goes incidentally for the developing countries, witness the manner in which the new rich of the Middle East are providing further testimony to the infinite capacity of economic appetites.

I would conclude therefore that neither on the demand nor the supply sides is there any necessary reason why, well within the next 20 years, the economic growth rate should not return to what we regarded as long term trend three years ago. Whether it will as far as this country is concerned depends very much on our own exertions.

Here I have no very original recipes to offer. It seems to me the neutral approach of the IAC is the right one, even though it some- times gives the impression of having a rather Jekyll and Hyde character. Behind its market orientated exterior one occasionally

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detects a dirigiste struggling to get out. How else to account for the enthusiasm the Commission displays for its Impact model if even- handedness is in no way advanced by trying to pick the likely winners and losers.

Considerations of good resource allocations aside governments are not good at picking winners and losers. As Adam Smith once observed:

“The statesman who should attempt to direct private peopIe in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted to no council and senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”

But while governments themselves are not good at showing private people how to employ their capitals if only because ‘they tend to be so beholden to the status quo and tender to the feelings of those who might be hurt by change, they can help create an environment in which industry responds positively to new opportunities. Because the latter will often take the form of new technologies or new markets emerging abroad, Government policy could usefully aim to reduce the time it takes for its industries to identify and harness new overseas deveIopments. It is all the more incumbent for governments to do this if they are also minded to slow up one of the most effective transmission systems available by making life difficult for transnationals.

Here again I find myself in a broad measure of agreement with the IAC which in its last annual report drew attention to the slow rate of growth of Australian foreign trade as a proportion of GDP. While in part this can be explained by the substitution of indigenous for imported crude, a trend which is about to be reversed, there is little doubt that anything which tends to insulate a country from abroad is calculated to retard a nation’s economic growth.

The other two areas in which government can contribute to more rapid economic growth are those in which it has already assumed some measure of responsibility, namely industrial relations and short-term economic management.

It may seem odd to put stress on the latter in the context of long- term perspectives but failures of short-term economic management have already had major long-term consequences in the shape of the low level of capital expenditure in the last three years. Some degree of uncertainty may paradoxically be a prerequisite of stability but the combined effect of high interest rates, depressed profit ratios and fluctuating rates of inflation has been such as seriously to curtail the rate of growth of capacity in almost every western country.

Turning to industrial relations, even allowing for some overreaction

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to recent events, it is hard to believe there will not be some fairly drastic changes in the relations between employers and employees within the next 20 years. While I mentioned earlier the particular vulnerability of the capital intensive mining industry to stoppages, there are many other sections of Australian industry whose prospects could be seriously imperilled by escalating strife in industry. Here again if there is going to be a solution, even a partial one, it is likely to be influenced by events abroad where similar problems are exciting growing interest in various forms of worker participation. Although the running in this respect has more often been made by the unions than by managements, it is not beyond the bounds of possibility that the latter will come to embrace worker participation as the means to regaining the loyalty of its workforce. If this were to happen, the enthusiasm of unions could be seen to cool. Already in fact many of the more left wing union leaders see in worker participation a threat to their position.

Certainly something is going to have to be done and if nationalisa- tion, the socialist vehicle for winning the loyalty of workers in large- scale industry, has failed, it is perhaps now time to try a solution more compatible with the market economy. The fact that worker participation is most highly developed in the most successful capitalist nation in the world may not be proof of the effectiveness of mitbestimmung. West Germany’s success may be despite it as much as because of it, but at least it is not a bar to dynamic management as many of the less imaginative managers in the western world would have one believe.

Worker participation seems to me an idea whose time has come and which we can confidently expect to have a significant impact under one name or another on industrial structure before the end of the century. Going back to what I said earlier, however, the real problem is to identify the factors as yet unrecognised which will have a major impact. Alas I am not persuaded that any of the pseudo- scientific delphi type techniques are of much use to us here. We can but prepare for as many eventualities as possible and if planning is the name of the game, then let it be contingency planning.

COMMENT

by

T. G. Parry

There is much in Mr. Brunner’s wide-ranging paper with which it would be difficult to disagree. Indeed, it is refreshing to hear an economist whose roots lie partly at least in the manufacturing sector stressing the need for both inter- and intra-sectoral adjustment in Australia. Unfortunately, the more usual arguments one hears stress the difficulties in exposing manufacturing industry in general to any forces consistent with long-run change.

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LONGER-TERM PERSPECTIVES ON DEVELOPMENT ISSUES