Summary of the Report

The Report of the Vernon Committee of Economic Enquiry is the greatest inquest ever conducted into the Australian economy. It has attracted much criticism as well as favourable comment, as it does again in this volume of reviews.

The Committee’s major positive achievement is simply that their Report was written, and was signed without dissent by five men, none of them a practising professional economist but all of them dis- tinguished leaders in their own very different fields, of industrial, commercial and financial management, of academic and public admin- istration. At the lowest level, the Report, especially in its appendices, assembles an enormous mass of facts for convenient reference. If little of this assembly is new, much of it was not until now easily accessible ; and all available facts have been thoroughly culled for what is of economic relevance.

Of the analysis, comments and recommendations which the Com- mittee draw from these facts, it has been said on the one hand that there is nothing of importance that is not already familiar to and written about by economists and other publicists; and on the other that the Report abounds in political ineptitudes, economic miscon- ceptions and statistical errors. (One hopes that these two criticisms are mutually exclusive, not coextensive.)

But with all this relentless exposure of partial weaknesses, the general story which makes up the Report, and which gives the im- primatur of five leading citizens to economists’ hopes for and worries about the future, remains essentially unimpaired. Indeed, the Commit- tee might well follow Keynes in his gracious acceptance of Dunlop’s criticisms of ‘a belief which has been widely held by British econ- omists. . . . Since the material on which Nr. Dunlop mainly depends . . . [has] been available t o all of us for many years, it is strange that the correction has not been made before. . . . But I still hold t o the main structure of the argument, and believe that it needs t o be amended rather than discarded. . . . If, however, it proves right to adopt the contrary generalization . . . my practical conclusions would have, in that case, d fortiori force’.’

In this introductory paper, I propose simply to restate, sym-

1 J. M. Keynes, ‘Relative Movements of Real Wages and Output’, Economic Journal, Vol. XLIX, March 1939, pp. 34 ff.

1

2 THE ECONOMIC RECORD MARCH

pathetically, what seems t o me the Committee’s essential line of argu- ment. For a brilliant but more critical summary, readers should turn immediately to Professor Lydall’s article.

The Report’s first two chapters are not covered by the contri- butors. Chapter 1 simply establishes, in fact, that there was a strong undercurrent of growth in Australia’s post-war development and that the Commonwealth government and the Reserve Bank during four booms ‘acted to protect the economy from internal inflation and the balance of payments from a serious deficit’ and ‘in the recessions to prevent any serious downturn’.

Economic Objectives In the second chapter, from among the government’s seven de-

clared economic objectives of ‘a high rate of economic and population growth with full employment, increasing productivity, rising standards of living, external viability and stability of costs and prices’, the Com- mittee select economic growth as ‘the central objective to which the other stated objectives should be related’. Growth not only ‘provides the means of raising living standards and of promoting national security. . . . It stimulates enterprise, encourages innovation and pro- vides a constant spur to technical and managerial efficiency. Moreover, a growing economy facilitates economic and social mobility ; economic mobility, because changes in the pattern of industry can occur through the fIow of new recruits t o the work force and the flow of new invest- ment ; social mobility, because economic expansion widens the range of opportunities to enterprising and imaginative members of the eom- munity. Growth endows the community with a sense of vigour and social purpose. ’

They support their emphasis on growth by quoting Adam Smith : ‘The progressive state is in reality the cheerful and the hearty state to all the different orders of society. The stationary is dull; the de- clining, melancholy.’ That their chosen central objective is not just materialistic they demonstrate by quoting Arthur Lewis: ‘The case for economic growth is that i t gives man greater control over his environ- ment and thereby increases his freedom’.

In this chapter and Appendix A, the Committee acknowledge the difficulties of defining and measuring economic growth but finally, with appropriate reservations, ‘accept the view, which me believe t o be generally held, that an increased supply of goods and services, as measured by G.N.P. a t constant prices, can be assumed for practical purposes to add to the general well-being of a given population’.

The Committee identify five variables which assume a key role in the economy. The level of spending is vital to the pursuit of full- employment and of stability of costs and prices. The level of wages, given a satisfactory level of spending, is a major determinant of the price level. The relation between external and internal prices is of critical importance t o Australia, where international trade plays a major role. The rate of capital accirmulatwn underpins economic

1966 SUMMARY OF THE REPORT 3

growth and population growth. Immigration provided about 50 per cent of population increase between 1947 and 1961. Through their tax, tariff, subsidy, expenditure and other policies, governments can both influence these five general variables and also exercise more limited and selective control over the structure and composition of industry, society and growth.

Th'e second chapter concludes with a useful discussion of the interrelationships and consistency of the economic objectives, and of the constraints on growth. While not seeking a rate of growth or a level of employment so high as to endanger price stability and external viability, the Committee do not believe that an excessive zeal for price stability should be permitted to inhibit growth and full employment, which they define as a zone commencing when registered unemploy- ment as a proportion of the work force lies between 1.0 and 1.5 per cent, depending on the time of the year.

Problems of Economio Growth From the remaining Gfteen chapters of the Report, dealt with

separately by various contributors and as a whole by Mr. Reddaway and Professor Smithies, it is possible to educe a simple but effective line of argument which underlies the Committee's conclusions.

Physical Resources Their examination of Australia's physical resources and environ-

ment shows that the only serious deficiencies are in softwoods, petro- leum, phosphate, sulphur, nickel and several other minerals, all remediable partly by overseas trade and partly by internal develop- ment. Even water resources they regard as unlikely to prove a serious impediment to economic growth, at least in the next decade or so. Australia's economic future will be determined then, not by any short- age of resources, but by good luck, particularly in external economic relations, and by good management and willingness to save for capital formation.

Economic Growth, 1953-54 to 1962-63 They find, after making due reservation for conceptual and

statistical difficulties, that between 1953-54 and 1962-63 G.N.P. at constant prices rose on average by 4.1 per cent a year. Allowing for employment rising at 1-7 per cent a year, the implied average rate of increase of productivity is 2 . 3 per cent a year. This is not a bad rate of growth in comparison with Belgium, Denmark, the United States, Canada, the United Kingdom and Sweden, which recorded rates of productivity increase during this period varying from an average 1 . 9 per cent to 2.7 per cent a year. The Australian rate is low in comparison with Norway ( 3 . 2 per cent), the Netherlands (3 .7 per cent), France (3 .9 per cent), Italy (4.1 per cent), West Germany (5 .3 per cent) and Japan (6.7 per cent) ; but in these latter countries there were special factors in' their post-war situations which gave them

4 THE ECONOXIC RECORD MARCH

both the opportunity and the incentive to seek and maintain high rates of growth.

Vork Force, Migration and Population Trends Examination of likely developments in the size, age- and ses-

composition of the population and the work force leads the Committee to approximately the figures set out in Table I below. It has long been

TABLE I Annual Rate of Increase of Employment

From natural increase From migrants

Total

1953-54 to 1962-63 I 1962-63 to 197475

Male Female Persons 1 Male Female Persons % % % % % % 1.0 1.6 1.2 0.3 1.5 0.5 I 1.2 2 . 4 1.55

~

1.3 3.1 1.7 I well known that, during the fifties, the heavy shortfall of the natural increase of the work force-the legacy of the shortfall of births in the pre-war decade and a half-opened the way for migration to make the enormous impact of providing some three-quarters of the increase of the total work force and four-fifths of the increase of the male work force. Despite this unprecedented contribution from migration, the rate of increase of the work force was less than Australia had been used to absorbing in the past.

It is also well known that, from 1962-63 on, the work force will be absorbing the massive impact of the post-war boom in births, with the annual net rate of recruitment to the work force of native-born and maturing migrant males rising from 0 . 3 per cent to 1.2 per cent, and of persons, from 0.45 per cent t o 1.55 per cent.

It is thus proper that a serious and informed public debate should be conducted about the future of migration, the one element of population and work force growth which is susceptible to influence by government policy. The Committee introduce such a debate. They are aware of the great demands made on scarce capital to widen the pro- vision of domestic, social and industrial assets needed for the main- tenance of migrants. They are aware that such capital could instead be used to improve, or deepen, the assets provided for a smaller and less rapidly growing population, and so to speed up the rate of in- crease of productivity.

On the other hand, the Committee are aware that the relationship between the growth of population and of productivity has comple- mentary as well as competitive aspects. A large and growing popula- tion permits larger-scale and more efficient methods of production ; a greater diversity and degree of specialization in the structure of industry; and greater mobility, easing the expansion of growth indus- tries and the contraction of declining industries. Moreover, the political and social climate engendered by widespread acceptance of rapid

1966 SUNMARY OF THE REPORT 5 population growth as an overriding national objective surely permits both governments and private industry t o impose on the people a higher rate of national saving than could otherwise be attained, thus easing the apparent conflict between the ‘widening’ and ‘deepening’ of capital. Also helping to resolve this conflict is the Salter effect: even though a high rate of investment may be achieved only because of the need to widen capital provision, that high rate of addition t o assets secures a more modern and efficient body of capital equipment and a more rapid spread of best-practice techniques, still one of the most fruitful sources of increase of productivity.

These complementary effects are strong, but the Committee em- phasize that migration does make heavy demands both on capital and on imports, and that these demands are a t their most embarrassing if there is a sharp increase in the rate of migration. They therefore come down finally in favour of a long-term average rate of net migration at 100,000 a year for a t least the next few years, significantly more than the long-term average of the last fifteen years.

This rate of migration will add about 1.1 to 1 .2 per cent a year to the increase of the work force between 1962-63 and 1974-75, giving total rates of increase of 2 - 4 per cent (males), -3 .5 per cent (females), and 2 .7 per cent (persons). Total population will be rising at about 2.2 per cent a year, compared with the recent rate of about 2.35 per cent.

It is evident from these figures that the proportion of women in the work force is going to increase substantially-from 22.5 per cent in 1947 and 25 per cent in 1961 to an expected 28 per cent in 1968 and 28.5 per cent in 1975.

Required Rate of Growth, Industrial Structure and Productivity The next step in the Committee’s analysis is an examination of

rates of productivity increase in broad industrial groups-primary and mining, manufacturing and other (the so-called tertiary) indus- tries. They find (a) that the rate of productivity increase is highest in the first group and lowest in the third; (b) that there has been a substantial shift of employment from the first (high productivity- growth) group into the third (low productivity-growth) group ; and (c) that the recent overall rate of productivity increase, measured by the Committee at 2 . 3 per cent a year, has been taking place simul- taneously with this shift of employment.

They conclude therefore that, if the differential group rates of productivity increase remain unchanged, and if the trend rate of shift into tertiary industries does not accelerate, the overall 2 . 3 per cent rate can be maintained. With the work force growing at 2.7 per cent, the required rate of economic growth will be 5 per cent a year. This rate the Committee acknowledge to be high, but consider it not beyond our capacity to achieve, given good management. On the basis of this required rate of growth, they are able to project an estimate of G.N.P. in 197475.

6 THE ECONOMIC RECORD MARCH

They also project estimates of gross national expenditure in 197475. By input-output analysis, they break down this expenditure estimate into a picture of the demands the expenditure wouId make on the three basic industry groups.

1954

15 28 57

100

TABLE I1 Aggregate Supply and Demand, Industry Structure and Productivity

1961

-- % %

12.5 27.5 60

100 -c_

-- 1954 to

1961 2 . 3

Industry Con- tinuatiqn of past trends

Primary, mining Manufacturing Other (tertiary)

Com- position of projected demand*

~~

Total

Overall rate of productivity increase

Estimated rate of

P‘.?-. increase

1953-54 to 1962-63

dUctlVlty

% 4.5-5 3.54-5 1.5-0.5

Composition of employment, supply and demand-

1901

- % 33 17 50

100 - I_

1947

- %

17.5 27.5 55

.oo - -

I

1975

1961 1- 1961 to

1 2 5 1 1975 2.3 (2.05) . ,

* Figures in parenthesis are the author’s very rpugh approximations for the Committee’s conclusions which are presented In quite different terms.

Their findings from these projections are presented, very approxi- mately, in Table 11. From this analysis, the Committee draw these conclusions :

(a ) Aggregate demand in 197475 is likely to exceed aggregate supply, implying over-full en;ployment, inflation, pressure f o r more imports and reduction of suppfies available for export.

(b) The pattern of demand in 197475 is likely to be such as to require an accelerating rate of shift of employment into tertiary industries, this time at the expense of employment in manufacturing, implying a lower overall rate of increase of productivity than has been achieved recently.

(c) However, such an accelerated expansion of the tertiary in- dustries, which are the heaviest employers of women, will make easier the absorption of the growing proportion of women in the work force.

(d) In the course of adjustments necessary to equate supply and demand in 1974-75, among other things changes in relative prices of manufactured and of tertiary products will switch some demand back from the latter to the former.

(e) It would be wrong (and futile) to attempt to discourage by policy measures the strengthening demand of an increasingly rich community for the products of tertiary industries, where productivity

1966 SUMMARY OF THE REPORT 7

as measured rises relatively slowly j an increase of manufacturing for export would, however, permit the maintenance of a larger share in total product for this sector where productivity rises relatively fast.

increase in primary production would have the same effect but the Committee regard the scope for such an increase as much more limited than in manufacturing. Despite a' strong pressure of costs on prices, primary exports have increased remarkably in recent years, thanks to high rates of investment and innovation, and to tax concessions and various subsidies. The Committee do not expect, however, that primary producers can significantly raise the rate of increase of esports. The outlook for mineral exports is, on the other hand, much more promising.

Three comments may be made here. First, any expansion of export markets fo r products, primary, mineral or manufactured, which exploits Australia's comparative advantages of natural resources, capital and skilled labour, and which gives the opportunity for larger- scale and more efficient methods, will certainly raise the rate of pro- ductivity increase and strengthen the balance of payments. However, since the demand for tertiary products, which do not enter inter- national trade, has to be satisfied by domestic production, any expan- sion of exports will surely not lead to a significant increase in the share of primary, mining and manufacturing in total production. It will occur rather, it is to be hoped, a t the expense of smaller-scale primary and secondary industries which use capital and skilled labour less intensively. The effect the Committee are seeking should be achieved, but rather by raising the differential sector rates of pro- ductivity increase than by increasing the weight of the sectors with relatively high rates of increase.

Secondly, since the Committee throughout their Report are so insistent on the need to promote exports, particularly of manufactures, it is strange that in discussing protection and the balance of payments they do not give more weight to the fruitfulness of at least a partial substitution of exchange devaluation for tariff protection. The question is discussed with admirable clarity in Dr. Corden's contribution.

Thirdly, as the Committee are well aware but have apparently failed to make evident, an increasingly rich community is likely to increase its demands for precisely those products which are dear because, though much desired, their rate of productivity increase is Iow. A declining rate of increase of productivity, as conventionally and inadequately measured, may be an inevitable but quite proper price to pay for a satisfactory rate of economic growth.

Production and Real Income Per Head of Population The Committee nevertheless accept as a target rate of economic

growth the 5 per cent a year required to provide an annual 2 . 3 per cent rate of increase of productivity for a work force increasing at 2.7 per cent a year. They point out that, in terms of living standards, this 2 . 3 per cent annual increase in productivity during the period 1953-54 to 1962-63, when population was rising more rapidly than the

8 THE ECONOMIC RECORD MARCH

work force, implied a rate of increase of G.N.P. per head of population of only 1.8 per cent a year. Allowance for the deteriorating terms of international trade during this period reduces the annual rate of increase of real income per head still further, to about 1.4 per cent. In the period 1962-63 to 197475, however, when the Committee assume that the terms of international trade. will cease to deteriorate and when population will be growing less rapidly than the work force, they expect that an annual 2 . 3 per cent increase in productivity should yield an increase of real income per head of some 2.6 per cent a year, nearly double the recent rate.

Investment for Growth The Committee nest examine the implications of the higher rate

of growth for investment and its sources of funds. They find that, to support the increase in the rate of growth by 1 per cent a year, invest- ment will need to rise from 24.5 per cent of G.N.P. in 196263 to 25.9 per cent in 197475. The implied incremental capital-output ratio is surprisingly low. A rationalization can be found in the Committee’s arguments. Firstly, they believe there was over-capacity in 1962-63, permitting the absorption of some extra workers without extra equip- ment. Secondly, the higher rate of investment means a higher rate of modernization of equipment, making the desired rate of productivity increase attainable with a smaller increase of equipment than would otherwise be required. Thirdly, by 1962-63 the economy had already gone part of the way towards increasing its rate of investment to meet the rising rate of increase of the work force. This is evident from the figures in Table 111.

TABLE I11 Fixed Capital Expenditure

(% of G.N.P.)

I 1953-54 to 1962-63 I 1962-63 I 1974-75

% % Public Private 15.4 15.8

Total I 23.9 24.5 25.9

The Committee expect public investment to continue to play a large part in total capital formation. They note, however, that both the Commonwealth and States have experienced certain difficulties in planning and carrying out major developments, and suggest that these difficulties might be largely overcome if an independent Special Pro- jects Commission were created ‘with power to investigate proposals for major development projects’ and equipped with a skilled staff to carry out cost-benefit analyses which the Committee consider basic t o project planning. The Commission would be required to report to the Com- monwealth Parliament on its activities each year.

1966 SUMMARY OF THE REPORT 9

Capital InfIow as 5 Source of Funds As a source of saving to match this investment, the Committee

notoriously reject reliance on an increase of new capital i d o w from overseas, recommending instead that this be held a t an annual rate of about €150 m. a year. This amount will be increased by the reten- tion in Australia of undistributed profits accruing to overseas resi- dents. The Committee base their conclusion on B projection of income payable overseas in service of international indebtedness, and of the degree of foreign ownership of Australian companies. Their projec- tions of the effect of even the f150 m. new capital inflow a year are so alarming that one wonders how they could have brought themselves to recommend its continuation. It does appear, however, as is suggested by Dr. Perkins and other commentators, that the Committee have substantially overstated the effects of new capital inflow. It is because I believe that an inflow of €150 m. a year would not seriously aggravate the burden of income payable overseas that Australia has been carry- ing in the post-war period-a much smaller burden than she staggered under during the thirties-that I am happy to go along with the Committee’s recommendation in this area, though for diiTerent reasons. Their comments on the need to watch developments, and especially to take steps to limit the imposition by overseas investors of export franchises, remain fully valid and pertinent.

Domestic Saving The only other source of funds for investment without i d a t i o n is

domestic saving. The Committee would like to see an increase of private saving but are pessimistic. Table N suggests they may have good cause, but Professor Lydall convincingly argues that the expected rate of increase of real income per head over the next decade is so much higher than Australia enjoyed during the fifties that it is reason- able to expect a signscantly higher rate of private saving in the future. Professor Henderson makes some effective suggestions as to how private saving might be increased and as to how economic welfare might be raised with a smaller strain on capital resources than the Committee envisage.

The Committee consider that the most fruitful source of funds is

1958

TABLE N

1962

Australia Private saving Government saving

Total U.K., U.S., Canada, France Japan

16.5 6 . 5 -

23 18 30

16.5 6.5

23 19.5 40

-

10 THE ECONOMIC RECORD MARCH

likely to be an increase of government saving, achieved through higher charges for public services and utilities and through higher taxes. They fear that such measures may tend, however, to discourage invest- ment needed for growth, partly by reducing the rate of growth of consumption, partly by reducing the reward for investment. If this should be so, then the Committee suggest that tax concessions and incentives may be necessary to stimulate investment.

I find this particular argument unconvincing as it is expressed. Higher taxes and charges should be imposed, not to produce finance for investment, but only where they are necessary to restrain total expenditure within the limits of available supplies a t constant prices. If such extra taxes and charges are required, it would be an unskilful policy which imposed them in such a way as to check growth. Growth has of course been checked in the past, and may be again in the future, but that is a failure of economic management rather than an inevitable consequence of pursuing growth.

If the investment incentive is there, the desired level of invest- ment can, given good policy, be achieved and financed. Professor Lydall queries whether the mere announcement of a target rate of growth will be enough to produce the desired level of investment. I should have thought i t would make a substantial contribution thereto ; if it proves inadequate, then is the time to bring in policy measures to stimulate investment, including tax concessions and incentives. If achieving the desired rate of investment causes inflationary pressure, then is the time to bring in higher taxes and charges designed to release resources for investment. Again, one agrees with the Committee, pro- vided their argument is stood on its head.

Balance of Payments It is inevitable that the Committee should make a projection of

the balance of payments in 1974-75-and very gloomy i t is. With new capital inflow at €150 m., they foresee the possibility by then of reserves running down at a rate between f34 m. and E344 m. a year. To avert this outcome, they argue for a considerable strengthening of policies to promote exports.

Dr. Perkins offers another projection, even gloomier. On the other hand, it is easy, by taking a reasonably optimistic view of mineral exports and net income payable overseas, to produce a quite cheerful projection. Perhaps Professor Lydall is right when he says balance of payments projections should not be made. It is certainly the one sector of the economy where the government is sure to take effective remedial action. Nevertheless, economists will still be anxious to ensure that the action taken will be both appropriate and timely.

Moreover, one of the most useful functions of a committee of economic enquiry is to educate public opinion. There is no doubt that export-promotion will long need to be pursued in Australia and the Committee have plenty of helpful things to say on this score. A projection of the balance of payments can be very useful in driving

1966 SUMMARY OF THE REPORT 11 the lesson home, provided the prospective deficit is not crushingly large, but rather is moderate enough to suggest that, if we all pull together and put our shoulders to the wheel, the gap can be closed, The Committee’s wide range of possible outcomes can be thought of as meeting this criterion, so that their projection is excusable.

Becommendations and Suggestions‘ This completes the exposition of the Committee’s main line of

argument as I see it, Their Report is full of good things, both sup- porting the argument just expounded and developing a large number of special aspects of growth. Outstanding is the discussion of pro- tection, which is examined a t length in this volume by Dr. Corden. There are important discussions, also examined in this volume, on costs, prices and wages; on the industrial pattern; on the availability of credit ; and on the role of research in raising productivity.

The Committee expect some significant strains and difficulties in the course of Australia’s efforts to absorb a higher rate of increase of work force without reducing the rate of increase of productivity. Notably there will be inflationary pressures as investors and consumers compete for scarce products; there will be strains on overseas reserves as a result of the demand fo r imports running ahead of export capacity; and there will be a debilitating switch of resources into the tertiary industries where the rate of productivity increase is relatively low.

In their search for solutions, the Committee reject reliance on a higher rate of capital inflow, on further import-replacement, on a change of migration policy, o r on increased capital expenditure unless i t can be matched by additional restraints on consumption. They have greater hopes for successful results from action to reduce the am- plitude and incidence of fluctuations, some continuation of which, how- ever, they consider inevitable ; from higher savings, especially through an increase in the current surplus of public authorities; from greater efficiency in the use of available resources, through developing Iabour and managerial skills and promoting technological research and development, a s a contribution towards raising the rate of increase of productivity without substantial capital outlay ; and from an increase of exports.

The Committee reject the case for a national economic plan for Australia, but favour periodical statements by the government that its long-term policies are directed to the achievement of a specified rate of growth. They favour also the establishment of an Advisory Council on Economic Growth which the government should appoint but whose advice it would be free to accept or reject as i t thought proper. The Council would regularly review the economy’s experience and pros- pects of growth, would contribute to the education and better under- standing of the public about the problems of growth, and would pro- vide a forum for debate, consultation and communication about these problems

12 THE ECONOMIC RECORD MARCH 1966 Conclusion

Summaries of reports inevitably leave out most of what is good in the original. Critical reviews concentrate properly on the weak- nesses. To my mind they do not, in this case, shake the truth of the simple central argument, or impugn the usefulness of providing a wide basis for a public debate about the issues raised by pursuing a high rate of economic growth-a debate which has been sadly weak and ill-informed so far in Australia. This volume will, we hope, con- tribute positively to this debate. Policies f o r economic growth should not be decided in secret and presented as an accomplished fact. Pro- gressively better policies are needed and, if they are to succeed, they must be understood, accepted and supported by public opinion. Aus- tralia is deeply indebted to the five men of the Vernon Committee for their enormous efforts and f o r their substantial achievement.

Umiversit y of Melbourne R. I. DOWNING L