THE JO

P

lEk E I 70 "i2ST

THE INSTITUTE OF PUBLIC AFFAIRS APRIL-JUNE, 1967

289 FLINDERS LANE. MELBOURNE • 63 6558 Vol. 21 — No. 2

THE 1967 WAGE DECISION

A Vast Improvement

THE 1967 Wage Judgment* is remarkable in more ways thanone.

It abandons the basic wage which has, been the centralfeature of the determinations of the national wage-fixing bodyfor 60 years. In this sense the Judgment is historic.

It accepts the "total wage" (the basic wage plus loadingsand margins) as the basis for future wage adjustments.

It applies, for the first time, the full increase awarded (inthis case $1) to adult female workers as well as to males; thishas been taken by some to foreshadow a gradual move towardequal pay for equal work.

It is unanimous. Judgments in recent years have oftenbeen marked by wide divergences of opinion between differentmembers of the Commission, thus seriously weakening theauthority of the majority decision.

*It is called a "Pronouncement", but to avoid confusion in terminology wehave retained the term "Judgment".

33

The 1967 Wage Decision (continued)

Perhaps for the first time the Judgment itself is expressedin brief, simple terms (it comprises less than 10 foolscap sheetsthus avoiding the lengthy, tortuous and confusing argumen-tation of previous post-war judgments.

Finally, the Commission, in spite of its constant insistencein the past that it is not an "incomes body" but a body for"settling disputes", seems to have moved, at least some way,toward the former conception. This is suggested by the textof the Judgment which emphasises the "economic conse-quences" aspect of the Commission's determinations and thedesirability of avoiding an increase which would "create diffi-culties about prices and inflation"; but, even more so, by thenomination of a specific date, August 6, 1968 for the nextannual economic review of wages.

All in all, the 1967 Judgment is hard to fault. It shoulddo much toward restoring public confidence in the nationalwage tribunal. In recent years the prestige and authority ofthe Commonwealth Conciliation and Arbitration Commissionhad suffered severely from determinations which, on occasions,seemed to conflict seriously with the needs of economic stabilityand balance; from the frequent, almost year-to-year, shifts ofground on the basic procedures and principles to be followedin the fixation of wages; from the lack of unanimity amongindividual members of the Bench; from the long-drawn-outhearings which preceded the judgments; and from the ex-cessively lengthy, ponderous and over-legalistic character ofthe judgments themselves. The Commission, at times, gave theimpression of being anchored to the past, hidebound andshackled by tradition, precedent and out-moded concepts, un-able to adapt itself to modern requirements and to the neweconomy of full-employment and "middle-class" affluence. Lastyear's Judgment confirmed all these impressions and gave riseto the feeling that the Commission had become an institution,which was confused about its purpose, uneasy about its role,and inflicted with a disturbing loss of self-confidence.

Now, in this year's Judgment, the Commission has shownthat past form is not necessarily a true indication of presentperformance. In one dramatic movement (one might say) it

34

has shaken itself free of the inhibitions and restrictions of thepast and has boldly entered the modern era.

The dollar increase is probably a realistic compromise. Itcertainly could hardly have been more — the CommonwealthGovernment was opposed to any increase — and in view ofthe acceptance of the total wage — which the unions did notwant — it could hardly have been less. It is difficult to feelany sympathy with the unions' lamentations since the Judg-ment was given. As the Commission points out this is thethird general increase in award wages within the 1966/67financial year, the others being the $2 increase in the basicwage last July and the interim margins adjustment in December.The Commonwealth Government's submission showed thataverage minimum wages had risen by about 7.4 per cent (thisis before the $1 increase) since June, 1966 - an increase "thatby no stretch of imagination can be regarded as coming withinthe limits that can be accommodated by possible increases inproductivity".

In view of the present increase, along with the other risesin award wages in the last 12 months, the Commission'sexpress desire that there should be no further general review ofwages before the second half of 1968 (that is, for over 12months) is wise and should go some way toward allayingofficial concern over the rate of increase in wages. The Common-wealth Government has insisted that wage increases of amagnitude which results inevitably in higher prices, weakenthe economy and, therefore, are not in the interests of wage-earners themselves.

The acceptance of the total wage concept (and the con-sequent abandonment of the basic wage) has clearly not beenan easy step for the Commission to take. The basic wage hadits roots deep in the industrial history of Australia and had beenthe main instrument for protecting the standard of living ofthe•Australian wage-earner. It was, in fact, the proud child ofthe Commonwealth wage-fixing authority itself. It is not, there-fore, surprising that the tribunal has felt a strong sentimentalattachment to the basic wage and has been reluctant to dis-pense with it.

35

The 1967 Wage Decision (continued)

Seven years ago, in the January/March 1960 number of"Review", the I.P.A. argued that for the adjustment of wagesfor economic conditions, the basic wage should be replaced bythe "total wage" concept. After rejecting the total wage inits 1964 and 1965 Judgments and embracing it, in principle,in 1966, the Commission has now come to accept it fully. Thisis a major, one might say historic, advance in wage-fixingprocedure.

It is worth quoting the reasons given by the Commissionfor its acceptance of the total wage:

The total wage " . . . will enable the Commission to act flexibly, toensure that economic gains are reflected in the whole wage each year,to give more reality to its award-making both in economic and work-value cases, and to give proper attention to the low wage earner. Itwill simplify the procedural difficulties in economic cases, whichwould not be entirely overcome by the unions' agreement to simul-taneous hearings of basic wage and margins cases. It will eliminate thepresent awkward necessity for different benches contemporaneouslydealing with different parts of the wage; it should simplify the rapidand proper spread of economic decisions throughout awards and de-terminations under this Act and the Public Service Arbitration Act;and it should put those who give and receive over-award payments ina better position to deal with their problems".

Few will dispute that these considerable benefits shouldall flow from the adoption of the total wage. But the realreason for the ultimate rejection of the basic wage in favourof the total wage procedure can be traced back to the nationaltribunal's own decisions, in the years after World War II, toadjust not only the basic wage for improvements in economicconditions, but also the "marginal wage" as well. (Prior toWorld War II, changes in margins ,for skill were assessed pri-marily on changes in the nature of the occupations concerned,and only the basic wage adjustments reflected movements ingeneral economic conditions) . The absurdity of applyingseparate adjustments, both based on the capacity of the economyto pay, to the two parts comprising the full wage was soon tobecome alarmingly apparent. In 1959, for instance, not longafter the Commission had decided that economic conditionsjustified an increase in the basic wage of 15/-, margins wereupgraded by 28%, also for economic conditions. This meant

36

that average wages were increased by some £2 a week or around9 per cent within the space of a few months — an increase farexceeding any conceivable gains in national productivity.

It was clear that the Commission itself was becomingseriously embarrassed and confused by its own system. Attimes, its members would assert that an increase in the basicwage had not absorbed the total capacity of the economy topay higher wages, implying that there was still room left formarginal increases. At other times this was denied. The dangersof this system — its inflationary potential and its threat toeconomic stability — were too real to be permitted to continue.In 1965, the Commission announced that it would consider thebasic wage and margins (for economic changes) together andnot separately. This decision really sounded the death-knell ofthe basic wage. The obvious , and logical course was clearlynow to make one single adjustment to the total wage, ratherthan to give separate decisions for the two portions comprisingit.

In its recent Judgment, the Commission has wisely em-, phasised that it is not committed to any one single method

of applying the increase on which it may decide from time totime. It may award a flat amount, as in the present case; or itcould specify a flat percentage increase (this would give thehigher wage-earners a greater absolute increase than thelower) ; or it could apply the increase in terms of varyingpercentages. (These alternative procedures were also proposedby the I.P.A. when it advocated the adoption of the "totalwage") .

Over the past two decades, the Commonwealth arbitrationauthority has been subjected to greater criticism than any otherAustralian institution. Dissatisfaction with the Commission hasbeen profound and widespread and has led many peopleto advocate fundamental changes in its constitution andnature. Some have even suggested that, not withstanding itshonoured role in Australian industrial history, it should be

37

The 1967 Wage Decision (continued)

scrapped and replaced by some other system of wage fixation.While we may perhaps claim to liave been more aware thansome of the great intrinsic difficulties of the Commission'stask, the I.P.A. must admit to having been among its severercritics. We were alarmed and dismayed, for instance, by lastyear's Judgment and the confusion and disharmony which itreflected in the minds of the members of the Commission.

Most thinking people, however, will wish to applaud theCommission for its 1967 Judgment. In its clear, straightcommonsense and its refusal to be bound by the impossibletangle of precedents and procedures established in the past,the Judgment represents a major advance. It should help tore-establish the respect in which Australia's national wage-fixing body was held in earlier times, and, given modern andresponsible attitudes by employer and union organisations, itcould • herald a new and saner era in wage negotiations and in-dustrial relations.

38

The Bankers DevelopmentRefinance Corporation

A Proper Perspective Needed

THE decision to establish the BankersDevelopment Re-finance Corpora-

tion has given rise to a rather virulentoutbreak of economic xenophobia — anear-fatal disease for Australia if it everreally took hold. Fortunately that is notlikely to happen, for nations as well asindividuals, when it comes to a show-down, are quick to grasp on which sidetheir bread is buttered.

It is to be regretted, however, thatthe spate of press speculation and con-jecture which followed the Common-wealth Treasurer's statements on theCorporation served to inflame latentemotions against foreign capital as suchand against so-called overseas ownershipof our astonishingly expanding naturalwealth. This was not the fault of Mr. Mc-Mahon. He has, on the contrary, beenat pains to emphasise that the Common-wealth Government welcomes foreigncapital; he has expressed concern thatthe restrictions on overseas investmentin the United States and the UnitedKingdom are resulting in less overseascapital for Australia. Indeed, one of thereasons the Treasurer advanced forthe formation of the Corporation stemsfrom this very fact: that by mobilisinglarge sums of money for investment, theCorporation may help to offset, at leastin some part, the falling off in the supplyof capital from abroad.

The very volume of press commentand conjecture has, not surprisingly, led

many people to attach far too muchsignificance to the Corporation. For in-stance, in the public mind the intentionto form the Corporation is being as-sociated with the notion that in futureAustralia's dependence on overseascapital will be greatly reduced. Even thebankers, who are justifiably proud ofwhat seems to be largely their own brain-child, must have been embarrassed bythe reception which greeted the an-nouncement of its impending birth. OneT.V. news commentator, in an excess ofnationalistic fervour, acclaimed it in ab-surdly ecstatic terms. The prospectiveposition and powers of the Corporation inthe total Australian economic and finan-cial complex are thus being considerablyover-estimated. Far too much is beingexpected of it.

Nevertheless, the Corporation shouldrepresent a useful forward step in Aus-tralian financial organisation. It shouldbe able to make a most valuable con-tribution in arranging for the provisionof finance of a magnitude and typehitherto hard to come by. While manytechnical details are so far unknown,the central purpose of the Corporationis to furnish finance specifically for largedevelopment projects requiring greatamounts of capital. In recent years, thescale of the finance needed for manyof the more spectacular ventures hasoften been far beyond the resources ofthe Australian capital market and theestablished banking and financial insti-

39

The Bankers Development Refinance Corporation (continued)

tutions. In effect, the Corporation meansthat the trading banks, with the backingof the Reserve Bank, will now be com-bining to do collectively what they havefound difficult or impossible to do in-dividually. No one can quarrel with this.The new institution should assist inmobilising local capital for great projectsof national importance. This may helpto appease the deep-rooted Australiandesire for a greater degree of participationin the ownership and control of organisa-tions concerned with the development ofbasic natural resources.

But that having been said, there willstill remain a compelling need for foreigncapital, foreign know-how and foreignskills to assist not only with the exploita-tion of Australia's mineral wealth, butalso with the continued development ofother equally vital areas of the economy.The truth — unpalatable as it may beto some — is that the eventual formationof the Corporation will not lessen by onedollar Australia's clamant need for over-seas money to bring to realisation thegreat goals of national development andpopulation expansion to which we haveset our hands.

The creation of a new piece of finan-cial machinery, no matter how ingenious,does not, of itself, add one iota to thephysical resources available for invest-ment in new projects and for maintain-ing and improving' living standards. Thisis not to deny that the Corporation, wiselyadministered, may bring about a moreefficient deployment of the availablereservoir of savings. There has beensome suggestion that the new Corporationwill also result in the movement of re-sources away from consumption to invest-ment. But this is highly questionable; theTreasurer himself has indicated that thediversion here could be no more thanmarginal.

Anyone who doubts that Australianeeds all the overseas capital it can get

should take a good look at our balance-of-payments' experience over the last fiveyears. This should prove a salutary exer-cise. The total deficit on current trading—that is, the extent to which our pay-ments exceeded our current receipts—was little short of $3,000 million. Adeficit of that order would have sentmost countries, let alone a small economylike Australia's down the drain towardnational bankruptcy. Fortunately, thesemassive deficits have been more thanmade good by the capital which othercountries were prepared to invest in Aus-tralia. Why we should be able to do inthe future what we have been unableto do in the past, is a mystery whichthe opponents of overseas capital havenot bothered to explain. The fact is thatthe flow of overseas money into Aus-tralia acts like a governor (not the onlyone) regulating the pace of our nationaldevelopment. When the stream of foreigncapital flows strongly, this pushes theAustralian economy ahead at a rapid rate.When the stream dwindles, the rate ofdevelopment, other things being equal,is slowed.

There is no escape from the basiceconomics of the Australian situation.If we want development to fire aheadwe must seek overseas money and tech-nical and managerial "know-how" andwe must be prepared to pay, withinreason, whatever price this may exact.If we are not prepared to pay this price,then we must accept the logic of a muchslower rate of national progress andvirtual stagnation in living standards.

The over-riding fact is that Australiais a capital-hungry country — perhapsmore so in relation to the size of itseconomy than any other country in theworld. There are several simple reasonsfor this insatiable capital hunger.

The first is that we are attempting tomaintain a rate of population growth,based on a massive immigration pro-

40

gramme, which is among the fastest inthe world. To settle people into homesand jobs at high living standards requireshuge sums of capital. Some economistsput the figure at around $10,000 permigrant.

The second is that Australia, becauseof its vast and sparcely populated area,poses unique and complex problems ofdevelopment. Many of these can be solvedonly by sinking immense amounts ofmoney into basic development to renderproductive large remote areas 'of theContinent. This means that returns fromsuch investments are long delayed, withthe possibility in some instances of noreturns at all. The development of theNorth and North-West provide obviousexamples. Only groups commanding greatfinancial resources can undertake ven-tures of this kind. Dr. E. M. Hutton ofthe Division of Tropical Pastures ofC.S.I.R.O., stated recently that large-scale pastoral investments by Americaninterests in the North were doing Aus-tralia a great service by putting Northerndevelopment ten years ahead.

The third is that in the last few yearsAustralia has become one of the greatestpotential sources of mineral wealth inthe world. The future viability of thebalance of payments, and thus the main-tenance of our industrial progress andimmigration programme, has become in-extricably bound up with the rapid ex-ploitation of these resources. Wealth leftin the ground is not wealth at all. Theeconomic and speedy development ofthis natural wealth, not to say the dis-posal of its output on world markets,is a task requiring not only huge sums ofmoney, but also sophisticated technology,specialised skills and, not least, inter-national marketing connections.

The fourth reason for the insatiabledemand for capital is that in spite of itsexploding economy, Australia's popula-tion and industrial capacity are still small

compared with the major industrialnations abroad. Indigenous research,scientific and technical, is thus on arelatively minor scale. It can and shouldbe greatly increased. But whatever isdone must, for a long time to come, beinsignificant by comparison with industrialresearch and development carried out inthe United States and Western Europe.Added to this is the fact that the worldis in the throes of an era of astonishingscientific and technological change, andnew highly complex, science-based in-dustries are becoming an indispenablefeature of any country that aims to keepin step with the rest of the world. Inthese fields, even the large WesternEuropean countries have found it im-possible to go it alone and have, in effect,been forced to draw liberally on Americancapital and technology.

The reasons for Australia's capitalhunger are thus plain. It has a spec-tacularly expanding population; it hasthe strong Australian thirst for improvedliving standards; the natural desire togrow big; defence commitments whichare rapidly accelerating; huge areas ofdifficult country to develop and populate.Finally, Australia, if it is not to becomean industrial backwater, needs the super-

; for technologies and scientific knowledgeof larger economies at a more sophisti-cated stage of industrial development.

One has only to pause and look aroundto appreciate the extent of Australia'scapital hunger. We desperately needmoney for roads; we need money forhousing; we need money for schools anduniversities and hospitals; we need moneyfor dams, hydro-electric schemes, basicpower and fuel developments; we needa great deal of money for public pro-jects such as the Melbourne underground;we need money for primary and manu-facturing industry development; we needmoney for opening up new lands, notablythe North and North-West (the "Ord

41

The Bankers Development Refinance Corporation (continued)

River projects"); we need money —immense amounts — for the exploitationof Australia's new-found mineral wealthand natural gas resources; we needmoney for our expanding defence obliga-tions. This capital hunger is the in-escapable accompaniment of a great waveof development and rapid economic ex-pansion. It will persist so long as wecontinue to pursue the national ambitionswe have set for ourselves.

If the inflow of capital were seriouslyto decline — either because of externalforces over which we can exert no controlor because of the triumph of small-minded, insular conceptions — the effectswould be felt throughout the entire econ-omy. We would find then we could notdo the things we all wanted to be done,and felt should be done. There wouldbe less money for everything: roads,schools, universities, industries, publicprojects, mining development, and therest. Even the most nationalistically-minded among us, harbouring impossibleideas of Australia "going it alone," wouldsoon feel the crunch and would bescreaming to High Heaven for relief.

Some people are assuming that theBankers Development Re-finance Cor-poration will be able to marshall vastadditional sums for mineral developmentby diverting resources from consumption.It has been suggested that this diversionmight be brought about by the Corpora-tion attracting additional savings andthrough the curtailment of consumercredit available through the hire pur-chase finance companies. The idea thatlarge resources can be shifted out ofconsumption into investment is a fallacythat dies hard. Consumption is, and al-ways will be, the stubborn, unrelentingenemy of the economic planner in ademocratic society. The curtailment ofconsumption expenditure is a prescrip-tion for the other fellow — seldom, ifever, for oneself. For there is hardly one

of us, when it comes to the pinch, whodoes not want to achieve some improve-ment in his standard of living here andnow. The notion that sizeable additionalresources can be made available for de-velopment by suppressing consumptionis one of our greatest essays in nationalself-delusion.

What the Corporation is more likelyto effect is some change in the deploy-ment of existing investment resources—away from, say, large office buildingsand from medium-size and smaller busi-nesses, dependant on the banks for theirworking capital — to natural resourcedevelopment. There is a danger here thatwill need to be watched. The Corporationitself will be keen to avoid any suggestionthat large powerful groups — many ofwhich in any case have access to over-seas sources of finance — will benefitat the expense of their smaller and weakerbusiness brethren.

The Corporation will also no doubt becareful to avoid using its privileged bor-rowing position to compete unduly withexisting financial institutions, and thusintroducing additional strains into an al-ready over-strained money market. In-deed, the main function of the Corpora-tion could well be that of a brokerrather than an actual lender of money.For instance, if funds can be obtainedfor large developmental projects underthe present money market mechanism —the Mount Newman venture strongly sug-gests this is so — there would seem to belittle sense in the Corporation duplicatingfinancial facilities already available.Where adequate funds do not seem to bereadily forthcoming from existing Aus-tralian sources, the Corporation, once ithas satisfied itself as to the intrinsicsoundness of a project, could act as a kindof broker, negotiating contributions fromthe large financial institutions.

The Corporation will introduce a newfactor into the money market, a highly

42

complex and sensitive instrument forallocating the supply of investment fundsamong the many competing demands fromboth the private and public sectors. Atoo-rapid or over-ambitious developmentof the Corporation's activities could intro-duce confusion into the capital marketand result in a deployment of resourceswhich would disrupt the balance of theeconomy. It could also aggravate presentinflationary tendencies by intensifying thecompetitive scramble for scarce resources,not only for capital purposes, but alsoas between investment and consumption.The Corporation must therefore hastenslowly.

It is interesting to observe that theCanada Development Corporation (withpurposes almost identical with those ofthe Australian counterpart) which wasfirst proposed in April, 1965, has yet tobe established. The Canadian proposalhas been subjected to fairly exhaustiveexamination over the last two years. Oneof the most authoritative is that carriedout by Professor E. P. Neufeld of theUniversity of Toronto. His assessmentappears in a report sponsored by theCanadian Trade Committee consisting oftop businessmen and leading acade-micians. Neufeld's report conceded theneed for such a Corporation but urgedthat it should be developed as a bodyto offer advice of a highly specialisedkind on the financing of major develop-mental projects. He recommended thatit should also conduct research into thetrue nature of the foreign' ownership"problem" so far as Canada is concerned.The Neufeld reports asserts, "there is apossibility that it is not a capital marketgap (i.e. scarcity of Canadian equitycapital) that explains the drift of

Canadian industry into foreign hands,but a technological and managerial gapas well as other non-financial factors. Ifthis is so, it would be ludicrous to estab-lish an institution to fill a capital marketgap that does not exist, instead of takingother measures to deal with the gaps thatdo exist".

While a convincing case can be madefor a new financial institution such asthe Bankers Development Re-financeCorporation, there can be no justificationwhatever for the second organisation pro-posed by the Department of Trade. Thislatter proposal envisages the borrowingof large sums of fixed-interest money fromoverseas to be re-lent to Australian-controlled enterprises for developmentprojects.

If such a scheme is tenable on strictlyfinancial and economic grounds — andthat is far from certain — then it canvery easily be made part of the functionsof the Bankers Development Re-financeCorporation.

The greatest mistake would be to ex-pect too much of the Corporation tooquickly. The relationship of the Corpora-tion to the whole economic complex andneeds of Australia should be carefullyspelt out to avoid the otherwise inevitabledisillusionment with its activities. It isquite clear, for instance, that it will bebeyond the powers of the Corporationto achieve any dramatic reduction of theextent of the overseas stake in the Aus-tralian economy; nor will it be able tolessen, in any substantial way, our de-pendence on overseas money and know-ledge for the realisation of our nationalambitions.

43

Savings and Investment

A burning issue in the Australian economy at the moment/is whether the community can be enticed, or compelled,

to save more and, consequently, spend less on its everydayneeds. The pace of development is creating massive demands forcapital from a multitude of large-scale private and publicprojects. The rapid expansion of defence expenditure is nowadding to these demands. The needed finance can be providedonly out of the savings of the Australian people, and the savingsof peoples of other countries made available to us throughoverseas investments and loan. The possibility of obtaining in-creased local savings to finance development was one of themain questions on which the Vernon Committee was requestedto report.

In the depressed 193 O's, Lord Keynes directed the attentionof governments and economies throughout the world to thecrucial importance of the "savings-investment" concept. Theproblem in those days was not so much a shortage of savings,as the inability or unwillingness of governments and business-men to undertake investment on a scale sufficient to provide fullemployment. In starkly simplified terms, Keynes' theory wasthat the level of employment depends on the volume of invest-ment.

Now that the "problem of achieving full or close-to-fullemployment seems to have been largely solved in the advancedeconomies, most countries have turned their attention to thepromotion of the fastest possible rate of economic growth.This is creating huge demands for investment funds.

In Australia, the problem is even more acute than in mostcountries. The national objectives of rapid development ofvast natural resources on the one hand, and of population

44

growth on the other, are giving rise to an insatiable demand forsavings.

It is felt therefore, that some of the significant facts aboutsavings and investment will be of interest. To facilitate easyassimilation and comprehension, they have been presented anddiscussed, below in question and answer form.

What determines the amount of money available forinvestment in capital projects?

A. Mainly the total savings of the Australian community.Rarely does the contribution from overseas, vital thoughit is, exceed 15 per cent of total investment. The import-ance of overseas investment however is much greater thanits relative amount, because it is attracted to industries inwhich Australians are reluctant or unable to invest becauseof the magnitude of the funds required, the risks involved,or because of lack of technical "know-how".

Q. What determines the quantity of savings?

A. Mainly the level of incomes and, to a less extent, spendinghabits. Most people save more out of a higher income.Government policy can affect the level of incomes (e.g.by providing full employment) but spending habits be-come ingrained and are not easy to change. Most of uslike to live well here and now, and are reluctant to

oin-

our ur savings beyond a certain amount.Government policy can also affect the amount of -moneyavailable for investment in another way: by raising taxesor charges to provide more revenue than is necessary tomeet current or operating expenditures and using thesurplus to finance capital projects. The economist hascome to call this "compulsory savings" as distinct from"voluntary savings", which are those set aside of theirown free will by individuals, or by institutions (such ascompanies, unincorporated businesses or farmers) out oftheir profits. A great part of all public works'expenditure(around 80%) since the War has been financed fromcompulsory savings. In recent years, government instru-mentalities, such as the Post Office and state electricity

Q.

45

Savings and Investment (continued)

. undertakings, have been setting their charges at a levelnot only sufficient to cover operating costs, but to providea surplus for capital outlays. Raising taxes or public utilitycharges to provide more compulsory savings is, however,likely to reduce voluntary savings, because people areleft with less money out of which to save.

Q. What are the main sources of savings?

A. The table below, compiled from official data, shows themain sources of gross and net savings in Australia in1965/6.

SOURCES OF SAVINGS

GROSS (includingdepreciationprovisions)

NET (excludingdepreciationprovisions)

CompaniesLife Assurance and Pension

1160$ million

440Funds

PersonsGovernments

30020601550

30012701380

Total Domestic SavingsSavings from Overseas

5070880

3390880

TOTAL 5950 4270

Gross savings include depreciation provisions by com-panies and private businesses and by government businessundertakings. Depreciation really finances the replacementof existing assets and not the creation of new assets.

Savings by life assurance and pension funds representincome from their investments. Government savings (asexplained above) are the surplus of taxes, and charges forservices such as electricity and gas, over current expendi-tures. A large share of personal savings represents retainedprofits of farmers and other small business proprietors; butit also includes deposits by wage and salary earners intheir savings and other bank accounts, life assurance pre-miums, contributions to pension funds and so on. Savingsfrom overseas cover investment in Australia by overseascompanies (including retained profits) and private indi-viduals, and also government borrowing abroad.

46

Q. Where do savings go?

A. Companies, farmers and other small businesses buy newplant and equipment and erect new buildings; govern-ments spend them on public works such as roads, powerprojects, schools and so on.

A good part of the voluntary savings by wage and salaryearners go into housing, but some finish up with industryand government. The broad categories of investment in1965/6 were:

$ million

Dwellings 880Factories, Shops, Office Buildings, etc. 740Plant and Equipment 2000Public Works 1920Stocks 160Increase in Overseas Reserves 60Cannot be accounted for 190

5950

Q. What are the main ways the savings of private individualsare channelled to the eventual borrowers?

A. Through loans and investments by banks, life assurancecompanies and pension funds, and direct purchases ofshares, debentures and government securities by in-dividuals themselves.

In 1964/5, personal deposits in savings banks rose by$409 million of which about one half went to the purchaseof government securities issued to finance public worksprogrammes. Most of the remainder went to pay for theerection and purchase of homes. Individuals — mainlyfarmers and businessmen — also increased their depositsin fixed and current accounts with the trading banks by$343 million, most of which was lent to companies, farmersand small businessmen for working capital.

The trading banks were net sellers of government securi-ties in 1964/5, having been heavy purchasers the previousyear when record farm incomes sent their deposits soaring.Personal contributions to life assurance and pension fundsin 1964/5, amounting to $198 million, were invested in

47

Savings and Investment (continued)

roughly equal proportions in company shares and deben-tures, government securities and loans to industry. Indi-viduals were net sellers of government securities in 1964/5,and indeed have been for some years. Share buying byindividuals is relatively insignificant, only 4% of personalsavings being devoted to this purpose in 1964/5.

Who are the major buyers of government bonds andcompany shares, debentures and notes?

A. The following table gives the answer for 1964/5.

GovernmentSecurities

Ordinary andPreference

Shares$ million

Debentures,Notes and

Deposits

Savings Banks 209 — —Trading Banks —23 3Reserve Bank 127 — —Life Assurance Companies 67 67 50Public Pension Funds 63 5 9Private Pension Funds 35 27 23Non-life Insurance Companies 9 14 2Non-Finance Companies —25 40 (t)Unit Trusts — 6 3Commonwealth Government 198 1 2State and Local Governments • 4Persons —35 78 93Overseas —24 119 120All Other 26 6 25

627 370 327

Notes: f Purchasers of existing shares only* Borrowers

This table shows that subscriptions to Commonwealth andsemi-government securities are primarily dependent on theCommonwealth Government (mainly financed by sur-pluses of tax receipts over current expenditures) thebanks and life assurance and pension funds. Life assuranceand pension funds together outranked individuals as sharebuyers. With ordinary and preference shares, debenturesand notes, the biggest subscribers were overseas companiesinvesting in their Australian subsidiaries. Of the $239million subscribed by overseas investors to ordinary andpreference shares, debentures, notes and deposits in 1964/5,only $37 million was "portfolio" investment in listedAustralian securities: the remainder represented "direct"

Q.

48

investment by overseas companies in their Australian sub-sidiaries or associate companies.

Q. Has the role of the individual investor in company sharesbeen declining?

A. Yes. The table below, compiled from statistics prepared bythe Reserve Bank, sets out net purchases of new and exist-ing ordinary and preference shares of all companies —public and private — in Australia over the period 1953/4to 1964/5.

NET SHARE PURCHASES 1953/4 — 1964/5Year

EndedJune 30

LifeCOs

PrivatePensionFunds

Individuals

$

All OtherAustralian *Institutions

million

OVERSEAS TOTAL

1954 2 4 86 32 24 1481955 2 5 132 27 70 2361956 6 7 98 39 62 2121957 10 9 54 49 64 1861958 17 13 14 56 70 1701959 24 23 3 74 68 1921960 45 23 —62 90 122 2181961 54 20 20 78 178 3501962 35 23 57 83 129 3271963 53 26 —105 65 185 2241964 63 25 57 103 57 3051965 67 27 78 79 119 370

TOTAL 378 205 432 775 1148 29381■1•1.0 INC■1111= .■■■1

% total 13 7 15 26 39 100* Mainly non-finance companies buying existing shares; trustee and investment companies

and non-life insurance companies.

In the two years, at the beginning of the period, indi-viduals subscribed to, or purchased on the stock exchange57% of all new and existing shares. But since then, aremarkable change has taken place. Over the two years,at the end of the period, individuals bought only 20%of the value of all shares sold.

Over the period, 1953/4 to 1964/5, overseas buyingaccounted for 39% of all share purchases; life companies13%; private pension funds 7%; other institutional buy-ing 26%; and personal buying only 15%.

49

Savings and Investment (continued)

Q. What are the reasons for the declining importance of theindividual share investor?

A. The main reasons seem to be:

1. The growth of tax-exempt fringe benefits to employeesthrough employer-subsidised contributions to lifeassurance and pension funds. These funds are nowgenerating huge amounts for investment each year,both from earned- income and from contributions.Personal contributions to life assurance and pensionfunds (less claims and expenses) are now exceeding$200 million a year and investment income $300million. In 1954/5, personal contributions were $102million and net investment income only $64 million.

2. The vast sums of money required for the developmentof the new mineral finds and for the highly automatedplants of modern industry are beyond the resources ofeven the wealthiest of individuals; they must beprovided, in the main, by institutional and overseasinvestors.

3. Changes in the distribution of personal incomes infavour of the middle and lower income brackets, whodo not invest directly in shares to the same extent asthose in the upper incomes.

4. Heavy death duties and income taxes are breakingup the large holdings of families who originallyfounded many of our companies.

O. Has the declining importance of the individual shareinvestor, relative to the institutions, significant implica-tions for the economy?

A. It means that a fundamental change is occurring in thenature of capitalism. Because of the great increase in theholdings of shares by life assurance companies and em-ployee pension funds, the benefits from profits are nowbeing widely spread throughout the community. It is nolonger true to speak of profits going in the main to onlya small section.

50

Methods of raising finance for companies are also altering.Companies no longer resort to frequent new issues ofshares to the investing public, but rely on retained profitsand substantial supplies of capital from notes and deben-tures and share placements, at or near market price, withinstitutions.

To what extent do institutional holders feature in theshare registers of major public companies?

A. A recent study by two economists at Sydney University*revealed that institutional investors — e.g. trustee com-panies, pension funds and life assurance societies — featureprominently. The authors analysed the shareholdings of299 of the largest manufacturing, mining 'and oil com-panies in Australia. 135, nearly half, recorded no institu-tional investment: these companies were mainly subsidi-aries of overseas companies. But institutions were majorshareholders in the other 164. They held more than 15per cent of the shares of 31 leading public companies, 10to 15 per cent of the shares of 39 companies; 5 to 10per cent of the shares of 56 companies and 1 to 5 percent of the shares of another 38.

The twenty largest holdings of the 299 companies whenaggregated, accounted for 58 per cent of total shareholdersfunds: of which overseas investors — mainly companies— owned 36 per cent; Australian companies and institu-tions 16 per cent and persons only 6 per cent.

Q. Does the proportion of their incomes saved by Australiansfluctuate very much?

A. No. Figures compiled by the Commonwealth Statisticianshow that domestic savings as a percentage of the grossnational product have kept uniformly high since 1948/9.

'I Anatomy of Australian Manufacturing Industry, by E. L. Wheelwright and Judith Miskelly,published by Law Book Co. Ltd. — Price $13.00.

Q.

Savings and Investment (continued)

Year Ended DomesticJune 30th

Savingsas % G.N.P.

1949 21.91950 24.81951 31.31952 22.11953 22.71954 22.71955 22.41956 22.61957 24.11958 21.41959 22.51960 23.61961 23.51962 22.61963 23.81964 25.41965 26.31966 24.7

Q. Is personal consumer spending in Australia increasing ata faster or a slower rate than overseas?

A. Over the past decade or so personal consumption expendi-ture (in constant prices per head of population) in Aus-tralia has been increasing at a slower rate than most otherWestern countries. Here are the figures:

Annual Rate of Increasein Personal ConsumptionExpenditure Since 1950

% increaseWEST GERMANY 6.1ITALY 4.0FRANCE 3.5SWEDEN 1.8UNITED STATES 1.5CANADA 1.7UNITED KINGDOM 2.0AUSTRALIA 1.4

Personal consumption expenditure has risen more rapidlyin West Germany, Italy and France partly because theirliving standards in the early post-war years had beenreduced to bedrock subsistence level by the deprivationsof war. One of the reasons for the markedly slower ratesof increase in Australia would be that Australia has beenforced to apply a greater proportion of its resources tomaintain large-scale immigration and development — inother words, to investment.

52

Q. How does the level of domestic savings in Australia com-pare with overseas?

A. In proportion to their incomes, Australians are among theworld's largest savers. This is revealed in a recent study bythe Bank of International Settlements.

SAVINGS AS % GNP

B yIndividuals

By Companies Forcedand Savings by TOTAL

Institutions Governmentsok % % %

AUSTRALIA 10 7 8 25UNITED STATES 7 9 3 19CANADA 5V2 14 5 241/2UNITED KINGDOM 5 10 31/2 18V2FRANCE 91/2 8 4V2 22GERMANY 9 11 6 26SWEDEN 51/2 9 10 241/2SWITZERLAND 7 11 10 28JAPAN 12 13 9 34

Q. What are the main reasons for the high level of individualsavings in Australia?

A. The exceptionally high level of individual savings inAustralia seems to be accounted for by:1. the savings of the farming community, who have en-

joyed great prosperity since the War.2. the high ratio of home-ownership, the highest in the

world.3. the high level of savings through life assurance and

pension funds (encouraged by tax concessions). Inmany overseas/ countries provision for the future ismade through government welfare schemes.

Q. Would it be possible to increase the level of savings inAustralia very much?

A. No! . . . The Vernon Committee explored various avenuesfor increasing savings through the provision of incentives— e.g. the encouragement of private pension schemes,the expansion of saving bank facilities and higher interest

53

Savings and Investment (continued)

rates. It concluded: "We cannot be confident that any ofthese, or a combination of them, would have sufficienteffect".

It fell back on' increased taxes as the main channel throughwhich greater saving might be provided.

Q. But can people be forced to save more?

A. Not to any significant extent. People are reluctant toreduce the level of consumption or standard of livingto which they have become accustomed. In fact, theyare looking all the time for an increase in their livingstandards and have come to expect some improvementyear by year. Increased taxes to provide for additionalcompulsory savings would be certain to meet with sternpolitical opposition. If extra taxes were imposed, peoplewould try to circumvent them by borrowing more, re-ducing their voluntary savings and agitating for highermoney incomes to preserve their "take-home" pay.

NOTE: All statistical tables in this article have been based on official govern.mental sources.

54

Interesting I.E.A. Publications

The following publications have arrived from the Instituteof Economic Affairs, London. Copies may now be purchasedfrom the Institute of Public Affairs, 289 Flinders Lane, Mel-bourne. Phone 63 6558.

The Australian prices have been kept as close as possibleto British prices in order to achieve the widest possible distribu-tion to libraries, companies, teachers, schools and universities.

A discount of 33i% applies to booksellers and of 10% toschools and universities. (Prices include postage.)

"Towards a Welfare Society" pp.40 Price 80 centsThis is a report of an I.E.A. study group which included two well-known economists — Colin Clark and Graham Hutton.

Until recently there was a widespread view among economists and politiciansthat the desire of the community was for an expansion in State-providedwelfare. British surveys now show there is a marked majority against Stateexpansion in Health, Education and Pensions and people favour confiningState services to people in need.

"Economic Fact and Fantasy" pp.34 Price 70 centsby Prof. G. C. Allen

In this essay Prof. Allen comments on Prof. J. K. Galbraith's Reith Lecturesdelivered on the B.B.C. in November/December, 1966. At various points hefinds Galbraith "misleading", "biased" and "perverse". Large firms candominate markets and can sometimes succeed in bending the choices ofconsumers. But there are large areas over which their sway does not extend.Their power is qualified by an ever-widening range of consumer choiceand competition.

Galbraith may be right in foreseeing a growing centralisation of authority,but we need not except it as inevitable.

55

Interesting LE.A. Publications (continued)

"Policy for Incomes" pp.76 Price $1.00by Prof. F. W. Paish and Jossleyn Hennessy

This paper discusses the desirability of controlling wages, profits and prices,and the difficulties of enforcing controls. The authors believe if unemploy-ment is below 2% an "incomes policy" would be ineffective because itwould not be able to withstand the pressure of demand for labour; and ifunemployment is above 2% an "incomes policy" would be unnecessary. Theconclusion is that an "incomes policy" is either unnecessary or abortive, andthat the way to maintain high employment and rising living standards andyet avoid inflation is to control the supply of purchasing power in relationto output and resources.

"What Price North Sea Gas?" pp.55 Price $1.00by George Polanyi

The recent discovery of a major natural gas field in the North Sea mayrevolutionise Britain's fuel supply. Mr. Polanyi rejects the official policy ofprice control for North Sea Gas in favour of free marketing pricing. "Ifand when sufficiently abundant supplies are available", says the author, "themarket price of the gas will automatically become very low — withoutany intervention by Government. Cheapness will result from abundance,not abundance from cheapness".

"Financial Intermediaries and Monetary Policy"by N. J. Gibson pp.63 Price $1.00

The author believes the attempt to control the growth of bank deposits andcredit expansion by restricting the supply of Treasury Bills and imposingliquid asset ratios and special deposits has been a failure. He says thedemand for H.P. finance may not show much direct response to monetarymeasures.This paper will be of interest to economists, politicians and civil servantsclosely concerned with economic policy.

"Universal or Selective Social Benefits?" pp.70 Price $1.40by A. Seldon and H. Gray

State welfare in Britain cost £6,500 million stg. in 1965/6. This is abouthalf of Britain's total public expenditure. A very large part of this ex-penditure goes to people who could pay and do not need it. The authorsare critical of this waste in social expenditure. There is growing awareness,even by "the poverty lobby", that universal services supplied without chargeor test of need make it difficult to give more generous assistance to victimsof special hardships or handicaps.

56

The I.P.A. Helps Teachers, Students andSchools

ONE of the most significant features of the I.P.A.'s educa-tional work is the remarkable demand by teachers and

students for I.P.A. publications. These are now being used inthe senior economics and social studies classes in over 600schools in all States.

We regularly send free of charge to teachers and studentsnearly 4,500 copies of each issue of "The I.P.A. Review," over10,000 copies of "Facts" and, in addition, about 1,000 "Facts"Wall Charts.

The fact that this important .distribution has been built upentirely by requests from teachers and students is a tribute tothe objective, educational character of our work.

If the I.P.A. succeeds in giving the citizens of tomorrow abetter understanding of the economic principles basic to Aust-ralia's welfare and progress, it is fair to say that, the communityshould derive great future benefit. But this kind of education isclearly a continuous task.

This year we reprinted, in association with The NationalBank of Australasia Ltd.,, an article, "Lord Keynes and Pre-vention of Depression", which first appeared in "The I.P.A.Review" in 1950. So great was the demand from teachers forcopies that the first print of 2,000 copies was exhausted inthree weeks, and to date nearly 5,000 copies have been dis-tributed to schools and universities throughout Australia.

We receive a wealth of mail from teachers and students,and some recent extracts from this correspondence follow:

Mr. F. T. Nankervis, Scotch College, MelbourneThe I.P.A. publications continue to be of great value . . . I alwaysread "Review" with interest, and nearly always there is more thanone article that is highly relevant to some aspect of the Matric-ulation work. In some cases I have retained sets in the subjectlibrary for use over several years . . . Students appreciate a freshand topical point of view . . . Presumably also the publicationmakes a useful contribution towards the education of their parents!

57

The I.P.A. Helps Teachers, Students and Schools (continued)

"Facts" is popular . . . and teachers ask for the wall sheets fordisplay in their class-rooms. I am very grateful to you for sogenerously supplying us with so many copies of each publication.

Master in Charge, Economics and Commerce, Sydney C. of E.Grammar School

We use these publications in our economics classes and I considerthem to be extremely valuable. We now have one hundred boysstudying economics in the Sixth Form.

Teacher of Commercial Subjects, Newcastle Tech. High SchoolThe publications "Review", "Facts" and the annual Reports haveproved most valuable in the teaching of economics to seniorstudents.

Mr. J. Peers, Pinjarra, W.A.I have been receiving the very informative and interesting I.P.A.Facts sheets . . . They are of immense value to me as a SeniorMaster in a Government High School teaching economics.

Master of Commercial Subjects, Drummoyne Boys' High School, N.S.W.I wish to congratulate you on your decision to provide copies of"Lord Keynes and the Prevention of Depression" free for schooluse . . . I would be pleased to receive 120 copies for use in thisschool's economics classes.

W. J. Blakeney, Lecturer, The Teachers' College, SydneyIt would be appreciated if 100 copies of "Lord Keynes and Pre-vention of Depression" could be supplied for distribution to ourgraduate student teachers . . . May I add how much I appreciatethe services given by the I.P.A.

Principal, Coburg Teachers' College, VictoriaWe find "The I.P.A. Review" of considerable value for keepingour lecture material up to date. The "I.P.A. Facts" are distributedto all first year student teachers-in-training and these have provedto be very valuable. Probably the most useful articles have beenthose on Asian countries.

Mr. R. G. Haebich, De La Salle College, Kingsgrove, N.S.W.I have just read your publication "Productivity — the Key toBetter Living". It is excellent for the purposes of teaching . . . Ihave been searching for a long time for a text or booklet whichexplains this matter so clearly, interestingly and in a way which isreal to students.

Lecturer in Social Studies, Bendigo Teachers' CollegeMany thanks for the copies of "Facts" (for January). These are ofgreat benefit to us in bringing text books up to date with newcontemporary developments.

L. Roberts-Smith, Adelaide UniversityWe can guarantee distribution of approximately 100 copies ofeach of "The I.P.A. Review" and "Facts" . . . We have a marketof over 2,500 freshers, in addition to 6,000 senior students (fulltime).

Economics Master, Mordialloc-Chelsea High SchoolI have a copy of your publication "Production, the Key to BetterLiving" . . . I have found it most helpful in the teaching of LeavingEconomics.

Mr. Alan Gregory, Lecturer in Education, Monash UniversityAs Chairman of the Economics Committee of the VictorianCommercial Teachers' Association . . . I am able to speak personallyas well as on behalf of economics teachers . . . in ... congratulatingthe I.P.A. for their excellent service and generous assistance toschools . . . To be of value, economics needs to be taught withrelevance to the economy itself . . . Both "Facts" and "Review"assist greatly in this task . . . hence their widespread use in ourschools . . . They are invaluable sources, which assist in wideningunderstanding beyond the textbook . . . The I.P.A. is to be com-mended for sharing its thoughts with, and helping to inform theyoung citizens on the way up.

58

The Rise of Japanby

Professor W. Macmahon Ball

The author of this article has been Professor of PoliticalScience at the University of Melbourne since 1949. Professor Mac-mahon Ball has a close first-hand knowledge of Japan. He re-presented the United Kingdom, India, Australia and New Zealandon the Allied Council for Japan in the years after World War II.

Prior to that (in 1945) he was an Adviser to the Australiandelegation at the San Francisco Conference of the United Nations,and later Australian Government Political Representative in theNetherlands East Indies.

In 1948 Professor Ball led an Australian Government Good-will Mission to ten countries in East Asia.

In 1949 he published a book "Japan: Enemy or Ally". Nextyear he will further his study of Japan under a Fellowship awardedby the University of Tokyo.

MOST of us in Australia have cometo realise how important Japan is

for our economic stability and growth.Japan is now our best customer over all,not just our best customer for wool. Theminerals we have lately discovered, andcontinue to discover in vast quantities,would not be nearly so important ifJapan were not eager and able to buythem. I want to suggest in this articlethat Japan may have a much wider anddeeper influence on Australia's futurethan can be measured by the rising tradefigures. Japan may play a key part inshaping the future of this part of theworld, in making the political and eco-nomic climate in which we must live.

For a long time Britain was the lead-ing power in the region. She won herinfluence by trade, investment, and seapower, and by the diplomacy that these

made possible. For forty years after herdefeat of Russia in 1905, Japan's in-fluence was in many ways replacing theBritish influence. All the national in-dependence movements in South EastAsia began about 1905, and were dir-ectly inspired by the demonstration thatan Asian power could defeat a Europeanpower. Since 1948 the influence of theUnited States has been decisive in thePacific, in Japan, in much of South EastAsia, in Australia and New Zealand.

I think it likely that in the next twentyor thirty years the influence of the UnitedStates will diminish and the influence ofJapan markedly increase in East andSouth East Asia.

The main reason, of course, whyJapan has such great potential as theleading power in the region is that sheis so very far ahead of all other Asian

59

The Rise of Japan (continued)

nations in productive capacity. Hernatural resources are meagre, but herhuman resources have been developed ona most impressive scale. The Japaneseare easily the most highly educated peoplein Asia, and much better educated thanmany "Western" peoples. Many Japan-ese are highly skilled in science and tech-nology, in organisation and management.Unlike some Asian nations that arecrippled by communal rivalries and con-flicts, the Japanese are a very homogene-ous people, in race, religion, languageand culture. They are a people with asense of basic national unity, that some-how transcends the most vociferous fac-tional, party, and ideological conflicts.

Twenty years ago Japan's cities werein ruins. There was some starvation, andmalnutrition was widespread. In partsof Tokyo, particularly in and aroundUeno railway station, men and womendied daily on the footpaths from hungeror disease. People seemed shocked andnerveless and almost indifferent to theirfuture. Since then Japan's economic re-covery and growth is one of the most im-pressive achievements in the world's eco-nomic history. For the last fifteen yearsthe average growth of the GNP has beennearly 10% with an average annual in-vestment rate of about 30%, a muchhigher investment rate than in any othercountry. In 1966 Japan made over 47million tons of steel, about seven timesmore than the peak production beforethe war. Japan has now surpassedFrance, West Germany and Britain as asteel producer, and ranks third after theUSA and USSR. Japan now also ranksthird in the production of motor vehicles.In 1966 Japan led the world in shipbuilding for the eleventh consecutiveyear, building 47% of the world tonnagebuilt.

This exceptional fast rate of economicgrowth has not, of course, been achievedwithout setbacks, or without social stressand strain. Though real living standardshave steadily risen, and are many times

higher than in most of Asia, and higherthan in some "Western" countries, theyhave been under continuous threat fromthe rise of consumer prices. I feel thatin Japan, as in many other countries, itis nearly impossible to measure the risein per capita real income in a way thatprovides any clear index of the rise inindividual welfare. It is good, no doubt,to have wage rises that enable you to buybetter food and better clothes than everbefore, television sets and transistors, andso on. But if the price of land, and thecost of building, have soared so high thatyou can never hope to own your ownhome; if you live in a crowded, uncom-fortable, unhygienic dwelling (in 1963only about 12% of Tokyo buildings weresewered); if the journey to and fromwork in public transport is an exhaustingordeal; if the air you breathe is ladenwith smog, then, all in all, your higher"real" wage or salary may not be sosatisfying.

I think there is a growing realisationin Japan that in the last fifteen years pri-vate investment in modernising and ex-tending industrial capacity has run farahead of public investment in housing,water supply, sewerage, roads, the con-trol of smog, and the extension of socialservices.

Until lately, there was a marked con-trast between the initiatives, the innova-tions, the impressive achievements inJapan's economic encounters with theoutside world, and the quiet, almost pas-sive foreign policy the Japanese govern-ment followed. In economics the stylewas positive and confident; in politics itwas a modest "low posture". There wereseveral reasons for the lack of foreignpolicy. Japan did not of course achieveindependence until 1952 when the peacetreaty of September 1951 came intoeffect. But the United States and Japannegotiated a mutual security treatysimultaneously with the Peace Treaty.Because Japan was still so weak econo-mically and militarily in comparison with

60

the United States, and because the secur-ity treaty provided for the stationing ofAmerican armed forces in and aboutJapan, it would have in practice beenimpossible for Japan to diverge in anymaterial way from American policy evenif its government had wished to do so. Infact the Japanese Government was onbalance very satisfied with an arrange-ment by which Japan was able to shelterunder the American nuclear umbrella andbe saved the financial costs and politicaltensions which a faster and bigger re-armament programme would involve.Even now Japan spends only about 1.4%of the GNP on defence, and this has beenone important reason for her quick eco-nomic growth. She has been investingin export industries rather than in mili-tary hardware. Foreign policy issues, atleast until lately, have generated strongdomestic tensions. These tensions ex-pressed themselves explosively in 1960when Mr. Kishi's government renewedand revised the security treaty withAmerica. Moreover those Japanese whooppose rearmament and the Americanalliance — and these people are notonly the supporters of the socialists andcommunists — build part of their caseon Article 9 of the Constitution. TheArticle reads:—`Aspiring sincerely to aninternational peace based on justice andorder, the Japanese people forever re-nounce war as a sovereign right of thenation and the threat or use of force asa means of settling international disputes.

In order to accomplish the aim of thepreceding paragraph, land, sea and airforces, as well as other war potential willnever be maintained. The right of bel-ligerency of the state will not be recog-nised."

This article has been pretty much ig-nored by the Government but the govern-ment parties in the Diet have neverachieved quite the two-thirds majorityneeded to delete or amend it. It remainssomething of an embarrassment to thosewho urge the need for more arms.

For all these reasons it has hardly beenfeasible for Japan to follow any foreignpolicy that would depend on Japanesemilitary strength. And indeed, there is adeep and widespread aversion, both onthe right and on the left, to the use ofJapanese forces outside Japan.

Yet in the last few years Japan hasbegun to abandon its "low posture" inthe world. The Government has takenthe initiative on a number of regionalissues. In some and probably most ofthese it has had American moral andmaterial support. But in others, it hasfollowed a firm line of its own, not al-ways coinciding with American policy.

The Japanese Government now seemsto be seeking the political and economic,though not the military leadership, ofSouth East Asia. Thus the Governmentnow convenes conferences in Tokyo ofthose in charge of economic affairs inSouth East Asian countries. There wasthe Ministerial Conference for the Eco-noniic Development of South East Asiain April, 1966, the nine nation Confer-ence on Agricultural Development ofSouth East Asia in December, 1966. TheJapanese Government has taken the leadin searching for ways and means to rescueand restore Indonesia's economy. Itmatched the American contribution of$200 million to the Asian DevelopmentBank, established last December (Aus-tralia contributed $85 million). It tookpart in the much publicised ASPACconference in Seoul in June 1966, and,very significantly, insisted that it shouldnot, as its original sponsors intended, bea conference to declare a united frontagainst communism, but a conference topromote the economic growth of theregion, without military or ideologicalundertones.

The attitude of the Japanese people tothe outside world has changed greatlysince 1960. From 1947 to 1960 itwas the Cold War. For Japan it was aperiod of complete military dependenceand heavy economic dependence on the

61

The Rise of Japan (continued)

United States. This dependence pro-duced the deepest domestic and politicaltensions in Japan. The issues were oftenposed in grossly over-simplified terms.Were you anti-communist and pro-American, or pro-communist and anti-American? Did you support the Ameri-can military affiance with American mili-tary bases in Japan, or did you supportthe Socialist Party's policy of neutralismin the cold war?

But things have changed since then.Japan's economic achievements havegiven her people confidence. The markedreduction in tension between Americaand the USSR has relieved one majorsource of fear. And it no longer makessense in Japan to talk about a policy oncommunism as such. It is essential tospecify whether you are talking aboutcommunism in Russia, in China, or some-where else. Recent developments inChina have created incorrigible problemsfor both communists and socialists inJapan. The Japanese Communist Party,which according to the police statisticshas a membership of about 110,000 andhas five representatives in the nationalHouse of Representatives (with a totalof 486 members) seems to be trying tosteer a neutral course between the Rus-sian and Chinese parties. The Socialistsare finding their rather rigid ideologyharder to maintain in its purity. It ishard to maintain a live hostility to"capitalism" when, under Japanese capi-talism, not only the GNP but real wagesand salaries keep on rising. Though theymay have no real fear of CommunistChina, it is becoming harder for theSocialists, who have been such passion-ate opponents of nuclear tests, and sup-porters of non-proliferation, to supportPeking's policies.

Overall I feel that Japanese foreignpolicy attitudes have become more flex-ible and realistic, no longer tightly boundby ideologies of the left or right, by"anti-imperialism" or "anti-communism".

I think the general election on January29 provides a good deal of evidence ofthe changing political mood in Japan. Ithad been widely predicted in the pollsthat the Socialist Party — the mainopposition party — would make sub-stantial gains, partly because of the re-ports of corruption in the Liberal Demo-cratic Party, and partly because theSocialists have criticised the Americanpolicy in Vietnam so strongly. In theevent the election was a clear set-backfor the Socialists and a lesser setback forthe Government, whose majority was re-duced from 108 to about 75. It was thesmaller "moderate" parties, with moreflexible policies, the Democratic Social-ists and the Komeiites who gainedground.' The Democratic Socialists, whohave diluted their socialist doctrines tomake them more acceptable to middleclass voters, won 30 seats, an increaseof 7. The Komeiites, the political wingof the Soka Gokkai, the Nicherin Bud-dhist sect, was contesting the nationalLower House for the first time. It won25 of the 32 seats it contested. TheSoka Gokkai claims the loyalty of 6 mil-lion households.

It is hard to know how far the KomeiParty can properly be regarded as anOpposition party, since Mr. Takeriri, theChairman, has said its aim is "to estab-lish a middle-of-the-road governmentbased on the middle-of-the-road" prin-ciple of Buddhism. Mr. Sato the PrimeMinister insists that the Komeiites arehis "friends". Yet the party is muchmore outspoken than the Government onforeign policy. It will seek "to correctJapan's over-reliance on the UnitedStates"; it favours the gradual droppingof the U.S.-Japan Security Treaty, and1. In April Dr. Matsushita, (supported by

the Liberal Democratic and the Demo-cratic Socialist parties) was defeated byDr. Minobe (supported by the Socialistsand Communists) in the election for thegovernorship of Tokyo. It seems likelythat this was a personal triumph, withno implications for national policy.

62

supports China's entry to the UnitedNations.

I think it would be a mistake to tryto draw clear and strong conclusionsabout Japan's future foreign policy fromthe January elections, taken by them-selves. No doubt the election results wereinfluenced by all sorts of factional andpersonal rivalries, and by the amount ofmoney the parties could lay their handson for the campaign. It seems that theSocialists in opposition had much lessmoney to spend than the conservativesin office. There are other signs that theapproach to foreign policy seems to bechanging. The questions asked are nolonger dominated by the American-Russian power struggle. There are nolonger questions about how Japan shouldreact to what Americans or communistsare doing, but questions about what poli-cies Japan can pursue on its own initia-tive. I feel that this new approach isgetting increasing support from both theleft and the right and is making manyof the foreign policy issues over whichthey fought so furiously as lately as 1960rather out of date.

It is already possible to discern someof the main objectives of Japan's newforeign policy. Its first objective is peaceand stability in East Asia. It will notfollow the United States in seeking peaceand stability by the military containmentof communism, but rather by the econo-mic development of the countries of SouthEast Asia, in the conviction that theireconomic development will give a firmbasis for their national independence, in-dependence from Peking or Moscow, orWashington. The Japanese are generallyopposed to Western military interventionin East Asia on three grounds. First,they are terrified that the local conven-tional war may escalate into a globalnuclear war which would obliterateJapan. Dr. Reischauer, Asian historianand American ambassador to Japan1961-66 has reported: "The escalationof the war in Vietnam in February 1965

through the extension of the Americanbombing to the North threw the Japan-ese public into virtual panic. It seemedto them that the United States policy wasin the hands of blind military adventur-ers, who, like those of Japan three de-cades earlier, were leading their countryinto a hopeless conflict with the forcesof Asian nationalism".2

Second, while the Japanese have longbeen suspicious and anxious about Rus-sian intentions, they do not believe thatWorld Communism, or Chinese Com-munism, is a real and present danger toJapan. Dr. Reischauer was expressingnot only his own feelings, but those ofmost Japanese, when he testified beforethe Senate Foreign -Relations Committeeearlier this year:—"The threat of UnitaryWorld Communism as sweeping Asia haslargely faded, and the menace of Chinesedomination — if ever it was a real men-ace in the military sense — is growingwe aker".3

Third, and perhaps most important.Where there is armed conflict between"advanced" western people and a "back-ward" Asian people, the sympathies ofmost Japanese are with the Asians. Mr.R. P. Dore, the British sociologist, whohas made Japanese society his specialstudy makes this comment: "A goodmany Japanese, watching films of theVietnamese war on one or other of theirseven or eight television channels haveseen the war as a battle between whitemen, armed with big planes, throwingbig bombs at under dog Asians — andpeople with Mongolian features at that —who squat down to eat rice out of bowlswith chopsticks, and might, but for thegrace of God, be themselves".4

This does not mean that most Japan-ese are anti-American. In public opinionpolls more than half the sample will

2. Foreign Affairs, January 1967, pp. 218-219.

3. New York Times Weekly Review, Feb-ruary 5, 1967, p. 1.

4. World Today, July, 1966, pp. 302-303.

63

The Rise of Japan (continued)

generally choose Americans as theirfavourite foreigners, while the Russiansare the least liked. The Japanese knowthat about a third of their foreign trade,in both exports and imports, has beenwith the United States, and that part ofthis trade has been due to special favoursWashington has been prepared to givefor political and strategic reasons. TheJapanese are grateful to America for hermoral support when Japan has soughtmembership of the UN, GATT, OECDand other international bodies. Andthere is little doubt that a good manyJapanese, however doubtful about par-ticular American policies, are glad tohave the Security Treaty with the UnitedStates as a sort of insurance against thepossibility of Russian attack, or of a longterm threat from China. Hence mostJapanese deeply value American friend-ship, but they want to influence Ameri-can policy in Asia, since decisions madein Washington may have critical conse-quences for Japan. It is very hard toguess what will happen when the Secur-ity Treaty comes up for review in 1970because so much depends on the Viet-nam conflict. All that can be guessedwith fair confidence is that the JapaneseGovernment will want the sort of treatythat would deter a direct attack onJapan, but will try to avoid the sort ofTreaty in which American bases in Japanmight be used for military operations onthe mainland which the Japanese mightdisapprove. When the renewal of theTreaty was being debated with such pas-sion in 1960 the most important singleissue was whether America was to havethe right to operate from bases in Japanwithout the consent of the JapaneseGovernment. The Americans were readyto agree that they would only use thebases "after consultation with" theJapanese Government, but could not

agree that they would only use them "withthe consent" of the Government. Un-easiness over this issue sharply increasedwith any escalation of the war in Viet-nam.

It would be foolish to pretend thatJapan's attitude towards her own militarysecurity, or the security of South EastAsia, is clear-cut and consistent. Eversince their creation at the request ofGeneral MacArthur in 1950, after theoutbreak of the Korean War, the govern-ment leaders have had the greatest diffi-culty in explaining why they have their"self-defence" forces, and, since they dohave them, why they spend a decreasingpercentage of the national budget andthe GNP on their maintenance. It seemsthat the Japanese Government and peoplemake an important distinction betweenthe security of Japan and the "contain-ment of communism". It is one thing tohave a security treaty with America as adeterrent to the possible, if remote, dangerof a direct attack on Japan. It is an-other thing to have a security treatywhich may involve Japan in war, becauseof an American decision to contain com-munism on the mainland. Hence Japandoes not want to spend too much onarms unless she is sure that the arms willonly be used as a result of a decision inTokyo, not a decision in Washington.

I believe that the general objectives ofJapan's foreign policy are very much inline with Australia's national interests. Itis therefore good to see increasing con-sultation and co-operation between ourcountries on the political, as well as onthe economic level. I believe we have alot to learn from Japan. The deepestnational interests of both countries is toachieve understanding and co-operationbetween Asia and the West.

W. Macmahon Ball.

64