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THE INSTITUTE OF PUBLIC AFFAIRS : VICTORIA JANUARY-MARCH. 1958

289 FLINDERS LANE. MELBOURNE : MP 6558 VOL. 12 No. 1

CONTENTSWithout Inflation 1High Taxes 8

Tariff Policy 12

What Business Thinks of the Public Service ... 21

Contributed Article"The External Picture", by R. G. Casey .... 26

Without Inflation

THE crucial economic issue in the Western World today isto maintain high or full employment without inflation.Notwithstanding the appearance of unemployment in

the U.S. and Canada in recent months, experience over thewhole period since the war leaves no doubt that massive strideshave been made in correcting the chronic under-employmentof the pre-war world. Indeed, the success which has attendedeconomic policy on this front has far surpassed the expecta-tions and fondest hopes of governments, business and tradeunion leaders, and economic and financial experts. But thissuccess had its price, and the price has been a kind of per-petual, built-in, year-by-year inflation.

For some years the public seemed to be strangely resignedto the prospect of inflation, to accept it as more or lessinevitable, and to be grateful for the mercies of continuedhigh employment. This attitude of resignation appeared tobe reflected in the thinking of economists and governments,who, while they may have deplored inflation, seemed singu-larly reluctant to undertake the measures necessary to preventit.

Page I

Without Inflation (Continued)

But the peoples of the world seem suddenly to have growntired of continuing and apparently never-ending rises in pricesand costs. The change in public attitude toward inflationmay, in retrospect, stand out as the most remarkable economicand social phenomenon of 1957. It has been paralleled bya resolute determination on the part of governments through-out the Western World to achieve reasonable stability ofprices and to use the economic and financial weapons necessaryfor this purpose. Many Australians are familiar with theefforts being made to curb inflation in the United Kingdomand the United States and have witnessed in their own country,over the last 12 months, a similar disposition on the part ofgovernmental, monetary and wage-fixing authorities.

The precise reasons for this sudden change of front arenot easy to determine. But at least partly it would seem toreflect a political hardening among those sections of the com-munity who have carried the major part of the burdens ofinflation over the years. These people, comprising mainlythe professional and salaried middle-class sections of the com-munity, although a minority, can exert a decisive influenceon the outcome of elections, a fact of which most democraticgovernments seem recently to have become aware. But thereis more than politics to it. There has been, among leadingeconomists throughout the world, a growing recognition ofthe grave social injustices to which chronic inflation givesrise; and also some fear that long-continued inflation containswithin itself the seeds of eventual economic recession and thatprosperity and development which rely upon continuous in-flation are based upon foundations less than secure.

There is—and, of course, can be—no retreat from thegoal of full employment. In this respect, opinion has notaltered one whit. But there is now a far better appreciationof the injustices and hardships caused by a rising price level,even one increasing at the rate of only 2% or 3% a year.There is also a spreading—although not unanimous—convic-tion that full employment need not be accompanied by creep-ing inflation; in other words that full employment and stableprices are objectives that need not conflict.

THIS change in attitude is strikingly revealed in threeimportant economic papers that have appeared in recent

months. One is a speech by Mr. Per Jacobsson, the ManagingDirector of the International Monetary Fund, to a joint

meeting of the American Finance Association, and the Ameri-can Economic Association in Philadelphia on December 30thlast year. Another is a book of four lectures, "ProsperityWithout Inflation", by Arthur Burns. Burns, as formerChairman of the President's Council of Economic Advisersand now President of the famed National Institute of Eco-nomic Research, commands at least as much respect as anyeconomist in the United States. The third is the First Report,published a few weeks ago, by the Council on Prices, Produc-tivity and Incomes appointed last August by the UnitedKingdom Government to make independent assessments ofthe state of the British economy. A noted member of thisthree-man Council is the Cambridge economist, Sir DennisRobertson, widely revered as the first figure in British eco-nomics today.

"People in general," said Mr. Jacobsson, "are getting increasinglytired of inflation. This does not only mean that they dislike rising prices;that they have done for quite a time. But it means that now they beginto recognise the reasons for the price increases, and thus to feel that stablemoney is something worthwhile making sacrifices for. It is this feelingthat has made it possible for the authorities to take steps to defend thecurrency which only a few years ago would have been politically unthink-able."

As a notable example of these steps, Mr. Jacobsson men-tions last year's increase in British Bank Rate to 7%, a movewhich has been paralleled in several other European countries.

"Credit expansion," stressed Mr. Jacobsson, "can be no substitute forsavings: a reliable currency is the only true basis for sustained investment.The experiences of Germany and Italy—two countries which have carriedout cautious monetary policies—prove beyond doubt that in our days,with so many inventions to be exploited and so many houses and hospitals,schools and roads needed for a growing population, the difficulty is -notto find outlets for the available savings but rather to increase the flow ofsavings in order to sustain a desirable level of investment. The Russiansknow this and, indeed, have put into practice a careful non-inflationarymonetary policy. In a speech the other day in Kiev, Mr. Khrushchev evenapologised for the fact that since 1954 there had been no further pricecuts in Russia."

Arthur Burns notes the same tendencies in public think-ing. He emphasises particularly the social and economicinjustices of continued inflation.

"In recent years, many citizens have come to feel that we have beenpreoccupied with the need to prevent the miseries of depression, when infact that matter was already being handled fairly well, while we haveslighted the injustice and hardship that flow from inflation, when in factthese have been multiplying for a generation. Concern over inflation hasbeen increasing."

Without Inflation (Continued)

"If we continue to tolerate the upward trend of prices",writes Burns, "the lives of millions of our people will surelybe blighted and the strength of our entire economy may bedamaged."

Burns rejects the view that creeping inflation is inevit-able under policies of full employment.

"A persistent, albeit a gradual, inflation need not mark our economicfuture. I have faith that we will work out an acceptable solution ofthe problem of creeping inflation, because I see economic literacy spreadingamong the American people. Nowadays, great numbers of citizens under-stand that inflation, whether it be gradual or galloping, can wipe outtheir savings just as effectively as can prolonged unemployment. . . .Most important of all they know that inflation is not an Act of God,and they believe that a mature people should be able to conduct theirprivate and public affairs so as to avoid both depression and inflation."

Burns insists that: 'Reasonably full employment and areasonably stable price level are not incompatible."

To marshal opinion against creeping inflation, Burnsurges an immediate practical step. He suggests that theepoch-making Employment Act passed by the U.S. Congressin 1946 should be amended by including among its objectivesreasonable stability of the consumer price level.

"What we need more than anything else at this juncture of ourgreat experiment in the management of prosperity is a national declarationof purpose with regard to the level of prices that could have a moral forcesuch as the Employment Act already exercises with regard to the levelsof production and employment."

* * ti

'THE First Report of the British Council on Prices, Produc-tivity and Incomes, which has been eagerly awaited,

makes no bones about where its authors stand on creepinginflation: "We conclude that alike on internal and externalgrounds our objective should be to stop the inflation, notmerely moderate its course."

The external argument is the familiar one that theviability of the British economy, dependent as it is on hugeimports of foodstuffs and raw materials, can only be securedby keeping British exports competitive in world markets.But the Council makes it clear that, in their view, the "in-ternal" arguments against a slowly rising price level would bedecisive on their own account. The arguments are basedon the fact that creeping inflation effects a redistributionof income within the community which is entirely arbitraryand patently unjust. The Council point out that different

groups of society vary greatly in their ability to protectthemselves against damage from slowly rising prices. Thesectors most likely to benefit from gradual inflation areindustrial wage-earners, businessmen and the holders of ordi-nary shares.

"On the other hand, there are many useful and meritorious elementsin society who are disadvantaged in different degrees by the process.Salaried workers, with their weaker collective organisation and withtraditions which rule out most forms of trade union pressure, find ithard or impossible to maintain their real income. Events have beenstrengthening both their organisation and their determination, and economicforces also operate to prevent an indefinite reduction in their relativeadvantage. But there is no doubt that rising prices, even if at a slowpace, would mean for them, in the future as in the past, hardship, dis-appointment and discontent."

Other large groups which suffer from inflation are pro-fessional people; pensioners, particularly those relying on pri-vate superannuation schemes; the holders of fixed and near-fixed interest debt, principally holders of government bonds,but also investors in debentures and preference shares; and,finally, owners of land and buildings let at legally controlledrents. The Council emphasises the disastrous impact of in-flation on government borrowing:

"Once a steady upward trend of prices came to be generally acceptedand anticipated, something would have to be done to mitigate the rentier'slosses—otherwise the Government would cease to be able to borrow anymoney on fixed interest terms."

In a significant sentence the Report states:"These arguments against aiming at a slowly rising price level would,

we think, be decisive even for a country like the United States. whichdoes not have to bother greatly about its foreign trade position."

It would appear that at the present time the overwhelm-ing weight of official and expert opinion in America concursin this view.

In an important section of the Report, the Council dealswith the main criticism of the policy of damping downdemand in order to stabilise the price level. The criticismis that by limiting demand through controlling the volumeof money, total production is less than it otherwise would be.The Council's answer is interesting, especially in light of thecurrent position in Australia and the widespread clamourfor an easier credit policy.

"Excessive demand cannot be restrained if at the same time it issought to wring the last ounce of output out of a given constellationof human and material resources. In an over-extended economy it is tobe expected that a moderate contraction of demand will tend to eliminate

Without Inflation (Continued) "

the most costly units of output, thus diminishing the total flow of moneyincomes by more than it diminishes the total flow of output, which is,of course, from the "disinflationary" standpoint, the right result. Butfurther there seems every reason to hope that by facilitating a smootherflow of work and a better organisation of labour, and transmitting apressure towards greater efficiency of management, the less congestedcondition of demand will also bring it about that the loss of outputproves to be no more than temporary. Such conversations as we havehad with those experienced in business do not lead us to regard theseexpectations as unduly optimistic."

Businessmen in Australia have found that the measurespursued by the Commonwealth Government in recent months(to achieve greater cost and price stability) have resulted inmarked gains in general efficiency and a healthier competitiveatmosphere in industry.

THERE has been a disposition in some circles to assail thispolicy, and to argue that the right course for Australia

in present circumstances is one of mild inflation and a slowlyrising price level. It is maintained that such a condition isin any case unavoidable in a country in the throes of rapiddevelopment; and that if this entails sacrifices, then theyshould be gladly accepted in the interests of building a greaterAustralia. We have been told that "you can't build a nationon a credit squeeze".

Although it is true that credit policy must be flexibleto meet changing conditions, the idea that development canbe sound and healthy—or even that it will proceed fasterthan otherwise—on a foundation of perpetual inflation mustbe highly suspect. This doctrine seems to come uncomfort-ably close to the time-worn fallacy that prosperity can behad just by the simple act of creating money. And, if itis admitted that inflation involves sacrifices, then it is in-cumbent upon the inflationists to show how these sacrificescan be spread fairly through the community, instead offalling on a few sections, as they have in recent years.

The judgment of governments and of expert opinionthroughout the world—which has now been delivered—isagainst the inflationists. The resolve of the CommonwealthGovernment to persist with its long-term policy of stabilisa-tion (in the face of a mounting agitation to take off thebrakes) is thus vindicated. If the Government can followKipling's advice and "keep its head when all about you arelosing theirs and blaming it on you", high statesmanship willhave triumphed over politics.

High Taxes

NOT so many years ago it was argued—and generally accepted

—that any increase in the burden oftaxation would tend to have someadverse effect on the desire to work,on enterprise and ambition. Con-sequently an increase in taxes wouldbe equivalent to putting a brake oneconomic progress.

This did not necessarily imply thattaxes should never be increased.There were considerations thatmight sometimes have to take prece-dence over the strictly economic.Economic progress might have to besacrificed to the demands of elemen-tary justice, to reducing the gapbetween the very rich and the verypoor. Or serious shortcomings inthe community's social servicesmight require and justify an increasein taxes. Or there could be a warwhen high taxes would be regardedas a negligible price to pay for sur-vival.

But few people, not even somesocialists, pretended that highertaxes would not tend to have, whatis called in present-day jargon, some"disincentive" effect. Thus, even arenowned socialist such as Sir HughDalton, Chancellor of the Exchequerin the British postwar Labour Gov-ernment, was able to write in thenineteen thirties : "It is probablyimpossible to impose heavy taxationin a modern community withoutthereby causing some check to pro-duction."

But we now live in a world whichhas become accustomed to a scale oftaxation that would have seemedprohibitive by prewar standards.Some even argue that high taxeshave little or no unhappy effects onproduction ; indeed, that in manycases the effects may be favourable,rather than unfavourable, and that

increased taxes can sometimes bethe means of securing increasedwork and effort. These views mustbe regarded with suspicion.

IN 1938/9 the total of all taxes in Australia amounted to 17% of

the national income; direct personaltaxes were only 4% of the nationalincome. In 1956/7 total taxes were27% of the national income; per-sonal taxes just less than 10%. Asa rough approximation, it might besaid the burden of taxes has aboutdoubled since before the war. Yetthis has happened without theeconomy being brought to a stand-still and, on the face of it, withoutcrippling effects on productivity andprogress. Indeed, the high taxeshave gone along with a period oftremendous development and indus-trial expansion, although, signifi-cantly, not of great gains in all-round living standards. At firstsight, then, there may appear to besome substance in the argument thatheavy taxes do not impose a dragon efficiency and progress, that is tosay do not act as a serious disincen-tive to work and enterprise.

But, if we go deeper, such anargument, based on the facts of post-war Australia, cannot be substan-tiated. For who is to say that, hadthe tax burden been lighter, economicprogress might not have been evenmore rapid than it has been?

Moreover, there is an obviouslogical weakness in the view thathigh taxes have little or no effect onincentives. Otherwise we reach theabsurd position that taxes could beincreased almost indefinitely withoutadversely affecting enterprise or thedesire to work. Plain commonsenseleads us to reject such a conclusion.Clearly, there must come a point

High Taxes (Continued)

where the tax burden begins to im-pose a drag on economic progressand to slow down, if it does not putinto reverse, the natural trend to-wards improvements in productionand living standards. While it maybe possible that a community such asAustralia can carry a tax load ofaround one-quarter of the nationalincome without a serious slackeningof the rate of economic progress, itdoes not follow that the burden couldbe increased to say 30% or 40%without dire consequences. Theproblem of economic policy is todiscover just when and where theimposition of higher taxes wouldresult in a reduction of effort and adisinclination to take the inescapablerisks of enterprise and invention.

For a start, the two extremeschools of thought — those who usedto see in every increase in taxationa threat to enterprise and work andthose who now argue that increasescan have a positively favourableeffect on production — are pro-bably both wide of the mark. Inthe light of postwar experience, thefears of those who, in the pre-warworld, believed that any increase intaxation in any circumstances wouldweaken incentives look unwarranted.In this, as in so many other things,Lord Keynes proved his presciencewhen he wrote in 1935 ; "It is notnecessary for the stimulation ofthese activities . . . that the gameshould be played for such high stakesas at present. Much lower stakeswill serve the purpose equally wellas soon as the players are accus-tomed to them." At the same time,Keynes cautioned : ". . . I believethere is social and psychologicaljustification for significant inequali-ties of income and wealth."

Whether Keynes would have re-garded the inequalities in income

which exist in Australia today assufficient to justify the adjective"significant" is a point for debate.It may be doubted, however, whetherhe would have gone along with themodern tendency to wave aside thequestion of incentives when increasesin tax are under consideration.

AN increase in taxes will affectthe incentives of different

people differently. It has been Sug-gested that an increase in tax rateson the income of a person .with largecontractual commitments, say onhire purchase for a motor car andhousehold durable consumer goodssuch as furniture or a washing ma-chine, will tend to make him workharder so that he can continue toearn sufficient to keep up his pay-ments. The same might apply to aman with a large family with heavyfixed expenses for housing, educationand life insurance. Again, a rise intaxes which reduced the family in-come might lead the wife to seekemployment in order to remedy theposition.

In these and similar cases, it isargued, an increase in taxes farfrom acting as a disincentive, couldconceivably have an "incentive"effect.

But how far is this reasoningvalid?

Confronted with an increase in histaxation it is certainly possible thata person loaded with heavy fixedcommitments—and even one who isnot—will endeavour to maintain hisnet income after tax and thus hisstandard of living. But will his im-mediate reaction be to achieve thisend by working harder? Or will heseek other and less painful means ofachieving it? It must be recognised,for a start, that the opportunities of

many wage and salary earners ofgaining an immediate, or even early,increase in their income throughworking harder are somewhat re-stricted. That being so, it seemsmore likely that an increase in taxesmight persuade the wage or salaryearner to press for an increase in hisremuneration rather than to workharder. Or it might divert some ofhis energies into financial specula-tion. If he is a professional man itmight lead him to raise his fees, or,if a self-employed business man, hisprices. Or it could result in a cut-ting down of the quality, rather thanincrease in the quantity, of the workor the service he provides. For in-stance, he may decide to endeavour toenlarge his clientele not by workinglonger hours but by giving less atten-tion to the needs of his individualclients. Or, it may encourage tax-payers, whatever their occupations,to seek ways of avoiding tax whichthey otherwise would never havebothered to prospect.

It is doubtful whether firm con-clusions can be drawn. Argumentsmight be advanced either way. But,in any case, it is clearly wrong to callan increase in taxes which led to anincrease in the amount of work an"incentive." An "incentive" issomething which encourages or in-spires a person to do more or better.It is "a prize" for improved per-formance, the carrot which makesthe donkey move faster. A tax in-crease which brings about harderwork is not so much a carrot as astick. Either may make the donkeygo a little quicker (although thehuman animal, one suspects, is muchless susceptible to the stick than isthe beast of burden). But the twohave very different psychologicalconsequences. One leaves a feelingof satisfaction and achievement; the

other a residue of dissatisfaction andresentment. If the resentment be-comes acute it leads to ultimate re-bellion against the tyrant who wieldsthe stick. The donkey, who at firstmoved faster to escape the penalty ofpain, may eventually refuse to moveat all.

It is a commonplace of modern in-dustrial psychology, that people giveof their best when properly encour-aged. They do not give of their best,at any rate for long periods, whenunder duress. Encouragement has abuoyant, uplifting, optimistic influ-ence on the mental outlook ; compul-sion has a depressing effect. Heavytaxes give rise to the feeling of`What's the use ; no matter what wedo, we can't seem to get anywhere."If this feeling becomes universal—asit seems to have almost • become inpostwar Britain—will it not in-evitably produce a widespread senseof frustration and hopelessness thatcan only lead to a slowing down ofthe vehicle of economic progress?

In certain instances, dependingupon the particular financial circum-stances and mentality of the personconcerned, an increase in taxes maylead to harder work. But it is doubt-ful, indeed, whether this possibilitycan be elevated to the status of ageneral principle. In discussing theeffect of heavy taxes on incentives itis easy to fall into error if one arguesfrom the particular to the general.In specific cases it may be true thathigh taxation has little impact onthe will to work, or that an increasein taxes would, for the time beingat any rate, result in a greater effortbeing made. Thus a steeply pro-gressive scale of taxation which mayreach punitive levels in the higherincome ranges may have little or noeffect on the lower income groupswho are not much affected by it.

High Taxes (Continued)

This does not mean, however, thatit does not seriously discourage thosewho take the risks inherent in busi-ness investment and enterprise, thusimposing a strong brake on economicprogress.

Indeed, it is in its effects on enter-prise and risk-taking, even morethan in its effects on the volume ofwork, that heavy taxation exerts astrong "disincentive." The farmerwho is considering whether to plantadditional acres of wheat, to runmore sheep or to milk more cowswill have in mind the extra incomehe might expect to receive by sodoing. If he finds that a good partof this income will be taken in taxes,he will naturally be less disposed totake the risks involved and perhapsto choose more leisure instead ofmore work. A business man who isweighing up the "for and against"of installing an expensive new ma-chine to cut costs and increase hisprofits, may be disinclined to do so,if the additional profit he wouldacquire will be largely taken in taxes.

Those who lean in favour of heavytaxes have frequently drawn on thereport of the British "Royal Com-mission on the Taxation of Profitsand Income" to support their pointof view. The Commission stated :"The evidence which has been pre-sented suggests that marginal ratesof tax are not at present a seriousdisincentive to effort in the lowerincome groups." But this statementapplies only to the lower incomegroups and even here the Commis-sion was careful to add the qualifica-tion : "But it is possible that presentrates may not be disincentive, whilea rise in taxes would still have adisincentive effect." Thinking moregenerally of the effects of heavytaxes the Commissioners agreed thatthey were likely to make a man "dis-

inclined to take on something out ofhis usual course" and probablytended to "repress effort and to dis-courage the taking of risks."

In 1954/5 the top tenth of the tax-payers in Australia paid over halfof all personal income taxes. Thisgroup included in the main, business-men, farmers and professional men,the group which makes the vital de-cisions which lead to higher produc-tivity, lower costs and all-roundeconomic progress and development.

TAXATION in Australia has not1 yet reached the penal levels of

the United Kingdom and we shouldsee that it never does. The migra-tion abroad of artists such as NoelCoward and Gracie Fields andwriters of the calibre of Nevil Shute ;the transfer of shipping to foreignflags and the domicile of large in-vestors in low-taxed Switzerland areall attributed to a desire to escapepunitive taxation.

It is sometimes argued that re-distributive taxation by leading toa more even spread of wealth bringsabout a wider spread of opportunityand thus makes for a more dynamicsociety. This is certainly true wherethere are great extremes of richesand poverty and where taxes have notreached a point where they have be-come a serious disincentive to enter-prise, work and risk. But does itapply where taxes on the middle andhigher incomes have become steeplyprogressive? Or is it not more likelythat in this case the opportunitiesbefore the less well-to-do will belimited? Under a steeply progres-sive tax system it is anything buteasy for the majority to become rich,or even moderately prosperous. In-come is largely consumed in meetingcurrent expenses, and it is hard to

add to one's capital resources. Aleading American economist, DavidMcCord Wright, writing on this pro-blem says : "Any measure whichdisproportionately hampers the riseon independent terms of the newman and the new enterprise strikesdirectly at the democracy and thetechnological creativeness of our so-ciety. Yet it can easily be shownthat income taxation, even at auniform proportion, may well favourthe man who is already rich at theexpense of the man who is trying tobetter his economic status, the estab-lished old firm at the expense of the

enterprising new one. The additionof high , progressive rates makesthings even worse, and the result isfrequently a policy for those 'alreadythere'—a policy which helps mono-poly and social stratification."

This is probably the most seriousof all the aspects of burdensometaxes. It places almost impossibleobstacles in the way of the mantrying to improve his lot in life byclimbing up the economic ladder. Inour modern high tax economy, it isan aspect worth a lot more thoughtby politicians and economists than itis usually given.

Page II

Tariff PolicyTN recent months, the. Tariff Board and tariff policy haveI been under the fire of criticism. It is hard to assess howmuch of this criticism is merited. Certainly, on the face ofit, the procedural mechanism seems slow and laboured—butthis may be inevitable in the process of granting tariff pro-tection. Probably much of the criticism arises from theuncertain state of mind engendered by import restrictions,and the fear that the present scale of duties would proveinadequate if the restrictions were suddenly or substantiallyremoved. Possibly there is a vague feeling that the Boardis a little old-fashioned in its approach and that it has notyet adjusted its thinking to the greatly increased importanceof secondary industry in the rapidly developing Australianeconomy of the nineteen fifties.

There have been signs that Canberra itself has not beenentirely satisfied with the approach and operation of the TariffBoard in recent years. The retiring Chairman, the highlyregarded Mr. M. E. McCarthy, has been succeeded by DrW. A. Westerman, who has achieved prominence for hiswork in the administration of import restrictions in theDepartment of Trade. It may be significant that Dr.Westerman is well known for his faith in Australian manu-facturing and its competitive capabilities. The Common-wealth Government has also taken steps to enlarge, andpresumably strengthen, the staff at the disposal of the Board.

AS an institution in the economic life of Australia, theTariff Board has enjoyed a position of high respect and,

for a body engaged in such a contentious field, it has been,until recently, singularly free from criticism. It has taken abroad and wise view of its functions. It is something more thana mere instrument for advising the government of the day onthe scale of protective duties. It has developed into thenearest approach we have to an economic general staff in-dependent of government direction. The Board's carefuland measured Annual Reports have come to take almost thenature of an economic review of the economy and its prob-lems. It has not hesitated to comment upon controversialmatters and, at times, to criticise government policies. Forexample, a recent Report drew attention to the large cumu-

lative cost burden imposed on industry by the payroll taxand also pressed the case for a more liberal scale of deprecia-tion allowances.

The Board has established its own standards or criteriaby which to assess claims for tariff protection and thesestandards have, on the whole, undoubtedly been reasonableand just. Over its history, the Board has shown a keen under-standing of its vital responsibilities for the health and stabilityof the Australian economy. It may have made mistakes; butthen what institution, concerned with the complex tasks ofeconomic advice and administration, hasn't?

Why, then, the recent fall from grace, if such it canbe called?

TO some extent the Board seems to be the victim of cir-cumstances.Perhaps we have all been slow to realise the tremendous

changes which have occurred since pre-war days in theenvironment in which the Board must carry out its work.There appear to have been five major changes.

1. Rapid Growth:

First, before the war Australia was a relatively stagnanteconomy. Overall growth was slow and the contribution ofsecondary industry to the economy was fairly stable. In thepost-war years the manufacturing sector has expanded withunprecedented speed. This expansion is intimately tied upwith the massive programme of development and populationincrease; since, directly or indirectly, manufacturing mustshoulder the task of providing employment for a large pro-portion of the annual additions to the working population.It has become a major factor in the new, industrialised Aus-tralia. Today manufacturing employs nearly 30% of allworkers (pre-war 20%) and contributes £1,500 million or60% of net annual production. This vast change in thesignificance of secondary industry in the economy mustclearly serve both to enlarge and complicate the tasks of theBoard.

Tariff Policy (Continued)

2. Import Controls:

Tariff policy in Australia has been complicated by twoother important changes in the economy. The first is theemergence of an acute and continuing balance-of-payments'problem and the necessity for far-reaching controls overimports. Dollar goods have been subject to exchange controlssince 1936—although to a much greater degree since 1949.Since 1952 all imports have been subject to licensing provisions.Imposed in the first place as a strictly temporary measure,import control seems to have become almost a permanentfeature of the Australian economy. Although exposed toobvious abuses, a better alternative has not yet been found.(Perhaps Dr. Westerman's appointment has been made partlyin the hope the Board may evolve some system, presumablybased on selective tariffs, to reduce the ambit of controls.)

The Tariff Board, hoping that equilibrium in the balanceof payments will be reached mainly by increasing exportearnings, has consistently discouraged manufacturing activi-ties which rely on import restrictions rather than the tarifffor protection. But the implications of the protective inci-dence of import restrictions cannot be escaped indefinitely,if these hopes of additional export income do not materialise.

3. Great Rise in Costs:

The third change affecting Australian trade policy isthe unprecendented rise in the domestic cost structure sincethe war. This increase has substantially exceeded that ofmost of the other Western trading nations and it seems onlyfair to infer that it has substantially weakened the competitivestatus of many local manufacturers. Minimum hourly wagerates in Australia appear to be at least 60%—in some instancesaround 10070—higher than in United Kingdom, to whichmust be added greater "fringe" costs such as longer holidays,long service and sick leave pay. The actual rate of protectionagainst dutiable British goods appears to average around 60%—25% on account of the exchange rate, 15% for freight andinsurance charges and 20% for duties. While the TariffBoard in its various Annual Reports has exhibited concernat the high level of Australian costs, it has not shown thatit considers large upward adjustments in the tariff to benecessary to compensate for cost disparities. This has given

rise to doubts in some quarters whether the old conceptionsof what constitutes adequate protection are any longer valid.

4. An International System:

The fourth important change arises from the fact thattariff policy has now to be assessed and administered in aworld striving toward greater freedom of international trade.This is in marked contrast to the situation in the highly pro-tectionist pre-war decade when doctrines of economic national-ism held sway and many nations were seeking to achieve themaximum possible measure of self-sufficiency. Since the warthe goal of liberalising and expanding world trade has ledto the establishment of a number . of important internationalbodies of which the Board's deliberations must take cognisance.Australia has become part of a wider international economicsystem which has compelled some sacrifice of national sov-ereignty in economic matters. All this has , meant that theproblems with which the Tariff Board deals must be broachedfrom a broader and more complicated viewpoint than thesimpler, direct, "nationalist" approach possible before the war.

Let us look at this "new order" in more detail. Australiaparticipated in the efforts in 1947 to set up the InternationalTrade Organization (ITO) which was to make a start onthe job of dismantling the maze of barriers to internationaltrade which grew out of the depression, the militant economicnationalism of the "thirties" and World War II. ITO wassucceeded by GATT (The General Agreement on Tariffs andTrade) to which Australia is a party. Under GATT Aus-tralia is obliged to extend "most favoured nation" treatmentto the 34 other member countries. This means that tariffconcessions granted to any particular country must be grantedalso to all the signatories to GATT. Although existing pre-ferences can be retained, preferences cannot be increased.Australia has, however, been able to take advantage of"escape" clauses applying to balance-of-payments' difficultiesand protection of domestic producers.

The Ottawa Agreement—a key element in the pre-wartariff—has now been discarded .under the pressure of develop-ments in post-war trade. Australia felt she was losing valuableexport trade to countries unable to compete on the Australianmarket because of preferences granted to British manufac-


turers. She was also denied the full advantage of price com-petition on many import items. After extensive negotiationthe Ottawa Agreement was superseded by the U.K.-AustraliaTrade Agreement in November, 1956. The new arrangementovercomes many of the objections to Ottawa and, in particu-lar, recognises the needs of Australia's own industrial develop-ment and her responsibilities under GATT.

The main provision of the new Agreement is the con-cession that Australia may reduce tariff preferences to 7i%on a wide range of goods basic to Australian industry, irre-spective of present margins. The minimum level of prefer-ence on other goods is to be 71% or 10%, depending on thepreviously existing preferences. Under the Ottawa Agree-ment goods from foreign countries had to pay an additional12k% when the duty on similar British goods was 15% andas much as 171% when the duty on British goods exceeded25%. The new Agreement should have the effect of increas-ing Australian trade with non-British countries and also re-duce the cost of imports.

As part of its policy of improving trade relations withgood customer countries, the Australian Government signeda new Trade Agreement with Japan in July, 1957. In returnfor assurances that Japan will maintain and expand her im-ports of wool, wheat, sugar, barley and certain other primaryproducts, Australia has agreed to grant "most favoured nation"treatment to Japan and to consider the possibility of Japanesemembership of GATT within the next three years.

Australia is also vitally concerned with proposals to estab-lish a European Common Market and Free Trade Area. InMarch, 1957, a six-nation community (France, West Ger-many, Italy, Belgium, Holland and Luxembourg) —alreadyoperating a common market in coal and steel—agreed toestablish among themselves a universal common market witha uniform external tariff within the next 12 to 15 years.The Free Trade proposal involves abolition of duties on manu-factures between 17 West European countries (including theIron and Steel Community) but, unlike the Common Market,still leaves each member free to determine tariffs against non-members. This would mean that the United Kingdom willbe able to retain existing Commonwealth preferences againstnon-members. The United Kingdom also wishes to exclude

agricultural products, so that any Commonwealth preferenceson these items would remain, even against members of theCommon Market and Free Trade Area. Strong attemptsare also being made to prevent the inclusion of overseasdependencies in the Free Trade Area. The British PrimeMinister, Mr. Macmillan, has stated: "The United Kingdomis not prepared to enter the Free Trade Area at any price.Equally the price of failure (to agree) may be very heavyindeed."

5. Exchange Rates:

The fifth and final change affecting trade policy in thepost-war world is the attempt to achieve international controlover exchange rates through the International Monetary Fund.National sovereignty in fixing exchange rates has been con-siderably weakened. The Fund which controls a good partof exchange rates is resolutely opposed to currency deprecia-tion as a means of gaining trading advantages. It also outlawscurrency restrictions unless justified by "temporary" balance-of-payments' difficulties.

THE economic environment, both domestic and inter-national, in which the Tariff Board must do its work

has thus changed drastically. It is not surprising that therehave been demands for a "new look" at tariff policy and atthe functions and "modus operandi" of the Board. Indeedan official review of the purposes of the tariff in the expand-ing Australian economy, which led to a clarification of itsposition, might be welcomed by the Board itself. Even ifsuch a review indicated that no basic reforms in tariff-makingwere necessary, it would at least help to dispel the aura ofdisquiet at present surrounding the Board and to re-establishits old-time prestige. There has been no survey of the placeof the tariff in the Australian economy since the classicreport of 1929—nearly thirty years ago—by a committee ofdistinguished economists. It may now be time for another.

One point of criticism is the apparently extreme slownessof the tariff-making process. This is by no means wholly thefault of the Board itself. A scrutiny of cases over recentyears suggests that although some tariff applications takethree years—from the date when a request is first made to


the Minister for Trade to the tabling of the amending schedulein Parliament—the average time has been around 18 months.It seems to be on average about five months before an appealis heard. The Minister has to refer the matter to the Board,and witnesses, including overseas representatives, have thento be notified. The Board may then take, say, eight monthsbefore presenting its report to the Minister. Whether or notthis time is unnecessarily long, there is undoubtedly much forthe Board to do. Witnesses have to be heard; reams of docu-mentary evidence on labour and other costs, profit histories,present and prospective demands, the numbers employed inthe industry and so on, have to be examined and weighed.Before making its recommendations the Tariff Board has tosatisfy itself that protection is granted only to economic andefficient industries, and then, only to the degree that willenable overseas industries to continue in reasonable competi-tion on the local market. Special consideration is, of course,given to "infant" industries with promising prospects anddue regard is also paid to the needs of national defence.Finally the Board must prepare its written report and recom-mendation for the Minister. It may well be feasible toshorten this procedure without seriously affecting the qualityof the Board's final decisions. At the same time it is obviouslybetter that all matters should be thoroughly weighed, evenat the cost of some delay, than that the Board should rushthrough a hasty, ill-considered judgment merely to save time.The matters at issue are too important for that.

After the Board has sent its recommendation to theMinister, another four months may elapse before the Ministeraccepts or rejects the Board's decision and introduces anychange in rates of duty to Parliament. A large part of thetime lag in reaching a decision sometimes arises from Aus-tralia's obligations under GATT. A number of items are"bound" against tariff increases, and, when this occurs, anyproposed upward revision is subject to the consent of allmember countries.

Other criticisms of the Board arise from the concern insome quarters that it is not fully alive to the key role ofsecondary industry in the development and migration pro-gramme, and that it is not paying sufficient heed to disparitiesbetween Australian and overseas costs in fixing tariff levels.

In some cases, it is said, industries are encouraged toinvest large sums of money in plant and equipment, butadequate assurances that the new industry will be protectedare not provided. Under these circumstances many manu-facturers naturally display a reluctance to undertake newavenues of investment. The whole situation is, of course,obscured by import restrictions. Many manufacturers fearthat if overseas trade improved sufficiently to enable therestrictions to be removed, they might find themselves inserious straits. These fears are understandable.

HISTORICALLY, Australia is wedded to the tariff as aninstrument to foster the development of its manufac-

turing industries. Industrialisation in a young and smallcountry cannot be achieved without ample protection. Aus-tralia is now becoming a highly industrialised nation andmost Australians want it that way. They would certainlylook with horror at. -any failure to provide adequate protectionfor secondary industries.

At the same time a reasonable balance has to be struck.This would be conceded by most manufacturers themselves.Some overseas competition is certainly desirable. Consumersare presented with a wider choice and local industry is kepton its toes in regard to technical and other developmentsabroad.

It should also never be forgotten, too, that the long-terminterests of Australian manufacturing itself lies in the healthyexpansion of exports based on a competitive cost structure.The 1929 Committee on the Australian Tariff concludedthat the tariff had enabled the country to support a largerpopulation at a higher standard of living than would other-wise have been possible. But it was at pains to warn that nofurther increases be made without rigorous scrutiny of thecosts involved. Through a process of passing on, the extracosts entailed by protection eventually fell upon the exportindustries. The Committee estimated that the tariff was add-ing around 10% to the costs of export industry as a wholeand if extended might result in loss of export markets.


The faster export income rises the faster will be thegrowth in living standards and of a wider home market forthe products of Australian factories. Conversely any per-manent reduction of export income must adversely affectsecondary industry. Local demand would fall off, and re-strictions might have to be placed on imports of materialsand equipment essential to the efficient conduct and continuedgrowth of industry.

WE cannot live in a world of our own. We are part ofan international system increasingly linked by economic

and strategic considerations. If we want other countries toshow respect for our particular way of life we have got tobe prepared to demonstrate a reasonable understanding oftheir problems. To sell we must also buy. Economic autarchyis an outmoded and destructive doctrine which the worldhas been striving to discard since World War II.

As with most things in life, moderation is the path ofwisdom. Australia's future tariff policy must attempt totread a middle course. Prohibitive protection cannot beentertained. At the same time we must be careful to ensurethat the nation's legitimate aspirations for industrial progressare being met.

What Business Thinks of the Public ServiceExtracts from a Paper given to the Institute of Public Administration bythe Director of the Institute of Public Affairs, Canberra, March 27, 1958.

THERE are very different valuesand standards in the public ser-

vice and business and this is neces-sarily so. While I believe it to betrue that modern business proce-dures can be increasingly applied tothe routine administrative activitiesof government departments, quite alarge part of the work of the publicservice does not lend itself to strictbusiness methods or to business con-ceptions of right and wrong. Thecritics of the public service some-times forget this altogether, or atleast fail to make sufficient allowancefor it.

Equally it is true to say that thepublic servant sometimes fails to besufficiently tolerant of the standardswhich obtain and must obtain inbusiness. He does not always fullycomprehend the businessman's atti-tude and the motives by which he isactuated.

All this gives rise to a tendencyfor the businessman to be over-critical of the public servant, andconversely for the public servant tobe over-critical of the businessman.

In these matters we should seekto be tolerant. We should try to putourselves in the other person's shoes ;to see the problem through his eyes.There is undoubtedly scope for moretolerance in the relationships ofbusiness and the public service, andI think possibly there is more toler-ance and a better understandingtoday than there was in the yearsafter the war. But there is stillroom for improvement.

WE are all to some extent thecreatures of our environment.

It is surely wrong to expect the manmoulded in the traditions and

methods of the public service to lookat life the same way as the manwhose life has been spent in businessand more particularly as the manwho is in highly competitive busi-ness. Two environments whichdiffer so vastly will produce quite adifferent species of animal. But theimportant thing, I believe, is this—they are different in kind, not inquality. One is no better than theother—morally no better, intellec-tually no better, in ability and energyno better. They are merely differ-ent.

If there is one thing I think bothbusinessmen and public servantscould do with great advantage, it isto rid themselves of any notion that,in some mysterious way, one issuperior to the other. Nothing couldbe more false. At the risk of tread-ing dangerous ground, I would saythat what the public servant shouldbe particularly careful of is the ideathat he possesses a kind of moralascendancy over the businessman.Such an idea, if you stop to thinkabout it, is, of course, complete non-sense. I am speaking now in generalterms. There are, of course, somepublic servants. who have a noblerconception of life than some busi-nessmen. The converse is equallytrue. But I am not concerned withindividual cases. What I am con-cerned with is the idea that thepublic servant as such is a betterman, in general moral standards andoutlook, than the businessman assuch.

This idea where it exists—and itis by no means universal—probablyhas its roots in the fact that thepublic servant must have regardalways to the interests of the nation,of the whole community, whereas

What Business Thinks of the Public Service (Continued)

the businessman is concerned, partlyat least, with his own narrower, per-sonal interests, and the welfare ofhis particular business. But this is,surely, purely an accident of position.The public servant, who takes as theacid test of right and wrong, theelusive concept of the public interest,is merely carrying out his job. Thatis what he is paid for. The business-man is operating in a tougher en-vironment. He must show a profit,or he will soon have no business atall.

This does not mean that the busi-nessman in his pursuit of profit isnecessarily running counter to thepublic interest. On the contrary, inmost cases the business that achievessuccess and shows a healthy profitand loss account and balance sheet isserving the public interest by thatvery fact. It has served the publicthrough its anticipation of thepublic's needs ; by providing productsand services which it wants and forwhich it is prepared to pay ; by pion-eering new fields of production; byits attention to efficiency and costreduction.

There is a disposition to envy,success, to assail good profits ; butbefore we do so it .is only fair toascertain how these profits havebeen made and to what extent theyrepresent a reward for efficiency andfor enterprise above the average.

On the whole I believe it to be truethat the best type of businessmanconsciously applies the test of thepublic interest to his own activitiesand makes a significant, and some-times unrecognised, contribution tothe general national welfare. Never-theless, it is only fair to recognisethat the businessman is exposed tomuch greater temptations than thepublic servant. What, for instance

is the businessman .to do who knowsthat unless he can secure a higherprotective tariff on his goods, he willgo out of business ? Yet it may beclearly against the public interestthat the tariff should be granted.Should the businessman refrain fromany efforts to obtain the tariff ?Should he gladly commit suicide?That, I suggest, is expectingaltogether too much of humannature.

What I am getting at is that it iseasy to be good if you are neverexposed to temptation. There areafter all more ways than one ofcommitting sin, and the sin of self-righteousness must stand high onthe list of the most ,reprehensible.I am not for a moment suggestingthat many public servants are self-righteous. I am sure that most arenot. But the danger of assuming a"holier than thou" attitude is one towhich the public service is peculiarlyexposed, and of which it needs to beconstantly beware.

WOULD say that, so far as my1. own experience goes, there arethree main general criticisms ofCanberra frequently heard in busi-ness circles ;

First, that it is too big.Second, that it is too remote.Third, that it tends to be "anti-

business."Now as for the first criticism, I

do not think there can be muchdoubt that it is valid. My own be-lief is that the work of the Common-wealth Public Service could be car-ried on just as efficiently, just aseffectively, with quite substantiallyfewer numbers. There is a natural,almost irresistible tendency' for ad-ministrative staffs in large and com-plicated organisations to grow be-yond, and occasionally far beyond,

the necessities of the job they arecalled upon to do.

There is no doubt that "empirebuilding" can go on in the adminis-tration of large private businessesjust as it does in government depart-ments. And, quite apart from"empire building," staffs both ingovernment and in private enterpriseare sometimes built up not neces-sarily to add to the prestige of thedepartmental or sectional head con-cerned, but in the sincere belief thatthe extra numbers are really neces-sary to do the job.

The departmental head in abusiness however has a harder taskto justify increases in his staff thanhis opposite number in government.In business the factor of cost is ofmuch greater importance than ingovernment, because business isunder compelling need to show aprofit. Costs are likely to be muchmore rigorously scrutinised. Whengovernments spend more (and theyare the ultimate arbiter of the sizeof government spending) they onlyhave to justify their spending to thetax-payer, who is rather a remoteindividual. He can kick up a fuss—as he usually does—but he cannotdo much more. But if a businessconsistently fails to show a profit, thetop executives are likely to findthemselves out of a job, or at leastin line for demotion. This does notimply any superiority of businessover government administration. Itis simply a frank recognition of thedifferent circumstances which applyto each. If you transfer the businessexecutive from business to publicservice, then it won't be so long be-fore he acts like a public servant.Conversely, if you transfer the publicservant to business, he would, I pre-dict, become much more cost con-

scious, and eventually he will actlike a businessman.

In these days when governmentadministration has become a hugeand significant factor in the life ofthe community, it is a good thingthat it should be constantly exposedto the searchlight of criticism andreview. When the criticism is fairand objective and firmly bedded inthe concrete of fact, then the publicservant should not be over-sensitiveabout it. If, however, as sometimeshappens, the critic fails to get hisfacts straight first, or indulges inwild exaggeration, then the publicservice has every right to feelaggrieved.

NOW what of the second complaint—that is, that Canberra is too

remote.Remoteness from the everyday life

of the people may induce a kind ofremoteness of the mind, a mentalunreality, a theoretical rather thana practical approach to nationalproblems. One tends to look at lifefrom afar. I often think it is athousand pities that business peopleand public servants are, in the Aus-tralian setting, unable to mix freelyin business affairs and social inter-course from day to day. I am surethat that would lead to a much betterunderstanding, of one another and,in the process, a much better under-standing of national problems. Theapproach of the public servant wouldgain in realism; that of the business-man would gain in appreciation ofwider national considerations. Bothcould not fail to benefit vastly. But,as things are, that is not altogetherpossible.

I know that most Canberra peopleare by no means unaware of thedangers of their enforced isolationand do at least something to over-

What Business Thinks of the Public Service (Continued)

come them. But any situation inwhich the processes of governmenttake place in an environment en-tirely different from, and far re-moved from, the everyday life of thegoverned is one fraught with hiddenmenace. I think you will agreethat the menace can by averted—andindeed will be averted—only if weare constantly alive to it. That ismy sole justification for mentioningthis matter here. But having saidall that, it is only fair to add thatCanberra is not something for whichthe public servant can be blamed.If any blame is necessary, then itmust be directed at the Australianpeople altogether.

•

The third criticism is the com-plaint that Canberra tends to be"anti-business." It is difficult todetermine whether, or to what ex-tent, this complaint is justified. Itis certainly one that is not unique toAustralia. One finds more or lessthe same kind of thing in most ofthe other democratic countries, inthe business attitude to, say, Wash-ington or Whitehall or Ottawa.

To some extent such a feeling maybe inevitable. The public service iscompelled to take decisions almosteveryday which cannot fail to beunpopular in certain business quar-ters. Often these decisions may beright; sometimes they may be wrong.But whether right or wrong they canhardly avoid giving rise to irritationand resentment among the peopledirectly affected by them.

Take the man who applies for alicence to import certain goods. Hisapplication comes up for considera-tion and is rejected. From thenational standpoint, the decision maybe perfectly right. But what is itseffect on the person who wants the

licence? He would surely be morethan human if he did not feel somemeasure of irritation, and evenannoyance.

But apart from decisions whichaffect particular business interests,I think I am right in saying thatthere is a general feeling amongbusiness people that where there isa doubt about whether this courseor that should be pursued, Canberratoo often comes down on the sideleast favourable to business. Shoulda certain control be removed? Shouldcompany • tax be reduced? Shouldpayroll tax be abolished ? Shouldextra depreciation allowances begranted? These are the kind ofmarginal questions on which busi-ness feels that Canberra, more oftenthan not, takes a stand adverse tothe interests of business.

There is another example of thisfeeling. When weaknesses appearin the economy, and restrictions haveto be applied, it is felt that theserestrictions usually fall on the priv-ate sector of the economy ratherthan the government sector.

A major part of the burden forsecuring the great objectives ofnational policy, for example, fullemployment, national growth andprogress, falls upon business, andthe community cannot fail to be ad-versely affected by unnecessary con-flict between business and govern-ment. The aim should always be toreduce the differences and expandthe areas of agreement and thusstrengthen the co-operation betweenthe two.

There has, for instance, been agreat deal of criticism in businesscircles in recent months of the"credit squeeze." What are we try-ing to do in Australia at themoment? After years of inflation,

are we, at long last, trying to pre-serve a reasonably stable internalpurchasing power for the £? If so,why are we trying to do this? Whythe apparently sudden change offront on this issue ? Why has itsuddenly become all-important tostop price rises, and, if really all-important, is the present tight reinon credit inescapable? Here is amatter on which clear, unequivocal,explanation could greatly ,help toclear up misunderstandings, to over-come antagonism in business quar-ters and enlist their co-operation inthe achievement of national objec-tives considered to be of over-ridingimportance.

IN the highest ranks of business1. there is a proper appreciation ofthe tremendously complex characterof the decisions which Canberra iscalled upon to make and of the greatburden of responsibility which fallsupon those people who have to makethem. There is also not a little ad-miration for the capacity, energy,and fair-mindedness which manyleading public servants bring to thistask. Few people envy them theirjob. In the field of economic policy-making, the work is of the highestclass. It is sober, responsible, dis-interested, and animated by a sinceredesire to do what is best. I have notalways agreed with what has beendone or said, but that has not les-sened my admiration for its quality.

We sometimes forget that the Aus-tralian economy is a highly volatileeconomy. We can be in a state ofunprecedented boom one year withalmost a surfeit of riches. Nextyear we can be nearly on the rocksand facing shipwreck.

The task of government and gov-ernment administration in these con-

ditions is peculiarly difficult andthe responsibilities correspondinglygreat. Serious errors of policy canhave disastrous consequences. Aheavy burden falls upon the higherpublic service and it is, above all,necessary, that it should unceasinglystrive to maintain the highest stand-ards of economic and social analysis,and of dispassionate, unbiased en-quiry and advice. Where any sec-tion of the public service fails to doso, where it falls below these stand-ards, it reflects on the prestige andstanding of the whole of the service.

There have been occasions, I be-lieve—fortunately they are few—when the best standards have notbeen achieved. There has been adisposition to support or justifypolicies not by unbiased scientificanalysis and investigation but byassertion, by dogma, and by the halftruth. These are, admittedly, excep-tions to the general rule, but thepublic service cannot afford excep-tions. The public service should not—indeed it cannot afford to—haveany truck with propaganda or any-thing that savours of the methods ofpropaganda. That should be left tothe politician. Propagandist methodsdo not belong in the permanent ser-vice and I hope that those who aretempted to indulge in such methodsincur the strong displeasure of theircolleagues, as no doubt they do.

Australia, and the business com-munity in particular, expect a lot ofthe public service and are entitledto do so. Its intellectual integritymust be beyond all doubt. It is,admittedly, expecting too much offallible human beings to expect thatthey will never make mistakes. Thepublic service can afford to be inhonest error ; what it cannot affordis to be false to the ideal of honestservice.

The ExternalPicture

ByRt. Hon. R. G. CASEY,

C.H., D.S.O., M.C.

Minister for External Affairs

The I.P.A. is privileged to have this survey of the internationalsituation from Mr. Casey who stands high in the Councils of the world.Mr. Casey has spent almost his entire working life as diplomat andadministrator in Britain, United States, India and the Middle East, oras a Cabinet Minister in his own country. Few men in world affairs todayhave had Mr. Casey's breadth of experience of the international politicalscene. •

ANY review of the world situationmust be mainly concerned with

relations between the Democraciesand international Communism, what-ever the geographical area under dis-cussion.

Disarmament

rE most important single aspectof the relationship between the

democracies and Communism con-cerns the efforts that have gone onfor many years to achieve some rea-sonable limitation and reduction ofarmaments. Disarmament discus-sions have been proceeding in theUnited Nations since 1946. Thestated aim of these talks is the con-clusion of an agreement providing

for large-scale reductions in thelevels of armed forces and arma-ments, and the eventual abolition ofall nuclear weapons and weapons ofmass destruction. Little has beenachieved, but in the last couple ofyears there has been an encouragingtrend to concentrate on what arecalled measures of partial disarma-ment. Obviously it is unrealistic atthe present time to talk in terms ofthe complete abolition of nuclearweapons. What is needed is alimited agreement which will lessenthe threat of war by providing fora system of international inspectionto guard against the danger of sur-prise attack, halt the present build-up in conventional and nucleararmaments, and so enable a begin-

ping to be made in reductions inexisting levels of armaments of allsorts.

Discussions in the Sub-Committeeof the Disarmament Commissionhave been useful in defining areas ofagreement and of disagreement be-tween the Western and the Sovietpositions. Unfortunately, the areasof disagreement far outweigh theareas of agreement. On most majorpoints the two sides are still a longway apart. This was demonstratedby the brusque Soviet rejection ofthe proposals for partial disarma-ment put forward by the Westernpowers in August 1957. These pro-posals provided for reductions in con-ventional armaments and levels ofarmed forces, a two-year cessationof nuclear test explosions, the ces-sation of the production of fission-able materials for weapons purposesand a system of mutual aerial andground inspection to guard againstthe danger of surprise attack.

These proposals and the latestSoviet proposals were discussed atthe Session of the United NationsGeneral Assembly in late 1957. Aresolution based on the Westernproposals was adopted by a vote of56 in favour, 9 against, with 15 ab-stentions. This vote was an encour-aging endorsement of the years ofpatient work which the Westernpowers have put into the disarma-ment talks, and an exhortation tothe Soviet Union to settle down tothe serious technical discussionswhich must precede the conclusion ofa disarmament agreement.

Unfortunately, the present pros-pects are not bright. Late in 1957the Russians announced their re-fusal to participate further in thework of the Disarmament Com-mission as then constituted. In aneffort to meet the Russian attitude,

the size of the Disarmament Com-mission was increased by the UnitedNations General Assembly from 11to 25, but Russia still refused to par-ticipate.

It is to be hoped that Russia willreconsider its position and resumethe discussions. The key to thewhole problem of disarmament is thequestion of mutual international in-spection of the operation of anyagreement that may be reached. Todate, the Russians have shown thegreatest reluctance to agree to evena reasonable degree of internationalinspection within its borders. Untilit does so, there seems to be no hopeof the talks coming to a successfulconclusion.

East-West RelationsIT seems that the Communist obj ec-

tive is, by constant and repeatedprofessions of the desire for co-existence, to win over the non-Com-munist and un-committed countriesand to prompt the Western democ-racies to drop their guard. Further,past evidence suggests that whilecontinually talking about peacefulco-existence, the Communist aim isto extend Communist influence andfoment grievances against the West.

The Russian leaders have latelyaddressed a series of letters to themajor Western powers. The appar-ent aim of this correspondence is toarrange "summit" talks. The sin-cerity of the West's desire for peaceis beyond doubt. They would join"summit" talks if there was anyreasonable chance of success. How-ever, such talks, to have any pros-pect of success, must be preceded bythorough preparations and theremust be broad agreement on the sub-ject matter of the agenda. Thesepreparations could take place

The External Picture (Continued)

through the Foreign Ministers ofthe countries concerned or throughdiplomatic channels. It would bedisastrous if each side brought upfor discussion proposals to which theother side could not possibly agree.This would only result in highlight-ing the points of disagreement andhardening their respective attitudes.A well-chosen and mutually agreedupon agenda might provide anopportunity for some advances to bemade by each side on matters onwhich agreement was possible andon which subsequent discussionmight develop into a wider area ofagreement.

Apart from proposals relating todisarmament, the main subjects thathave been variously suggested fromeither side for summit discussionare—reunification of Germany; free-.dom for Eastern Europe ; estab-lishment of a nuclear free zone inCentral Europe; a non-aggressionpact between N.A.T.O. and theWarsaw Treaty powers ; use of theveto in the United Nations; theMiddle East; and the peaceful use ofouter space.

British-American Relations

A MATTER of the very highestimportance in the world is the

relationship between the UnitedKingdom and the United States.Interdependence and close co-operation are the key notes of therelationship. The partnership isbased on confidence and trust be-tween the partners in all aspects ofinternational affairs.

The partnership was gravelyshaken in late 1956 over the MiddleEast situation, but has achieved aremarkable come-back since Mr.Harold Macmillan became PrimeMinister.

It is useful to look at the remark-able record of achievement in the re-building of British-American rela-tions, during the past year.

The year 1957 opened by the visitof Mr. Duncan Sandys (UnitedKingdom Minister for Defence) toWashington for official talks. Thiswas followed in March, 1957, by themeeting between Mr. Macmillan andPresident Eisenhower at Bermuda,a conference which did much to pavethe way for the work of the follow-ing months. In October, 1957, camethe most successful visit by theQueen to the United States, whichwas followed shortly afterwards bya further conference between Mr.Macmillan and President Eisenhowerin Washington.

In the very difficult field of dis-armament the United Kingdom andthe United States took an almostidentical line which contributed in amajor way to the agreed proposalsfinally drafted by the United King-dom, the United States, France andCanada.

Similarly, in the United NationsGeneral Assembly at the end of 1957there was a remarkable similarityof view between Britain and America.on all important issues, and therewas the fullest consultation andliaison between members of the twodelegations. At the N.A.T.O. Sum-mit meeting in Paris in December,1957, both Mr. Macmillan and Presi-dent Eisenhower showed a hearten-ing identity of view and purpose.

In fact, I believe that it can besaid that the state of the world hascreated a common realisation in boththe United Kingdom and UnitedStates that each is indispensable tothe other. This has been reflectedin 1957 by numerous examples toco-operation and of evidence of afundamental ability to work together.

Each of these two great demo-cratic partners has a great deal tocontribute to the survival of thedemocratic world. The interests ofthe British Commonwealth areworld-wide, although the materialstrength of Great Britain has beensapped by their efforts in two worldwars. The emergence of the UnitedStates as the greatest single demo-cratic world power has been rapidand dramatic. Their vast and con-tinuous contributions towards therevival and support of all threateneddemocratic countries have saved adozen countries from being absorbedin the Communist fold. The scaleand scope of American aid to thedemocratic world is without prece-dent in the world's history.

European Economic Community

ON 1st January, 1958, the in-auguration of the European

Economic Community marked thelatest stage in the development of amore closely integrated Europe.The six countries which constitutethe Community are—France, Italy,Western Germany, Holland, Belgiumand Luxembourg. In recent yearsthese six countries have representedthe most rapidly expanding majormarket in the world. When theEuropean Economic Community isfully implemented, these six coun-tries will form a large economic unit,working to a common policy whichpromises to lead to an expansion ofproduction, a growth of trade be-tween the member countries, andincreased living standards for the225 million people of the area.

With this greater economic inte-gration it is hoped there will alsocome greater political stability andgreater resistance to Communist in-filtration.

Discussions have also been goingon for some time for the establish-ment in Europe of a free trade areato include all the Common Marketcountries and the other countries be-longing to the O.E.E.C. (Organisa-tion for European Economic Co-operation).

Australia's interest in this pro-posed free trade area lies primarilyin the problem of finding some meansby which the United Kingdom mayassociate itself with the current de-velopments in Europe and at thesame time maintain her close econo-mic ties with her Commonwealthpartners.

The Australian Government willfollow closely these new develop-ments in Europe to ensure that Aus-tralia's interests are protected.

Middle East

THE announcement on 1st Febru-ary, 1958, by President Nasser

of Egypt and President Kuwatly ofSyria, proclaiming the union of theirtwo countries is the most recentevent of great interest in the MiddleEast.

Just prior to the proclamation ofthe Egyptian-Syrian union there wasa meeting of the Ministerial Councilof the Baghdad Pact in Ankara.The Pact countries—Iraq, Turkey,Iran, Pakistan and the United King-dom, supported by the United States,are united in their determination toresist the various pressures, whichinternational Communism is at pre-sent exerting in the Middle East.

Examples of this Communist driveare numerous. The Soviet loans, thesupply of Communist arms to Egyptand to Syria, the attempts by theSoviet Union to create at the UnitedNations a crisis in Turco-Syrian re-lations, and the constant bombard-ment of Russian radio propaganda

The External Picture (Continued)

directed at the Middle East. Com-munist China has also entered thefield with a loan of 75 million Swissfrancs to Yemen. This small coun-try which has a border dispute withthe Aden Protectorates, is reportedto be thinking of joining the Egypt-Syria union.

Relations between Israel and herArab neighbours remain strained. Aslong as the Arab-Israel hostility isunresolved, it represents a source ofdanger to the area, by providingRussia with the facile cry that Israelis the tool of Western Imperialism,which tends to be music in manyArab ears.

In short, the Middle East remainsa scene of some confusion, to whichat present there is no sign of an over-all solution.

South-East AsiaIN South-East Asia the situation has

both encouraging and disturbingaspects. During the past twelvemonths most, but not all, of thecountries of the area have continuedtheir progress towards political andeconomic stability.

1957 has seen the emergence ofthe independent Federation ofMalaya and the conclusion of a con-stitutional agreement between Singa-pore and the United Kingdom. Onthe other hand, 1957 has seen theadmission of Communists into theGovernment of Laos, the currentpolitical and economic crisis in In-donesia and by the .continued effortsof international Communism to in-crease its influence over the coun-tries of South-East Asia.

In Burma and in Malaya, the Com-munist parties are striving to securerecognition as legal political parties.In Indonesia the Communists havehad considerable success in increas-ing their political influence through

parliamentary means (notably inthe Java municipal elections) andhave exploited the current Indone-sian crisis by professing to be thechampions of extreme nationalistaspirations.

Selective economic aid by the Com-munist countries to the countries ofSouth-East Asia has been based ontheir efforts to establish the propo-sition that "neutralism" pays.

One of the most significant recentdevelopments in South-East Asia wasthe agreement reached in November,1957, between the Royal LaotianGovernment and the Communistdominated Pathet Lao for the re-unification of the country. The twonorthern provinces of Laos, whichhad been largely under the controlof the Communist dominated PathetLao since the Geneva Agreement of1954, were to be returned to thejurisdiction of the Government ofLaos and the Pathet Lao fightingunits were to be integrated in theNational Army of Laos. In returnthe Pathet Lao were given two port-folios in the new Government ofNational Union. Laos thus becomesthe first country in South-East Asiato accept Communists in its Govern-ment. While we can sympathisewith the desire of the people of Laosto re-unite their country, it will bea tragedy for them and the rest ofthe area if, in their eagerness toachieve reunification, they haveaccepted a settlement which affordsthe Communists the opportunity tobring the country into the orbit ofCommunist domination.

While the Malayan. Governmenthas embarked on a constructive pro-gramme to consolidate the Federa-tion's still young independence, ithas still the major problem of meet-ing its promise to the people to endthe Communist terrorist menacewithin the 12 months following in-

dependence. Its policy of extendingamnesty terms to the Communistterrorists until the end of April,1958, has been followed by a hearten-ing number of surrenders in thecountry regions. In the face ofovertures by the Communists for acompromise settlement and for re-cognition as a legal political party,the Prime Minister (Tungku AbdulRahman) has declared his firm in-tention of refusing anything lessthan unconditional surrender.

By agreement, initialled betweenSingapore and the United Kingdomin April, 1957, Singapore will obtaininternal self-government with theintroduction of a new Constitutionlate in 1958 or early 1959. Interestwill be focused on Singapore during1958 when the stability of the pres-ent Government (a coalition of theLabour Front, the Alliance and theMalayan Union) may be .challengedby the opposition group, the People'sAction Party, which recently secureda majority in the Singapore CityCouncil elections.

The bloodless Army coup in Thai-land in September did not change thebasic nature of Thai politics. Thegeneral elections held in December,1957, returned an Assembly similarin composition to its predecessor,and a new Government has recentlybeen instituted under GeneralThanom, whose policy is to continueThailand's alignment with the Westand membership of S.E.A.T.O.

The greatest threat to the stabilityof South-East Asia in recent timeshas flowed from the events in In-donesia. Following its failure to getUnited Nations' endorsement of itsclaim for sovereignty over DutchNew Guinea, the Indonesian Govern-ment embarked on a campaignagainst Netherlands nationals andinterests in Indonesia.

This has contributed to a break-down of inter-island communications,a curtailment of exports, productionand of foreign exchange earnings ;some pressure on essential food sup-plies and, in fact, a further aggrava-tion of Indonesia's already substan-tial economic difficulties. This newdeterioration in political and econo-mic conditions provided fresh impe-tus to diffident leaders in Sumatraand the Celebes to put heavy pres-sure upon the central governmentfor political and economic reforms.They demanded in effect the limita-tion of Communist influence andsome decentralisation for the outerislands, in administration of econo-mic affairs. When they did notsecure satisfaction, the dissidentsproclaimed in February, on CentralSumatra, a rival "Government ofIndonesia." Since then, there hasbeen some fighting between adher-ents of the two regimes.

This disorder and actual hostili-ties are an obvious cause of concernto Australia. It is our desire to seea suitable and democratic govern-ment in this country which is near-est to us, and we could be adverselyaffected by the emergence ofstronger Communist influence or bycontinued disorder there.

East Asia

TWO of the most important coun-tries in the Pacific region of

which Australia must take dueaccount are Japan and China.

With its admission to the UnitedNations in 1956 and election to anon-permanent seat on the SecurityCouncil from 1st January, 1957,Japan has become again a fullmember of the international com-munity. Moreover, as a democraticconstitutional monarchy it is com-mitted to the free world position.Australia has tried to follow a sym-

The External Picture (Continued

pathetic and co-operative policy to-wards Japan in the interests of help-ing it both as a free world partnerand as a Pacific neighbour. Therehave been increased comings andgoings between Australia and Japanon government and other levels, theconclusion of the Australia-JapanTrade Treaty, and the settlement ofmost outstanding issues between us.There is much mutual advantage inthis improved association.

Unfortunately, China is anothermatter. Under its Communistmasters, mainland China is com-mitted to the cause of internationalCommunism, the antithesis of whatAustralia and the free world standfor. We have watched for a moreliberal approach, internally and ex-ternally by China, but have seennothing encouraging.

We see the position of Formosaand the Nationalist Government asa reflection of the state of affairs inChina. There is no moral or prac-tical argument for abandoningChiang Kai-Shek's government andthe ten million inhabitants of For-mosa to the Communists. Althoughthere has been a lack of serious hos-tilities in the Formosan area for sometime, it is well to remember that theproblems there are unsolved, the ten-sions still acute, and the ChineseCommunists still committed to theiraggressive designs.

Conclusion

WE are at a stage of world his-tory where the Communist

bloc appears to have a number ofadvantages over the Free World.Although we know what tensions arebuilt up in the satellite countries bythis tight control from Moscow, andwe have an example in Hungary ofhow an oppressed people can riskall in an attempt to shake off thisforeign control, we cannot ignore thegeneral effectiveness of this tightcentral control of the Communist

world and the implications it has forthe democratic world which isthreatened by it. Communist policyis set by a relatively small group ofmen whose decisions govern a com-pletely conformist world-wide ap-paratus equipped to explain andjustify the "line" adopted by Moscowand Peking. In the democracies, de-cisions are arrived at by a processof consultation, with Governmentsresponsible to legislatures and publicopinion.IT is clearly necessary for us all at this time to examine where we

stand. It is not enough for the coun-tries in N.A.T.O. to confine theirthinking to the frontiers of freeEurope, nor is it enough for themembers of S.E.A.T.O. to look onlyat the southern border of China orfor the members of the BaghdadPact to show anxiety only about whatthe Communists do or threaten to doin the Middle East. There is acommon identity of interest by themembers of N.A.T.O., S.E.A.T.O.and the Baghdad Pact, and theremust be a global sense of respon-sibility. As we achieve that, con-fidence will increase among thenations outside the Communists'orbit.

Tyranny maintains an apparentlymonolithic front until it suddenlycrumbles. The world has had manyexamples of this. A living organismcannot remain static for long andwe believe that history has proveddemocracy to be more adaptable tochanging conditions than any otherpolitical system. It is Communisttyranny more than democracy, whichcontains within itself the seeds of itsown undoing. We must maintainour courage and our unity and acommon resistance to the Communistmenace in its many forms. If wedo this, I believe that a vastly morehopeful and constructive futureawaits mankind than now appears insight.

the institute of public affairs : victoria january …

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