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Vernon Six Years After
Economic Analysis and Policy
19
Vol. 02 No. 02, September 1971
VERNON SIX YEARS AFTER* It is still instructive to read the Vernon Reporl. 1 Perhaps it is even more instru..:tive tu read the commentaries on it: there have been few such opportunities in Australia to see econonllsls reacting tu a compre~ hCllsive but fairly clearly defined set of practical issues. Shortly after its publication ill 1965 the Report was discussed in a special Ilumber of The Ecollomic Record. 2 Other valuable discussions hilVC been published by the University of Adelaide,3 by H.W. Arndt. 4 and by \Y.M. Corden. 5 Among these commentaries H.F. Lydall, in his article 011 "The Economy as a Whole: Policies for Growth" in the Vernon issue of the Record, was nut ably criticill of the Report, while Arndt on the whole defended it. III this brief note I should like to make three points in its raVOl! r.
First, and most il11purtilllt, by 1971 the main practical signiricallcc of the Report appears to be its contributiun to the reform of the Australiall {ari ff and the rdore to the more econOll1 ic use 0 r resou rces in llHIl1U fnc tu ring industry. As is well-knowll, the refurm of the tariff has been advocated by the Tariff Board on the basis of its "points of reference" system which involves great reluctance to recommend rates of protection over 50 per ccnt. 6 11le Tariff Board's propusals, which have been strongly opposed by representatives of manufacluring industry. derive from the Vernon Report. And a re-reading of the Vernon Report shows that what is involved is not simply II matter of technical suggestions being applied to a different end by a body with a different ideology: the Committee's ideology appcars to be the BOiHd's. 111at this should be so lllay be regarded as ironit:, in view of the political origins of the Committee, and a lesson in 110t prejudging the work and effects of a body on the basis of "Can there illlY good thing come oul of Nazareth?" (This kind of prcjudgemcill explains why Sir Robcrt Menzies idlowed himself to be persuilded, and 10 assert, that the Commitlee advocaled the bending of the economy towards rmll'luf"acturing ill order lil increase productivity growth.) 111C sClling'up of the Committee was a viclury for the Minister and Departmellt of Trade and Industry. Sir James Vernon could perhaps I.
Commonwcalth of Auslrilli.. , Re/JON oj" 'lie COlllllli, tee of 1;·CQIlOlllic HI/quiry. 1965,
2.
Vo1.42.
J.
E"/(!I'elltll
4.
A Smol/. Nidl/lUlI/stria/ COIIIIII:I'. McJbourm.' 1968. pp.I02·IIM.
5.
Allslrofhlll I:'cOJl(J/IIic /'OIiCl'
6.
In "clTcclivl'" 'Crtll'.
'.
0.97, March t966.
SlIlIIlIIer Schoo/ of IJIISill('ss IIdmillistratio/l 1%6. Report, A dclilidt' J 967.
;1'
f)i\·(·IH~ioll.
77/{' Vemoll
A Surrey. MdllOllrtlC 196M. pr 53-56.
c\.l'l;lltlcd uclo\\".
I am gr;l,cfuJ to Ur. ILT:llurll'y. Ur. W.M. ("OHlen ;111(1 Dr. II.D. Evans dis..:u~sion
of lhi.~ paper.
fIJr
Economic Analysis and Policy
20
Vol. 02 No. 02, September 1971
be described as Ihe leading intcllcl.:tual of the manufacturing lobby. He had, for instance, defended manufacture at the Australian Institute of Political Science Summer St.:hool in January 195:2, a time when the polky of promoting it was under heavy attack. 7 And at another Summer School a year before the Committee was sci up, Vernon :lskcd a question which was meant to be rhetorical but which orthodox cl.:ol1omists would be eager to answer: (Arndt) suggests that we should be discriminatory in our selection of secondary industries and should encourage those with substantial comparative advantage ... 111cse arc unexceptionable sentimcnts wilh which I absolutely agree. The only problem abol! I them is thcir appalling difrit.:lllty ... I-Iow docs one allempt to attach re[;ltive degrees of desirability to steel manufacture, aluminium manufacture, television sets, washing machincs, l.:opper sheeting and all the rest?8 On lhe assumption thai this is a second-best world in whkh frec trade with exchange-rate adjustmcnt is excluded, the orthodox answer tu the qucstion, which in 1962 Vernon so obviously regarded as unanswerablc, involves leaving steel manufacture "and all the rest" to fight it out behind a uniform (miff. Though, as they put it, ..... far from rushing tu Ihe conclusion that a uniform tariff is desirable",9 in 1965 lhe COlllmittec undcr Vernon's chairmanship suggested a policy whose object was to increase the uniformity uf thc tariff. They suggested a "benchmark" of abollt 30 per I.:ellt up to which protection should be granted wilhoUlllluch di fficult y, wh ile spe\: ial jus ti fictll ion would bc nccded for rates sign ific'lIl tl y higher.
The 30 per celli was ill nominal terms, that is expressed in relatioll to gross value of ou tpUI, bu t the Committee were aware of, and expounded, the idea of protectiun expressed in relation to value added, that is the effe1.'tive rale of protection. 111is idea is essential to the pursuit of greater uniformity in a third-best world where complete uniformity is excluded, perhaps through f~ar of the innationary cffects of raising tariffs on inputs. For while greater uniformity of nominal rates lllay bring the price signals rCl.:cived by consumers nearer to the free-trade pallcrn, it will further distort the signals to producers if it means greater incquality of cffective rates; in olhcr words while 1l0Illil1 ..i1 rales may be a good guide 10 the consuillption costs of the tariff they Illay be a b:ld guide 10 the prOclUl.:lioll costs, and conversely for effective rates.
7.
"Trends in $cl:ondllry Production" in R. r. Iiolder c'( al. Allstra!io/l Productioll
a/ '''e CrQssruads. Sydney 1952. pp.6G-89. 8.
i\u~lr:llian Institute or Politil,:
9.
Op.dl.. p.375.
Economic Analysis and Policy
21
Vol. 02 No. 02, September 1971
H.G. Grubel and H.G. Johnson have said: UTIle Australian Government's Report of thc Commillce of Economic Enquiry (Vernon Report) is the first official report in any cOllntry Lo make use of thc concept of effective protectiotl in a systematic form and to present cmpirical estimates for some industries."lO Corden, in his article in the Vern un issue of the Record, summcd up the COlllmittee's position as "firmly protectionist and yet moderate when compared with government policy or the views of mosl Aust· But besides being specially aware of the significance of ralians."ll uniformity ill tariffs Corden was also llware of how high many available tariffs werc; he said that his intuition suggested that the uiliform tariff equivalent in nominal rate terms (and completely uniform ;lpparent rate terms) might be of the order of 30-40 per cellt. l2 Probably many official and unofficial readers of the Report, knowing its political background, regarded its discussion of protection as essentially all altempt to justify more protection of manufacturing industry. In his article in the special issue of the Record, W.B. Reddaway. while appreCiating " ... the effort which the Committee have made to suggest ways of lessening various evil features of the tariff' spoke of the Committee as showing cnergy and ingenuity in ..... defending the need to permit tariffs of any height on the basis of the Tariff lloard's judgmcnt (which will inevitably consider mainly the interests of the affected partics)".l3 But in fact the benchmark was the precursor of the points of reference. to which manufacturing interests take so much exception. And though of course a great deal would depend on how rcady lhe recommending authority would be to go up to the level in qucstiol1, 30 per cent nominal is probably a much more stringent criterion than SO per cent effective. Perhaps therefore the most curiolls irony in recent !\ustralian tariff history is that Mr. McEwen, whcn as Minister for Tradc and Industry he was responsible for the Tariff Bm.rd and probably the Minister most strongly opposed to its proposals, should havc seCIl fit to nttnck the Board by contrasting it with the Vernon Committcc. (When doing so Mr. McEwen said that: "In selecting members for thc Board the Govern· ment has never looked for great emincncc in economics or in other fields", while the ..... Committee had members of great eminence ... ")14 to.
"Nominal Tariffs, Indirect Taxes and EITcctive Rates of Protection: The Market COIlTltries 1959". ECOl/omic JOI./TJlal. Vol. 77, No.30R. Dcccllll>cr 1967, p.76 I. "Protcction",IQI.:.cil.. p.129 Ibid.. p.147. "An English Economist's Vicw", ibid.. p.25. Commonwealth l'arUall/ClIlm)! Delmles O"lallsard), House of Rcpn:scnlalives, No.23, Novcmber 28, 1968. Jlp.340S·6. COllllllOIi
11. 12. 13.
14.
Economic Analysis and Policy
22
Vol. 02 No. 02, September 1971
Re~ent
lllvestigatiolls by the Tariff Board have suggested lhat ill 1967-8 the average rate of effective protedioll availablc to manufacturing industry as a whole was 46 per ccnLl5 This might suggcst that 50 pCI' CCllt effective was a fairly stringent criterion, and 30 pcr ccnt nominal an illlpracti~ably stringent criterion. But, as the VCI'llOll Report says (para.
13.19): "It is open to question whether a mcasurc of thc avcrage tariff level, howcver carefully calculated, has any dircct significance. Particular ratcs at a givcn timc Illay or may not be fully needed and used by particular produccrs." 111C assumption of profit maximiz:uion, together with pessimism about the degree of actual and potential internal competition (and by implication about thc elasticity of demand curves) would probably lead many academic economists to disregard this qualification. But F.H. Grucn and H.D. Evans have made an estimate of the amount of "W,lter ill the tariff'oll manufactures, that is how far Ih(' protection available excccds the protection used. (In other words, how far landed-duty-free value added plus available effective protection exceeds actual domcstic value added.) They conclude that the amount of water « ... is probably very substantial - at most it averagcs out at 46 minlls 18 or 28 pcr cen!. "16 Il is a reasonable assulllption, or a reasonable basis for decision, that an industry granted a new and highcr rate of protection after a Tariff l30ard enquiry will in fact use it and not leave Illuch of it as water. Thus Ihe proper opporlunity-cost criterion for an upper limit to such 3 new ratc is the average ratc used by manufacturing industry rather than the averagc rate available. In thc light of the estjmale by Gruen and Evans, therefore, the Vernon Committee's 30 per cent nomimll does not look at
So if one wished to question the value of the tariff discussion in the Vernon Report one might, while admilling the Report's connection with the Tariff Board's proposals, question whether these proposals arc anything like suffiCiently radical. But to press home such a critkism it would be neccssary to specify what thc Board and thc Government wtluld have done about tariffs if the Vernon Report had nol been writtcn or had beell different. And this is a Ulsk from which it would be fuolish nut to recoil. My second point relates to one of LydaJrs crillclSmS of the Committee's projection of G.N.P.: that lhe COlllmittee should have had a fuller discllssion of technical progress.
t 5.
Commonwealth of Australia, Tariff Boord Report: AIIIII/al Report for J'('or 1969- 70, Canberra t 970, p.6.
16.
"Tariff Policies and the T;lriff Board", Australia" 2nd Quaner 197t, p.40.
/:"('OIlO/1/;C
RC-11;('1I'. No.N
23
Economic Analysis and Policy
Vol. 02 No. 02, September 1971
As Lydall pointed OUI,17 in using their prujet.:tiolls the Committee resorted to a form of trying to have it both ways which is not unfamiliar 011 cOl1lmillees but whkh shows it l
1'1.
"The Economy asa Whole: Policies for Growth",loc.cil.. pp.152-5.
18.
Ibid., p.155.
19.
TI,e Ecollomic Jot/mal. Vol. LXXIII, No.312. December 1968,1'1'.807-826.
20.
Ihid., p.812.
21.
Ihid., 1'.816. I h:ld origilwlty added that Lydall's work :llso depends 011 of Olltput by industry which in 40 out of 54 cases C:1Il be compared with altcmativc (Orficilll) indices, and that he gives the eonclation coefficient of grolVth r;lles for the 40 industries as only 0.78. (Ibid.. p.814). l3ul Dr. Burley ha~ pointed out tu Ill": that this is probably a misprint for 0.98. illdicc.~
Economic Analysis and Policy
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Vol. 02 No. 02, September 1971
"Produl:tivily Change in Australia: An Overall View."22 They range from -1.0% 10 5.3%. (It is no consolation that some of these differences are due [0 differences in assumptions, since we do not know how to relate the assumptions to the mallers the Vernon Committee would have been trying to discuss.) Powell is forced 10 end his article with .. roar of Towardsism and the Need for More Money for Research. The Vernon Committee had presumably to face Ihe economic question whether some or ils resources should be devoted to research un technical progress. 111e 1I1lsalisfJctoriness of the results reported by Powell lllay be taken to emphasize how much such research is indeed needed and therefore how wrong was the answer pres lim ably given by the Committee. But another interpretation is possible! My third point also relates to a criticism by Lydall. It is a criticism which seems worth answering bccausc it raiscs methodological issues about the role of economic policy discllssion by such a body as lhc Vernon Committee. who were not simply writing a textbook prescinding from politics. Lydall says: "Let us consider their celltral proposition that long-teflll growth may require additional taxation to proVide the necessary volume of saVing. If we accept this proposition, whcn 'do we begin? Clearly we cannot start incrcasing laxation at a time of unemployment, since this would connict with our full cmployment objective which they
regard as 'an overriding responsibility' (17.18);
and
anyway, there is no sense in increasing saving at a time when investment is insufficient to absorb all the saVing that would be generated at full employment. So we must wait ulltil the economy is at its ceiling, or at least approaching its ceiling. But if we raise taxes at this poinl, are we doing anything that we should not be doing anywlly? It is difficult to see how their prescription for growth adds anything, in practice, to thc policy which we are already pursuing, namely to maintain as near full employmcnt as possible without excessive strain in prices or Ihe balance of payments. Does their conclusion amount to more than a warning that, if the investmcnt ratio riscs to a level consistenl with a 5 per cent growth rate, the economy will experience even more inflationary pressure than in the past, so that fiscal restraints will need to be even firmer? This may indeed be true; but it scarcely amounts to a programme for ensuring a faster rate of growth."23 It is all obvious contradiction that whereas until the last two sentences Lydall confronts us with an Eleatic impossibility of changing our
22.
I::COI/OIII IC Papers, No.3!, Ju nc- Deeem bcr 1969, p.26.
23.
O'l.cil.. pp.162-163.
25
Economic Analysis and Policy
Vol. 02 No. 02, September 1971
policies, in the last two senlences he agrees thaI liseal polil.:Y will need 10 be (and presumably will be able to be) "cven firmer". 11 would also be dirficult to justify the assertion (or il1lplidt asscnion) Ihat additional taxation is the COlllmittce's "Central proposilion". In paragraphs N.60 to N.63 cven the more general idea of greater s:lving only appears as one of three llle:lsures. The COlllmittee had not suggested thaI incre:lsed fiscal rest ra int s mllollllled "loa programme for ellSll ri ng :l fasler ra leo f growlh". (In facl the best feature of the Vernun Repurt is ils non-features; all the dreadful suggestions it might have made but didn't.) TIle answer to the Eleatil: dirficulty is surely that the point where the econumy is :It or approaching its L'eiling is not unique; with a higher investment ratio (howcver sccured) it will be a point with lower consumption t!lall \l'ould utl/e/wl:n' be I!le ("(fSf!. But this lcads LIS In consider the (OlllllliIlCC'S projeclion of persunal consulllption: lower cunsumption than would be thc L'asc but for Ihc higher investmcnl ralio lIlay slill bc quite a high levcl ur L'Ullsumptillll by past expericnce if it is based on a ,,:ullsumplillll prujet.:tioll which in ilsclf is over-generolls. III projCl.:tillg national expenditure the Committee did in fa!,;t make o..:rudc iUld extrcillc assulIlptiollS aboul the growth uf person
24.
O[J.cit., pp.IS6-7. In the second l'omplete Ililr.lgr.lph on p.IS7 therc seem .. to Ix: a misprint: "rcal incomc" appe,ns Whl'rlo' "real consumption" mu .. t lx' mC'IIlt. TIle mi..print ~{.'CIlIS to havc Illi"kd I\mdt (op ...:it. 1).117) in hi.. dcfence of thc Rcport. LW. Nc\'ile (Unillcr..i1y or i\dclOlide, up.cit.. p.ll) critkil.cd the COlllmittcc for e"timating " ... con:.t1Ill/>tiOIl on thc bilSis of tfl~nds in rCitt l'onstl1l1ptioll per hC:ld without allY re crcnc.;c to thc level uf incomc. I itl11 cnoll~h of :I Keyncsian to find this distluieting". This criticislll seem." unjll.~tlficd: the ('ol11l1lillcc said ill paragraph N.12 th;!t .~incc (;.N.P. per persoll cmployed lwd also beell projccted in itecordalll:C With past trends ..... the pcrsoll:ll COIl."UllIptioll expcllditure projectiolls are bro;ldly consistent with Ihc growth in incomcs implied in the projection of G.N.P'"
26
Economic Analysis and Policy
Vol. 02 No. 02, September 1971
advice and - in principle - to influence events, for example towards apolitical Kcyncsianism. Academic economists may not wish to engage in this activity, especially in view of the treatment given to the Vernon
Report, but they should surely avoid implying that there can be no scope for it.
La Trobc University
F .G. Davidson
19
Vol. 02 No. 02, September 1971
VERNON SIX YEARS AFTER* It is still instructive to read the Vernon Reporl. 1 Perhaps it is even more instru..:tive tu read the commentaries on it: there have been few such opportunities in Australia to see econonllsls reacting tu a compre~ hCllsive but fairly clearly defined set of practical issues. Shortly after its publication ill 1965 the Report was discussed in a special Ilumber of The Ecollomic Record. 2 Other valuable discussions hilVC been published by the University of Adelaide,3 by H.W. Arndt. 4 and by \Y.M. Corden. 5 Among these commentaries H.F. Lydall, in his article 011 "The Economy as a Whole: Policies for Growth" in the Vernon issue of the Record, was nut ably criticill of the Report, while Arndt on the whole defended it. III this brief note I should like to make three points in its raVOl! r.
First, and most il11purtilllt, by 1971 the main practical signiricallcc of the Report appears to be its contributiun to the reform of the Australiall {ari ff and the rdore to the more econOll1 ic use 0 r resou rces in llHIl1U fnc tu ring industry. As is well-knowll, the refurm of the tariff has been advocated by the Tariff Board on the basis of its "points of reference" system which involves great reluctance to recommend rates of protection over 50 per ccnt. 6 11le Tariff Board's propusals, which have been strongly opposed by representatives of manufacluring industry. derive from the Vernon Report. And a re-reading of the Vernon Report shows that what is involved is not simply II matter of technical suggestions being applied to a different end by a body with a different ideology: the Committee's ideology appcars to be the BOiHd's. 111at this should be so lllay be regarded as ironit:, in view of the political origins of the Committee, and a lesson in 110t prejudging the work and effects of a body on the basis of "Can there illlY good thing come oul of Nazareth?" (This kind of prcjudgemcill explains why Sir Robcrt Menzies idlowed himself to be persuilded, and 10 assert, that the Commitlee advocaled the bending of the economy towards rmll'luf"acturing ill order lil increase productivity growth.) 111C sClling'up of the Committee was a viclury for the Minister and Departmellt of Trade and Industry. Sir James Vernon could perhaps I.
Commonwcalth of Auslrilli.. , Re/JON oj" 'lie COlllllli, tee of 1;·CQIlOlllic HI/quiry. 1965,
2.
Vo1.42.
J.
E"/(!I'elltll
4.
A Smol/. Nidl/lUlI/stria/ COIIIIII:I'. McJbourm.' 1968. pp.I02·IIM.
5.
Allslrofhlll I:'cOJl(J/IIic /'OIiCl'
6.
In "clTcclivl'" 'Crtll'.
'.
0.97, March t966.
SlIlIIlIIer Schoo/ of IJIISill('ss IIdmillistratio/l 1%6. Report, A dclilidt' J 967.
;1'
f)i\·(·IH~ioll.
77/{' Vemoll
A Surrey. MdllOllrtlC 196M. pr 53-56.
c\.l'l;lltlcd uclo\\".
I am gr;l,cfuJ to Ur. ILT:llurll'y. Ur. W.M. ("OHlen ;111(1 Dr. II.D. Evans dis..:u~sion
of lhi.~ paper.
fIJr
Economic Analysis and Policy
20
Vol. 02 No. 02, September 1971
be described as Ihe leading intcllcl.:tual of the manufacturing lobby. He had, for instance, defended manufacture at the Australian Institute of Political Science Summer St.:hool in January 195:2, a time when the polky of promoting it was under heavy attack. 7 And at another Summer School a year before the Committee was sci up, Vernon :lskcd a question which was meant to be rhetorical but which orthodox cl.:ol1omists would be eager to answer: (Arndt) suggests that we should be discriminatory in our selection of secondary industries and should encourage those with substantial comparative advantage ... 111cse arc unexceptionable sentimcnts wilh which I absolutely agree. The only problem abol! I them is thcir appalling difrit.:lllty ... I-Iow docs one allempt to attach re[;ltive degrees of desirability to steel manufacture, aluminium manufacture, television sets, washing machincs, l.:opper sheeting and all the rest?8 On lhe assumption thai this is a second-best world in whkh frec trade with exchange-rate adjustmcnt is excluded, the orthodox answer tu the qucstion, which in 1962 Vernon so obviously regarded as unanswerablc, involves leaving steel manufacture "and all the rest" to fight it out behind a uniform (miff. Though, as they put it, ..... far from rushing tu Ihe conclusion that a uniform tariff is desirable",9 in 1965 lhe COlllmittec undcr Vernon's chairmanship suggested a policy whose object was to increase the uniformity uf thc tariff. They suggested a "benchmark" of abollt 30 per I.:ellt up to which protection should be granted wilhoUlllluch di fficult y, wh ile spe\: ial jus ti fictll ion would bc nccded for rates sign ific'lIl tl y higher.
The 30 per celli was ill nominal terms, that is expressed in relatioll to gross value of ou tpUI, bu t the Committee were aware of, and expounded, the idea of protectiun expressed in relation to value added, that is the effe1.'tive rale of protection. 111is idea is essential to the pursuit of greater uniformity in a third-best world where complete uniformity is excluded, perhaps through f~ar of the innationary cffects of raising tariffs on inputs. For while greater uniformity of nominal rates lllay bring the price signals rCl.:cived by consumers nearer to the free-trade pallcrn, it will further distort the signals to producers if it means greater incquality of cffective rates; in olhcr words while 1l0Illil1 ..i1 rales may be a good guide 10 the consuillption costs of the tariff they Illay be a b:ld guide 10 the prOclUl.:lioll costs, and conversely for effective rates.
7.
"Trends in $cl:ondllry Production" in R. r. Iiolder c'( al. Allstra!io/l Productioll
a/ '''e CrQssruads. Sydney 1952. pp.6G-89. 8.
i\u~lr:llian Institute or Politil,:
9.
Op.dl.. p.375.
Economic Analysis and Policy
21
Vol. 02 No. 02, September 1971
H.G. Grubel and H.G. Johnson have said: UTIle Australian Government's Report of thc Commillce of Economic Enquiry (Vernon Report) is the first official report in any cOllntry Lo make use of thc concept of effective protectiotl in a systematic form and to present cmpirical estimates for some industries."lO Corden, in his article in the Vern un issue of the Record, summcd up the COlllmittee's position as "firmly protectionist and yet moderate when compared with government policy or the views of mosl Aust· But besides being specially aware of the significance of ralians."ll uniformity ill tariffs Corden was also llware of how high many available tariffs werc; he said that his intuition suggested that the uiliform tariff equivalent in nominal rate terms (and completely uniform ;lpparent rate terms) might be of the order of 30-40 per cellt. l2 Probably many official and unofficial readers of the Report, knowing its political background, regarded its discussion of protection as essentially all altempt to justify more protection of manufacturing industry. In his article in the special issue of the Record, W.B. Reddaway. while appreCiating " ... the effort which the Committee have made to suggest ways of lessening various evil features of the tariff' spoke of the Committee as showing cnergy and ingenuity in ..... defending the need to permit tariffs of any height on the basis of the Tariff lloard's judgmcnt (which will inevitably consider mainly the interests of the affected partics)".l3 But in fact the benchmark was the precursor of the points of reference. to which manufacturing interests take so much exception. And though of course a great deal would depend on how rcady lhe recommending authority would be to go up to the level in qucstiol1, 30 per cent nominal is probably a much more stringent criterion than SO per cent effective. Perhaps therefore the most curiolls irony in recent !\ustralian tariff history is that Mr. McEwen, whcn as Minister for Tradc and Industry he was responsible for the Tariff Bm.rd and probably the Minister most strongly opposed to its proposals, should havc seCIl fit to nttnck the Board by contrasting it with the Vernon Committcc. (When doing so Mr. McEwen said that: "In selecting members for thc Board the Govern· ment has never looked for great emincncc in economics or in other fields", while the ..... Committee had members of great eminence ... ")14 to.
"Nominal Tariffs, Indirect Taxes and EITcctive Rates of Protection: The Market COIlTltries 1959". ECOl/omic JOI./TJlal. Vol. 77, No.30R. Dcccllll>cr 1967, p.76 I. "Protcction",IQI.:.cil.. p.129 Ibid.. p.147. "An English Economist's Vicw", ibid.. p.25. Commonwealth l'arUall/ClIlm)! Delmles O"lallsard), House of Rcpn:scnlalives, No.23, Novcmber 28, 1968. Jlp.340S·6. COllllllOIi
11. 12. 13.
14.
Economic Analysis and Policy
22
Vol. 02 No. 02, September 1971
Re~ent
lllvestigatiolls by the Tariff Board have suggested lhat ill 1967-8 the average rate of effective protedioll availablc to manufacturing industry as a whole was 46 per ccnLl5 This might suggcst that 50 pCI' CCllt effective was a fairly stringent criterion, and 30 pcr ccnt nominal an illlpracti~ably stringent criterion. But, as the VCI'llOll Report says (para.
13.19): "It is open to question whether a mcasurc of thc avcrage tariff level, howcver carefully calculated, has any dircct significance. Particular ratcs at a givcn timc Illay or may not be fully needed and used by particular produccrs." 111C assumption of profit maximiz:uion, together with pessimism about the degree of actual and potential internal competition (and by implication about thc elasticity of demand curves) would probably lead many academic economists to disregard this qualification. But F.H. Grucn and H.D. Evans have made an estimate of the amount of "W,lter ill the tariff'oll manufactures, that is how far Ih(' protection available excccds the protection used. (In other words, how far landed-duty-free value added plus available effective protection exceeds actual domcstic value added.) They conclude that the amount of water « ... is probably very substantial - at most it averagcs out at 46 minlls 18 or 28 pcr cen!. "16 Il is a reasonable assulllption, or a reasonable basis for decision, that an industry granted a new and highcr rate of protection after a Tariff l30ard enquiry will in fact use it and not leave Illuch of it as water. Thus Ihe proper opporlunity-cost criterion for an upper limit to such 3 new ratc is the average ratc used by manufacturing industry rather than the averagc rate available. In thc light of the estjmale by Gruen and Evans, therefore, the Vernon Committee's 30 per cent nomimll does not look at
So if one wished to question the value of the tariff discussion in the Vernon Report one might, while admilling the Report's connection with the Tariff Board's proposals, question whether these proposals arc anything like suffiCiently radical. But to press home such a critkism it would be neccssary to specify what thc Board and thc Government wtluld have done about tariffs if the Vernon Report had nol been writtcn or had beell different. And this is a Ulsk from which it would be fuolish nut to recoil. My second point relates to one of LydaJrs crillclSmS of the Committee's projection of G.N.P.: that lhe COlllmittee should have had a fuller discllssion of technical progress.
t 5.
Commonwealth of Australia, Tariff Boord Report: AIIIII/al Report for J'('or 1969- 70, Canberra t 970, p.6.
16.
"Tariff Policies and the T;lriff Board", Australia" 2nd Quaner 197t, p.40.
/:"('OIlO/1/;C
RC-11;('1I'. No.N
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Vol. 02 No. 02, September 1971
As Lydall pointed OUI,17 in using their prujet.:tiolls the Committee resorted to a form of trying to have it both ways which is not unfamiliar 011 cOl1lmillees but whkh shows it l
1'1.
"The Economy asa Whole: Policies for Growth",loc.cil.. pp.152-5.
18.
Ibid., p.155.
19.
TI,e Ecollomic Jot/mal. Vol. LXXIII, No.312. December 1968,1'1'.807-826.
20.
Ihid., p.812.
21.
Ihid., 1'.816. I h:ld origilwlty added that Lydall's work :llso depends 011 of Olltput by industry which in 40 out of 54 cases C:1Il be compared with altcmativc (Orficilll) indices, and that he gives the eonclation coefficient of grolVth r;lles for the 40 industries as only 0.78. (Ibid.. p.814). l3ul Dr. Burley ha~ pointed out tu Ill": that this is probably a misprint for 0.98. illdicc.~
Economic Analysis and Policy
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Vol. 02 No. 02, September 1971
"Produl:tivily Change in Australia: An Overall View."22 They range from -1.0% 10 5.3%. (It is no consolation that some of these differences are due [0 differences in assumptions, since we do not know how to relate the assumptions to the mallers the Vernon Committee would have been trying to discuss.) Powell is forced 10 end his article with .. roar of Towardsism and the Need for More Money for Research. The Vernon Committee had presumably to face Ihe economic question whether some or ils resources should be devoted to research un technical progress. 111e 1I1lsalisfJctoriness of the results reported by Powell lllay be taken to emphasize how much such research is indeed needed and therefore how wrong was the answer pres lim ably given by the Committee. But another interpretation is possible! My third point also relates to a criticism by Lydall. It is a criticism which seems worth answering bccausc it raiscs methodological issues about the role of economic policy discllssion by such a body as lhc Vernon Committee. who were not simply writing a textbook prescinding from politics. Lydall says: "Let us consider their celltral proposition that long-teflll growth may require additional taxation to proVide the necessary volume of saVing. If we accept this proposition, whcn 'do we begin? Clearly we cannot start incrcasing laxation at a time of unemployment, since this would connict with our full cmployment objective which they
regard as 'an overriding responsibility' (17.18);
and
anyway, there is no sense in increasing saving at a time when investment is insufficient to absorb all the saVing that would be generated at full employment. So we must wait ulltil the economy is at its ceiling, or at least approaching its ceiling. But if we raise taxes at this poinl, are we doing anything that we should not be doing anywlly? It is difficult to see how their prescription for growth adds anything, in practice, to thc policy which we are already pursuing, namely to maintain as near full employmcnt as possible without excessive strain in prices or Ihe balance of payments. Does their conclusion amount to more than a warning that, if the investmcnt ratio riscs to a level consistenl with a 5 per cent growth rate, the economy will experience even more inflationary pressure than in the past, so that fiscal restraints will need to be even firmer? This may indeed be true; but it scarcely amounts to a programme for ensuring a faster rate of growth."23 It is all obvious contradiction that whereas until the last two sentences Lydall confronts us with an Eleatic impossibility of changing our
22.
I::COI/OIII IC Papers, No.3!, Ju nc- Deeem bcr 1969, p.26.
23.
O'l.cil.. pp.162-163.
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Vol. 02 No. 02, September 1971
policies, in the last two senlences he agrees thaI liseal polil.:Y will need 10 be (and presumably will be able to be) "cven firmer". 11 would also be dirficult to justify the assertion (or il1lplidt asscnion) Ihat additional taxation is the COlllmittce's "Central proposilion". In paragraphs N.60 to N.63 cven the more general idea of greater s:lving only appears as one of three llle:lsures. The COlllmittee had not suggested thaI incre:lsed fiscal rest ra int s mllollllled "loa programme for ellSll ri ng :l fasler ra leo f growlh". (In facl the best feature of the Vernun Repurt is ils non-features; all the dreadful suggestions it might have made but didn't.) TIle answer to the Eleatil: dirficulty is surely that the point where the econumy is :It or approaching its L'eiling is not unique; with a higher investment ratio (howcver sccured) it will be a point with lower consumption t!lall \l'ould utl/e/wl:n' be I!le ("(fSf!. But this lcads LIS In consider the (OlllllliIlCC'S projeclion of persunal consulllption: lower cunsumption than would be thc L'asc but for Ihc higher investmcnl ralio lIlay slill bc quite a high levcl ur L'Ullsumptillll by past expericnce if it is based on a ,,:ullsumplillll prujet.:tioll which in ilsclf is over-generolls. III projCl.:tillg national expenditure the Committee did in fa!,;t make o..:rudc iUld extrcillc assulIlptiollS aboul the growth uf person
24.
O[J.cit., pp.IS6-7. In the second l'omplete Ililr.lgr.lph on p.IS7 therc seem .. to Ix: a misprint: "rcal incomc" appe,ns Whl'rlo' "real consumption" mu .. t lx' mC'IIlt. TIle mi..print ~{.'CIlIS to havc Illi"kd I\mdt (op ...:it. 1).117) in hi.. dcfence of thc Rcport. LW. Nc\'ile (Unillcr..i1y or i\dclOlide, up.cit.. p.ll) critkil.cd the COlllmittcc for e"timating " ... con:.t1Ill/>tiOIl on thc bilSis of tfl~nds in rCitt l'onstl1l1ptioll per hC:ld without allY re crcnc.;c to thc level uf incomc. I itl11 cnoll~h of :I Keyncsian to find this distluieting". This criticislll seem." unjll.~tlficd: the ('ol11l1lillcc said ill paragraph N.12 th;!t .~incc (;.N.P. per persoll cmployed lwd also beell projccted in itecordalll:C With past trends ..... the pcrsoll:ll COIl."UllIptioll expcllditure projectiolls are bro;ldly consistent with Ihc growth in incomcs implied in the projection of G.N.P'"
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advice and - in principle - to influence events, for example towards apolitical Kcyncsianism. Academic economists may not wish to engage in this activity, especially in view of the treatment given to the Vernon
Report, but they should surely avoid implying that there can be no scope for it.
La Trobc University
F .G. Davidson