The Spike [or Victoria University College Review 1961]
New Zealand's Industrial Development
New Zealand's Industrial Development
'Are we not like a racehorse owner who has a weight-for-age horse in his stable but devotes all his energies to three-legged hacks that have to be nursed to keep them running?'
— A. P. O'Shea.
At the Present Time there appears to be a decided inconsistency between New Zealand's import and export policies. On the export front every endeavour is being made to persuade the major industrial nations of North America and Western Europe to moderate their policies of agricultural protectionism. On the import front the current revision of the New Zealand tariff structure is likely to lead to a considerably higher over-all level of tariff protection, while continuing balance of payments difficulties ate providing an excuse for the protection of local industry by quantitative restriction.
Why Protect Local Industry?
What are some of the basic arguments put forward to explain the need for rapid industrial development in New Zealand? Many people think that 'because of its excessive and unique vulnerability, New Zealand's urgent and essential priority is to reduce heavily its dependence on imports and its narrow range of exports'.1 New Zealand's manufacturing industries depend heavily on imported raw materials and capital equipment for their continued operation and a deterioration in the terms of trade is likely to reduce our ability to import these goods.
It might be suggested, however, that New Zealand's main concern is not with short term fluctuations in export proceeds. These are a necessary condition which New Zealand must accept following the basing of her economy on the production of those commodities which give the highest return per unit of factor input. The major concern must be with the long-run failure of exports to grow in volume at the same rate as imports. In the post-war period the demand for imports as a percentage of the national income has been relatively stable, but export receipts have been inadequate to meet import demands.2 Perhaps the most important reasons for this are that inflation and protection of local industry have diverted labour and capital away from the export sector.
A good case can usually be made out for protection of local industry when the price and quality advantage of imports is due to overseas countries indulging in dumping or export subsidization. Again, protection can reasonably be extended if low cost imports are causing disruption of local industry to the extent of creating unemployment which cannot be absorbed in other sectors of the economy. However, this latter type of protection should be of a temporary nature only, extended until the idle factors of production can be absorbed in other, more competitive lines.
Full employment can be ensured in the short run by heavily protecting local industry, but in the long run such action tends to weaken New Zealand's ability to employ her population fully because the tendency is for factors of production to be diverted away from industries capable of earning foreign exchange or able to hold their own in competition with imported goods. New Zealand's industrial development is likely to continue to depend heavily on imported producer goods, while the growing population will demand larger quantities of essential consumer goods of the type impossible to produce economically domestically.
The manufacturing interests are usually basically opposed to any movement directed towards diminishing the degree of protection accorded to local industry, particularly if these reductions are made on a multilateral basis. Their major objection is that they cannot compete with the exports of low cost countries, particularly those with low standards of living. But wages are only one cause of low costs; technical ability, capital equipment and institutional settings are also of fundamental importance.
Given all these facts it is still true that it is eminently desirable for New Zealand to develop a sound industrial base in order to assist in the development of a balanced economy. How is this best achieved?
Methods of Protection
A country which employed a non-discriminating tariff as the only means of protecting domestic industry would have, in the height of the tariff needed to ensure for local products at least a fair share of the home market in competition with non-subsidized imports, a direct measure of the cost disparity between local and overseas production. But New Zealand in common with most other countries has had import licensing of varying degrees of severity almost continuously since the war and under such conditions it is almost impossible to estimate the extent to which factors of production have been diverted into those sectors of the economy where their productivity is considerably lower than that obtainable elsewhere in the community. In New Zealand's case the justification has been balance of payments difficulties, but many people feel that the flexible use of quantitative restrictions is a necessary prerequisite to sound industrial development.
There is little doubt that stable moderate tariffs provide the best means of affording protection to local industry. They leave the guidance of trade largely to private business, keep the need for cumbersome official administration at a minimum, allow competition from efficient overseas producers and provide revenue for the central government. Quantitative restrictions on the other hand limit overseas competition to the extent of the licences issued, require the arbitrary allocation of such licences, and lead to high administrative costs. By diverting demand onto home produced goods they add to inflationary pressures which provide the main cause of balance of payments difficulties.
Just what height the tariffs should be is debatable. In 1954 the Board of Trade suggested that an industry requiring a British preferential tariff of more than 25% over a period of time could perhaps be regarded as of doubtful economic worth. But in any system where tariffs are applied at a different level for various classes of goods, what is essentially happening is that various sections of the community are being forced to pay differing prices for foreign exchange, a type of discrimination which could equally well be achieved by the use of multiple exchange rates.
The suggestion has been advanced by theoretical economists3 that the best way to avoid this type of discrimination is to work towards a uniform ad valorem tariff as the sole method of protecting local industry. In New Zealand's case it would require at least two uniform rates, i.e. one for most favoured nation countries (say, 30%), another for imports from British Preferential sources (say, 25%). Admittedly raw materials and essential foodstuffs which at present face low or non-existent duties would rise in price for domestic consumers, but this should be offset by the lowering of price of more nearly finished goods facing lower tariffs. It would cause local manufacturers to seek where possible domestic substitutes for the raw materials now facing higher duties and the development of the aluminium and pulp and paper industries suggests that in many cases the degree of substitutability might be high.
In concluding I can only emphasize that when protection is given to a domestic manufacturer against outside competition the consumer is indirectly subsidizing his operations or denying himself access to cheaper or better quality goods from overseas.page 14
This can often be justified, but it must act as a balancing factor when deciding on the degree of protection to be afforded to specific industries.
1 Dr W. B. Sutch, Programme for Growth, p. 24. Paper presented to the Industrial Development Conference, June 1960.
Record, April 1958.
'Were Import Restrictions really necessary? — A critical examination of recent New Zealand Balance of Payments Policy.' J. W. Rowe, A.N.Z.A.A.S. paper, August 1959.
2 See 'Australia's Long Term Balance of Payments Problems', Lundberg & Hill; Economic
3 Particularly W. M. Corden. 'Import Restrictions and Tariffs — A new look at Australian Policy' — Economic Record, December 1958.