National Growth—II ALTERNATIVES TO MORE BORROWING

Press, Volume CI, Issue 29913, 29 August 1962, Page 20

National Growth—II ALTERNATIVES TO MORE BORROWING

[Specialty written for “The Press” by

DONALD T. BRASH]

We have seen that if interest and profits on New Zealand’s external debt continue to rise, relative to total external earnings of the country, as quickly in the next decade or so as they have in the past, debt service will be absorbing £1 in every £5 earned abroad by New Zealand .by 1975-76. Is this likely to occur? A definite answer is, of course, impossible. But a few comments •re quite in order. To begin with, we know that the Labour Government borrowed more in 1958-59 than had ever before been borrowed by a New Zealand Government abroad in any one year. Fortunately, a sudden rise in export prices coupled with a sharp deflationary shock administered to the economy, enabled a substantial part of this to be repaid before the end of this Government's term of office. At present, export prices have again turned against us. This time. too. the Government apparently hopes to borrow its way out of the trouble. Unfortunately, however, there are two signifi- . cant differences in our situation in 1962 compared with 1959. First, export prices are not at all likely to rise appreciably, and over the next few years they may well decline even further. Second, the Government has not yet made the same sort of determined attack on the internal demand position as was made three years ago. So there would appear to be little prospect of cutting down our borrowing, none whatsoever of paying back w’hat we borrowed last year, and every likelihood of increased boi rowing in the future. I.M.F. Resources The International Monetary Fund, which we have just joined, promises some additional access to “borrowable” funds. But we are not able to borrow more than £22.5 million from this body in our first year of borrowing. and not more than £ll5 million in our second. Moreover, though these loans bear very low rates of interest, they must be repaid after three or at most five years. By present indications, the prospects of our being able to do this are slender indeed. What help in predicting the future increase of our external debt can we derive from assuming the continuation of past trends in overseas payments and receipts? Between 1951-52 and 1960-61. total payments overseas for all imports of goods and services averaged an annual growth rate of 2.4 per cent. Continued growth of payments at this rate seems the lowest that it is possible to assume, since the level of payments was, in relation to New Zealand’s total income, very high in 1951-52 and fairly low in 1960-61. <A continuation of the trend would probably necessitate a cut in the rate of growth of our national income in money terms by more than onehalf.) Over the same period, chosen to avoid the once-for-all rise in earnings which accompanied the Korean wool boom, overseas earnings grew by only 1.8 per cent, annually on average. Earnings may well grow by less than this amount in the future, especially with the European Common Market looming on the horizon. Payments may well grow more rapidly than the rate being assumed, too. Interest Payments But if we suppose these rates do continue into the future from the base year 1960-61, and money can be borrowed overseas at a rate of interest of only 6 per cent., the payment of interest and profits will absorb more than 24 per cent, of our external earnings by 1975-76. It may be argued that the average rate of interest which will have to be paid will be much less than 6 per cent. But this is highly unlikely, since it includes the rate of return on private borrowing as well as on public, and the former has been more than 10 per cent in our period. If most of the borrowing in the future is done by way of direct investment and the average rate of return to be paid therefore rises to. say. 9 per cent., the investment service ratio will rise to almost 34 per cent, by 1975-76. Admittedly, our base year 1960-61 was a year of substantial deficit in the New Zealand balance of payments: and this naturally effects the pessimism of our conclusion for 1975-76. But it can be shown that results which are not significantly different from those quoted can be obtained from apparently “more favourable” assumptions than those used. At least it can be said that a continuation of recent trends in the investment service ratio seems quite likely: this would bring the ratio to 20 per cent, within 15 years These conclusions are depressing, but they are inescapable unless our assumptions prove markedly astray. Is there any way of ■voiding this dismal plight, in which probably more than one-fifth of our external earnings are absorbed by the service of our external debt? Possible Remedies There are two distinct possibilities which lie within our own control The first is that, if we must borrow, let us do it in the cheapest possible manner. This means that private foreign investment which is by far the most expensive way of securing capital and foreign exchange, should not be actively encouraged by our Government It should, perhaps, even be discouraged. Instead. the Government might borrow, at lower rates of interest than are possible

for private borrowers, and either invest the money itself, or lend it to private enterprise within New Zealand to use.

If it is objected that this deprives the country of much-needed “know’-how” and technology which only private investment can bring, the answer would be that this difficulty could be overcome in at least three ways. A greater use could be made of overseas patents which give access to foreign technology. The cost of royalties in terms of foreign exchange is infinitely less than the cost of debt service. Moreover, as Dr. G. A. Lau has noted, the liability attached to the patent grows only as fast as the quantity of goods sold, and the overseas company does not participate in the capital appreciation of the New Zealand company, w-hich is an important disadvantage of direct investment in a full employment economy such as New Zealand. It might also be possible for the government to contract w’ith foreign firms to establish an industry in New’ Zealand and run it for, say, three years, till New Zealanders had been trained in its operation. Alternatively skilled technicians from advanced countries could be paid salaries sufficiently at. tractive to bring them to New’ Zealand to teach our engineers. workmen, and managers. (This would of course also involve our own skilled personnel sufficiently to make staying in New Zealand attractive for them after they W’ere trained.) Labour’s Experience Japan is the most famous example of a nation which developed from poverty with practical aid from private foreign capital. New Zealand has advantages infinitely greater today than Japan ever had when it began its policy of industrialisation. There is really no reason why w’e should be dependent upon private foreign capital, at least for most of our requirements. The second possibility for avoiding the drastic increase in debt service payments which appears likely is. perhaps obviously, the avoidance of such a large increase in the debt itself. The essential reason why a country needs to borrow abroad is that its current demands, for consumption and investment, exceed its production. To avoid borrow’ing. we must ’ either reduce our demands or increase our production. We must stop—to mix a metaphor rather grotesquely—trying to eat our cake and to build a factory with it at the same time.

To avoid borrowing we must either reduce our demands. or increase our pro. duction. There is probably much scope for both in New Zealand at the moment. If we will not reduce our demands voluntarily by saving more, we may have to have increased compulsory saving in the form of increased taxation or reduced social security benefits. Neither alternative would be attractive. Whether we seek the remedy to our predicament primarily through reduced demand or through harder work and increased production, both alternatives de. mand the fullest cooperation of every section of our society. Both w’ill involve harder work and greater effort for all. But then w’e really have no choice; it is not possible to live beyond our means indefinitely. (Concluded.)