Growth targets fail to meet economists’ test

Press, Volume CXIV, Issue 33463, 19 February 1974, Page 3

Growth targets fail to meet economists’ test

(From DENIS WEDERELL) WELLINGTON, February 18. The Manufacturing Development Council is confident of achieving growth rates in manufacturing output and in exports much higher than the present National Development targets. But its expectations have not stood the test of an economic planning model study.

The present indicative plan was drawn up in 1971, and the M.D.C. said in its annual report for 1973 that it considered the framework was made too restrictive by the assumption that “present conditions and Government policies continue.”

The M.D.C. contends that the. two main obstacles to a higher growth rate in gross national product—the capital investment-G.N.P. ratio, and the level of export earnings required—should be accepted as challenges, not as absolute constraints.

In its annual report the M.D.C. said that by 1981-1982 the manufacturing sector should aim for $1370 million of exports, representing 21 per cent of total output. It noted that Denmark was one of several countries, “comparable with New Zealand in many ways,’’ which exported about 30 per cent of their manufactured products. This contention, previously not seriously challenged, is challenged now as a result of a study undertaken by the Victoria University Project on Economic Planning. This project is financed by the Treasury and directed by Professor Bryan Philpott. It is doing research into economic models for long-term manning for use bv the National Development Council.

Professor Philpott is cautious about the conclusions, and warns that the results are even now only preliminary. His report notes that further work is required before definitive conclusions can be reached. NEWER DATA

The most important modification will be the use of the new version of the Victoria planning model, incorporating 1969-1970 data instead of the 1964-1965 data as at present. Nevertheless, his conclusion is that the M.D.C. proposals are only feasible if they embrace a much higher level of imports than at present envisaged, and even then the end result in terms of

target consumption is no better than the present N.D.C. plan. With improved agricultural terms of trade it is substantially worse. “the key problem is the increase in labour demands made in other non-manufac-turing sectors (utilities, transports. and services) as a result of the increased manufacturing production,” says Professor Philpott.

The M.D.C. did not overlook the higher demands which would be made on other sectors. Its annual report acknowledged that “the projected higher export growth rate implies a need for greater resources for the sector and this aspect was duly examined.” LABOUR FORCE The council assumed that the labour force in manufacturing would not increase above the numbers in the present indicative plan, so the greater volume of goods would have to come from annual productivity increases of 4.8 per cent. "This is well above the presently-projected 3.5 per cent, but given steady developmental policies it is capable of attainment.” The M.D.C. conceded that the growth of manufacturing productivity in the decade up to 1969-70 was about 3 per cent on average, but was heartened by the annual average of 4.4 per cent which resulted whe i the low growth years of 1966-67 to 1968-69 were extracted On this .basis the council “is encouraged to believe 4.8 per cent a reasonable possibility,” provided industrial stability and steady development policies could be attained.

Economists argue that it is as unreasonable to extract the years of lowest growth as it would be to extract the years of highest growrh.

They declare that the manufacturing sector cannot be looked at in isolation, and doubt if the M.D C. has considered the pressm.es which would be imposed on other sectors as fully as it «ays it has. REVISED TARGETS

The Project on Economic Planning at Victoria tried the M.D.C. proposals all ways in

the computer model, in attempts to fit the suggested manufacturing targets within the limits of the New Zealand economy, without success.

One run after another showed that the M.D.C.’s proposed revised targets were incapable of achievement. Time and again the computer reported that the hoped-for result was not feasible, no matter what variations were introduced in attempts to reach the target growth rates.

For example, an increase in productivity in manufacturing alone is not enough, unless there is a simultaneous increase in productivity in other sectors to meet the demands that a faster-grow-ing manufacturing sector would make. ■Nor is it sufficient to introduce more labour'by way of an expanded immigration flow. Even when the Victoria University economists increased the 1981-82 labour supply by 80,000 workers the projected targets were still not feasible, for the migrating workers brought with them more new demands than the increase in supply which they produced. While the immigration would probably increase total G N.P., it does not necessarily increase per capita G.N.P., which should be the mein goal of policy.

When the Victoria team reverted to the original labour force target for 197182 the M.D.C.’s expectations could not be fulfilled, even if labour productivity was raised by 50 per cent. “INDIRECT OUTPUT” “The required manufacturing output and exports were produced with the labour force available,” they reported. “But the problem lay in the very large indirect output, and therefore labour requirements, in other sectors servicing manufacturing, like utilities, transport, and services, and in sectors producing the additional capita) reuired, like building.”

There, was not enough labour to go round. In one of the other runs the M.D.C. export targets were achieved but “the economy was exporting just for the of it and getting

inadequate imports in return.”

Three broad implications of the results were identified by Professor Philpott.

These are:— As it stands it is not sufficient just to secure greatly increased labour productivity .'n manufacturing alone, to obtain the desired increases in manufacturing exports with $lOO million in extra imports, unless export targets for other sectors are lowered, especially for agriculture. The non-feasibility occurs because of the indirect labour and capital demands on other sectors made necessary to meet the manufacturing targets. “In the programme as it stands we are essentially forcing more labour-intensive activity into an economy in which labour is already the basic constraint.” To overcome the labour shortage a tripling of the additional manufacturing imports is required, and even this does not yield as high a level of aggregate consumption in 1981-1982 as the present N.D.C. targets. “This tripling of the import level not only eases the labour shortage but also avoids the balance of payments surpluses which otherwise occur through exporting just for exporting’s sake.”

Nevertheless, says Professor- Philpott, the general idea and policy of restructuring the manufacturing sector towards an accent on competitive efficient exporting industries accompanied by higher levels of manufactured imports is to be encouraged. “INFEASIBLE” At Victoria they do not wish to knock the idea, ano Professor Philpott acknowledges that more work must be done on the model by updating the data. But he contends that the message of the preliminary study of the N.D.C. proposal is clear. In computer language, it’s “infeasible.”