130 that home produced goods should be made more attractive relative to

In document The control of imports : Australia 1952-1960 (Page 135-139)

imports. The necessary reduction in expenditure will therefore be correspondingly greater.

A similar situation applies when some imports are not restricted and consequently subject to none of the direct price effects referred to here. They will become relatively more attractive. Since the implication of the controls, other than when used as a short term measure, is that the currency is overvalued the absence of restriction on some imported items is equivalent to subsidising their consumption. If the items are of any importance in the economy the distorted/refS- tionship between the unrestricted products and domestic products may have adverse structural effects on the economy. Moreover, unless demand for the unrestricted items is completely inelastic, a greater degree of restriction on other items will be necessary.

The imposition of direct controls on imports in Australia in 1952 was superimposed upon an existing tariff structure. To t he extent that the controls were effective in reducing imports, the duty on that item no longer restricted imports or protected local industry. Where the tariff was still the effective protecting measure, the controls were not effective in reducing demand for imports.

In an imperfect market, whether the imperfections result from imperfect knowledge or from distances between different parts of the

17

This would seem to provide further reason for assuming that the possibility of the optimum tariff argument being applicable in the Australian situation in 1952 or 1955 is fairly small.

another importer of the same product the tariff is not a deterrent and he would be willing to import more than the controls permit.

Earlier discussion has emphasised the expenditure redirecting function of the controls on imports. We shall now consider the nature of the structural shifts likely to have been stimulated by the redirection of demand brought about by the controls.

At any one time there will be a variety of influence causing changes in the pattern of productive activity within an economy, increasing or decreasing the relative importance in terms of final output of particular sectors or particular industries within those sectors. Many of these influences will be internal, e,g. new products or new methods of production. Many will be external; these will

include, importantly, policy actions by the government impinging on particular sectors, as well as others which are external to the economy. Of course, internal developments in one sector will be exter­ nal developments to another. The structural impact of any one set of government policies will therefore be superimposed on or interrelated with a variety of other influences.

While limiting ourselves to arguments of a general nature we shall have in mind the particular circumstances of the Australian economy - a primary product exporting country with a secondary industry sector which is small in absolute terms but large in terms of the domestic economy

132

As a result of the imposition of direct controls on imports demand for domestically produced importables will increase and prices (and profits) will rise* This will move relative prices internally in

favour of the non traded goods and export sectors and lead to increased demand for these products*

Since factors of production in the export sector are rather spec­ ialised - land and relatively immobile labour - there would probably be only a small shift of resources from the export sector* The re­ sources shifts will therefore tend to be primarily from the non traded goods sector, including non traded manufacturing as well as construction and service industries etc* Similarly, there will only be a limited shift in demand from imports to exportables* If total expenditure is reduced when the controls are imposed, this will in itself reduce import demand and consequently the degree of import restriction required; resources will also be released from the other sectors of the economy to be absorbed by the import competing sector* This will enable out­ put to increase to meet the redirected demand without inflationary competition for labour and other resources. Essentially, this is the case for using import controls to redirect expenditure from imports* In this situation there would be a structural shift in resources to the import competing sector* The extent of the shift would depend to a considerable extent upon the degree to which non traded goods, rather than domestically produced importables, are the next preferred substitutes for imports.

accurate calculation of the reduction in expenditure which is just necessary to maintain full employment; it implies some downward flex­ ibility of prices of non traded goods in response to cuts in total

expenditure or alternatively no built-in mechanism which increases costs - particularly wage costs - in line with an overall increase in prices; it implies mobility of factors of production, at least between the non traded goods and the import competing sector; it also implies that the demand for resources in the import competing sector will be sufficient just to absorb the resources made available in the non traded goods sector. These assumptions are not, of course, mutually exclusive; moreover their importance will vary according to the time span involved.

The longer the period during which the controls are in force, the less immobile factors will become, but also the less it is likely that total expenditure will be contained at a level consistent with inter­ nal balance. With a more or less constant import ceiling an initial increase in income will induce a more rapid secondary expansion of income since the economy’s effective marginal propensity to import is virtually nil. Resulting from attempts to maintain total expendi­ ture at levels sufficient to avoid any significant degree of unemploy­ ment, boom conditions will tend to develop in the import competing

tend to rise through increased factor costs and there will be a slowing down in the shift of resources away from the non-traded goods sector.

There is no necessary reason why the controls as such should contribute to their own ultimate removal. The domestic production of substitutes for imports - whether of importables or of non traded goods - will reduce the propensity to import provided prices at the same time move in favour of the domestic products. While the price of domestically produced importables can be moved favourably relative to the imported product by tariff duties, this is only indirectly and

1 imperfectly the case with non traded goods.

The reduced competition from imports and, possibly in consequence, a reduced level of competition domestically, may imply considerably less incentive to reduce costs through increased productivity. If the licensing system is selective, the most profitable areas of in­ vestment under the controls may not be those which have the least

comparative disadvantage in the absence of the controls. Alternative­ ly, there may be too great a diversification of investment with

2

In document The control of imports : Australia 1952-1960 (Page 135-139)