AU STRALI A’ S C U R RENT AC CO U NT D I FFI C U LTl ES AND THE ROLE OF TRADE AND INDUSTRY POLICY by NEIL HART* 1. Introduction It is now fairly widely accepted that persistent current account deficits and the associated accumulation of foreign debt represent the key constraint challenging Australia’s medium term growth performance and the formu- lation of macroeconomic stabilisation policies.’ It is in the context of the search for a policy instrument which can be assigned directly to the target of alleviating Australia’s balance of payments constraint that recent debate over the role and stance of industry policy has developed. A case for an interventionist industry policy, founded on targeted export assistance instruments, is argued in this paper. This paper is organised as follows. The contention that industry policy, irrespective of its stance, is incapable of securing significant improvements in Australia’s current account difficulties is briefly considered in Section 2. Section 3 provides an overview of the structural weaknesses in the Australian economy which may have contributed to its recent trading difficulties. A case for an interventionist approach to industry policy, based largely on a review of some recent advances in trade theory, is argued in Section 4. The final section summarises the paper’s central conclusions. 2. Australia’s balance of payments difficulties: a role for industry policy? A role for industry policy in finding a lasting solution to Australia’s balance of payments difficulties rests on the contention that these difficulties are a reflection of deep seated structural weakness in the economy. Industry policy is therefore targeted directly at generating changes in the orientation of production resulting in a sustainable improvement in net exports. Importantly this contention is founded on the view that capital flows are fundamentally passive over the long term, accommodating changes in the current account. Therefore a reduction in current accounts deficits ultimately requires changes in the circumstanceswhich determine net export performance. * University of Western Sydney, Macarthur. Thanks to Peter Kriesler. University of New South Wales, for useful comments. 1. A notable exception is Pitchford (1989, 1990) who argues that a case is yet to be made to support the conclusion that Australia’s recent current account deficits have been excessive. Similar conclusions can be found in Sjaastad (1989). while Arndt (1989) is an example of a n opposing view. 32
Transcript
AU STR ALI A’ S C U R RENT AC CO U NT D I FFI C U LTl ES AND THE ROLE OF TRADE AND INDUSTRY POLICY
by NEIL HART*
1. Introduction It is now fairly widely accepted that persistent current account deficits
and the associated accumulation of foreign debt represent the key constraint challenging Australia’s medium term growth performance and the formu- lation of macroeconomic stabilisation policies.’ It is in the context of the search for a policy instrument which can be assigned directly to the target of alleviating Australia’s balance of payments constraint that recent debate over the role and stance of industry policy has developed. A case for an interventionist industry policy, founded on targeted export assistance instruments, is argued in this paper.
This paper is organised as follows. The contention that industry policy, irrespective of its stance, is incapable of securing significant improvements in Australia’s current account difficulties is briefly considered in Section 2. Section 3 provides an overview of the structural weaknesses in the Australian economy which may have contributed to its recent trading difficulties. A case for an interventionist approach to industry policy, based largely on a review of some recent advances in trade theory, is argued in Section 4. The final section summarises the paper’s central conclusions.
2. Australia’s balance of payments difficulties: a role for industry policy? A role for industry policy in finding a lasting solution to Australia’s
balance of payments difficulties rests on the contention that these difficulties are a reflection of deep seated structural weakness in the economy. Industry policy is therefore targeted directly at generating changes in the orientation of production resulting in a sustainable improvement in net exports. Importantly this contention is founded on the view that capital flows are fundamentally passive over the long term, accommodating changes in the current account. Therefore a reduction in current accounts deficits ultimately requires changes in the circumstances which determine net export performance.
* University of Western Sydney, Macarthur. Thanks to Peter Kriesler. University of New South Wales, for useful comments.
1. A notable exception is Pitchford (1989, 1990) who argues that a case is yet to be made to support the conclusion that Australia’s recent current account deficits have been excessive. Similar conclusions can be found in Sjaastad (1989). while Arndt (1989) is an example of an opposing view.
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However, there exists an opposing belief, often implicitly stated, that current account movements are chiefly driven by fluctuations in net capital flows from overseas. Under these circumstances industry policy measures assigned to bring about changes to net exports will be largely ineffective. Instead it is argued that domestic savings should be stimulated in order to reduce the extent to which domestic investment is financed by borrowing from overseas (capital inflow). The logical foundations of this argument can most clearly be captured with reference to the following well-known identities:
. . . (1)
. . .(2) where the variables are government revenues (T) and spending (G), private sector savings (S) and investment (I), exports (X), imports (M), other net income flows paid overseas (R), and K net capital inflow from overseas.
From these identities it can be observed that a current account deficit (X - M - R c 0) is associated with both negative domestic net savings ({ T- G} + { S - I}) and positive net capital inflow (K > 0). i.e. borrowing from overseas. Likewise an improvement in the current account balance would be associated with both an increase in net domestic savings and a reduction in net borrowing from overseas (K). An argument can therefore be developed along the lines that a reduction in overseas borrowing (K) is achieved by financing a greater proportion of domestic spending through domestic savings (T+ S). If this is accomplished, then it follows from the equations (1) and (2) that the current account balance must improve.
Importantly, this improvement would have been achieved without any direct recourse to policies aimed specifically at changing Australia’s net export performance. Rather, as Forsyth (1990, 13-16) has stated, this line of argument would suggest that policies which fail to “affect the balance of savings and investment” are incapable of providing a solution to Australia’s current account.
However, it is often overlooked that equations (1) and (2) are merely identities and therefore convey no information about causation. It is essential therefore to investigate the mechanism whereby domestic savingdinvestment “imbalances” and corresponding overseas capital flows impact on the current account.
At the theoretical level it is often argued that the traditional Mundell- Flemming open economy macroeconomic model suggests the existence of such a mechanism. Here a reduction in overseas borrowing, presumably as a result of an increase in the percentage of spending financed through domestic savings, would lead to a depreciation of the domestic currency triggering an improvement in net exports and a subsequent (perhaps lagged) reduction in the current account deficit.
Similarly, Forsyth (1989) and Bewley and White (1990) argue that any potential improvements in the current account resulting from an industry policy induced promotion of net exports, and not accompanied by increased
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(T-G) + (S-I) = (X-M-R) ( X - M - R ) + K = 0
net domestic savings, would be all but eliminated through a currency appreciation (given unchanged interest rates). There is nothing new in this line of argument, as it is readily recognisable as corresponding to a reiteration of a simplified version of the “Gregory thesis”.
However, the extent to which the current account is linked to changes in the savingslinvestment balance is questionable. Once the rudimentary Mundell-Flemming framework is extended to encompass price and uncertain asset effects, expectations, market imperfections and associated price rigidities, the exchange rate driven adjustments outlined above become muah more intricate and uncertain. It is not surprisingly therefore that Gregory’s (1991) recent assessment of the available empirical evidence concluded that in Australia’s recent history there seems to have been little relationship between real exchange rate changes and current account defificits, or between exchange rate effects and the relative profitability of the traded goods sector. This finding is also consistent with empirical studies by Krager (1992) and others using co-integration techniques which have failed to find a long-run relationship between exchange rates and trade balances.2
The absence of such evidence therefore brings into question the existence of the mechanism outlined above connecting net domestic savings and the current account. Indeed as Gregory (1991) concluded, there is now some evidence to suggest a significant causation flow in the other direction and that current account outcomes are contributing to changes in household savings. Hence, the often heard argument that adverse exchange rate effects render industry policy an ineffective instrument in targeting an improvement in the current account requires reconsideration.
It can be seen therefore that the pessimistic conclusion regarding the effectiveness of industry policy in influencing current account outcomes is derived largely from a rather simplistic appeal to national income identities and underdeveloped economic theorising. As Argy (1991) has noted, it is easy to correct a perceived savingslinvestment imbalance if we are prepared to keep the economy permanently sedated. However, if investment and growth performance and living standards are to be maintained at an accustomed level, such policies are inappropriate. The balance of payments constraint demands correctly formulated industry policy in order to achieve a sustained improvement in net exports and the current account.
3. The structure of production and Australia’s current account deficit The sectoral distribution of Australia’s GDP is not dissjmilar to other
industrialised Western countries, with the agriculture, industry and service sectors respectively accounting for 4%, 31% and 64% of 1990 GDP (World Bank, 1992, table 3). Similarly to other OECD economies, over recent decades there has been a slight decline in ihe relative importance of industry, largely
2. A s Krager 11992) suggests, this may indicate that exchange rates follow a non-linear stochastic process, or that there exists the phenomenon of hysteresis.
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to the benefit of the services sector. This trend arises partially as a result of a shift toward services as real incomes rise through time, and may also reflect a decline in the relative prices of manufactured goods. It is also important to note that with the increasing sophistication of products and the continuing trend to contract out operations activities such as main- tenance, information management and research and development previously carried out in-house, the distinction between manufactures and services is becoming increasingly blurred. A decline in the share of agriculture in GDP is also consistent with the experiences of many OECD countries.
TABLE 1 EXPORT ORIENTATION OF HIGH-INCOME OECD ECONOMIES
O/o of GDP
Exports of Primary Machinery Other Goods 6 Products 6 Transport Manu-
Non Factor Equipment factures Services
O/o of Merchandise Exports
1965 1990 1965 1990 1965 1990 1965 1990
United States*
Germany France Italy United Kingdom Canada Spain Australia Netherlands Sweden Belgium Austria Finland Denmark Norway New Zealand Ireland Average
* Countries are ranked according to 1990 GDP levels. Source: Derived from World Bank (1992, Thbles 9 and 16).
However, as can be observed from Table 1, it is the export composition of Australia’s production that distinguishes it from most other industrialised market economies. Australia’s export share of GDP has barely changed over the past twenty-five years. This situation is in stark contrast to the general trend of increasing export to GDP ratios in most comparable industrialised market economies. Even after allowing for the relative size of the Australian economy and its distance from major export markets, along with the effects of intra-European Community trade, the Australian export to GDP ratio
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remains low compared with most other industrial ec~nomies.~ Most significant is the very high proportion of primary products as a
percentage of merchandise exports, a proportion comparable in 1990 with only New Zealand and Norway (where oil exports have become significant). The extremely low contribution of machinery and transport equipment to exports is also readily observable.
Australia's atypical export pattern over recent decades is further high- lighted in Bble 2. Each entry in 'Igble 2 represents the share of each product type in Australia's trade relative to its share in total trade in the OECD nations included in the sample. Australia's emphasis on natural resource based exports is accentuated with its relative export intensity approached only by Finland with a value of 2.55 (down from a value of 2.97 for 1970/72). Also important are the particularly low export intensities occurring in the case of differentiated high-technology commodities where scale economies are important. Australia's relative export intensity values for these categories have changed very little over the sample time period and are significantly lower than is the case for smaller economies such as Sweden, Finland and Norway. The extremely low relative export intensity for differentiated goods is particularly significant, as the intra-industry trade between countries associated with such goods represents the fastest growing area of international trade during recent decades. Conversely, the percentage (by value) of primary products and semi-manufactures in world trade had fallen from around 60% in the mid 1960s to 46% in 1987. Significantly, Australia experienced the highest relative import intensity values for differentiated and high technology manufactured goods.
* The OECD countries included in the sample are: United States, Japan, West Germany, France, United Kingdom, Italy, Canada, Australia, Belgium, Finland, Netherlands, Norway, Sweden.
Source: OECD (1989, "hble 4.9).
3. The Centre for International Economics (1989). for example, has estimated that after allowing for these factors, the merchandise export to GDP ratio would be approximately 19%.
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As is illustrated in Figure 1, associated with Australia’s atypical trading patterns has been a deterioration of its terms of trade over recent decades. This deterioration should be contrasted with the experiences of other OECD nations. Over the period 1973179, Australia’s terms of trade deteriorated by an average annual rate of just Over 7%, compared with the OECD average decline of 2.8%.* From 1979/90 the annual average deterioration of Aus- tralia’s terms of trade fell to just over 2%; however this decline remained well above the OECD annual average decline of 0.3%. The volatility of Australia’s terms of trade over the period was comparable only to other OECD primary goods exporters such as New Zealand and Norway.
FIGURE 1 TERMS OF TRADE 1951152 To 1989190
160 I I
1
’7 90 ’-1 ;:: 60 60
1961/52 1956157 1961/62 1966/67 1971/72 1976/77 1981182 1986187 Source: Derived from Foster and Stewart (1991, l’hbles 1.12. 1.13).
The difficulties arising from Australia’s attempts to maintain consumption patterns characteristic of developed economies despite its atypical structure of trade have been accentuated during the past decade in the face of increased global interdependencies in both commodity and capital flows. The implications of Australia’s recent trading performance can be clearly illustrated in a recent medium-term stabilisation scenario undertaken recently by the OECD, where the scenario target was to stabilise the foreign debt ratio to 36% of GDP by 1994:
4. Amongst the OECD nations, only New Zealand (5.5%) and Tbrkey (5.3%) recorded average annual declines greater than 5% over this period. The terms of trade data discussed in this paragraph are derived from OECD (1992).
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. . . if the figures in the illustrative scenario are to be attained, exports of goods and services would need to rise by a little over 7 per cent per year. If the rise in natural resources and farm exports can be assumed to be considerably less rapid than this, manufacturing and service exports would have to grow on average by around 10 per cent. (OECD, 1990, 38)
These estimates were based on some rather optimistic assumptions, such as world output growing at 3% and no deterioration in Australia’s terms of trade.
It is apparent therefore that the current composition of Australian export production is not consistent with the goal of achieving stabilisation of Australia’s foreign debt given that present living standards and associated consumption patterns are to be maintained. The major challenge confronting the Australian economy is therefore to increase the export income generated from its production of manufactures. It is in this context that industry policy must be formulated and evaluated.
4. The stance of industry policy Interventionist vs market forces approaches
The supporters of an interventionist approach to industry policy essentially argue that government intervention and assistance to industry is required in order to restructure Australia’s production to overcome the current account difficulties which threaten the economy’s long term growth prospects. Specifically, it is argued that assistance is required for the manufacturing sector if the recent trend of an increasing trade deficit for this sector is to be reversed. It is generally agreed that such assistance needs to be predominantly export orientated, and that ultimately it is only a more export orientated manufacturing sector that will strengthen the import competitiveness of these industries.
For the reasons outlined above, grave doubts are expressed about the ability of exports from the primary goods and services sectors to offset the manufactured goods trade deficit over the long term. Rather, as previous government initiated reports such as the Vernon Report (1965), Jackson Report (1975) and Crawford Report (1979) have argued, the key lies in increased manufactured exports.
It should be noted here that supporters of the interventionist approach to industry policy are not opposed to many of the microeconomic reform policies proposed by the supporters of a less interventionist “market forces” industry policy stance. However, such policies are seen as being necessary but not sufficient conditions for the kind of export improvement Australia requires in the 1990s and beyond. The extent to which microeconomic reform programs in themselves are capable of achieving significant structural changes is questioned, with the empirical “evidence” said to emerge from ORANI model simulations, such as those derived by the Industry Commission [IC] (1990), seen to be rather unconvincing. Equally, support for the interventionist industry policy approach should not be interpreted as support for a return to the inward looking protectionist
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manufacturing policies of the past. Tariff reductions are not opposed provided they are part of a total package including positive industry assistance initiatives and structural adjustment a~sistance.~
Recommended assistance initiatives include selective depreciation allowances, particularly for large capital-intensive downstream processing projects, and conditional grants or low interest loans to accelerate the take- up of advanced manufacturing technology. Extension of existing trade enhancement schemes (e.g. the EMDGS), particularly in the area of risk sharing assistance to established firms that invest in managed export developments, has also been recommended. National procurement develop ment schemes, increased’provision of non-tax R&D support, and measures to increase the availability of venture capital are also seen as playing an important role. Critically, it is in activities which integrate Australian manufacturing selectively into global scale industries which are seen as most usefgly attracting government assistance.
On the other hand, supporters of what could be termed the “market forces” approach to industry policy, contend that the removal of “distortions” which hinder the operation of “market forces” is the key to improved economic performance in Australia. The IC (1990), for example, has argued that protection from foreign competition and the establishment and tolerance of public and private monopolies have blunted the rewards and disciplines that competition provides. Similarly Garnaut (1991, 29) concludes that “it is impossibly unlikely a selective export subsidy scheme, applied on a dis- cretionary basis to particular industries, projects or firms, would yield net benefits”. Instead it is envisaged that policies such as microeconomic reform and the abolition of existing assistance to producers are required. These policies, it is argued, would result in trade flows which would more closely reflect Australia’s true comparative advantage, with internationally com- petitive producers being unburdened of assistance measures directed to “less efficient” producers.
Theoretical considerations The strict non-interventionist trade and industry policy stance finds
widespread support amongst professional economists. This emerges largely from the dominant neoclassical theory of international trade which argues that trade and investment decisions are, or should be, determined by comparative advantage revealed in competitive markets. This theoretical position is itself an extension of the two fundamental theorems of welfare economics which suggest that intervention in most situations reduces
5. These principles are central to the ACTU (1990) and Pappas Report (1990) recom- mendations, and repeated by other supporters of the interventionist approach such as Bell (1991). Chapman (1990) provides a useful discussion of the expectations and limitations of microeconomic reform measures.
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allocative efficiency and that competitive markets should be free to do their job of enforcing efficiency. It is also argued that government intervention encourages additional inefficiencies associated with rent seeking behaviour. It is only in response to specific episodes of “market failure” that government intervention may be deemed appropriate. Importantly, such intervention is seen as reinforcing the allocative efficiency of markets rather than inferring general principles for the substitution of “market forces”.
Supporters of an interventionist approach would argue that the economic tools of analysis used to justify the market forces alternative are simplistic andor inappropriate. Hamilton (1991, 273) for example argues:
In the world of economic theory it is well established that, under competitive conditions, free trade maximises welfare. However, it is widely recognised that this elegant conception sits uneasily with the messy world it seeks to describe.
Within the context of neoclassical welfare economics, it is critical to recall that the welfare losses induced by government intervention are dependent on a number of very special assumptions, few of which manage to survive once the analysis shifts from the abstract world of neoclassical general equilibrium models to the “real world”. As such the efficiency and welfare judgement of neoclassical theory need to proceed in the rarely charted territories of “second best theory”. As was clearly demonstrated in Lipsey and Lancaster’s (1956/57) important contribution, there is no a priori way to judge between various situations in which some of the Paretian optimum (static allocative efficiency) conditions are fulfilled while others are not. In a situation in which there exist many constraints which prevent the fulfilment of the Paretian optimum conditions, the removal of any one constraint may affect welfare or efficiency either by raising it, by lowering it, or by leaving it unchanged.
The implications of second best theory for industry and trade policy can be illustrated through Neary’s (1988) review of recent literature on export subsidies and national welfare. This review indicates that economic justification for export subsidies may arise in situations of imperfect competition and increasing returns to scale. In a broader setting, second best theory would caution against the assertion that the economy wide effect of assistance policies is negative in terms of allocative efficiency in a world where Australia’s trading partners also “distort” trade flows. What second best theory does demonstrate is that, even within the narrow confines of static allocative efficiency considerations, there is no general argument against export assistance schemes or other forms of government inter- vention. Instead a case by case approach is implied. Recent advances in international trade theory have attempted to provide a theoretical framework in which such case studies may proceed.
The interventionist approach and recent advances in trade theory Of the alternative approaches to standard neo-classical trade theorv,
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strategic trade theory has recently attracted most attention in the literature6 Strategic trade theorists argue that in recent decades there has been a fundamental change in the nature of trade. It no longer simply consists of exchanges depicting strengths of economies, but rather one where trade seems to reflect arbitrary or temporary advantages resulting from economies of scale or shifting leads in close technological races. Intra-industry trade, rather than the exchange of commodities of one industry for another, has come to increasingly dominate trade between industrialised nations. As a result two-way trade in commodities with no underlying comparative advantage is increasingly observed. Instead, as Krugman (1986,8) concludes: They lie in the advantages of largescale production, which leads to an essentially random division of labour among countries, in the cumulative advantages of experience which sometimes perpetuate accidental initial advantages, in the temporary advantages conveyed by innovation. What is important is that the conventional economic analysis is based on a theory of trade that does not allow for these kinds of motives for international specialisation. It follows from Krugman’s observation that the notion of competitive
markets needs to be replaced with the strategic decision making process of firms in imperfectly competitive market structures characterised by increasing returns and barriers to entry.‘ Strategic trade theory developed from these premises suggests that an interventionist trade policy may benefit a country relative to free trade in two important ways. Firstly, a government may be able to secure a larger share of the economic rent derived from consumers in internationally imperfectly competitive markets. Similarly, promotion through measures such as export subsidies of sectors where external economies are significant may also raise national income. Foreign promotion of these sectors might instead deprive the home country of the benfits of spill-over effects. The central point is that governments can alter the strategic game played between domestic and foreign firms by using measures which are by their nature unavailable to individual firms. Such policies would amount to targeting particular industries, rather than the general subsidisation of exports.
The case for government intervention is even more compelling when the dynamic dimensions of the increasing returns process are recognised. Kaldor (1981) for example, drawing on Myrdal’s (1957) principle of “circular and cumulative causation”. illustrates that under a regime of “free trade” success
6. These developments stem largely from Spencer and Brander (1983) and Helpman and Krugman (1985). and include Kmgman (1986). Brander (1986). and Spencer (1986). More advanced theoretical developmentscan be found in Helpman and Krugman (1989) and Krager and Zimmermann (1992). Useful outlines of the basic ideas can be found in Krugman (1987) and Hamilton (1991).
7. Davis (1990) argues that these characteristics form the basis of the “vision” and concept of competition in the Pappas Report (1990). However, the theoretical issues discussed in this section are not consided directly in the Report.
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breeds further success and failure begets more failure.* In such a setting the removal of assistance to Australian manufacturing and its exposure to “competition” from already established manufacturing exporters would have the effect of reinforcing the weaknesses in the manufacturing sector. More recent work on the cumulative causation thesis by Dixon and Thirlwall(1975), and Whiteman (1991), lends further support to the principle of strategic sectors being subjected to government intervention, particularly in accelerating the flow of resources into high technology areas. Most signifi- cantly, the dynamic “learning by doing” aspects of increasing returns emphasises that comparative advantage is not a characteristic which is somehow exogenously determined, but is instead a largely endogenous process in which nations to a significant degree can create competitive advantage ahead, or independent, of time. This principle forms the most consequential aspect of Porter’s (1990.73) critique of traditional approaches to international trade theory:
National prosperity is created, not inherited. It does not grow out of a country’s natural endowments, its labour pool, its interest rates, or its currency’s value, as classical economics insists. The notion that, in the presence of a learning curve, protecting the
domestic market can promote exports was demonstrated earlier by Krugman (1984). a result consistent with Yamawaki’s (1992) recent study of Japanese manufacturing. In such a context it is likely that R&D subsidies significantly widen the conditions under which strategic interventions may be economically justifiable.
Therefore in dynamic context, the role of government is seen as one of assisting in the process of the creation of competitive advantage through the promotion of strategic sectors. However, potential for such strategies to improve a nation’s trading performance is not to be discovered in theoretical models constructed to investigate narrower static allocative efficiency questions.
Chatlenges to the interventionist position According to one observer, strategic trade theory finds a rationale for
intervention only “under highly special assumptions, by radically altering the usual assumptions made by economists about world markets” (Swan, 1991,27). However, even within the boundaries of rather simplistic modelling of co-operative behaviour between firms and the absence of real dynamics,” Spencer’s (1986) analysis shows that such conditions are much more likely
8. Kaldor’s ideas can in turn be traced back to Young‘s (1928) important contribution to the late 1920s value theory debate.
9. These shortcomings are explicitly recognised in Helpman and Krugman (1985). In their more recent work, Helpman and Krugmen (1989) have developed more sophisticated strategic relationships between firms. However, the dynamic implications have yet to be formally incorporated into the theoretical models.
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to exist than those assumed to prevail in the traditional neoclassical models. These conditions include: significant barriers to entry, existence of signifi- cant foreign (existing or potential) competition, and a highly concentrated domestic market. Collectively, these conditions tend to point towards industries that have large capital or knowledge requirements. As noted above, the theoretical justification for such interventions is significantly widened when dynamic processes are added to the existence of simple market imperfections.
Other critics have argued that while studies may offer a theoretical justification for implementing targeted industry policy, difficulties arise in applying these theories in practice. Grossman (1986), for example, argues that the theory is replete with ambiguous policy conclusions that could only be resolved on the basis of very detailed data and a relatively complete understanding of how a particular industry competition is played out. Krugman (1986) has conceded that the new theoretical arguments do not, at least so far, provide straightforward guidelines for policy. Information concerning the complex interrelations between industries is required, as is an analysis of the relative merits of the multitude of intervention measures available to governments.
Questions have also been raised about the ability of policy makers to identify strategic sectors and to successfully pursue strategic policies. Dixit (1986). for instance, argues that the new ideas are likely to be used to serve political rather than economic ends. The IC’s (1990. 53-64) discussion of strategic trade theory in operation claims that not only is this approach “largely unworkable because of implementation problems”, but also that strategic trade interventions could “not [be] identified as an essential common factor” in the East Asian experience.
However, it needs to be re-emphasised that once the traditional neo- classical theoretical apparatus is forced to confront real world “compli- cations” such as imperfect competition and increasing returns, unambiguous policy recommendations are not forthcoming. The strategic games amongst firms and dynamic dimensions of the increasing returns process can not be assumed to be non-existent simply because they defy precise represen- tation and analysis. Government intervention in such processes has preceded the construction of the alternative theoretical structures noted above. The IC’s view that strategic interventions have played only a minor role in the transformation of the East Asian nations is an interpretation of history which largely unfolds from a neoclassical vision emphasising the “importance” of the creation of “vigorous competition” in product and factor markets. The IC’s interpretation is to be contrasted with Edwards’ (1982) extensive review of this episode of economic history which places major significance on governments’ ability to assist in the process of the creation of competitive advantage.
That the successful implementation of strategic interventions by govern- ments is a difficult policy formulation agenda is not open to dispute. However, recent developments in international trade theory alluded to in this section
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suggest that the success of a nation’s trading performance may well depend on the implementation of such strategies.
5. Conclusion This paper has argued that Australia’s current account difficulties are
essentially a reflection of deep seated structural weakness in the economy.1o Arguments that trade and industry policy, irrespective of its stance, is unlikely to offer a solution to these difficulties emerge largely from a rather simplistic appeal to national income identities. The most important target of such policies is undoubtedly in the promotion of Australia’s manufactured exports.
Despite enjoying fairly widespread support, the “market forces” policy stance was shown to be founded on largely inappropriate and under- developed economic theorising. Instead more recent theoretical advances are supportive of a more interventionist policy stance. It is essential that future theoretical and empirical work in the area of industry policy be directed at shedding more light on the significant implementation problems associated with strategic trade and industry policies. Most importantly, such a research program must not be inhibited by an inability to escape preconceived notions about the apparent superiority of market based outcomes.
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