1. The importance of easing the fear and pain of change (February 29, 1980)
2. What to do when market forces control exchange rate (March 7, 1980)
A Modest Farmer [Bert Kelly], “The importance of easing the fear and pain of change,” The Australian Financial Review, February 29, 1980, p. 11.
Fred keeps nagging me because I do not write more often about the importance of exchange rate movements. He has become particularly interested in the subject since the recent Agricultural Outlook Conference where the importance of exchange rate movements was emphasised.
Eccles says that our exchange rate, now that it moves more freely with supply and demand pressures, acts to keep the value of our imports and exports in balance.
He also says that there is only one way of being paid for exports and that is by imports. This is an economic law like the law of supply and demand.
You may not like such laws but you have to obey them in the end, if you want to or not.
Because exchange rate movements act to keep imports in balance, it follows that any government actions such as erecting tariff or quota barriers, which make it harder for imports to come in, also make it more difficult for exports to go out.
It was Dr Gregory who first brought this to Eccles’ notice during the mining boom in the early 1970s. When mineral exports expanded as they did then, imports just had to expand to pay for them.
This is why the Labor Government cut tariffs by 25 per cent, to encourage the imports that had to come in to pay for these mineral exports.
The exchange rate was moved up at the same time, again to encourage the necessary imports.
Perhaps it may have been better to have left the whole burden of increasing imports to fall on exchange rate movements.
These would have increased imports in the end anyway and without all the argument that was associated with the 25 per cent tariff cut.
But be that as it may, the important thing is to realise that then, as mineral exports expanded, other exports, even rural exports, had to contract, or imports had to increase.
Then in November last year, Mr John Stone, the Secretary of the Treasury, with crystal clear logic, spelt out the lesson yet again.
He recognised that, because of the impending world energy shortage, and because of our great reserves of coal and uranium, Australia is teetering on the edge of an explosion in mining and energy exports.
And if we successfully grasped this opportunity, we would either have to contract other exports or else encourage imports.
He said that the preferred way would be to lower trade barriers so as to encourage these imports, but if the Government did not do this deliberately, the movements in the exchange rate would do it automatically.
Then at the Outlook Conference, Andy Stoeckel, a BAE officer, gave an excellent paper on the effect on agriculture of the energy crisis.
You should read the paper because it is packed full of facts, some of which you will not like.
In his talk he used a pregnant phrase which I wish I had had the wit to invent.
He said that, not only would our mineral exports increase to meet world demand, but we would also have a great natural advantage in producing electricity because of our great coal reserves.
So we should have a great opportunity to turn our very plentiful and cheap bauxite into aluminium and that we should regard aluminium as “congealed electricity.”
When you put the opportunity to export congealed electricity alongside the possibilities of expanding the export of other minerals, it does indeed look as if we are on the edge of an export boom. And if we are, then farmers as well as others should be warned about what is likely to happen.
There will be some who want to sit on the mining industry’s head to prevent it getting going to fill the world’s needs. They may think that they can stop the economic laws working as the textilers do.
But these people should realise that every barrier to the importation of orange juice, cheese, wine, brandy, lamb or any other primary product, will damage exporters in the same way as does the tariff on textiles.
It is clear then that there is going to be a great deal of activity in the bucket of worms which is the economy.
If we are to grasp the great opportunity to meet the world’s needs and to improve our standard of living at the same time, there will have to be great changes in a great many industries.
And change is always feared and resented by farmers even more than by others.
We must try to ease the pain of change but we must never try to stop it.
The economic laws will win in the end, no matter how poignant our pleas that change pass us by.
A Modest Farmer [Bert Kelly], “What to do when market forces control exchange rate,” The Australian Financial Review, March 7, 1980, p. 11.
Last week [above] I discussed the implications of the likely export explosion of ordinary and energy minerals, and “congealed electricity” in the form of aluminium and similar electricity intensive products.
I said that, if the exchange rate was allowed to move with market forces, then exports of other products would be discouraged while imports would be encouraged.
Eccles complains that I did not warn people, and particularly the Government, that if the exchange rate was held artificially low, then we would soon be awash with money with devastating effects on inflation, as happened in 1972 when the exchange rate was held down by Country Party pressure.
This we must never allow to happen again.
However, on the assumption that we are going to allow, or even encourage, the exchange rate to move with market forces, what are the further implications of the expected expansion of mineral exports?
Bitter experience has made me cynical when governments or other people put on their prophet mantles, but they continue to do it in spite of their mistakes.
So if others do it, I don’t see why I shouldn’t have a go.
And I am encouraged to do so because I won’t have to take the responsibility for my mistakes, so I will be like most of the other prophets in this.
And, because of my advanced age, I am likely to be dead when my theories are nailed out on the cross of action.
This comforts me a lot.
Fortified with a mixture of cynicism and fatalism, what advice should I give the country if the expected expansion occurs and we are men enough to let the market forces control the exchange rate?
My first advice would be not to invest money in industries that have to compete with imports because imports will become cheaper in our money as the exchange rate moves up.
The industries which are dependent on high rates of tariff and quota protection such as textiles and cars will be bad risks unless they can adjust to the changing situation.
This advice about avoiding investment in import competing industries applies to the rural sector also.
The citrus, mushroom, cheese, brandy, lamb and similar industries who need, or say they need, protection from the outside world, will be bad bets in the long term.
You don’t have to be a financial genius to advise people to put money into industries that service mining.
The heavy machinery should be able to take advantage of this opportunity if they are not too busy on their knees asking for government help and so are unable to stand up and fight.
Because an export expansion will raise our living standards, I would put money into the service sector which will continue to expand.
I would be particularly attracted to soft living products such as beer, soft drinks and massage parlours.
I know that these are unworthy ways of earning money but I am giving advice about earning money, not morality.
I hope we could put a lot of our new wealth aside for wise government on social services.
I am not optimistic about being able to do this wisely but we should try even if we know that most of the milk of human kindness will end up on the cowshed floor.
At least, we won’t be able to claim, as we can now, that we can’t afford to be generous.
If we are properly tough with our exchange rate management, our inflation rate should be lower than in other countries so we should be able to expand those industries in which we have natural advantages.
But we must recognise that, if this expansion takes them into the export market, they too will help push the exchange rate still higher.
We should be able to learn from the experience of the OPEC countries who have had a much more rapid expansion of their export income than we can hope to have.
One result for them has been a compulsion to import at almost any price so that they can get paid for their exports of oil.
So they buy sheep at high prices because they just have to buy something and it might as well be sheep.
And that is why their wharves are choked with goods and their harbours with ships waiting to unload.
If the OPEC countries cannot import goods, they have to leave their money overseas so they invest it in all kinds of odd adventures.
They are pushed urgently along the paths of increasing imports and increasing overseas investment with a force that makes it hard for them to do either wisely.
We should not have this pressure on us but at least we should start thinking how we are going to handle the situation if things develop as they might.
I do not often give gratuitous advice. The advice you get for nothing is usually worth that. So if you don’t like it, I suggest you do some thinking for yourself.
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