The Real Payments Crisis
By NICHOLAS DAVENPORT
WHEN is a balance of pay- ments crisis not a crisis? The answer seems to be when it is a 'maudlin' crisis. (Sec the definition of 'maudlin' in Dr. Johnson's dictionary: 'fuddled.') The pun is not intended to be a reflection upon our Mr. Maudling. He has very correctly refused to apply the stock deflation- ary measures to this particular balance of pay- ments trouble. The economy does not need deflating; it needs modernising. The same was true at the time of the last two crises. Indeed, when Mr. Thorneycroft applied his deflationary 7 per cent Bank rate in September, 1957, all the economic indicators were pointing to the early stages of a cyclical decline (1957 actually ended with a surplus on the balance of payments of £216 million). When Mr. Selwyn Lloyd repeated the deflationary dose of a 7 per cent Bank rate in July, 1961, the internal pressures had already eased and the result was disastrous. Growth was stopped, output in the steel industry fell to 75 per cent of capacity and investment in the private sector of the economy came to a stand- still. In fact, we had eighteen months or more of stagnation. Mr. Maudling is wise not to repeat these follies. His BBC statement last week that there was no real sign of over-heating in the economy and that the case for domestic restric- tions had not been made out was completely justified. Deflation is not a cure when the economic malady is not an excess of demand over-all, but a lack of up-to-dateness in certain sections of the engineering industries.
Of course, Mr. Maudling goes too far in pooh-poohing the idea that there will be a balance of payments 'crisis' before the end of the year. There is one already and if a Labour Government were in office the whole Establish- ment would be crying wolf and a flight from the £ would be in full swing. That Mr. Maudling should be angry with the National Institute of Economic and Social Research for daring to point out that it is one of the worst balance of payments 'crises' seen under the Conservative rdgime is understandable at this political juncture. The deficit on our current trading account in the first quarter was £62 million and, having regard to the recent visible trade figures, will have been worse in the second quarter. For the whole year it looks as if the total deficit on current account will well exceed the £258 mil- lion deficit for 1960, which has been the worst so far for any Tory Chancellor. (In 1955 the deficit was only £156 million.) Including the long- term capital account the total deficit for 1964, according to the National Institute, will be of the order of £500 million. For 1965 they think that it will be at least £300 million 'with no fore- seeable prospect of any automatic swing back into surplus.'
It is this pessimism which seems to have angered the Chancellor. He admits the current trading deficit this year, but looks for a surplus next year. In his view the deficit is merely a tem- porary affair brought abbut by the stocking-up which is inevitable in the early stages of a broad expansion. He refuses to call it a payments crisis because it has been financed so far without any appreciable fall in the gold and dollar reserves and without recourse to borrowing at the IMF. The overseas sterling area has, in fact, come to our rescue by turning in a large surplus from its trading with the dollar area. Being an optimist the Chancellor believes that imports will decline and exports continue to rise—though he con- fessed that exports were not rising as much as he had expected—so that the deficit will work itself out. But the professional economists do not agree with him—not only the National Institute ones but the formidable Mr. Nicholas Kaldor, of Cambridge, who has recently joined in the rebuke of Mr. Maudling's optimism. The trouble, I agree, is more deep-seated than the Chancellor imagines. Imports will continue to. rise because of the shortcomings of the British engineering industry.
How far can the increase in imports be ex- plained by stock-building and how far by the flow of competitive finished manufactures and semi-manufactures in a period of general expan- sion? The question is fairly answered by the National Institute experts. They believe that there is still a significant rise in imports to come if national output continues to increase at 4 per cent. Both in 1960, when the last burst in stock- building occurred, and this year, when it is being repeated, a large part of the increase in imports has consisted not of raw materials and fuel but of competing finished manufactures and com- petirig semi-manufactures. Mr. Kaldor, replying to Mr. Maudling's snub in The Times, remarked that the percentage rise in imports over the first five months of 1964 was the greater the higher the degree of fabrication. Thus, while the in- crease in value of imports of basic materials was only 20 per cent, that for chemicals was 28 per cent, for semi-manufactures 31 per cent and for machinery and transport equipment 36 per cent. We know that there has been trouble in the steel industry—witness the imports for re-rolling —and in paper and board, where EFTA tariff reductions have improved the competitive position of the Scandinavians, and we know that the home industry cannot meet all the demand for earth-moving machinery, certain machine tools and the more sophisticated capital goods. The National Institute points out that imports of electrical machinery have continued to rise steadily right through the period since 1957 and that other machinery imports have been steadily increasing their share of the British plant and machinery market—in fact, from 12 per cent in 1957 to over 20 per cent at the beginning of this year. It is this steady rise in the imports of sophisticated manufactures which is the most disturbing feature of our economic complex.
In the first seven months of this year imports, seasonally adjusted, have increased by 13 per cent over the 1963 average and exports by only 3 per cent. I can well understand Mr. Maudling's disappointment at this export record, but the businessmen say that their export order books are full and that in due course the deliveries will appear in the export returns. But this takes time. There is nothing to suggest that we are yet fail- ing to secure orders—that our prices are yet uncompetitive—in spite of the ominous decline in productivity this year. The fact that our share in the world's trade in manufactures is still de-
dining. may merely be a. reminder that we are not exporting the right sort of goods. Indeed, the continued rise in the imports of manufactured and semi-manufactured goods suggests that our industry is not equipped to produce the sophisti- ca,ted capital goods that we and other advanced nations require. It has been the burden of many previous articles on this page that the indiscrim- inate investment bribes which Tory Chancellors have handed out, especially to • those building factories in the so-called development areas, have led to much wasteful investment, that is, to in- vestment which merely duplicates existing plant and industrial processes and fails to install the latest scientific techniques. Slothful and un- scientifically minded managements, abetted by trade unions hanging on to their restrictive prac- tices, have no doubt been responsible for these shortcomings. To put our industry right needs something like another industrial revolution which cannot happen overnight.
If the balance of payments deficit .begins to shake -up the £, which has so far been bolstered .up by the high dollar earnings of the overseas sterling area, then Mr. Maudling will have to impose some import quotas and controls as Mr. Butler did in 1951-52. I was glad to hear him say on BBC radio that if more import controls were justified in practical terms there was no doctrinal reason which would stand in the way of his bringing them into force. That is sensible. It would be ironic if, in the event of a Conserva: live victory at the polls, the first act of a new .Tory Chancellor would be not to introduce a real incomes policy but to devalue the £.