ECONOMIC GROWTH IN WESTERN

Transcription

1 ECONOMIC GROWTH IN WESTERN AUSTRALIA M. L. PARKER* and A. G. YEOW$ University of TNestern Australia One measure of the economic activity generated by the primary sector is the extent to which the demand for its products is retained within the sector or is transmitted elsewhere. In this article an analysis is made of these inter-relationships between industries and between each industry and the trade sector, as they influence the rate and direction of economic growth in Western Australia, Two input-output models of the Western Australian economy are then used to examine structural changes implied in changes in input coefficients over time. In a previous issue of this journale it was postulated that Western Australia s past ability to retain its industrial position, despite many industrial disadvantages, could be explained by the strong economic interdependence between the rural and extractive industries on the one hand, and the manufacturing and service industries on the other. It is intended to further examine this proposition and to present some additional findings based upon input-output tables in which the Western Australian economy is treated in isolation from the national economy. Induced Manufacturing Output Manufacturing industry in Western Australia has consistently lagged behind the other Australian States. One measure is the fact that although Western Australia has 7.1 per cent of the total population, it generates only 4.4 per cent of the value of production recorded by Australian manufacturing establishments. Another measure is the proportion of the State s total value of primary and secondary production which is generated directly by manufacturing. Approximately 46 per cent of the recorded production for Western Australia comes from factories, compared with the Australian average of 64 per cent. Nevertheless the State has been industrializing and the policies of recent Western Australian governments have given strong emphasis to the direct stimulation of manufacturing production. In the 19 postwar years to 1964, Western Australia more than matched the national average rate of expansion in factory employment. During this period the annual compound rate of growth was 3.45 per cent in Western Australia, compared with the overall Australian rate of 2 73 per cent and rates of 2-69 per cent and 2.53 per cent in Victoria and New South Wales, respectively. The most rapid expansion in Western Australia was in the immediate postwar years, reducing to an annual rate of 1.36 per cent for the nine years from 1955 compared with the overall Australian rate of 1.79 per cent. If the national average rate of growth in factory employment had operated in Western Australia during * John Thomson Agricultural Economics Centre and Institute of Agriculture, University of Western Australia. f Institute of Agriculture, University of Western Australia. 1 Parker, M.L., Inter-industry Analysis of the Western Australian Economy. Aust. J. Agric. Econ., Vol. 9, No. 1, 1965, pp

2 AUSTRALIAN JOURNAL OF AGRICULTURAL ECONOMICS JUNE the 19 years to 1964, 6,570 fewer persons would have held factory jobs in Western Australia in This would represent a 12 per cent reduction in factory employment. Bearing in mind the substantial differences between States, there has been no marked levelling of the degree of industrialization. On the other hand a surprising feature of the Western Australian economy has been its ability, over a period of 40 years, to consistently provide between four and five per cent of the recorded value of factory production in Australia. This appears to be the outcome, in part, of the inter-industry linkages between the primary, secondary and tertiary sectors, together with the high income elasticities of demand for manufactured goods. One measure of the economic activity generated by the primary sector is the extent to which the demand for its products is retained within the sector or is transmitted elsewhere. In Western Australia the retention rate is about 60 per cent for both the rural and extractive industries (Table 1)- In the case of the cereals-sheep industry, for example, 63 per cent of the total output resulting from a unit of sales to final demand in 1959 was satisfied by the primary industry itself. The manufacturing, construction and servicing industries jointly gained almost &600,000 for each 51 million of final demand for cereals-sheep produce. In the case of the horticultural industries the average retention rate within the primary sector was as low as 54 per cent. Since the import content of rural and extractive output is quite low (approximately 10 per cent for rural exports2), an inter-industry demand of this order indicates a substantial generative effect upon the remainder of the local economy. TABLE 1 Total Output Generated in Major Sectors by flm. Increase in Final Demand for Products of Selected Western Australian Primary Industries where final demand increases by Elm. CereaIs-sheep Dairying Pastoral Horticulture Fishing and forestry Coal mining Gold and oiher mining ~ -- Sectors where output is generated Services Primary Manufac- Construc- and Govturing tion ernment ~- Total output ,460 1, , , , Retention within primary sector (%I By contrast, the retention rate for the agricultural sectors in underdeveloped economies is usually of the order of 80 to 90 per cent. The much lower rate in Western Australia is to be expected in view of the degree of mechanization and the complex infra-structure supporting the: primary sector. It emphasizes also the importance of looking beyond the immediate labour intensity of the primary industries. But the economic 2 Op. cit

3 1966 ECONOMIC GROWTH IN WESTERN AUSTRALIA 41 ties between the primary and manufacturing sectors alone would not have ensured that Western Australia maintained its industrial position vis-a-vis the other States. In fact input-output tables indicate that the overall retention rate for Australian agriculture is also about 63 per cent.3 The fact is that the rate of expansion of the primary industries has been maintained at a higher level in Western Australia, thereby providing a continuing source of induced manufacturing growth. Quantum indexes showing trends in agricultural, pastoral and other farming production for Australia as a whole are published annually by the Commonwealth Statistician. For the period of 19 years to 1964, these indicate an annual compound rate of increase, in total farm production, of 3.24 per cent. From similar estimates calculated for Western Australia it can be shown that the annual growth rate in that State, during the same period, was 4.21 per cent. Some of the implications of the differential rates of expansion in the major farming sectors are illustrated in Table 2. Tnis shows, for each sector, the annual compound rate of growth calculated by curvilinear regression. In each case the rate for Western Australia is substantially higher than the national average. The advantage to Western Australia in terms of the value of the additional production made possible by the faster expansion has been estimated by comparing tha production in (based upon the actual trend) with the production which would have been achieved had the rate of expansion been no faster than the national average. The net gain in production has then been valued at prices. In total, this net upward shift is substantial, being of the order of &24 million, or 22 per cent of the net value of farm production in Western Australia during There exists considerable scope for this derived manufacturing growth to continue and to be strengthened by a more rapid expansion in the mining, fishing, forestry and rural industries. With prospects for an unprecedented expansion in the export of iron ore, much of the stimulus for growth is likely to lie with the mining sector. At the same time there remain at least 21 million acres of uncleared or unalienated land, in the agricultural districts, suitable for development using known techniques of production. A recent survey4 has shown that there are about 11.7 million acres uncleared on existing farms, of which 9.3 million acres appear to be suitable for farming. The greater part of this uncleared land is in units of at least 600 acres. In addition there are 11 '9 million acres of unalienated agricultural land, 36 per cent of which receives at least 14 inches of rainfall annually. From the same survey it has been estimated that an additional 3,000 farms could be established on the area yet to be alienated. The 11.9 million acres of unalienated agricultural land remaining in Western Australia appear to account for at least 35 per cent of all such land in non-tropical Australia.5 But Western Australia's agricultural potential consists of more than unused resources. It includes also rates of return on capital invested in wheat and sheep farms and pastoral holdings which, on the evidence of farm surveys conducted by the Bureau of See, for example, Commonwealth Bureau of Census and Statistics, Input- Output Tables, , (mimeo), Canberra, Nalson, J. S. and Hogstrom, A. W., Farm Population and Land Development in Western Australia. University of Western Australia Press, SDavidson, B. R., The Distribution of Agricultural Land in Australia. 3. Ausf. Ins?. Agric. Sci., VoI. 27, 1961, pp

4 ~ W.A. TABLE 2 Farm Production, Western Australia and Australia, to Annual compound growth(a) (%) Value of production in (fm.) Net upward shiftcb) (Em.) Agriculture I Pastoral 1 Other farming 1 All farming Aust. W.A. Aust. I W.A. Aust. 1 W.A. Aust. i , Calculated from quantum indexes of production. The difference (at prices) between production achieved in and the production which would have resulted from a rate of growth equal to the national average. P h, -I C w + r m n s 0 z B

5 1966 ECONOMIC GROWTH IN WESTERN AUSTRALIA 43 Agricultural Economics, are consistently higher in Western Australia than in the other States. The production to be expected from the prospective expansion of the rural sector in Western Australia is largely dependent on the availability of sheep. During , Western Australian farmers imported 155,000 sheep, mainly from South Australia. Even with 300,000 sheep imported annually and with the net annual breeding increase in flock numbers maintained at 5 per cent, the 44 per cent increase in sheep numbers likely between 1964 and 1970 would account for less than 80 per cent of the additional sheep required by 1970 to stock the additional cleared area and to meet the substantial requirements of heavier rates of set stocking. Nevertheless, the increase in rural output between 1964 and 1970 is likely to be about 18 per cent for cereals and 50 per cent for livestock. Some indication of the output generating effect of a rural expansion of this order can be obtained by reference to the inter-industry transactions identified in an input-output table. This can be done by applying estimates of 1970 final demand deliveries (sales to government, consumption, investment or export) to the inverseb of a 54-sector input-output table for By this means it is possible to estimate the output required from each industry if the 1970 schedule of final demand deliveries is to be achieved. However, as the aim is to illustrate the economic activity generated by growth in the rural sector, the final demand deliveries from the non-rural industries have been retained at their 1959 level. On the other hand, the 1970 deliveries to personal consumption from the rural, rural processing and fishing industries were projected from national estimates assuming an increase in productivity of 2.5 per cent per annum.7 The estimates of 1970 rural exports were then estimated as the residual after local consumption had been deducted from the projection of rural output. This new schedule of final demand deliveries was then applied to the inverse of the input-output table. Table 3 shows the output required from the industries listed at the left (located in Western Australia and elsewhere) to meet the 1970 requirements of an expanded rural (and fishing) sector. The projected output of the agricultural, pastoral and dairying industries is 49 per cent greater than the actual output of these industries in the base year (at constant prices). Increases of 30 per cent, 40 per cent and 35 per cent are projected for the horticultural, poultry and fishing industries. The output generating effect of this expansion upon the rural processing industries and other industries servicing the rural sector is likewise shown in Table 3. The expansion is not confined to industries which directly service the rural industries, however. Thus the output of coal is shown to increase by 8 per cent, although there are no direct sales of coal to the rural industries. In the manufacturing sector the overall expansion is 10 per cent. Since the analysis is based upon relationships which existed between industries in an earlier year, it ignores changes in technology. Nevertheless, the analysis does indicate the approximate stimulus which expanding rural production can have upon the manufacturing, commercial, transport and service industries. Table 3 does not indicate the 6 The distinction between an input-output table (showing the direct transactions between industries) and its inverse (showing the direct and indirect linkages) is outlined in Parker, op. cit. 7 Coombs, H. C., Some Ingredients for Growth. University of Western Australia Press, 1963.

6 44 AUSTRALIAN JOURNAL OF AGRICULTURAL ECONOMICS JUNE TABLE 3 Estimates of Sales from the Rural Industries in 1970 and Associated Changes in Output of other Industries Industry Agricultural, dairying, pastoral Horticultural Poultry Fishing Forestry Gold (including pyrites) Coal mining Other mining Cereal foods Milk processing Meat processing Wine, aerated waters Beer, tobacco Other processed foods Animal oils Saw mills Furniture Paper, printing Petroleum products Fertilisers Other chemicals Cement goods Lime, bricks, glass, etc. Leather goods Woollen mills Clothing and textiles Other manufactures Iron and steel Ferrous wire and pipe Other engineering Gas and electricity Building and construction Rail transport Road transport Air and shipping Commerce Other services Unallocated Total Total Output f'm PO00 98, ,761 12,010 15,652 2,735 3,816 5,216 7,046 6,657 6,820 14,230 14,543 3,910 4,232 6,949 7,174 18,251 18,247 8,751 11,495 25,375 39,872 5,022 7,122 28,274 28,377 16,996 17,543 2,332 2,529 16,573 17,097 7,773 7,800 14,704 15,751 51,648 55,903 9,023 14,436 20,094 21,196 4,332 4,438 8,211 8,468 6,449 6,455 11,962 13,000 25,704 26,670 12,606 13,557 3,975 4,039 5,764 5, , ,604 11,215 11,828 56,000 56,965 14,679 17,606 15,278 17,024 8,675 9,472 86,325 98, , ,149 17,163 18, ,577 1,040,302 Increase to 1970 % additional output associated with the investment programme needed if the rural industries are to achieve these higher levels of output; nor does it indicate the generative effect induced by the increased rural and nonrural incomes. Structural Change The preceding use of an input-output table for purposes of projection raises the question of the stability of the input coefficients over time. It is therefore of interest that Western Australian input-output tables have

7 ~ ~~ ECONOMIC GROWTH IN WESTERN AUSTRALIA 45 been compiled for both 1954 and 1959,s and the consistent treatment of entries in each table enables comparison to be drawn between the coefficients in the two years. The three major sources of variation are changes in prices, changes in composition of the output of sectors, and changes in technology; in dealing with rural output, changes in yield can obviously be a further source of variation. The input-output coefficients are normally estimated from a single observation for each industry and they represent merely averages of the input-output relationships of component sub-sectors. In view of these deficiencies in derivation, Rasmussens has asserted that a priori it would be most surprising if an application of the model would not make it inevitable to make extensive use of structural changes as an explanation of the (expected) deviations between the predictions of the model and the actual observations. As a summary measure of the structural relationships in 1954 and 1959, the columns in Table 4 show for each of five major sectors the total requirements (direct and indirect) from other sectors per El00 of their individual deliveries to final demand. This table is derived as the inverse of a unit matrix less the matrix of input-output coefficients obtained from a consolidated version of a 54-sector input-output table for Western Australia. At this stage it should be pointed out that following a standard procedure in input-output analysis, competitive imports have been combined with similar local production; the transactions in Table 4 therefore refer to a combination of imported and local commodities. Non-competitive imports on the other hand have been charged directly as a cost to consuming industries. This treatment can be defended on the ground that it helps to stabilize input coefficients which would otherwise be affected by changes in the source of supply. Nevertheless the need to use this procedure was imposed by the availability of statistics. The alternative procedure of directly allocating all imports has the advantage TABLE 4 Requirements per floo of Final Demand,(a) Western Australia, and Using sector Producing Year Rural Extract- Manufact- Construct- Services sector ive wing ion -~ - ~~ Rural Extractive Manufacturing Construction Services (a) Each column element shows the total purchases required, directly and indirectly, from each of the sectors listed at the left, per El00 of sales to final demand of the sector listed for the column. 8 Parker, M. L., An Inter-industry Study of the Western Australian Economy. University of Western Australia Press, Rasmussen, P. N., Studies in Inter-sectoral Relations. North Holland Publishing Co., Amsterdam, 1957, p ~- ~

8 46 AUSTRALIAN JOURNAL OF AGRICULTURAL ECONOMICS JUNE that it distinguishes the transactions between local industries but it also implies a knowledge of the relative proportions of domestic production and imports used by each industry. In Table 4, the coefficients for 1954 and 1959 are substantially the same. This is perhaps expected in view of the short interval of time and the degree of aggregation. A better measure of the overall structural change is obtained by comparing the actual 1954 output of each industry with the output obtained by applying 1954 final demands (at 1959 prices) to the inverted matrix of inter-industry demands for This comparison is shown on a 30-sector basis in Table 5. The deviation in the value of output of the total system of industries amounts to only f373,000, or 0-05 per cent. On the other hand the standard deviation of the differences between actual and predicted outputs for individual industries is El ~01 million. The major differences in output requirements are TABLE 5 Comparison of Actual and Estimated Output, Western Australia, 1954 Industry 1954 Output Index of 1954 estimated Change output from 19s = 100 coefficients Cereals-sheep Dairying Pastoral Horticulture Fishing and forestry Coal mining Gold and other mining Cereal foods MiIk processing Meat processing Beer and tobacco Other processed foods Woodworking Paper and printing Petroleum products Chemical fertilizer Other chemicals Cement, bricks, etc. Woollen mills Clothing and textiles Other manufactures Iron and steel Vehicle assembly Engineering Gas and electricity Building and constr. Transport and comm. Commerce Other services Unallocated re.ooo (a) 47,846 11,213 7,586 13,723 9,077 4, I55 18,255 16,321 8,622 23,543 30,056 17,726 23,106 10,789 20,372 6,893 13,798 12,816 7,053 32,038 11,083 2,613 21,714 93,338 7,548 60,579 38,017 75, ,020 16,457 f 000 (a) 49, ,204 8,042 13,205 9,361 3,160 18,230 15,253 8,484 23,694 30,094 18,221 22,414 11, ,265 6,457 15,615 13,137 7,333 31,433 10,943 2,642 21,851 89,680 8,860 60,010 38,115 76, ,424 15, Total 767, , (a) At 1959 prices,

9 1966 ECONOMIC GROWTH IN WESTERN AUSTRALIA 47 those which would be expected to result from technological progressnamely a 24 per cent reduction in coal and a 17 per cent increase in gas and electricity. A further summary measure of changes in the input coefficients is shown in Table 6. This is based upon an index developed by Rasmussen,1 in which changes in the coefficients are indicated by deviations... ~ Industry TABLE 6 Average Changes (a) in Input Coeficients, 1954 relative to 1959 Cereals-sheep Dairying Pastoral Horticulture Fishing, etc. Gold mining, etc. Coal mining Cereal foods Milk processing Meat processing Beer and tobacco Other foods Woodwork Paper and printing Mineral oil Fertilizers Other chemicals Cement, etc. Woollen mills Clothing, etc. Other manufactures Iron and steel Vehicle assembly Engineering Gas, electricity Building and construction Transport, etc. Commerce Other services Unallocated 0, , ~ ,0047-0~ ~ O.oOO ~ ~ (a) Based on Rasmussen s index of the form: a0 30 (212 ( ~ c j + xcj)}{z [(a &, acj)/(a cj + ail)] (x +, + Xij)}, i = 1, 2,...30 i = l i=l where a c, = output of industry i used per unit output of industry j in 1954 (at 1959 prices); at, z output of industry i used per unit output of industry j in 1959; x, = output of industry i used by industry in 1954 (at 1959 prices); x+, = output of industry i used by industry i in Deviations from zero indicate the average change in input coefficients for each of the industries shown at the left. Column 1 takes into account the changes in coefficients relating to inputs from each of the 30 intermediate industries. In column 2, the index covers inputs from the intermediate industries plus inputs in the form of value added and imports. lolbid., p. 131.

10 ~ Gross 48 AUSTRALIAN JOURNAL OF AGRICULTURAL ECONOMICS JUNE from zero. In this case the direct coefficients for 1954 and 1959 are compared column by column, using 30-sector tables computed at 1959 prices. From the viewpoint of average changes in the input coefficients of each industry, the greatest changes are shown to have occurred in the petroleum, iron and steel, and gas and electricity industries. At least for this interval of five years the results in Tables 5 and 6 appear to confirm the observation that while it is difficult to attribute observed changes in the values of input coefficients to particular causes, the genera1 consensus is that changes in technology exert only a gradual influence upon the coefficients and affect principally the inputs of energy and the inputs of primary factors such as labour and capital.ii Component of final demand E States exports O seas exports Personal consumption Other demand (invest., govt., stocks) TABLE 7 Factor Content of Final Demand Competitive E States fm. 9% O seas % Import Content Non- domestic -competi- Total product tive % % % TABLE 8 Composition. of Output in Terms of Ultimate Inputs, 1959 Percentage of output accounted for by: Wages, Business Competitive importsnon- Sector salaries, surplus & competisupple- indirect Ea&p Overseas imports tive Total ments taxes ~ Rural Extractive Manufacturing Construction Services and Govt Total United Nations Report by the Secretary-General, Problems of Input-Output Tables and Analysis, (mimeo), 1965, p. 110.

11 1966 ECONOMIC GROWTH IN WESTERN AUSTRALIA 49 Imp or t Dependence The greatest value of the Western Australian input-output tables is likely to be in their description of the type, size and interdependence of economic activity in that State. However they can be applied to a variety of regional problems and can be used to compile a range of new statistical series. The remainder of this article illustrates the application of the technique to an analysis of import dependence in Western Australia. The importance of trade to Western Australia may be inferred from the fact that in imports from the Eastern States and overseas were valued at &223 million, compared with a total net value of primary and factory production in Western Australia of &249 million. The significance of imports is further illustrated in Table 7. Here input-output tables for 1954 and 1959 have been used to indicate the approximate import content and the gross domestic product in the form of wages, profits, depreciation and net indirect taxes embodied in major components of final demand. The import content of demand in is shown to be as high as 44.5 per cent for Eastern States exports and 24.5 per cent for overseas exports. The increase between 1954 and 1959 is largely accounted for by the substantial import content of petroleum products. But even with local demand (personal consumption, investment and government outlay) the import content is of the order of 30 per cent. It 1s this substantial dependence upon imports-particularly Eastern States imports -which is often viewed as a measure of Western Australia s potential for economic growth through import replacement. However, whether such opportunities really exist can only be determined by detailed examination of the prospects for particular firms and industries. In Table 8 the analysis is extended to show the wage, non-wage, and competitive and non-competitive import content of the aggregate final demand for products of the major sectors in Sales of rural products, for example, are shown to have a direct and indirect wage content of 27 per cent, a non-wage content of 56 per cent and a total import content of 17 per cent. At the other extreme, final sales of manufactured goods have an average import content of 45 per cent. A further set of calculations concerns the contribution of individual local sectors to local or export demand. In Table 9 the contribution of each sector is measured firstly in terms of its total supplies moving into local or export demand and secondly, in terms of the gross domestic product generated by each sector in producing for local or export demand. The attempt to specify the factor content of the components of final demand introduces the assumption that, for the same commodity, all components of final demand have the same factor content. In view of the magnitude of competitive imports in Western Australia, this is an inadequate assumption and can lead to distortion. For example, many competitive imports are in the form of consumer goods destined for local markets; it is not reasonable to assume that the import content of local demand and export demand for the products of the industry through which these imports are distributed will be the same. The interpretation of Tables 7 and 9 is further influenced by the treatment of re-exports. Ideally, imports and exports should be measured net of re-exports, in which case the direct competitive import content of exports would be zero. However, the practice of distinguishing re-exports in Western Australia s published trade statistics was discontinued after 1954 and it was found impractic-

12 50 AUSTRALIAN JOURNAL OF AGRICULTURAL ECONOMICS JUNE abie to make this adjustment. Some idea of the discrepancy involved may be seen from the fact that re-exports (other than goods of other Australian origin exported overseas) accounted for 2.4 per cent of the recorded value of Western Australian exports in The discrepancy is likely to be more serious with regard to particular classes of TA3LE 9 Contribution of Selected Zndustries to Local and Export Demand, Western Australia, Local demand(@ Export demand (a) Actual Gross Gross sales domestic sales domestic product product % % 9% % Rural Extractive Beer, tobacco Meat processing Other proc. foods Woollen mills Clothing, textiles Petroleum products Motor vehicles Other engineering Building, constr Transport, communic Commerce Other services Other industry Non-competing imports 1.3 Total Total local content Total import content fa) Personal consumption, investment, stocks and public authority outlay. (a) Eastern States and overseas exports. exports. However, despite these assumptions, the analysis in Table 9 is believed to give a reasonable indication of the factor content of local and export demand. Its accuracy is strengthened by the degree to which the major industries in Western Australia specialize in either the local or export market. In Table 9 the contribution of the rural industries to overseas and interstate exports is shown to be about 39 per cent, whether this is measured in terms of the value of exports or in terms of the contribution to gross domestic production. PetroIeum products accounted for a further 20 per cent of the value of exports in 1959 but the export contribution of this industry in terms of wages, etc., generated locally, was less than 9 per cent. Table 9 also emphasizes the small local contribution (relative to actual sales) of the food processing, clothing and textiles, and motor vehicle sectors. The transport, commerce and other service sectors, on the other hand, made a surprisingly large contribution to local demand and also to export demand, although directly there were no sales to export from these service sectors.

13 1966 ECONOMIC GROWTH IN WESTERN AUSTRALIA 51 Further Development of Input-Output Analysis It is now 30 years since the first input-output tables dealing with the U.S. economy were compiled by Leontief. During this period many national and regional tables have been constructed for both developed and underdeveloped economies. Official interest has been lagging in Australia although several tables for have been released by the Commonwealth Statistician and work has commenced on a further national table for It is hoped that the standardized data collection and special statistical collections needed for national tables will also provide the means and stimulus for the construction of regional tables. Many of the more interesting questions of agricultural and general economic policy centre about the inter-dependence between industries and cannot even be clearly posed in the aggregative terms of the existing statistics. This is particulariy so with regional issues where the official statistics may be further aggregated to conform to the secrecy provisions of the Statistics Act. The Western Australian input-output tables have. been used to throw new light on the role of the primary industries in inducing economic growth elsewhere in the economy. However, they may be used in a variety of ways since,they provide a means of integrating, in a meaningful array, all available regional statistics, while providing a framework for incorporating data from secondary sources. They provide an aid in developing and implementing economic policy in areas which require a long-range view of future patterns of regional economic growth.