ECONOMIC RESEARCH CENTRE THE ROLE OF TRANSPORT IN COUNTER-CYCLICAL POLICY EUROPEAN CONFERENCE OF MINISTERS OF TRANSPORT PARIS1978 ECONOMIC RESEARCH CENTRE REPORT OF THE FORTY-FIRST ROUND TABLE ON TRANSPORT ECONOMICS held in Paris on 2nd-3rd March, 1978 on the following topic: THE ROLE OF TRANSPORT IN COUNTER-CYCLICAL POLICY EUROPEAN CONFERENCE OF MINISTERS OF TRANSPORT The European Conference ofMinisters of Transport (ECMT) was insti¬ tuted by a Protocol signed at Brussels on 17th October 1953. It comprises the Ministers of Transport of the following 19 countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxemburg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom and Yugoslavia (associated countries: Australia, Canada, Japan, United States). The purposes ofthe ECMT are: to take whatever measures may be necessary to achieve, at general or regional level, the maximum use and most rational development of European inland transport ofinternational importance; to co-ordinate andpromote the activities ofInternationalOrganisations concerned with European inlandtransport (rail, road, navigable ways), taking into account the work ofsupranational authorities in thisfield © ECMT, 1978 ECMT publications are marketed by the Sale ofPublications Department ofthe OECD, 2, rue Andre-Pascal, 75775 PARIS CEDEX 16, France. TABLE OF CONTENTS THE ROLE OF TRANSPORT IN COUNTER-CYCLICAL POLICY Professor B.T. BAYLISS (cid:9) 5 SUMMARY OF THE DISCUSSION (cid:9) 49 (Round Table debate on the report) LIST OF PARTICIPANTS (cid:9) 59 ECMT ECONOMIC RESEARCH CENTRE Forthcoming publications (cid:9) 61 THE ROLE OF TRANSPORT IN COUNTER-CYCLICAL POLICY Professor B.T. BAYLISS Centre for European Industrial Studies University of Bath United Kingdom SUMMARY Introduction(cid:9) 7 Chapter I THE TRADE CYCLE(cid:9) 8 Pre- and Post-War Trade Cycles in the United States and the United Kingdom(cid:9) 10 The Trade Cycle and the Transport Cycle(cid:9) 18 The Aims and Instruments of Counter-Cyclical Policy. . 24 Chapter II COUNTER-CYCLICAL POLICY(cid:9) 28 The Success of Counter-Cyclical Policy since 1945.... 28 Counter-Cyclical Policy and Structural Policy for Transport(cid:9) 34 Counter-Cyclical Measures Aimed Directly and Solely at the Transport Sector(cid:9) 38 Counter-Cyclical Measures Aimed Directly but not Solely at the Transport Sector(cid:9) 43 Counter-Cyclical Measures and Demand for Transport Services(cid:9) 46 Bibliography(cid:9) 47 INTRODUCTION Counter-cyclical policy relates to short-term measures taken by governments to flatten out the peaks and depressions of the trade cycle. Transport can be affected by such policies in three ways: 1) The counter-cyclical measures can be aimed directly and solely at the transport sector, e.g. fuel taxes, infra¬ structure investment, transport tariffs and licences. . 2) Counter-cyclical measures can be aimed directly, but not solely, at the transport sector in the form, for example, of corporation and profits taxes, investment allowances. 3) Counter-cyclical measures can affect the transport sector indirectly through changing the demand for its services. This might result on the passenger side through changes in the levels of personal allowances and income tax, or on the freight side through changes in allowances, subsidies or taxation of industry. Although this study is devoted to counter-cyclical policy, which is by definition short or medium term policy, this is irre¬ vocably tied up with longer term policies of governments which may, as with the counter-cyclical policies, have direct or indirect effects on the transport industry. Thus the effects of counter¬ cyclical measures will depend upon the structure and operating conditions of a particular mode, both of which will have been determined in substantial measure by the long term policy of governments towards the transport industry. Attention has, there¬ fore, been paid in the study to the inter-play of longer-term structural policies of governments and counter-cyclical policies, as well as counter-cyclical policies per se. The work is divided into two main sections: Chapter I dealing with the general form of trade cycles and the aims and instruments of counter-cyclical policy, whilst Chapter II is devoted to counter¬ cyclical policy and transport with analyses in relation to each of the three aforementioned groups. Chapter I THE TRADE CYCLE Economists are generally agreed that two forms of general economic change are a feature of capitalist economies. The one is a persistent long-term trend and the other characterised by short- period fluctuations. During the nineteenth and twentieth centuries growth of pro¬ duction has been the dominant secular characteristic of Western industrialised countries, this upward trend has, however, been subject to fluctuations. The nature of these fluctuations has in the opinion of many economists been sufficiently regular to warrant the description of cycle. Schumpeter(l ) maintained that cycles of different durations existed simultaneously and that business activity could be ex¬ plained in relation to these separate cycles imposed upon each other. These three cycles were considered, to be of 40 to 60 years (the Kondratieff cycle); eight to eleven years (the Juglar cycle); and four to five years (the trade cycle). In Schumpeter's view innovations (in which he included such things as territorial ex¬ pansion as well as technological change) were responsible for all three cycles. More recent works(2) have cast doubts on the exis¬ tence of both the Kondratieff and the Juglar cycles (in the case of the former not least because of lack of sufficient data) and opinion has shifted in favour of an intermediate cycle of about 22 years (the Kuznets cycle). (3) No generally accepted explanation of these intermediate swings exists nor is there indeed agreement on the separate nature of these intermediate cycles and the trade cycle. It does, however, appear to be the case that the Kuznets cycles are related to the established building cycles of about 20 years1 duration. 1) Business cycles by J.A. Schumpeter (New York, 1939) 2) Measuring Business Cycles by A.F. Burns and W.C. Mitchell (New York, 1946) and The Business Cycle by R.C.O. Matthews (Chicago, 1959) 3) Secular Movements in Production and Prices by S. Kuznets (New York, 1930) For economic management purposes it is the trade cycle which is of primary importance. Although the existence of this cycle is without the controversy attached to longer period cycles it has nevertheless demonstrated irregular behaviour. In the United States in the one hundred years 1857-1957, for example, the dura¬ tion of the cycle varied between 28 and 99 months. (1) Given the existence of an intermediate cycle superimposed upon the trade cycle this would have prevented any completely regular trade cycle occurring even if the economy, free of external shocks, had been able to generate one. Nevertheless trade cycles have shown sufficient regularity to suggest that the fluctuations may be due to certain recurring causes capable of identification. Identification being an important step towards control. Theories based upon both exogenous and endogenous causes have been developed. It is, of course, natural to think that endogenous rather than exogenous factors would be responsible for a regular cycle of business activity and the huge bulk of trade cycle theory has relied upon an endogenous explanation of events. Nevertheless, the "limiting concept" of the exogenous case, namely that the regu¬ lar basis of the trade cycle is generated by completely random ex¬ ternal shocks has elicited some interesting results. It has been shown(2), for example, that the application of random shocks to models in which endogenous fluctuations are impossible can result in regular fluctuations not dissimilar from actual trade cycles. An examination of endogenous theories, many of which are based on multiplier-accelerator models, is out of place here. Given, however, that there is no general agreement on the regular basis of the trade cycle and that irregularities can most certainly be caused by exogenous shocks, e.g. technical innovation, change in demand, the most suitable way forward is through an analysis of actual trade cycles. The nature and causes of trade-cycles vary from country to country and although there exist common features no global analysis is possible. Two important aspects of trade cycles suggest the types of country best selected for comparative purposes. Firstly, external influences can be important depending upon the relative size and make-up of a country's foreign trade sector. In the United States the foreign trade sector only represents some 6 per cent of Gross National Product. In Europe although the corresponding fi¬ gure is as low as 17 per cent for France it approaches one-quarter 1) See Business Cycle Indicators by G.H. Moore (Princeton Univer- sity, Press, 1960) 2)' Business Cycles - Endogenous or Stochastic, by I. Adelman in the Economic Journal, December 1960.