It is no coincidence the federal government is increasing its existing multi-billion dollar subsidies to the car industry at the same time it is increasing the tax burden on the mining sector.
Price signals from global markets are telling Australian labour and capital to reallocate resources out of manufacturing industries characterised by excess supply and into commodities, where there is excess demand. Politicians do not like the distributional implications of these price signals, particularly when it comes to manufacturing.
The manufacturing share of developed economies has been in decline for decades. But that does not mean that manufacturing output has been declining in an absolute sense. Far from it. In the United States and the United Kingdom, manufacturing output was at record levels prior to the onset of the financial crisis. Manufacturing employment has fared less well, but this is symptomatic of substantial long-term productivity gains in this sector, not declining absolute levels of output.
Manufacturing has also been declining steadily as a share of world GDP. This should not be surprising. It is driven by much the same process that saw a decline in the agricultural share of GDP during the 19th and 20th centuries with the onset of industrialisation. As incomes grew, the share of food and other agricultural goods in consumption and production declined. The same is now happening with manufactured goods, as a greater of share of rising incomes is allocated to services.
Unfortunately, the political class the world over still associates manufacturing with economic development and progress. In the minds of many politicians, primary industries are associated with economic backwardness. Service industries and employment are often viewed as inferior to manufacturing, not least because they do not have the tangible outputs that politicians and others can readily understand. The intangible outputs of service industries also do not lend themselves to the photo opportunity with the politician in the hardhat and fluro-vest.
It is a mindset exemplified by Kevin Rudd’s statement, before he became prime minister, that he wanted Australia to have “a bigger vision for its economic future than being China’s quarry and Japan’s beach”. Apart from the implicit xenophobia, these comments reflect a profound misunderstanding of the sources of value creation and progress in the Australian economy.
Contrary to popular stereotypes, Australia’s primary industries are at the forefront of technology and innovation, employing highly skilled workers who are also highly productive. These industries compete in global markets with little or no government assistance, especially by international standards.
However, like the US and other high-income economies, most of the value-added in the Australian economy is attributable to service industries. This is symptomatic of an advanced stage of economic development. But politicians still yearn for manufacturing. As opposition leader Tony Abbott told workers at the Repco distribution centre in Ingleburn last year, “I want us to be a country that continues to make things”.
What also sets manufacturing apart in the minds of politicians is that manufacturing employment is often more geographically concentrated than primary and tertiary employment. This concentration translates into electoral influence and gives manufacturers the kind of leverage over politicians that ultimately results in the shake-down of Australian taxpayers by foreign car-makers.
The antiquated thinking that leads politicians to associate manufacturing with economic success helps explain why many governments around the world provide assistance to their manufacturing sectors. This is a cost they impose on their economies and a benefit they unwittingly bestow on the foreign consumers of their exports. It also helps explain why the prices of manufacturing goods have been in steady decline. The flip-side of Australia’s terms of trade boom is the slump in the terms of trade experienced by manufacturing economies such as Japan and South Korea.
The excess capacity in global manufacturing is partly due to strategic industry and trade policies followed in many countries. This is a vicious circle, because the more manufactured goods prices decline, the louder the demands for additional assistance from producers.
Bolting things together is something any country can do if it is willing to misallocate sufficient resources for this dubious privilege. For example, Australia designs and manufactures its own submarines, which sounds impressive, until you consider the enormous cost to taxpayers relative to buying off-the-shelf from abroad. This DIY approach to defence procurement has probably done more to harm Australia’s national security than enhance it.
The Gillard Government’s mercantilist notion that we should subsidise and protect the local car industry because other countries do so belies its rhetoric on free trade at international fora like the G20. Industry Minister Kim Carr issues press releases celebrating the profitability of US carmakers in Australia, neglecting to mention that those profits were secured at the expense of Australian consumers and taxpayers. It is hard to imagine similar government press releases celebrating the local profits of foreign miners or banks.
Industry policies such as the Australian government’s assistance to the car industry impoverish many for the benefit of a few. They turn Australia into a rent-seeking rather than a productive society.
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Comments (8)
Russell Hamilton
Librarian (logged in via email @gmail.com)
Kim Car is actually the 'Minister for Manufacturing'.
I think this article is wrong in every paragraph - but we knew what to expect when we read of the 'tax burden' on the mining sector.
As Bruce points out price signals don't necessarily tell you much about the long term - could we please have long term planning for a diverse and balanced economy. The future is a bit like the environment for economists, something to be ignored.
"As incomes grew ...." - to economists that is the measure of all things; no need to consider any of the downsides of the process, or exactly whose income grew (as compared to whose life was messed up), or whether the growth is sustainable, all we need is a statistic that national income grew.
Popular wisdom ('don't put all your eggs in one basket') has some lessons for economists.
Bruce Tabor
(Research Scientist at CSIRO)
Oddly enough, neither Japan nor South Korea (nor currently China) were stupid enough to allow price signals (aka "the free market") to determine their industrial policy. In fact fact almost all developed nations (and now the more sensible developing ones) went through periods where their economies were highly protected in order to allow them to reach a competitive position. Countries that give in to free market ideologies end up as basket cases.
There are strategic reasons for retaining a car…
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James Jenkin
EFL Teacher Trainer (logged in via email @gmail.com)
Hi Bruce, you say 'all developed nations ... went through periods where their economies were highly protected to allow them to reach a competitive position'. So are you actually saying we can stop the subsidies now? Or are we not competitive yet? If not, when will we reach that point?
Also you argue car manufacturing needs to be supported because in wartime it could switch to manufacturing armaments. If 'war readiness' is so important, shouldn't the principle be applied to all industries? Why not have government subsidies for the manufacturing of camping equipment, recreational firearms and saucepans (which could switch to helmets)? Why does only car manufacturing receive subsidies on the grounds of strategic importance?
Joseph Bernard
Director (logged in via email @parasoft.com.au)
As a service provider to Industry, I'm Curious!
Ques. What services can I provide without a strong manufacturing base to service? And what about all the other service providers and support industry to manufacturing? The claim that advanced automation means reduced employment is a little simplistic, because automation shifts the labour required in manufacturing to higher skill levels needed to support the advanced technology.
Ques. Which is a greater waste of money? A) Pumping Billions…
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Bryan Kavanagh
Research Associate, Land Values Research Group (logged in via email @lvrg.org.au)
No, we oughtn't be subsidising the car industry, nor any manufacturing industry, Stephen, but how like most neoliberal economists you are ("price signals from global markets are telling us..") by saying we should give up on our manufacturing industry once it's challenged.
How about this as an alternative, Stephen? We don't surrender. We do as Dr Ken Henry suggests: We eliminate most of our conventional taxes and their attendant deadweight; we capture much more of our land and resource rents, the doing of which can't be passed off in higher prices - and thereby start to give Australian manufacturing a bit of competitive chance? No?
Seamus
(logged in via Twitter)
Some excellent comments here debunking a lot of the hash in this article. The idea that a service economy is sustainable in the long run is a fantasy (good luck maintaining a balance of trade in the long term).
In per-capita terms the following countries have the highest industrial output in the world: Switzerland, Japan, Sinapore, Finland and Sweden. Manufacturing is not the domain of backward economies, quite the opposite.
Putting all our eggs in the mining basket is a sure fire way to recession when commodities prices inevitably fall.
Ben Ting
Engineer (logged in via email @gmail.com)
This article seems to jump in and around a whole range of issues loosely bonded together by the term, "manufacturing".
Firstly, the article tries to define what manufacturing means. It dissociates manufacturing from economic development and progress; a tall claim indeed, seeing as manufacturing in essence is the process of creating of value from some input. Whether this input be other manufactured products or raw materials, 'manufacturing' IS the process which adds value to such goods or commodities…
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David Arthur
n/a (logged in via email @fastel.com.au)
Thanks Stephen.
If we don't 'make things', how do we justify our existence?