Manufacturing Industry: what, if anything, should we do to help it?

I’m a speaker at Kevin Rudd’s Manufacturing Industry Roundtable on Monday. I thought I’d outline a few thoughts here and invite feedback. Ive thrown these points together quickly as Ive got to get on a plane so apologies for any typos and for the staccato delivery.

But feedback before midnight tonight is especially welcome and feedback after that time is (slightly less) welcome.

Introductory thoughts. Why manufacturing and what is manufacturing?

1. Why manufacturing? Why indeed. A lot of manufacturing industry policy discussion is driven by naive mercantilists and special interests. The union movement is particularly bad at this because the rump of members they have are disproportionately located in large traditional firms in manufacturing industry.

2. There are also basic definitional problems. For instance one of the more encouraging things our manufacturing firms for instance in the automotive industry – are doing is selling design services around the world, particularly Asia. Pharmaceutical firms are doing research here. Pretty obviously this is a good development. If we want manufacturing to prosper, were nuts if we dont try to include this kind of thing in our definition of manufacturing though in each case what is being supplied is services.

3. Software production is also an add on service to manufacturing and in addition it is actually quite like manufacturing in the sense that at least much of it involves building specific products for sale rather than the provision of services.

The integration of macro and micro economic policy

4. One of the strengths of the first few years of the previous ALP government was the judicious integration of macro and micro economic policies. Accord partners got together and worked out what was really critical for the economy at the time which in the early years involved restraining real wages and increasing the profit share to which was added in late 1985 competitiveness issues.

5. In this regard, from 1985 until the late eighties, there was the happy circumstance of tariff reform in the most protected sectors, gathering microeconomic reform in the economy and a low exchange rate which was very conducive to a good transition from import replacement to export orientation.

6. Things started coming unstuck when the government felt forced to raise interest rates to restrain the economy. The way this led to an overvalued currency undermined this transition and indeed drove resources out of investment in our traded sector to our ultimate disadvantage.

7. We are now in a similar situation (though obviously there have been many important changes in our economy and the way we think about it). We have relatively fiscal policy about as tight as our political system seems capable of delivering (at least measured by the budget surplus), and yet we are finding that we have an additional need to slow the economy. The result is that monetary policy is used to fill the void and that has nasty effects on our industrial structure by squeezing the traded sector with an overvalued exchange rate. Of course there remains a buoyant mining sector given the prices we are getting, and it is appropriate for resources to flow strongly into that sector. But with a CAD at around 6% of GDP even with the increases in investment were seeing in mining, we should be wary of an overvalued exchange rate hampering our ability to stabilise foreign liabilities.

8. It amazes me that the Labor Party has said so little about the growth of foreign liabilities. Here we have a government that was elected who as an opposition had a Debt Truck travelling the country to highlight how outrageous it was that net foreign debt was heading towards $200 billion or then 38% of GDP. It’s now around $550 billion or 54% of GDP and yet it’s not a major focus for Labor’s advocacy. Perhaps that’s because the ALP thinks that debt will keep rising if it were to form a government. But shouldn’t Labor be talking about how it was Labor that established the most comprehensive savings policy the country has seen – compulsory super? It was Labor that went to the 1996 election with a policy of increasing compulsory super from 6 to12% with an intention to get to 15%. The Liberals promised much the same but subsequently reneged. Now it is certainly true that compulsory super doesnt raise saving by a dollar for each dollar deposited in super funds because people, seeing their super growing are prepared to spend more of the rest of their income. But if compulsory super increased saving by 50 cents in every additional dollar it puts into super, that means firstly that the policies Labor implemented have probably reduced our net foreign liabilities by a hundred billion odd, and had the policies they took to the 1996 election been implemented that would be worth another hundred billion odd.

9. The idea of increasing superannuation contributions as an alternative to raising interest rates would have saved a great deal of heartache in the late 1980s and early 1990s. Thats not something I’m saying with hindsight I said it at the time. The same is true today.

10. Stronger savings policy would have similar macro-economic effects as tighter fiscal policy. It would slow the economy in a bunch of ways that are more constructive than higher interest rates. It would stimulate, rather than suppress investment, it would slow the economy but not raise the exchange rate thus placing our traded sector (including manufactures) in a better position to compete in international markets.

11. A further thing to keep in mind is this. One of the major reasons why export promotion is so much more successful as an interventionist industry policy as a strategy for economic development is that the world is a big place. That is, once a manufacturer develops, by design or by accident some niche in the export market, theres the whole world to export to. By contrast a niche in ones own domestic market is quickly exhausted as a market. Similar things can be said about a range of general policies in our economy. Thus for instance the policy of dividend imputation discriminates in favour of domestic investors (who face near zero levels of effective company taxes dividend imputation making company tax payments effective withholding of income tax on domestic shareholders) whereas foreigners are taxed the full 30%. So in some ways this is a financial equivalent of tariffs. It discourages foreign investors in our country (compared with taxing them the rate wed need to without dividend imputation 19-21%) and it also discourages Australian firms from investing offshore and diluting their capacity to pay fully franked dividends. A major problem.

Policies of independent value which would advantage manufacturing (considered broadly).

11. There are a bunch of things that are worth doing for their own sake but which could have strongly positive effects on innovation in our economy and for manufacturing – broadly considered. For example:

12. We should become a regulatory pacesetter.

13. There are many industries in which regulation might be thought of as so integral to a market that its better thought of as a co-product with firms output. Industries I’d put in this category are finance (pdf), pharmaceuticals, biotech and genetically modified agriculture, greenhouse gas trading.

14. Lateral Economics provided an example in its recently published study on Regulation and innovation (pdf) where we argued that we could set up penumbral carbon markets which had integrity in the sense that they genuinely abated carbon emissions even if they were not (yet) recognised in global carbon trading. This is better regulation for its own sake, but it would also stimulate a lot of innovative industry development in the systems to deliver and audit the carbon abatement.

15. I could outline similar policies in the other areas Ive mentioned. If some are too hot to handle (like GM crops), then others are definitely not too hot to handle.

16. There are a range of areas where intellectual property protection is becoming a major impediment to innovation. The most obvious area is software patents. Weve been heading in the wrong direction here owing to our kowtowing to the Americans. We have some new obligations under the new Free Trade agreement with the US, but it seems to me that even given these we should be able to reduce the impact of software patenting here giving software producers some confidence in Australia as a market to lead in the creation and distribution of leading edge software. In addition we should do whatever we can to protect open source software from the fear uncertainty and doubt that software patents seem to be having. The aim should be to make Australia as safe a haven as we can for the creation and distribution of software. Governments should also be doing whatever they can to remove institutional obstacles to the creation and use of open source software.

17. The Commonwealth government should insist that State Governments not seek to poach existing business off each other, and going further should prevent them competing with each other with incentives to attract foreign investment except as part of some process co-ordinated with a national approach to investment attraction.

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oyster
oyster
14 years ago

maybe its time for the government to pick winners and support them , it appears to have enough of our money at present

cs
cs
14 years ago

The union movement is particularly bad at this

Is there evidence of this?

derrida derider
derrida derider
14 years ago

I don’t want to derail the thread, but I strongly disagree with your description of the effects of superannuation. Super’s one of those things that look really good until you think it right through.

david tiley
14 years ago

BTW, Nick – the film industry might be an interesting model.

Huge R&D component; local production for cultural reasons; ambiguities about genuine differences between societies; industry hopelessly subsidised, but…

studio, specialist services and post production sector are competing successfully internationally, partly on the bedrock of local subsidised production. ‘Australia’ brings in $130 mill; ‘Pacific’ brings $180 mill, all flowing directly into the local economy, often in regional areas.

Jc
Jc
14 years ago

I actually agree with Kimm Ill Carr about manufacturing. That’s where a lot of high paying jobs are.

However our agremeent ends at the every point. It’s down hill all the way after that.

What will supoort manufacturing?

1. harden the currency.
2. Allow first year depreciation allowances
3. Ensure labor laws do not allow unions to treat firms as captured capital.
4 remove all tariffs and soft support.

Manufacturing is quite different from services simply because of the outlay for capital euqipment and longer lead times. Capital accumulation is quite complex and the stages of production are longer.

A great pointer to manufacturing is the mining sector where there are high paying jobs in even harder times.

Jc
Jc
14 years ago

example of the mining industry…..

the sceret is the high capital to labor ratio that supports high rates of pay.

Caroline
14 years ago

As I said to JWH in a letter I wrote to him way way back in the year of our Lordy, Nineteen hundred and ninety six– Australia should build itself a reputation for making things that last. Scoff if you will.

We have the technology to make toasters that will last for 500 years. Does anyone need a toaster that will outlive them? Well possibly not, but in this age of decreasing natural resources its really worth considering the possibilities of going against the flow of throw away consumption. Indeed, it has become imperative that we try.

We cannot compete with China on volume and cheap-nastiness but we sure as hell could compete on quality/design and aesthetics. I think there would be niche markets all over the world for commodities that have been built to last.

David Rubie
David Rubie
14 years ago

A naive question: Why do we bother again with manufacturing? I’m sure in 1938 it made sense when you needed factory capacity to make bullets, owen guns and mosquitos, but now? I always considered the fostering of manufacturing capacity a kind of insurance policy against industrialising nations who were prepared to gear up war machines to an extent we were never comfortable with. Now, when weapons manufacture is concentrated in a small number of major powers, the idea of building motor vehicles here seems like sentimentalism for an age where people took their lunch to work in a metal pail.

Of the things Australia has been consistently good at (digging things up and the industries that arise in pursuit of that activity like finance) none involve value adding or manufacturing to any large extent other than the opportunities that exist in exotic financial products. Occasionally, and by accident, flogging a few cars into the biggest motor vehicle market in the world is no great achievement. Even the eastern bloc did that (the Yugo!).

The smart thing to do would seem to not bother with it. We get some great, cheap cars from the subsidised industries in our Asian neighbours – let them go broke trying to build an unsustainable industry. Subsidising the film industry only ever brought riches to David Williamson – and if any child is ever subjected to tosh like “White with wire wheels” ever again as part of a school curriculum we should listen to the dirtbag conservatives and privatise the whole lot.

Damien Eldridge
Damien Eldridge
14 years ago

Nick, Here are a few quick points, bearing in mind the midnight timeframe. First, what is special about manufacturing? Why should we want to bias policy towards manufacturing? Is there a market failure in manufacturing that does not affect other sectors? Second, do you believe that governments can pick winners? If not, then discriminatory policy in the absence of a market failure is likely to reduce social welfare. Third, I think you are overplaying the foreign debt issue. The Pitchford thesis and all that. Is there a market failure? If so, where is it and what is the underlying problem? Once this has been established, we can think about designing a policy to address it, rather than using a blunt instrument to try and tackle foeign debt.

I gather you probably enjoyed the football this weekend!!!

Jc
Jc
14 years ago

Damien

Why design any policy when you could imsply follow the three paramenters I set out? It ain’t difficult. Reagan allowed accelerated depreciation in thje early 80’s and the result was that the US grew the equivalent of a West Germany in 6 years. Manufacturing took off in the US after that.

And who the bloodly hell says we aren’t good at manufacturing.

Eg.
I would include the wine business as manufacturing. The grape growing is a small part of the total process- everything about the wine business is a process operation. From a tiny industry in the 80’s our wine business is now an international industry that deserves respect.

You don’t want industry policy to give manufacturing a boost. Just ensure we have macro policy settings such as adequate tax depreciation allowances and the other three points.

Sacha
14 years ago

The starting point is to properly defining “manufacturing” and then, as you point out, asking why should it be treated differently to other economic activities. What I perceive to be the usual response to the latter question is that “manufacturing employs lots of people”, so you’ll have to address that idea.

derrida derider
derrida derider
14 years ago

Nic, I’ll take you up on that offer about a guest post on super sometime in the next few days.

On manufacturing I’m with David Rubie. We’ve never been any good at it, largely because we’ve never had to be; we’ve always had better things to do with our resources. If other people want to donate cars to us for less than the cost of production then more fool them.

Sacha, manufacturing does not employ lots of people in Oz relative to services. Car manufacturing, in particular, is quite small beer. There’s a good argument that the subsidies and tariffs needed to support it costs considerably more jobs than they create.

Nabakov
Nabakov
14 years ago

An often overlooked point about manufacturing is that it is a major market for other industries, especially in the services area, from the milkbar next to the factory all the way through to the TDL, ICT and financial, professional and technical services sectors.

If it goes down, it takes a lot of the non-manufacturing sector with it from SMEs to a big chunk of the Australian operations of multinationals working in the service industries.

And of course old school manufacturing as we used to know and love is going to go down here, especially the areas dependent on low to medium skilled workers. No matter what we do about financial, regulatory and labour market settings, we just can’t compete against this.

So we need to start inching our manufacturing sector up the value chain – towards R&D, IP, skilled craftspeople making unreplicable products and competitive ways of adding value to commodities before they’re shipped offshore.

I remember when visiting the Hawker De Havilland plant at Fishermans Bend, being struck by the level of craftsmanship that went in to them being the global leader in supplying composite material flight control surfaces,(eg: the carbon-fibre rudder on the next Boeing or Airbus hauler you catch), cooked in autoclaves by master resin chefs and handfinished by other canny old blokes, all on six figure salaries and passing their hard-won nous about their unique trade onto another generation.

This leads me to where I think joe cambria (I always dispense with the derogatory terminology when I agree with someone about something worth agreeing about) has a very good point about our wine industry. Food processing is manufacturing too and we have several excellent and not easily replicated competitive advantages here.

Firstly the further food commodities travel down the supply chain before being finally ready to go on the shelf, the more quality risk there is. And more and more middle-class Western consumers (now joined by a fast growing BRIC demographic as well) are now acutely aware of this and willing to pay a premium for they think is healthy, safe and sustainable. And for their pets too.

Here Australia has an excellent global reputation as a clean, green, sustainable, well quality-controlled and naturally quarantined generator of foodstuffs.

Secondly, which ties into joe’s point, and value-adds marketingwise to my point above, we also have a growing reputation for seriously value-adding to our foodstuffs in a way that cannot be easily replicated abroad because of hard-won and not easily transferable skill and knowledge factors (Even the frogs now consult Australia viniters) and that is building serious long term brand loyalties. Recommended any good Chinese wines, cheeses or pet food to anyone lately?

And food processing is an industry that always has need of low and medium skilled workers.

We just gotta sort out the GM and pastuerisation issues while never grudging a cent or a second on biosecurity measures.

Paul Frijters
Paul Frijters
14 years ago

the number one thing you could do is to halt the decline of the quality of science at universities since manufacturing floats on hubs of expertise. That requires changing (federal and state) policies towards universities which still contain the incentives to let every student pass everything.

Francis Xavier Holden
14 years ago

nic – did they actually have a round table in the Arthurian sense or was it just the usual rectangle? Was there PowerPoint involved?

conrad
conrad
14 years ago

“It was one of the few things that Rudd – who was mainly in listening mode – responded to with some force”

Can I ask what the response was?

Sacha
14 years ago

dd, my comment was about what I’ve heard people say, that’s all.

Pat
Pat
14 years ago

It’s early days and there are other factors, but the unions were right to campaign against the FTAs. Since commencement of the respective FTA, our trade balance has declined by 32% with the US, 177% with Thailand and 1,027% with Singapore!

Pat
Pat
14 years ago

Nicholas, the data is in ABS 5368.0 International Trade in Goods and Services, Australia (June 2007). TABLE 14a. MERCHANDISE EXPORTS, COUNTRY AND COUNTRY GROUPS,AUSTRALIA, FOB Value ($million) and TABLE 14b. MERCHANDISE IMPORTS, COUNTRY AND COUNTRY GROUPS,AUSTRALIA, Customs Value ($million)

Monthly figures, when aggregated to annual figures. The percentage increases in post #23 are to 2006.

US Trade Balance ($ millions)

2004 -10,980
2005 -12,136 (Agreement commences 1/1/05)
2006 -14,489
2007 -15,753 Based on projections from January to June

Thailand

2004 -713
2005 -681 (Agreement commences 1/1/05)
2006 -1,977
2007 -4,153 Based on projections from January to June

Singapore

2002 666
2003 -930 (Agreement commences 28/7/03)
2004 -2,952
2005 -4,667
2006 -6,177