Overview

In recent months targeted government industry policies has been increasingly advocated. This has focused on: the limitation of microeconomic reform for high value added industries; the implications of 'new' growth theories for the importance of knowledge intensive industries; the need to focus the community on opportunities which are too big for individual firms; the poor international perception of Australia due to the lack of industry policy; business calls for the development of such policy; criticism of the Commonwealth for the lack of an industry policy; and uncertainty about whether 'competition' policy or 'industry' policy would best strengthen industry. Victoria's Premier recently presented a considered case for targeted industry strategy.

In assessing this debate, issues for consideration include:

• Australia's traditional industry policy based on tariff protection - which is seen to have been ineffective
• the debate in Australia about industry policy over the past 15 years
• the 1984 debate about industry policy in USA, which rejected the concept
• the interest in MITI's role in Japan, and the disagreements about its significance - due largely to a lack of understanding of Japan's radically different economic and governance systems
• the disadvantage of the lack of public information about the issue in Queensland
• the current review of the Department of Tourism, Small Business and Industry
• whether manufacturing should be the key target of 'industry' policy

This paper speculatively concludes that:

• arguments for targeted industry policy have become more sophisticated, but may not be valid
• economic strategies need to consider industry assistance / competitiveness. For example, improved (non-governmental) support for firms can be achieved by developing the economy.
• the system of governance affects whether governments can constructively support industry; while community attitudes to self / community interest affect the outcome of protectionism
• policy for industry might best be identified, researched and enhanced by broadly based non-governmental organisations - given appropriate relationship with all governments

This paper outlines emerging pressure for 'industry policy' in Australia, and some issues which arise from this. It also outlines a few specific papers of some technical interest in advancing this debate.

2. The Emerging Debate

The currently accepted view is that strengthening Australia's industrial performance requires: getting macro economic factors right (eg low inflation, fiscal balance); reducing protection; and creating a competitive micro-economy. There are indications over several months of pressure for more directed industry policies. Those indications include:

• Weaknesses have been suggested to exist in the principles of microeconomic reform (which boosts efficiency) in its effect on high value added industries (whose productivity is not primarily dependent on cost savings).

The Productivity Commission's Stocktake of Progress in Microeconomic Reform suggests improving economic performance through productivity growth, which is to be achieved mainly by reducing costs through increased competition. This approach is only suited to an economy where firms compete on the basis of low costs. This is an un-stated sectoral bias against manufacturing and knowledge intensive industries (which compete on bases other than low costs, and whose requirements are not considered in, but can be adversely affected by, the emphasis on competing just on the basis of cost) Large sectors of Australian industry will disappear through implementation of the microeconomic reform strategy. The report ignores (and its conceptual framework can not deal with) non-cost competitiveness factors such as technological innovation, public infrastructure, human resources management, demand side influences, clusters and linkages. Cost reduction can lead to reduced productivity. The report ignores the effect of industrial structure - ie the greater growth potential of knowledge intensive industries. Exchange rates as well as productivity also affect competitiveness - but are ignored. Government's role proposed by the report is unrealistic (eg proposed 'hands off approach ignores government's role as largest consumer, and its political goals / responsibilities etc). In the US where many of the Productivity Commission's microeconomic reform proposals have long been practiced economic performance has been well below G7 averages, and even below Australia. (Australian Economic Analysis for Australian Business Chamber, Critique of the Productivity Commissions' Approach to Microeconomic Reform, September 1996)

• the Australian Business Chamber argued that the Commonwealth seeks to promote savings, but has no vision for Australia or ideas about how high order objectives can be achieved. Government (they suggest) needs to take a leadership role to focus the community on long term objectives, and facilitate action by others.

Markets can not do so unaided. Conventional economic analysis is limited to a static view - and assumes economic endowments can not be changed - which ignores our ability to create the future. Central planning is not needed, but while the economic fundamentals must be right, this is not enough. Unless attention is paid to factors in competitiveness other than costs (especially knowledge) Australia will never do more than slightly transform its mineral and agricultural commodities. (Holt P. 'Creating a Growth Culture', Australian Business Chamber, September 1996)

• an Economist Intelligence Unit survey showed that chief executives of multinational companies believed Australia was a less attractive destination for investment because it had no coherent industry policy. Industry policy would not now imply protection (Cook P., 'Policy on Industry is needed urgently', Australian, 1/11/96)
• firms were said to call for an industry policy to help manufacturing expand and export (eg for R&D and export development) (Porter I. 'Call for Complete Industry Policy', Australian Financial Review, 13/11/96)
• the Commonwealth Industry Minister announced continuation of industry development programs for telecommunications (eg including the Partnerships for development approach). (Merideth H etal, 'Moore sets out post-97 industry plan', Australian Financial Review, 5/12/96)
• A Federal politician called for a bipartisan interventionist industry policy along the lines of the Ministry of International Trade and Industry in Japan (Field N etal. 'Crean Calls for MITI Approach to Industry', Australian Financial Review, 9/12/96)
• intense debate was said to be occurring about the need for industry policy.

One view is that industry structure is unimportant; the other is that it matters and can not be left entirely to the market. Treasury and Industry Commission support the view that no industries are better than others in wealth creation - so only need get the fundamentals right. Problems with this are: even when fundamentals are right we are well behind; and there is a lack of agreement about fundamentals. Alternative view is that some industries are better than others for wealth creation. Romer has put new theory of growth which suggests the importance of knowledge intensive industries. BIE concluded from this that: market solutions may not be optimal; intervention might increase growth; investment (in technology, human resources) creates externalities leading to growth. Thus support for investment is justified. Knowledge intensive industries grow very quickly - thus there is a case for supporting innovation and investing in knowledge intensive areas. Australia has recently reduced support for innovation (R&D tax concessions) when others in its region are increasing theirs. Growth in knowledge intensive industries is high, and spin offs are significant for those who attract them. Other countries in the region have decided to pursue such activities. Australia is not yet a serious player. (Stanford J. 'Catching the industries that count', Australian Financial Review, 19/12/96)

• the Business Council of Australia announced their intention to develop industry policy proposals (Lewis S. 'BCA takes on new more political role', Australian Financial Review,13/2/97)
• the Premier of South Australia criticised the Commonwealth for failing to develop an industry policy, and attacked the Productivity Commission's reports on various industries (cars, wine and electricity) as failing to take account of the needs of regional economies ('Olsen steps up attack on productivity unit', Australian Financial Review,24/2/97)
• the Federal Industry Minister reportedly chaired a meeting with business at which officials advised how industry could lobby Federal ministers about the need for industry policy (Wood A. 'Moore's Cabinet hit-list talks', Weekend Australian, 1-2/3/97)
• Federal Industry Minister rejected criticism about the lack of a Commonwealth industry policy. Productivity Commission inquiries are helping, as are inquiries into information industries and programs which support business. There is a need to respond to APEC commitments to free trade by 2010. Business is being assisted by fiscal savings by government. Business advice is being sought on how to reconcile APEC requirements with fiscal position. Many business responses seem no more than demands for business welfare (Henderson I., 'Industrial Action', Australian, 4/3/97)
• business was said to observe: the major difference between investment in Asia and in Australia; that companies from France / USA have government support which gives them significant advantages; and that Australia has limited employment opportunities. Business advocates forming a long term vision for Australian industry which would eliminate bumbling from election to election. That which has been produced by the Commonwealth is said to be unsatisfactory (Gluyas R. 'Flotsam of Policy leaves captains of industry all at sea', Weekend Australian,' 12/3/97)
• the federal opposition believes: that interventionist policies can improve our growth prospects; that Australia has to support its manufacturing sector; and that assistance to industry needs to be strategic to achieve nett export growth and new jobs in key manufacturing and service sectors. This requires much more than micro-economic reform. A coherent industry policy would not be based on protectionism, looking inwards, restricting imports - or on reducing industry assistance (Crean S. 'Australia's future is in industry', Australian Financial Review, 18/3/97)
• A strong statement concerning the development of an environment for high value added industries was presented in Brisbane by Victoria's Premier in March 1997 (see outline in Attachment A). Principal issues addressed were: Australia's goals; the challenge of Australia's economic environment (including the need to diversify from a resource base to a knowledge based economy); government's role; proposals for a new industry policy which was non protectionist but involved strategies for targeted sectors; and the difficulties of implementation.
• uncertainty has been claimed to exist about whether competition policy or industry policy is the major determinant of future industrial competitiveness.

If industry policy concerns the shape of Australian industry, the Industry Minister has been replaced nationally by the Productivity Commission, the Australian Competition and Consumer Commission and the National Competition Council and most policy action has shifted to the states. While assistance for such matters as R&D is accepted, the Commonwealth is critically reviewing all business assistance. Many firms seem fixed on the need for tax breaks and spending on support programs. However the PC, ACCC and NCC are simultaneously remaking industry. Broad ranging reform is seen to eliminate need for specific industry programs. The PC is proposing further (a final round of) tariff cuts. After tariffs are eliminated attention will focus on competition policy. The NCC view is that innovation and productivity should be pursued by competition not by protection. Following reforms of public sector monopolies, attention is turning to 1600 items of legislation which still protect businesses. NCC will ensure states take part in reform process. This makes activities of Commonwealth industry Minister marginal. Key reforms now relate to infrastructure, extension of competition to areas protected by legislation; and tax reform. This leaves Federal industry department out of date, with main task now in ensuring government understands what industry policy is now really about (Henderson I. 'The Industrial revolution', Australian, 3/4/97)

3. Assessing the Industry Policy Debate

The following is a partial statement of issues which might be considered in assessing the above emerging debate:

Australia's Industry Policy History: Australia's major traditional form of industry policy (for manufacturing) was based on tariff protection. This was eventually widely criticised as leading to weak, domestically oriented, fragmented industries which lacked the motivation for innovation - which was the major basis on which their productivity / competitiveness might be enhanced. This critique was led by the Industry Assistance Commission (later the Industry Commission and now the Productivity Commission). Several rounds of tariff cuts between 1973 and 1991 have substantially reduced such protection. Elaborately transformed manufactures have since achieved a very high rate of growth in Australia (off a low base).

Australia's current export facilitation policies appear to be contrary to World Trade Organisation rules. There is an ongoing threat by the USA to challenge them (ref)

There is a history over the past 15 years of proposals in Australia for interventionist industry policy somewhat similar to the current emerging debate, as well as a history of counter argument (see Attachment B). Key themes in that historical debate include:

• the MITI example in Japan, which involved a high level of government intervention
• Commonwealth efforts to develop active 'positive adjustment' policies in the 1980s
• the difficulty for any central body in identifying activities which should be encouraged
• the failure of 'positive adjustment' policies because of an inability to 'pick winners', and because any such process tends to allow established interests to protect themselves
• inadequacy of right macro-economic fundamentals, if microeconomic bottlenecks exist
• the difficulty in diversifying a resource exporting economy
• how tariffs had gained a life of their own, and become a means for protecting less viable sectors [which was not the original intention]
• the scope for gaining 'dynamic' competitive advantages through 'learning by doing' after gaining an early involvement in an emerging industry sector
• the lack of situations in which strategic trade policies might work in Australia
• possible constructive options for government without 'picking winners'
• the influence of Michael Porter's theories of competitive advantage
• concerns by firms about difficulties in competing, and the labelling of their calls for assistance as 'new protectionism'
• favourable outcomes from protectionism in East Asia
• economists' lack of understanding of business strategists' insights into competitiveness (which viewpoint is outlined in some detail in Attachment C)
• the need for diverse interests in society to understand / participate in economic debate
• attempts to reduce industry assistance programs by Australian governments

The International Debate:

There was an 'industry policy' debate in the USA in 1984 - in which Robert Reich (current US Secretary for Labour) had a prominent role. The basic argument was that government did many things which impacted on industry, and that if these were coordinated competitiveness would be increased. This was rejected almost immediately because it was recognised that diverse administrative actions could not in practice be coordinated for industry benefit, and that the interest groups which drive the US political system would immediately capture any such effort for their own gain. Reich subsequently produced arguments (in The Work of Nations) that the best government could do was to build up a communities human resources and infrastructure.

There is considerable debate about the effectiveness of MITI's role in Japan. There is also great difficulty in realistically assessing (quite apart from emulating) that role because of the radically different cultural environment. For example:

• MITI's major role arguably involved manipulating the flow of information (ie accelerating learning through vision development and administrative guidance) rather than providing financial assistance;
• that role arguably only worked because Japan's government is by bureaucracy, rather than by interest group politics; and
• it also reflects a quite radically different approach to power and problem solving to that which applies in Western societies (eg power is considered in East Asia as the avoidance of decision making - which leads to 'bottom up' decisions by subordinates which reduces the argument about the impossibility of assembling the information required for any central decision maker to 'pick winners').

MITI is now reviewing its traditional industry policy approach - including facilitation of foreign investment in Japan for the first time (Boyd T., 'Japanese Overhaul their Creaking Miracle Machine', Australian Financial Review, 14/4/97). Japan has for several years indicated an intention to expand its industry policy arrangements internationally, of which MITI's MFP proposal for Australia was an early experiment.

A major review of business support programs in UK has been undertaken with a view to increasing the role of business led partnerships in service delivery (eg Training and Enterprise Councils, Business Links and Trade Associations). The goal is to ensure that business (seen as the best judge of what is needed) can control the services provided (UK. Cabinet Office. Competitiveness - Helping Business to Win: Consultation on a New Approach to Business Support, 1996)

What is 'Industry':

Traditionally industry policy has been linked to the requirements for encouraging manufacturing - and policies directed towards (say) mining, agriculture, or service industries have not been seen as 'industry' policy. Recently however arguments have been presented that manufacturing is not of any particular importance.

Manufacturing is 1/7 of Australia's GDP and employs over 1 million people. It can involve varying levels of processing . It is typically closely linked to other sectors (in terms of inputs and outputs) and requires substantial inputs. Manufacturing's share of the economy has fallen in recent decades (though its employment share has fallen less) because the overall economy and employment has grown mainly in service areas. This shift reflects technological change and increased demand in other sectors as incomes rise. This is a common feature of industrialised nations. Composition of manufacturing has varied, with some sectors increasing and others declining. Manufacturing productivity has improved (through investment, better training / management). Productivity growth was below that of OECD generally. This does not prove that reforms were unsuccessful, merely that too early. Manufacturing has become more export oriented (up from 16% to 25% of sales), and more linked towards Asia. Decline of manufacturing is seen as a problem which requires government action. This reflects: perceived need for manufacturing for high wage jobs; need to generate exports to reduce trade deficit; improve overall productivity growth; promote R&D growth; and increase income through higher value added goods. There is some truth in this, but all industries are important - and support for manufacturing per se is inappropriate. Effective manufacturing will emerge when firms are encouraged to respond to their operating environments. Government can help in addressing market and institutional impediments to wealth creation process. (Clark C. Etal The Changing of Australian Manufacturing, Productivity Commission, Staff Information Paper, December 1996)

Every economy is often seen to need a manufacturing base. But this is not uniquely important. Manufacturing has fallen as a share in many economies in recent decades. Reference to manufacturing as an economic base is misleading. Farming used to be seen as the economic base. But wealth does not just come from making 'things'. Some factories add a lot of value - others add little value. Manufacturing has never been separated from services, and the distinction is now even harder. It is right to worry about whether people are capable of creating wealth, but not about whether they are in manufacturing in particular. (Economist 'Making too Much of manufacturing', Australian, 15/11/91)

This changing approach reflects the fact that - until the 1970s - success in manufacturing was the hallmark of a developed economy. It may however have been more correct to argue that success in high value added industries was what was important. And from the industrial revolution until the 1960s, manufacturing had been the sector which achieved the high rates of productivity growth and value added. Now however manufacturing seems to be only one of the industries where intense reliance on knowledge allows high value added to be achieved.

Industry Policy Debate in Queensland:

There appears to be no reflection of the national debate about industry policy in Queensland - and no reportage of it in the Queensland press - which places Queensland at a comparative disadvantage in addressing the issues raised. However this also reflects that fact that the past debate was carried out at 'top level' so that those who had to implement the policies, or advise the next generation of political candidates, had little understanding of what was involved.

4. Speculative Conclusions

The Debate: Increasingly sophisticated arguments are being presented for 'positive adjustment' / industry policies - and the need for this has been endorsed by the Victorian Premier.

A simplified explanation: A case for such selective assistance can be simplified to the view that microeconomic reform (creating a competitive micro-economy) which is the main current approach to industry policy in Australia is mostly of value in promoting efficiency. Such efficiency might (say) allow a producer to cut its costs for a commodity from $4 to $3 - with the result that another firm which has established a strong position in the market (through distribution / service networks; advanced technologies; known branding etc) might buy the commodity for $3.50 rather than $4.50, perform $1 worth of processing, and sell the adjusted product for $15. Thus the firm with market strength adds $10.50 in value, and the efficient producer (say Australia's agriculture and mining) gains little. High value added firms, it is argued, do not only compete on the basis of costs / efficiency. Furthermore once established such competitive positions may not be eroded - because the ability to reduce costs depends on accumulated experience (which those with market share get most of). This may be the basis on which (say) Japanese firms engaged in 'strategic pricing' well below the current marginal costs (which pricing policy microeconomics would encourage) - to buy market share in anticipation of future 'learning by doing' - resulting is savings to justify those costs. 'Strategic pricing' (seen by others already in the market as 'dumping') would only be possible for a business with organised outside support (eg from a business group, or government).

However while there may be potential gains from successful selective assistance by government, the difficulties of implementing this remain considerable (including the risks of rent seeking behaviour by particular interests). It is noteworthy that tariff protection was intended as a 'positive adjustment' policy when first implemented. And Victoria's Cain Government generated most of its financial problems during the 1980s from attempts to force desirable economic changes. And the 'knowledge intensive' activities which may currently have good growth / value adding prospects are those where firms actually mobilise knowledge as a competitive factor. There is nothing to be gained from supporting so-called 'knowledge intensive' sectors - ie those where many firms (but not Queensland firms in that sector) compete on the basis of knowledge.

Politics and Government Intervention: A country's system of government (particularly the extent to which interest group politics controls policy) may have an impact on the reliability / safety of government actions to provide direction to industrial structure. Anglo-American countries (which place full control over policy with politics) have more bly rejected industry intervention than have those in Continental Europe (where bureaucracies are b, and proportional representation political systems often limit the influence of particular interest groups) and East Asia (where government is primarily by bureaucracy, rather than by democracy). This affects both the level of economic expertise which governments can mobilise, and their responsiveness to interest groups.

Thus while forming an economically viable vision for Australian industry might be very valuable, this might only be possible if undertaken separately from the political process (because politics can only accept what is accepted by popular opinion, whereas a viable strategy would need to be based on the knowledge of leading experts / practitioners)

Self Interest and Protection: Likewise attitudes to individual rights or community responsibilities may have a major influence on whether protection can be safely used to promote industrial strength. It may be possible to use protection to create dynamic competitive advantages in countries (like those in East Asia) where responsibilities are given more emphasis than rights. But this may be impossible in Australia.

Assistance to Industry: For Australia, the key question in dealing with the pressures which have led to the current industry policy debate may be how assistance to industry can be strengthened, and the key may be to ensure that such assistance is compatible with the operation of a competitive market economy. The concept of market facilitation developed by Les Godfrey in 1986, prior to Queensland's initial economic development strategy Quality Queensland, included both micro economic reform, and micro-economic development.

Economic development involves increasing the ability of business and the community to initiate and support high value added enterprises and industries. Economic development is the opposite of direct government 'assistance' to individual firms because it involves increasing the ability of business and the community to provide such support - through measures compatible with a competitive economy. Methods for economic development were suggested in Craig J., Transforming the Tortoise: A Breakthrough to Improve Australia's Place in the Economic Race, 1993.

In developing economic strategy the need for enhanced support for industry to improve its competitiveness should receive attention, as should the competitiveness issues raised by corporate strategists in support of targeted industry policy.

Stating Industry Policy: One way to overcome the perceived need for coherent statements about Australia's policy for industries would be for governments to encourage responsible (say) business groups to assemble and disseminate such information, and for governments to co-operate by providing data to them and considering (through due political process) requests for adjustments to their policies. Providing it were agreed that resulting policies from governments would not support any one firm or sector over another without a public benefit test, there should be little risk in such an arrangement.

There are many business groups who have motivations to assemble information about Australia's characteristics as a site for investment, and to research ways in which those characteristics might be enhanced. And there are other groups (eg broadly based industry associations, other economic / public policy research groups) able to advise about public benefit aspects.

The advantages of such an approach might be that:

• the need for coherent statements about Australia's policies towards industries would be met.
• such statements would reflect a market orientation, rather than political goals - and would thus tend to be economically viable
• such statements would be able to reflect the requirements of all government jurisdictions, and thus to encourage harmonisation across jurisdictions
• knowledge about industry requirements would be concentrated in groups who are able to take initiatives, and motivated to seek economically beneficial changes
• scope would exist for faster development of Australia's economy by the latter groups
• policies towards industry would stabilise, as changes would be less likely to be initiated politically

Such an approach would benefit:

• multinationals who would obtain clearer / stable statements about Australia's policies for industry
• governments by improving the quality and quantity of market oriented data available in formulating policies which impact on industries
• business who used their participation in providing information about Australia's characteristics affecting industry in arranging investments or ventures
• the community through more rapidly developing Australia's economy - thus increasing job creation and income levels

Information for Government about Industry Needs: There is a need for government to know what is important to the competitiveness of all, and major specific, industries in Queensland. This might best be derived as a by-product of research undertaken as advice to firms / business networks about how their performance might be enhanced, which might be assembled by broadly based business associations. Only arrangements compatible with a competitive market economy would then be reflected in public policy.

Attachment A: Outline of The Case for a New Industry Policy
(Kennett J., March 1997)

Why industry policy: Australia needs to be dynamic, secure and confident in the next century. Central elements in this are: being b, independent, tolerant; allowing prosperity and stability; being cleanest and greenest; aspiring to excellence and rewarding success; forward looking and planning; and outward orientation.

Wealth, opportunity, jobs: To prosper must create wealth and high quality jobs - which is the task of business. Challenges in doing this include: globalisation, technological change and changing mix of world trade. Globalisation presents both opportunities in new markets and new competition. Change is not without cost, and unemployment has risen. Capital is increasingly mobile and international; and production occurs increasingly across national boundaries. World trade in manufactures has grown rapidly. World trade composition has changed, with very rapid growth by manufactures and services. A similar change has occurred for Australia, though our exports remain focused on commodities - reflecting our natural endowments and efficiency. However we paid a price for this in: declining terms of trade; lower standard of living; and declining share in world trade. The Communication and information revolutions, technology and the knowledge economy are changing the way wealth is created and captured. Transport and communication changes have eliminated the tyranny of distance. Knowledge, applied ideas and ability to differentiate products and services can be highly valued - so skill, flexibility and application will ensure Australia creates wealth and jobs. Australia can not prosper as a farm, mine, or pretty place to visit. Australia has begun to adapt, but needs to go much further. APEC requires Australia to operate with free trade by 2010 - but must be ready far sooner to attract investment. There are also opportunities - eg many other countries have weaknesses which give Australia advantages. But these will not last long. Australia can succeed in high value added goods and services only by being innovative, adaptable, investment and future focused, and committed to excellence.

Government's role: Business must deliver wealth and jobs, but governments set directions / parameters for business operation (via standards, regulations, tax, social support, fiscal and monetary management). Constraints on growth through low savings and current account deficit must be removed. Government's must make Australia internationally attractive for investment. Barriers to accessing international markets must be removed by international negotiation. Government must: work with business to remove impediments to growth; ensure markets work fairly and efficiently; and engender competition. Victoria has sought efficient markets (rather than budget balance) in privatisations. An industry policy must address factors allowing firms to operate at highest level. In investing, business considers: market access; availability of inputs; and cost competitiveness. Government helps through: leadership; creating efficient / competitive business environment; and ensuring business access to capabilities. Leadership requires: building relations with other governments; responsiveness to business; encouraging international orientation; facilitating investment; whole of government policies; responsible approach to major issues; stating shared vision; and clear / stable policies. Business environment requires: minimal costs; certainty about standards; alignment with global standards; good tax regime; good fiscal / monetary policy; micro-economic reform; effective markets and institutions; impediments to growth addressed fairly; and a legal system facilitating business. Developing capabilities requires attention to: education and training system; physical infrastructure; export support; support for R&D, innovation, technology and skills; encouraging enterprise development; good financial system; and capitalising on natural endowments.

New industry policy: A new kind of industry policy requires action across all government areas, and extends well beyond particular manufacturing / service industries. New approach is: non-protectionist (because protection impedes innovation); and emphasises strengths (but does not support specific firms so much as identifying advantages / capabilities - and ensuring they are cleverly exploited). Some industries activities should be nurtured because of advantage to economy as a whole (ie because of flow ons). In Victoria these are: automotive industry; communications, information and multimedia industries; agriculture, food and natural fibres; health services; education; and tourism. Others will have different strengths (eg mining services and technology in WA and Queensland). The Commonwealth (with states) must identify sectors with capabilities for long term sustainable advantages and prepare strategies for them. Change occurs in all economies. Government has important role in managing this (to avoid resistance to change and loss of opportunities). The full costs of change needs to be considered, and fairly distributed. Social capital depends on wealth generation, but generating wealth also requires quality social structures. Goal should be to create more and better jobs than are shed. Government must facilitate change where needed. A whole of government approach is needed (eg education / budget etc decisions must be informed of economic effects). New industry policy requires a long term approach (and some short term actions like regulation reform). Government already makes many decisions affecting business - and now needs to be more strategic in the way this is done. Successful economies make long term plans and carry them out. Much of what needs to be done is national in scope, but not the province of just one government. Joint investment promotion and action on competition policy are examples of what can be achieved. The risks in getting it wrong are serious eg reduced support for R&D, scrapping of DIFF scheme which decisions were made only for fiscal reasons.

Way ahead: Industry policy is the responsibility of all governments, while business also must: look for better ways; pursue high quality and value; take charge of own destinies; and demonstrate that Australia wants to do business. Governments must act now to: foster shared vision of future; reform tax system; increase national savings; ensure internationally competitive inputs to business; develop education and training; formulate national population policy; position and promote Australia internationally as competitive and conducive place for investment and business; and identify key strengths and advantages and develop strategies for them.

Attachment B: Outline of Prior Debate in Australia since 1980s

Australia is moving towards a fundamental switch towards 'picking winners' to improve its export performance. Positive adjustment policies are well accepted internationally. Tools which could be used are export incentives and export controls. There needs to be more community awareness of the importance of exports (Durie J. 'Menadue's targeted strategy for trade', Australian Financial Review, 24/4/84)

An ALP Conference adopted an interventionist industry development policy requiring: agreements amongst employers, unions and government; more emphasis on planning; establishment of an overseas trading corporation; commitment to viable manufacturing sector ('New industry intervention plan agreed', Courier Mail, 14/7/84)

While the federal government is now sensitive to the needs of industry, the proposal for a broadly interventionist approach is inconsistent with the national objective of a more competitive industry structure. It is very difficult for government or any centralised body to identify before the fact what activities should be encouraged or expanded. It is essential to encourage the widest possible sources of new ideas, products and processes ('Danger for Business in ALP Industry Platform', CAI News, July / Aug 1984)

Senator Button believes that there is a chance of a coordinated, marketing, management, export and technological push to update the industrial base. The present linkage of industry technology and commerce functions is inadequate - rather a super-ministry is required, mobilising the efforts of several ministers. There must be a central manufacturing advisory body from which government can get advice. (Ford J. 'Button sees chance for revolution in industry', Australian, 9/1/85)

Many advocate industry policies to overcome rigidities which slow economic and employment growth - and seek to steer industrial adjustment 'in the right direction'. This is often based on the example of Japan, but MITI has not been able to pick winners. Japan's success was the result of hard work, not industry policy. Hayek's work shows that innovation / economic change do not depend only on scientific / technical knowledge which could be handled centrally - but also on social / commercial knowledge which can not be centralised. New opportunities are risky and can not be proved to committees. Thus centralised industry policy will tend to 'conserve' old industry structures and harm economic performance. Industry policies weaken direct market incentives and rewards. What are intended as 'positive adjustment' policies turn out to be no more than protectionism. (Kasper W. On the Road to Corporate Serfdom)

The prospects of Australia's commodity export sectors are limited. Most rapid growth comes from using human resources well. The emphasis over the past decade has shifted from import substitution in industrial development. Technologically based innovation is central to a more internationally competitive industry. Sectoral programs have been introduced for motor vehicles, steel, communications equipment - which all recognise the role of technology. To aid technology government emphasised R&D incentives, closer meshing of public and private R&D efforts; and improved conditions for technology transfer. (Charles D. 'Australia's Industry and Technology Policy',7/1/87)

Since the collapse of the $A in 1985, it has been realised that getting the macroeconomic fundamentals right is not enough where there are microeconomic bottlenecks. Prime Minister Keating's expected 'J' curve effect has not arrived [ie the expectation that currency devaluation would improve the balance of trade through improved improving competitiveness]. But Senator Button's consensus industry plans were criticised by the OECD for high levels of remaining protection. The industry policy debate is more focused and less intense than the protection debate of the 1970s. The choice is whether to speed up change through more quickly reducing protection, or by extending tax concessions to promote adjustment. IAC has been transferred from Button to Treasury to reduce tendency to see each sector as separate constituency. Button proposes future plans for sectors like pharmaceuticals, while the IAC would take a broader view of the long term environment needed for growth (Stuchbury M. 'Keating, Button and industry policy: some call it creative tension', Australian Financial Review, 22/7/87)

Australia's industrial failure was said to result from an inability to imagine the overall shape of a favourable collective outcome (rather than from inefficiency or looking inward). No country has succeeded (as Australia tries to do) without government influence over industrial structure. Australia (as an economic colony) has had no successful experience of its own in organising overseas market access for exports. Countries who rely on commodity exports have a problem initiating manufacturing because this requires going against the interests of their commodity customers. Australia initially tried this through tariffs - which once started gained a life of their own in protecting less competitive firms. In the 1970s a new agenda emerged which rejected tariffs - but reducing tariffs was not enough to solve the problem. An industry policy is needed. This requires eliminating the assumptions that: business can do it alone; the best that can be done is assistance with R&D; multinationals will help small Australian firms gain world market footholds; economists can advise on industry policy; conferences or OECD advise will provide answers; just becoming more competitive would solve the problem (Stewart J. 'Industry Policy and Why Australia Needs One', Canberra Bulletin of Public Administration, August 1989).

Australian industry must compete in a world dominated by transnational corporations. Labour cost advantages are no longer significant in explaining trade. Trade advantages are derived from static and dynamic scale economies (the latter derived from learning on the job) and from technological advantages. Technological advantages are particularly important at early stage in product life cycle, with cost factors important later. Globalisation provides Australia with opportunities to access mass market. Initial advantages can translate into productivity growth through 'learning by doing' - and create an ongoing competitive advantage. Government intervention may help in stimulating such effects (eg support for pre-competitive research) - though there are dangers in excessive intervention. (Whiteman J. 'Globalisation and Strategic Trade policy: Some Implications for the Australian Information Technology Industry', Prometheus, June 1990)

ALP left faction's called for government to provide special tax and export assistance to manufacturing, considered vital to improving Australia's chronic trade imbalance. Strategic intervention was said to be required as the matter could not be left to market forces. (Eccleston R., 'Ministers accelerate push for Export Aid', Weekend Australian, 29/3/90)

Strategic trade policies attempt to increase national income by assisting firms which have significant international influence or where there is rapid technological / market development. This can help under some circumstances, but those conditions do not generally apply in Australia (Curran B. 'Strategic Trade Policies: Implications for Australian Industry Development', Agriculture and Resource Quarterly, June 1990)

Australia is supposed to have a 'level playing field', but is a small player internationally. Larger trading blocs can have gains from internal trade, whilst adopting a protective external stance. Australia is supposed to benefit from gains in Asia, but may not. Japan did not develop by 'letting the market rip', but had high levels of government control. The level playing field assumes consumer sovereignty - and ignores other important social values (stability / equity). There can be many casualties from rapid change. Financial deregulation led to dangerous instability. Government can not pick winners, but could do more to direct savings to productive rather than speculative investment. There could be insistence on reciprocal trade. Enough protection could be kept to prevent damaging rates of change. Banks could be controlled to ensure viable firms are not destroyed through high short term interest rates. (Self P., 'Level Playing Field may exist elsewhere but not in Australia', Courier Mail, 13/12/90)

pressure increased for assistance to manufacturing industry on the basis of poor export performance, and import competition. (Eccleston R. 'Demands for aid grow with trade gap', Australian, 28/12/90)

The ALP left is seeking more interventionist industry policy - involving tax breaks for selected industries. Support for more investment to make the economy internationally competitive in traded goods and services. Risk sharing development capital might be made available on condition of training people, and undertaking R&D (Eccleston R. 'Left gets on with the jobs', Weekend Australian, 29-30/12/90)

The free marketeers have retained the upper hand over the new protectionists in the Commonwealth proposals in Building a Competitive Australia - which was heavily influenced by the ideas of Professor Michael Porter. In the middle of recession large cuts to tariffs were made. Everyone agrees that the problem is that Australia has not developed a mature export culture. An AMC study showed that Australia had only one strategic exporter, and only 12 manufacturers who exported more than $60m pa. However the AMC said that more than tariff cuts were needed for the situation to be improved. Garnaut and Treasury however described strategic trade ideas as merely new protectionism. Porter's ideas favour government encouraging domestic competition and nurturing industrial clusters. (Power J., 'A strategy that goes beyond labels', Australian Financial Review, 13/3/91)

Australia's history of industrial protection has been said to have doomed it to a low standard of living and insularity (Dusevic T., 'protection: the cosseting that can kill', Australian Financial Review, 13/3/91)

The Industry Commission attacked business for a 'new protectionism' but this view was disputed by manufacturing industry executives who claimed that Australia's hands off approach and tariff reductions were pointless when not matched by similar reforms elsewhere. Anti-dumping actions never succeed. Lack of support for manufacturers implied serious social consequences, and the movement of firms offshore. The Industry Commission suggested that modern calls for a strategic approach do nothing to reduce costs of error, or to make it possible to balance the interests of local users against local producers (Doman M. 'Business hits back as IC Chief Criticises 'New Protectionism', Australian Financial Review, 27/11/91)

Australian manufacturing industry is considered to be uncompetitive because of years of protection. However protectionist strategies in East Asia have given good results. (Stewart J. 'Traditional Australian Industry Policy: What went wrong', Prometheus, December 1991)

Insights into the requirements for competitiveness gained by business strategists over the past 2 decades have not been understood by economic policy makers. Policy needs to match that applicable to particular competitors, rather than be equal across all sectors in Australia (see article outlined in detail in Attachment C)

Present policy rejects government intervention, but intervention in conformity with market directions should be considered. Strategic industry policy would start with a vision of a desired future (eg for employment, wealth). Then the broad industry structure needed for this would be identified based on existing industries, and high growth / high value sectors of global economy. Identification of this would allow debate amongst business and unions in particular, but also welfare community, environmentalists and women's organisations to seen links between sectional and community interests. Based on this sectoral strategies might be devised. While economic rationalists reject government intervention, strategic trade theorists take a more pragmatic approach based on experience in Japan and East Asia. The political. institutional and analytic challenges in strategic industry policy would be considerable, however many analysts considering advice put forward by the Industry Commission believe that the outcomes from this will be well short of what is required. (Marsh I. 'Picking Winners for the Common Good: the Business of Government', Australian Financial Review, 7/10/94)

the Industry Commission has been examining options to reduce industry assistance programs by governments in Australia

Most selective assistance is part of harmful rivalry between jurisdictions. An agreement amongst states to make assistance transparent, and limit its extent would be useful. State assistance takes the form of budget outlays and payroll tax exemptions. Commonwealth assistance is mainly provided as tariffs and market protection. The poor quality of data about assistance, prevents public scrutiny. Secrecy increases as discretion and selectivity of assistance increases. Not only is data confidential during negotiations, but afterwards. Bidding wars are becoming prominent. Competition between jurisdictions can be useful in terms of services and regulatory environment. But competitive use of assistance is costly. Assistance is contrary to the spirit of Section 92 of the constitution. Assistance which targets market failures (eg R&D) may not be a misallocation of resources. Selective assistance has very high delivery costs. Reasons for state involvement in selective assistance are: to be seen to do something; misunderstanding benefits - flawed evaluation; fear of losing when others do. Assistance by one state provides short term benefits. If all do so, then all lose. Assistance is evaluated before projects are undertaken, but not afterwards. Governments can insist on transparency and public accountability procedures; and improve evaluation. Options include: unilateral action of states agreement on transparency; states agreement on transparency and monitoring; agreement to limit some assistance. States should ensure local authorities also comply. There should be no constraint on competition in broad based taxing and spending. An agreement could be negotiated through COAG. Independent monitoring would be appropriate. The Commonwealth could use various powers of coercionIt has been argued that it is no longer clear who has the leading role in forming industry policy - those dealing with competition policy, or those dealing with industry sectors. (Industry Commission: Draft Report On Assistance To Industry, 1996)

Attachment C: Outline of Determining Industry Policy
(Carter C., AGSM Conference on
Creating the New Australian Economy, February 1992)

It is said that targeted assistance is just a form of protection. Yet Singapore proposes economic development programs, to make it more affluent than the USA, which involve such action. Germany provides twice as much industry assistance as UK. The main issue in Australia is why the strategies of successful economies can not be discussed - presumably because understanding of the causes of problems are not shared.

Conventional economics is seriously flawed in explaining success of firms in high value added industries. Author's work is directly linked to forming competitive strategies for such firms - and he has no sympathy with past protectionism. Economic rationalism was effective in getting rid of this - but its prescriptions of microeconomic reform and macroeconomic fundamentals are inadequate. Models developed by business strategists over the past 2 decades have not been understood by economic policy makers. There is a need to focus on traded sectors where competitive (rather than comparative) advantage is important.

Paradigms: Different conclusions about the effect of intervention are based on different paradigms. Intervention is said to make things worse - even when examples of highly successful activities subject to intervention are quoted. Different persons interpret MITI experience in terms of their pre-formed beliefs. Australia even believes it can show a good example to Asia.

Business has worked for 25 years on the idea of competitive advantage (because the market forced it to) which is quite different to economist's concept of comparative advantage. Comparative advantage depends on natural endowments. Competitive advantage depends on capabilities (scale, technology, brand strength, service capabilities) and applies to imperfectly competitive markets. Competition is dynamic, and not captured by static thinking. Despite deregulation, new entrants to financial markets failed because scale / consumer franchise meant that allowing competition made no difference.

Business strategy changed markedly 30 years ago with recognition of the experience curve (ie that costs fell as cumulative output rose). Those who capture experience pre-empt their competitors. Competitive advantage can not be replicated once gained. In particular, high market share gives advantages which others can never copy. Given increasing evidence of 'adversarial trade' (Drucker) it can no longer be assumed that trade is beneficial to all.

Most high value added sectors involve competitive advantage. Once secured by firms this can be defended to ensure above average returns. Comparative advantage is however possessed by whole regions (and all the firms in it) - and it is this which economics focus on. The private sector is thus confused because of its inability to reconcile public policies with reality of marketplace. In industries with comparative advantage, intervention is a no-win game. But industries with competitive advantage have different rules - advantage can be created. Protection can lead to performance unattainable without it. The difference depends on whether advantage is possessed by a region, or owned by a firm. Porter's work on industry clusters, shows that advantages can be owned by networks of firms. Successful regions without comparative advantages have had no choice but to create competitive advantages. Intra-industry trade is a growing effect, and only makes sense in terms of competitive advantage. In addressing competitive advantage the key unit is the firm, not an industry.

The Importance of Strong Firms to Trade: Internationally competitive firms are the crown jewels in value added industries - and are vital to national economies. Competition policy should be vigorous in the non-traded sector, but more cautious in traded areas. To those who understand the importance of competitive firms, economists disregard of this is stunning. Where comparative advantages apply, any damage can be re-covered. But where competitive advantage applies, firms can be eliminated by dumping - and the economy will never recover.

Relevant Competitors: Australia must compare itself with relevant competitors - but traditionally compares itself with OECD averages. Firms which do this often fail. Comparison with competitors is far more important (eg for depreciation rates) than the absence of domestic distortions. Trade practices must be driven by international competitiveness, not domestic market conditions. Australia's tariffs are compared with OECD averages, not with those nearby who have high protection levels. And even if average protection is low, some countries ensure that it is high in sectors where it matters (doing this is an art form in Japan and Korea). Firms do not compete against averages but against conditions in specific segments. Public policy fails to understand what is needed to build capabilities in value added sectors. Economists are only concerned with the absence of domestic distortions, whereas international differences are what matters. Australia's tax system is internationally uncompetitive (especially in our region).

Portfolio Approach: Business sees activities as a portfolio - and the 'centre' of a corporation must add value. Government must do so also. Not all sectors need to be highly productive. One can not be good at everything - but only succeed by focus. Inefficiency in rice production is no impediment to the creation of competitive advantage in automobiles for Japan. In the comparative advantage model, input costs are key; but in competitive advantage scale, innovation, quality, and time to respond are central. The effect of inefficient sectors on high value added firms is far less - than on low value added industries.

Need for Vision: Firms need a sense of vision, so does Australia - but it is absent. Vision is the most abstract statement of strategy. In a way it is 'picking winners' but it is vital. AMC's vision in 1990 was: Asia is a window of opportunity which must be grasped as markets driven by competitive advantage are established; value added manufacturing will not solve balance of payments problem as operators will move offshore; high value added manufacturing will be essential to high incomes; Australia's prospects in global scale businesses are small; high technology contribution will be small because of lack of a deep venture capital market; services are unlikely to fulfil export gap (eg tourism is a low value added sector). Australia must capitalise on its resource based industries and on value adding to them. Successful economies have all had a strong sense of national mission. Strategy is essential - large resources are allocated - either well or badly. Vision statements allow strategy to be discussed.

Implementation: Implementation will be hard in Australia (as it is for business), but can not be addressed until the principle is first established. Governments may be poor at picking winners - but so is business. Canberra is a poor place to identify successful business. Success requires dialogue between business and government. The main requirement which is different from the present is emphasis on exporting, and on firms.