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This document outlines comments on a (draft) New Industry Policy (NIP) which was prepared in October 2002 by Martin Feil for the Society for Australian Industry and Employment.
Comments deal with general issues (such as the basic strategy NIP advocated) and with detailed issues.
Outline of (draft) New Industry Policy
[links to detailed comments are included]
Introduction: Few people believe that economic policy is interesting, yet it makes a big difference. Industry policy is as important as debates about taxes. In the 1990s, Australians were told that the tariff debate was dead. Manufacturing employment has fallen to half relative to GDP. Farmers have still be shut out of major markets in Europe, the USA and Japan. Minerals and energy has only been quarried. Many good companies have been taken over. This occurred because all political parties continued the 1980s policies of removing government assistance. In a free market only the efficient and internationally competitive survive against import competition. This theory is neo-liberalism - and has been called economic rationalism in Australia. Some would suggest that vehicles and TCF were able to beat this, but they have suffered badly - losing half the market to imports [Market share] and much employment.
Great Divide [Divide]: All economies are divided between production of tangible goods and services. For many years Australian governments had provided assistance to tangible goods sector against greatest threat - imports - via Customs Duty (or quotas occasionally). This has largely been eliminated. Many opponents of assistance to tangible goods sectors are in services - who have claimed that others should not get help if they don't. But it is much harder to work out how much assistance is given to services
Conceptual Error: Services do receive assistance - largely through regulation. Government assistance over the past 30 years has been increasingly of non-tariff nature because it is harder to value, and can be more accurately focused. Thus the tariff debate is dead - but many assistance implements are not obsolete.
Industry Policy and the New Millennium: Predecessor, Society for Balanced Trade, led debate against economic rationalism in 1990s. Others ignored declining $A, escalating CAD, growing foreign ownership and indebtedness. HIH, OneTel and Ansett show that self-correcting free market breaks down [Market failure]. Also 911 events have led to global retreat from liberalization, There is a need for a new industry policy debate - that recognizes that the tariff debate and economic rationalism are relics of the past.
Society's Ten Point Plan: TPP needs to be reviewed, not discarded.
New Industry Policy: First task is to identify industries that are to be developed and help them to grow [Picking winners]. Treasury argues that this is impossible, yet during 1990s governments have developed many ad hoc assistance policies. Government has returned to the non-systematic approach that applied before first world war - which was basis for establishing Tariff Board - which eventually became to Productivity Commission. The latter said no one should get anything, thus leading to new ad-hoc processes. It is ridiculous to suggest that government decisions (based on dispassionate investigation and all points of view) about what should attract investment is inferior to everyone doing what they like until the market fails.
Integrating Industry Policy: The Society's focus for the first 10 years was on manufacturing, without integrating backwards into the factors of production (agriculture and mining) [Integration]. The latter is needed. Industry policy needs to be considered at macro-economic level. Policy must look at the rural sector (and mining industry), and consider downstream value-adding - rather than simply exporting commodities. Australia's trade position in the rural and mining sector's is poor - behaving like a colony supplying raw materials and unprocessed agricultural produce. Australia must supply its own market, and succeed with value added goods.
What is still relevant in the 10 point Plan? The TPP called for unity - which seems in danger of being lost. Its most contentious call was for revenue duty. It is possible to say 'I told you so' about some recent developments (ie collapse of major service company which have left government with only blunt instruments to cope; some foreign takeovers have failed). Australia's perilous position is largely hidden (being close to financial meltdown due to $120bn borrowed for credit card spending; $60bn in offshore investment by superannuation funds [Economic risks]. Australian Government needs to stop its ad hoc and selective approach to market management and industry assistance. Government must govern the economy. The TPP is sound, but needs to be expanded to embrace rural and mining sectors. Tariff cuts have eliminated the farming equipment industry (along with its after sales service benefits) and the Cairns group failed to improve market access. In the mining sector, many firms have been sold to overseas interests.
Plan for the Rural Sector: There is no simple answer. The starting point must be an examination of how imports take significant parts of the local market, and what barriers to exports exist. Major industrial economies protect their markets through quantitative restrictions and penetrate export markets with subsidies. A second step would be a new Rural Income Support Scheme. Thirdly production initiatives and import restrictions could be designed to advance rural produce along the value added chain [Value adding]. Finally government intervention to create regional distribution hubs would improve use of technology and integration - so as to reduce rural sector costs [Hubs]. Infrastructure hubs that can be created at regional centers can perform back office functions for companies throughout Asia. Farmers let themselves down for a long time by the view that free trade was all that was necessary. Tariffs (which have pre-occupied rural lobby groups) are not needed - but assistance directed at problems such as drought, fire and isolation would be useful. Australia can be more than a major food supplier to Asia.
Industry Policy in the Mining / Resources Sector: Australia is at a perilous cross roads in this area. It used to have the world's highest living standards on the basis of gold - and has since discovered and exploited many other minerals. The challenge is to retain ownership of these resources and get involved in value-adding. This has been ignored in pursuit of knowledge based industries. In the 1970s Australia exited the electronics industry which had existed behind high tariff barriers because it could not afford the R&D. Why is this not true of knowledge industries today? A policy for mining and resources requires that government decide to intervene - by considering the interests of all Australians not just shareholders. The low value of the $A has made buying these assets very attractive [Resource ownership]. Only when the trend and risks became obvious (eg with Woodside where leaving the resource idle to increase prices was likely) did government act in the national interest. In Ireland's great potato famine in the 1840s farmers died of starvation while growing bumper crops (that they did not own) for the English markets. Key policy issues for mining and resource industries must be: foreign ownership subject to national interest tests; raw material exports should be subject to export levies to compel value added processing [Value adding]; export sales must be in foreign currencies; preventing resources being used for currency speculation; and government approval of foreign acquisition of assets. Pasminco (the world's largest lead producer) was destroyed by currency speculation. The sale of BHP resulted from Board decisions that resulted in foreign acquisitions that lost money. We should not have to accept overseas CEOs to obtain foreign investment. [Corporate management]
New Manufacturing Industry Policy: tariffs should not be the major basis for industry policy for manufacturing. However a general tariff on manufactured products should be used for a time within WTO parameters. This would (a) improve scope for bargaining (b) encourage import replacement - that is vital to reduce the Current Account Deficit [Current account deficit]. Traditionally tariffs were based on equalizing prices without examination of local production inefficiencies. But if they are efficient, then they should not have to compete on a cost basis with low wage countries. [Cost competition]. Industry policy also needs to focus on R&D, capital equipment tax deductions, provision of competitive infrastructure, and generation of export costs knowledge and training for workforce that is a lean manufacturing unit. Australia's manufacturers know that international competitiveness is about cost and quality. They want a level playing field, but know there is no such thing. They want governments to thus play the global game of providing non-transparent assistance - that is not readily criticized [Non-tariff assistance]. Australia's vehicle tariffs were reduced from 57% to 15% since 1984, while the Export Facilitation Scheme was attacked in WTO forum, and Australia developed ACIS legislations - which focuses on R&D, new capital equipment and exports. The result is $5bn in exports, doubling every 5 years. Similar arrangements are needed in other industries. Combining old and new manufacturing industry policy is reasonable. Major industrial economies use tariffs to create irritants to import competition - and Australia should do the same. They then create significant tariff barriers where there is substantial import competition. And there are major fire-fights where countries arm-wrestle about particular imports. Australia needs to stop import penetration that does too much economic damage. Manufacturing in Australia has been through a major reconstruction - and the survivors are not useless bludgers and need help. There are no simple answers as to how to achieve this.
Integrated Industry Policy in Australia: Planning for the services sector is a major challenge. Trade in services and intangibles is the biggest contributor to the current account deficit - which is a tragedy because Australia has a comparative advantage relative to almost everyone in agricultural output and resources. The Society is not focusing on trade in services, as this needs substantial research and will resist entrenched self interest groups. This study is about tangibles. The problem is to develop a general theory for industry policy. Five elements would need to be integrated
knowledge about existing industries. One can't strategize about things one does not know about - and such knowledge has been lost on the assumption that policy should be neutral. Inquiries need to be recommenced - in a deliberate process.
economy wide initiatives to create infrastructure for the whole nation or solve endemic problems. Government needs to decide to invest a lot of money in the future of Australia. Governments have sought to balance their budgets for 20 years - which sensible companies would not do. There are many areas where spending is needed. The user pays principle is a problem - as it is hard to establish the critical mass that is needed to justify a project.
encouraging value adding to resources. The major problem again is organizing a number of suppliers into capturing benefits that may be individually small, but collectively large. Resource suppliers have allowed themselves to be captured by producers in next stage in supply chain. Agriculture is different - freight and middle-men's profits are a huge impost. Yet they have been entrenched in to-market processes that should have been reformed;
barriers that assist efficient local manufacturers and protect against low cost imports. Such barriers are inappropriate if they allow firms to become lazy, inefficient or fragmented into uneconomic production units. Their absence is also wrong if we ignore the value of own culture, or permit predatory practices;
bilateral efforts to gain entry to overseas markets. Such initiatives have been discussed with Japan and US - but they are not real free trade agreements. They seek to remove our quarantine regulations and pharmaceutical benefits system and ensure that we protect their intellectual property. Access to markets in areas where Australia is globally competitive would not be provided. Australia should treat the rest of the world in the same way it treats us (eg subsidize exporters and create domestic price equilibrium). This may hurt consumers - but prices may not change due to subsidies already paid to foreign suppliers.
Overall policy perspective: Australia is a big rich country, which feels that it is small, because it is not as large as some others. It has an educated population, great climate and rich resources. It has never been invaded and has a stable government [Government]. Yet we fail to integrate policy. We are pre-occupied with high technology industry, services, eliminating public debt and balanced budgets. Politicians have no vision. Anyone who seeks help is berated.
Conclusion: The industry policy debate is not dead. Australians are trusting - and there is a temptation to leave policy making to economists and bureaucrats. Theory needs to combined with industry and trade reality. Theory must constantly be tested [Economic realism]. The ultimate goal is to ensure that Australians retain a standard of living and culture that is special. We lack a competitive edge because we are not prepared to exploit the less capable. Industry policy is about how Australians will live.
Style and Substance
The draft NIP represents progress and provides a simple account of the issues involved for public information.
However to win the debate any such proposal would have to be accompanied by a detailed technical analysis which quotes data and supporting sources, and outlines / analyses alternative views (eg what might be achieved by new rounds of multilateral negotiations).
And, as comments below will imply, there is still a long way to go. By way of input to any future effort, an indication of the types of issues that might have to be considered is available in The Industry Policy Debate: a brief introduction (April 1997).
The goal of the NIP seems most appropriate because:
However there are several limitations on what NIP has attempted in this respect.
First, the draft NIP has mainly drawn upon precedents in Western countries, yet when industry policy was being evaluated by analysts in North America and Europe in the 1980s the major concern of was with how to cope with the challenge of industry policy in Japan (and elsewhere in East Asia). NIP needs to consider the strengths and weaknesses of the latter challenge (and what was done about it). Some speculations about this are included in Transforming the Tortoise: A breakthrough to improve Australia's place in the economic race? and in Asian Literacy.
Furthermore models of socio-political-economy in continental Europe can also be quite different to those in Anglo-American societies (eg the German social-market model). These models have economic and social strengths and weaknesses (and philosophical foundations) which requires special consideration.
Second, a brief examination of international experience in relation to industry policy suggests that whether or not this is likely to be constructive depends on the circumstances in that country (ie cultural and institutional features need to be taken into account).
This author's preliminary view of the circumstances under which such programs can be useful is available in the form of a comment on a case for 'strategic economics' (which is equivalent to industry policy) that was made in the Financial Review in 24/1/03 .
Third, the assistance which the draft NIP has focused on is mainly that which might be provided by the Commonwealth Government. The problem with this is that:
Fourth, NIP needs to increase the emphasis it gives to assistance available to firms in dealing with economic change - because reducing effective competition by addressing new opportunities and competitive challenges is a major source of increased productivity.
Fifth, NIP needs to consider the practicalities of implementation.
In particular, the competence of public administration in Australia has been seriously eroded during the 1990s by politicisation which was intended to overcome perceived 'bureaucratic resistance' to the implementation of political policies (see The Decay of Australian Public Administration). Thus to be credible NIP must show how the administrative machinery that would be needed to implement it can now be rebuilt.
Links to the following detailed comments are included in the outline above.
As well as loss of local manufacturer's share of the vehicle market, there has been a rapid increase in exports and a much greater trade intensity. To win the debate NIP needs to acknowledge the positives as well as the negatives of what has happened.
The Great Divide
There certainly is a division between tangible goods and services, but it is probably best to ignore it in developing industry policy, because:
All of the issues impacting on tangible goods that imply the need for better assistance, apply equally to services.
Collapses by HIH etc were not market failures. Private firms are not the market, rather the market is the context within which firms operate. The failures cited were examples of the market working to detect and correct business failures.
Unfortunately it is impossible for central analysts to 'pick winners' because the systems involved are too complex and the information required (which is far more than published statistics ) is dispersed throughout the economy and not available to any central analyst. This was the key point of Hayek's 1945 paper on 'The Use of Knowledge in Society' which was intended to discredit the notion of socialist economic planning and now seems to be the fundamental plank of 'neo-liberalism'. It can be noted that:
It would seem most appropriate for governmental concern with industry to be limited to acknowledged 'losers' (which are easier to identify even though participants may not want to see them this way) - and largely involve procedures to accelerate economic adjustment and reduce social costs.
Integrating Industry policy
Comments on the Great Divide (above) imply that integration of industry policy by considering the input factors of production derived from agriculture and mining can not be sufficient.
Furthermore economic growth theory has, since the 1950s, recognized that knowledge is the most important economic input factor - a situation which was strengthened by 'new growth theories' which have formally tried to incorporate knowledge as a an input to economic production functions in addition to labour, capital etc. [As an aside, it is the author's opinion that these 'new growth theories misunderstand the economic role of knowledge - see Defects in Economic Tactics, Strategy and Outcomes ].
Though the author lacks the resources to properly evaluate such questions, it appears that the economic risks that Australia faces may be far greater than indicated in NIP (eg see The Need to do Better in Queensland's Economic Strategy).
Value adding to rural and mining commodities is not necessarily achieved by down-stream processing. Whether value is added depends on whether the increased price of the product exceeds the cost of the processing - and this depends on the competitive environment, and what competitive advantages are available to build market power.
The best option for adding value would appear to involve creating machinery to stimulate accelerated development of the ability of enterprises, infrastructure etc within related industry clusters to provide appropriate support (eg see Developing a Regional Industry Cluster).
While the author has no ability to assess the relevance of the suggested distribution hubs, it does appear that (in Queensland at least) there are significant weaknesses in the machinery that is supposed to be responsible for transport planning.
Ownership of mineral and resource companies has not been taken by foreign investors because the $A has been weak - as the value placed on such assets would have reflected their international value (ie if the $A halved in value, the value of the asset would merely double in $A terms).
Rather it seems likely that ownership has been taken by others because:
Why would it be assumed that instances of poor corporate decisions (eg Pasminco, BHP) would not arise if they were subjected to external control? The federal government itself incurred large foreign exchange losses . Would not development of the support available to firms from within the industry cluster be more likely to result in satisfactory outcomes?
There is, moreover, no reason to believe that corporate decisions in Australia have been significantly worse than those in other countries - and one writer has recently suggested that corporate management in Australia could be relatively strong 
Current Account Deficit
The issues involved in the current account deficit are very complex - and it is unrealistic to suggest that this makes import replacement essential. For example, it may well be that the significant worsening of Australia's deficit that has emerged in early 2003 is as much due to a slowdown in the outward investment by Australian superannuation funds (which will increase domestic expenditure relative to domestic income) as it is due to changes in the environment for trade.
It is not realistic (as NIP suggested as the basis for a new tariff policy for manufacturing) to provide cost equivalence providing local production is 'efficient', because:
There can be little doubt that Australia needs to play the non-tariff assistance game - but (a) how can this could be managed in practice and (b) might pursuing a multilateral path to reducing non-tariff barriers be a superior long term strategy?
There are strong ground for suspecting that the stability of Australia's system of government could be under threat (see The Decay of Australian Public Administration).
Two ways to move industry policy forward in a realistic way could be:
direct inquiries from the Society to those responsible for current policies requesting that they indicate the basis for those policies - and the tests that are applied to ensure their realism. Responses obtained could be assessed against 'industry and trade reality', and any discrepancies brought to public attention;
get involved in a specific industry area and seek to identify practical options that would improve the situation (eg through indicative plans for business initiatives or government policy). A way in which this might be achieved is suggested in Developing a Regional Industry Cluster which seeks to identify some of the 'secrets of failure' in industry development which often constitute traditional tactics in Australia