ATTACHMENT C TO COMMENTS ON THE TEN POINT PLAN (2000)
of the Society for Australian Industry and Employment
CPDS Home Contact Summary   TPP outline (A)  How to Strengthen (B)

STRENGTHENING THE TEN POINT PLAN (TPP) - WHAT?

It is highly desirable that a plan be able to be expressed simply. However to be most credible it must clearly be technically accurate and supported by detailed evidence and argument somewhere in the background.

To start with the TPP probably needs to be given a better professional 'polish' by:

For example concerning the latter it was claimed that OECD countries generally increased total support for agriculture from 55% to 59% - while Australia reduced support from 11% to 9% (Katter B. 'The bush will teach rationalists a bloody lesson', Financial Review, 26/2/01 - quoting Agricultural Policies in the OECD)

This attachment also suggests many specific ways to improve TPP's content. It deals with:

1. SUPPORTING TPP'S BASIC CONCLUSIONS

The basic conclusion which TPP reaches is that Australia has adopted particular policies (what it described as 'economic rationalism') over the past twenty five years, and that the results have not been satisfactory (with problems being identified in terms of unemployment, the current account deficit, manufacturing industry, value-adding to resource exports, etc).

Other analysts have reached similar conclusions, and their work should be referenced in TPP, to strengthen the Society's case.

For example, and there will be MANY others:

And practitioners views, eg: Lyons J. 'Aussie battlers are fighting to repel invaders' (Financial Review, 17/7/01) which argued that, Australian businesses are fighting to retain market share against heavyweight global competitors. The ground is being tilted against local players by higher company taxes, less government assistance and multinationals tactics of shifting profits offshore to lower taxed regimes. And Australian consumers, who would like to support Australian producers, are confused about who these are

2. ENHANCING TPP'S STRONG POINTS

TPP seems to be on its strongest ground in relation to the professional practice of manufacturing industries.

These strongest points, and some comments on them, are:

More can be said: There is presumably a large international literature on this subject which could be drawn in to strengthen the TPP's case.

Comment: by the same token it is not desirable (or feasible) to prevent economic rationalists from expressing their point of view (eg noting TPP's proposal to 'gag' the Productivity Commission - p12). The case has to be won on its merits in the face of the best possible counter-arguments.

More can be said: the relationship between such practices and the stability / instability of the global financial system might also be mentioned (eg the emergency dumping to obtain hard currency during the Asian crisis (p14) was forced on those countries by financial instability). However there was another side to this because emergency discounting also had the effect of dampening inflation in the US (because of cheap imports) and so permitting it to drive global growth more strongly than otherwise possible. The point is that solutions are needed to financial instabilities - as well as to trading instabilities - as the two are closely related.

Another aspect to note is the strategies that many Asian producers often adopt as a result of cultural factors also tend to result in what appears to be 'dumping'. Firstly communities seek market share, rather than profitability (because of communitarian / mercantilist motivations which value 'real' production rather than 'abstract' financial outcomes - a predisposition that was very relevant to the Asian financial crisis). Secondly strategies to build market share by pricing below cost can make sense from a 'learning curve' viewpoint (ie gaining experience through producing allows costs to be cut as experience is gained and production to become profitable) and can't always be said to be an illegitimate tactic.

More can be said: it is also noted that protest movements worldwide in relation to globalization focus on the need for social and environmental conditions / outcomes to be considered in future trade negotiations - and that there are indications that US business is agreeing with this viewpoint (Hartcher P. 'US Inc bows to left on trade', Financial Review, 12/6/01)

An aside: the major obstacle to successful innovation in Australia was traditionally a lack of commercial capabilities, rather than any lack of technical competence. Perhaps the shift to commercially oriented subjects may be desirable - and it may also (eventually) overcome the traditional poor remuneration which has plagued science and engineering in Australia (and so lead to a large increase in enrollments) - if an environment emerges in which those technical capabilities can lead to commercial payoffs (??)

More can be said: The existence of a gap in Australia's skills profile also needs to be highlighted (ie Australia has a reasonable percentage of its population with professional qualifications - but a much lower percentage with technical and trade qualifications than would be normal for a developed economy, reflecting the lack of demand for the practical 'doers' in a technically sophisticated economy. The fact that it is not a simple matter to fill this gap could also be highlighted. It not just a matter of finding the resources to increase training. There must also be a balance between supply and demand for skills, and that demand will be rapidly changing (and not easy to predict) as industry responds to markets and changing technological opportunities. The problem is probably to set up institutions that are capable of filling the gap in the long term, rather than simply trying to identify particular skills for a short term program.

TPP referred to statistical quality control in Japan and its relationship with training in manufacturing science (p22). This is only part of the story as: Japanese management styles led to 'total quality management' (TQM) which goes far beyond statistical quality control; TQM has encountered cultural obstacles in Western firms - because of different assumptions about the nature of power and management; and TQM (as a means for steady incremental process improvement) may have been by-passed by techniques for more radical business process re-engineering developed in the USA (though the jury is still out).

Comment: the fact that such opportunities are not understood by political leaders (p23) should not come as a surprise - or cause concern. It is ever thus (eg TPP was overly generous to suggest that such leaders know much about economic theory - p23). Australia's political establishment has always been, and will always be, 15 years out of date in appreciating such issues - because it has to reflect the knowledge of the 'man in the street'. The point is that the people who do know about such opportunities need to be the ones who take the lead - and they need institutional arrangements which make it possible for them to do so which are not constrained by the inevitable limitations of political understanding.

This is one of the main reasons that it is desirable to eliminate dependence on governments in providing operational support in such functions as export development (see below). Eliminating dependence on political decision making about training priorities by institutional changes (rather than trying to get political understanding as TPP suggested - p23) should also substantially aid Australia's economic performance.

More can be said: these general points are receiving massively increased attention in relation to concern about Australia's potential loss of major corporate HQs - where such tax issues are critical. Thus a lot more can presumably be added to this argument from information that is becoming available. Governments are likely to be very sensitive to this issue for some time - and as TPP noted (p25) the ATO is already active.

More can be said: It may well be that the tougher ATO approach (p25) combined with the introduction of the GST and the parallel reduced corporate income tax rates may have been a factor in the recent improvement in the current account deficit - see Section 7 below.

More can be said: the tax revision option suggested in TPP is undoubtedly not the only one available

More can be said: there is a considerable literature on the inability of changes in currency values to balance cash flows - which revolves around the fact that competitive advantages are not primarily determined by relative costs (eg the existence of production capabilities and distribution chains matter more - so that devaluation often does not lead to its predicted effect of significantly altering the balance of trade).

The points that TPP makes about currency manipulation are equally significant though the problem does not just lie in currency manipulation but in instabilities inherent in financial markets. In any event it is very likely that Australia is at risk with its high foreign debt and current account problems.

More can be said: the growth of compliance costs is not only associated with Australia federal system of government. Despite effort to reduce red tape and to simplify taxation, Australia's tax legislation has reportedly grown from 3000 to 9000 pages over the past few years.

Furthermore despite numerous efforts to cut red tape, the volume of new legislation / regulation that has been created has swamped the efforts to reduce it. The problem probably lies in (a) allowing interest groups that benefit from regulation to suggest how it should be reformed (b) giving attention to specific regulatory requirements rather than to finding alternatives to political solutions to community problems and (c) the increasing complexity / interconnection of social / environmental and economic issues.

Some of these strong points address the failure of what should be basic to good governance - and the fact that common sense practices have been discarded is evidence that, in seeking economic reform, 'babies have often been thrown out with the bathwater'.

In any event, any future TPP revision would be wise to build on these strengths.

3. DON'T RISK UNDERSTATING AUSTRALIA'S CHALLENGE

Though TPP has made a start towards identification of Australia's economic problems, there are other aspects that need to be considered - because there is a risk of otherwise proposing solutions which fail in practice though they may have seemed good in theory (a problem which, it is argued below, befell the advocates of 'economic rationalism').

In brief, other issues that probably require recognition include (in no particular order):

For example: The fact that strengthening the ''supply'' of knowledge and skills, while essential, is not likely to be enough on its own is supported by a Dusseldorp Skills Forum''s study, Australia''s Young Adults: The Deepening Divide (1999). It found that: ''..... during the 1990s there has been a ..... trend towards lower skill jobs for young adult(s) .... and ..... a clear shift ..... towards employment in jobs that require only elementary or intermediate skills. ..... These findings ..... contrast with the central policy emphasis of the past 15 years .... (which sought to) to enhance ..... skills and maximize employability''.

Moreover, to some extent, the large devaluations which have occurred during the 1990s seem likely to have contributed to the appearance of large productivity gains during the decade (eg if exports worth $A100m and $US75m are revalued by devaluation of the $A to $A100m and $US50m, they are still likely to sell for $US75m on the world market - resulting in a large increase in income measured in $A (and in productivity as measured through the national accounts)

The strength of both science and of Anglo-American cultures has lain in reliance on empirically derived knowledge (ie does an idea match reality). We are now tending to move into a 'post-empirical' environment - in which 'knowledge' is again being seen as appropriately derived from people's subjective ideas and preferences. This was discussed by Bloom 'The Closing of the American mind' - which commented on the shift in US universities from seeking knowledge empirically to seeking knowledge based on human cultures.

Elites criticize ignorance and intolerance in society, yet exhibit those characteristics themselves. Their goal is to prove their own opinions right rather than skeptical inquiry (Stone R 'The fundamentalism of our elites', Financial Review, 23/2/01)

There is good reason for current confusion and the issues involved are extremely difficult - but the result has been a loss of confidence in 'positive' knowledge which has led to numerous pathologies including:

It appears that TPP was started with an assumption about a solution - rather than starting with an assessment of Australia's (or manufacturing's) strategic environment. This is not good practice, as it risks overlooking something critical - and leading to policies that fail in practice though they may have seemed good 'in theory'.

It is likely that a major source of the problems resulting from the adoption of 'economic rationalist' policy regimes was that they was based on an overly simplistic assessment of the strategic environment.

The problem with 'economic rationalism' does not lie only in what was done (though there are undoubted weaknesses some of which the TPP has identified) - but rather also in the overlooked need to simultaneously build the capabilities of individuals and firms to cope with a more competitive environment.

In the 1980s when elites were contemplating major economic change by adopting policies based on market economics, changes in the standards required for international competitiveness were occurring for reasons outlined in Section 5 below. Thus business and the community needed to go up a steep learning curve about this challenge and reorganise themselves for what they would need to do in a more competitive environment. This was not done - because the elites started with a favoured 'solution' rather than with a comprehensive evaluation of the strategic environment. The result has been:

4. INDUSTRY POLICY REVIEW

TPP's stated primary purpose was to revisit industry policy (p1) and its first recommendation involved establishing a policy review to recommend industry assistance measures (p10).

The author has a summary available of the industry policy debate in Australia up to 1997 (together with copies of some source documents) which might perhaps help in refining the 'review' proposal.

Also: critiques of Australia's recent economic policy framework which propose various serious alternatives have been are included in (only up to early 1997) sources such as:

Other considerations which might be taken into account in refining a proposal for an industry policy review are:

"In the lead up to some recent high profile collapses, well known brokers kept hold or even buy recommendations on companies .... until the bitter end" (McLean T. 'Hidden price of investor advice', Australian, 28/8/01)

5. ACHIEVING INTERNATIONAL COMPETITIVENESS

The concluding comments to the TPP express the Society's profound desire for Australians and the Australian ethos to prosper (p39).

And the TPP ascribed Australia's declining relative position during the 20th century to a failure to convert abundant / cheap resources into manufactures - ie so that Australia is still exporting cheap raw materials without adding enough value (p17). Adding value to exports (p20) was one of several TPP proposals for increasing competitiveness.

However more than 'efficient processing' of raw materials (that TPP suggested, p20) is likely to be required to add value - because economic value is only added if the increased price of a processed commodity exceeds the cost of processing - and increased 'efficiency' may merely result in lower commodity prices and be unable to cope with low wage producers.

Adding Value: Basic commodity producers who rely on the comparative advantages of regions (ie their natural resource endowments) tend to face unfavourable market conditions, because all producers have similar advantages and lack market power. In a competitive environment they find that prices are bid down to near average producers' costs - and margins (as well as profitability / productivity) are low. Australia primary producers and mining firms have been dominated by an 'efficient production' rather than a 'value creation' ethos, and have long focussed on increasing efficiency. If all producers achieve similar efficiency gains (as they will tend to do by copying others' changes), all the economic benefits from increased efficiency flow to consumers or middlemen. This is one of the reasons for constantly declining commodity prices over several decades (and for the poor terms of trade that Australia has faced). During the 1990s resources companies thus faced an expectation of low commodity prices, and their strategy in trying to profit often appeared to be to acquire large high quality resources and become a very low cost producer. However as 'everyone' did much the same, supply increased faster than expected and prices fell even faster than expected. Thus reasonable rates of return at project planning time, usually turned into poor post-hoc returns. A particular problem facing resource producers in Australia whose strategy was limited to industrial-era tactics (ie seeking competitive advantages on the basis of capital intensive mass production) was that their major competitors were in low-wage less-developed countries (whose involvement necessarily eroded the productivity obtainable from such activities). As manufacturing industries in Europe and North America found in the 1970s this strategy was unsustainable - and resulted in de-industrialisation in many countries and radical changes in the organisation of production (eg the shift from mass-production to knowledge-based production; and the break-up of hierarchical organisations into networks which accelerated learning). The current strategy which appears to be favoured by resource companies to increase value added involves seeking market power through increasing market share by a few large global firms (revisiting the early 20th century cartels - a move that may perhaps result an international 'competition policy' response)

The implications of this are that:

An object lesson: "With Glencore poised to reap billions from its Australian coal float, ... the Swiss broking house left some local miners looking like rank amateurs. ... the Swiss are not generally associated with coal mining ... It is therefore highly ironic that it has taken the Swiss banking and commodity trading fraternity to teach Australians - among the world's biggest coal producers - how to make some serious money out of the black stuff. ... Glencore ... is floating its coal mining division, Enex resources, in a deal worth between $3.3bn and $4.1bn. ... Glencore will crystalise a capital profit of between $2.95bn and $3.78bn on the sale of its Australian and South African coal mines to Australian investors.. (this) would appear to be bigger than all the profits made by the entire Australian coal industry over the past decade. ... The reason (Glencore) can make so much money ... is that (it) knows the secret formula for making money out of commodities is to buy low and sell high. The global seaborne coal market has (many) ups and downs ... At the low point ... investors will sell out for 50c in the dollar. At the high point ... investors will happily pay $1.50 to the dollar. ... Over the past seven years Glencore has (acquired) a group of 14 Australian coal mines and undeveloped coal seams .. (and a) South African coal miner. Glencore bought many of its coal mines at low points in the coal mine cycle. It also bought from companies that had decided to exit the industry for strategic rather than financial reasons and was thus able to buy cheaply. Glencore also, in the main bought mines that were not well managed.... Immediately after acquiring most of its mines, Glencore brought in new management, slashed costs and brought in new equipment to expand production. ... While good management helped Glencore's Enex bonanza, the biggest factor has been the firming of the coal price in US dollar terms and the weakness of the $A against the greenback" (Ries I. 'Big black', Bulletin, 28/8/01)

There is scope to refine what TPP's discussion of competitiveness in other ways.

However there are options that TPP has yet said little about. For example:

For example this precise point (and the expected consequent need to shift to a knowledge intensive economy, which was the basis of the revolutionary changes that resulted in the American 'new' economy) were clearly stated in 1983 by the USA's then industry policy guru, Robert Reich, (See 'Can the US recovery save the Australian economy, National Times, 1-7/4/83).

Such counties went through quite radical changes in the organisation of production in order to rebuild competitiveness despite their higher costs.

6. ECONOMIC RATIONALISM

The Ten Point Plan identifies problems emerging from 'economic rationalism'. The Plan suggests that the problem is that 'economic rationalism' is theoretically sound but failed in the real world because others are not so idealistic (p1-2).

However TPP's critique of 'economic rationalism' can be, and needs to be, far better developed. In particular:

Moreover, to provide a basis for consistency and coherence in deciding on programs and initiatives some sort of sound theory is essential. Thus there is a need to find a theory which does better match reality - not to say that theory is irrelevant.

In fact, market economics is anything but a 'simple theory' and is based ultimately on very sophisticated ideas about the 'limits to rationality'. Unless TPP goes down the same road, the Society will be susceptible to being criticised for 'not understanding the problem'.

Factors involved in its introduction include: reviews of the poor international competitiveness of tariff-protected manufacturing industry developed on import-replacement policies; the need for structural change in the Australian economy because of the low productivity and poor terms of trade of traditional commodity exports; the obvious worldwide failure of planned economies; and the OECD's recommendations (about 1980) that market liberalisation was the best way to achieve structural adjustment - a conclusion based on failures in Europe in the 1970s resulting from attempts by governments to manage strategic responses to NIC threats to European manufacturing industries - which always resulted in support for losers.

Similarly TPP needs to demonstrate familiarity with the current work of advocates of 'economic rationalism' (eg Stone J. 'Rational benefits of rationalism', Financial Review, 16/5/01)

For example: "All of a sudden there is an optimistic outlook and people start to realize there is a future in agriculture .... It is a long way from the old regulated agriculture. Now you have to use your initiative and that really is where people are starting to get the full benefits of farming. Producers are now putting in place very innovative systems, not only of marketing but breeding, and really doing things they would never have dreamed of doing 15 years ago. Even though the technology was there, there was no need to do it" (Wahlquist A 'You've never had it so good', Weekend Australian, 4-5/8/01)

The federal government is to offer a large rural assistance package. However there are many opportunities eg agricultural unemployment is below the national average; farm incomes have increased rapidly - an improvement partly due to deregulation; and food exports could lead to an agricultural boom. Australia's clean and green image is helping, as is a lowered exchange rate. Growth of provincial cities has been similar to capital cities (though at the expense of smaller towns). Agricultural productivity has been growing at nearly 3 times the national average. Managers and professionals (who can earn good wages) now make up more than half of all agricultural employees (Moore M. 'Rural life was never better' Financial Review, 29/8/01)

7. CURRENT ACCOUNT DEFICIT (CAD)

TPP points out the undeniable fact that Australia runs a current account deficit which has serious potential economic implications - despite official claims that it is irrelevant (p3)

For example, if Australia's CAD is (say) $30bn pa, then around $30bn pa of capital inflow is required annually. And, if it is not available because Australia becomes a less attractive investment destination, then a risk of a currency crisis is very real. A downturn in Australia's attractiveness for resources investment (following the miserable returns achieved by such investors during the 1990s) may well account for the current weakness of the $A, and the potential for a currency crisis which seems to exist.

TPP also validly pointed out the relationship between currency manipulation and a country's cash flow (p32), and the effect on the CAD of multinationals transfer pricing arrangements (with the ATO crackdowns on manipulative arrangements used as an example - p 26). Thus:

Partial solutions could emerge not only from and improved trade balance but also from (say):

In particular: the CAD does not only take account of the balance of trade in goods and services - but also of the balance of income (and financial transfers). Furthermore the CAD is also equal to the difference between national spending and national income (because the CAD is balanced by a capital account surplus which is used for investment, and allows spending to exceed income). Thus increased domestic savings can reduce the CAD, and increased productivity (which implies an increase in domestic income) can also do so provided the gains are saved. Also balancing the budget by reducing public spending will reduce the call on external funds. And, any measures that increase productivity / national income without increasing national spending (ie through productivity gains which flow into savings) would reduce the CAD,

A much more integrated (trade, financial, commercial and monetary) analysis than TPP has yet attempted is required to properly diagnosis the CAD problem, and to find viable solutions.

Other factors that might be considered in such an analysis include:

Possible explanations (which basically have to account for an increase in Australia's national income relative to its expenditure) might include: 

One analyst's comments: Australia's CAD has fluctuated between 3% and 6% of GDP since 1980, but in March 2001, it was under 3% (and is likely to be less in the June 2001 quarter). This reflects changes in both the goods and services trade (because import volumes were suppressed by domestic weakness, while the tail of the departing global boom held up exports - especially of commodities) and in capital payments (where the cost of servicing foreign capital fell from 4% of GDP 5 years ago to below 3% - as reduced rates of return, outweighed larger amounts of foreign capital to service) (Hughes B. 'The incredibly shrinking current account deficit', Weekend Australian, 4-5/8/01)

8. LOSS OF MANUFACTURING EMPLOYMENT

TPP suggests that there are no overall solutions to unemployment in programs for youth, regional unemployed and the retrenched, or in high technology or service industries, because high unemployment is due to the loss of local market share relative to imports by manufacturers (3).

However, for reasons outlined below the issue is quite complex:

It is not strictly correct to blame high unemployment on loss of manufacturing employment as:

There is also some logic in the view that the level of unemployment is a product of how 'flexible' the labour market is (ie if workers will accept low wages none need be unemployed) - a logic which raises problems.

Much better arguments in favour of (specifically) manufacturing industry are likely to exist in (a) the linkages between manufacturing and other industries (b) the strategic leverage which control of final products potentially brings.

Also arguments can be developed in relation to job quality - because labour market 'flexibility' should never be interpreted as a willingness to accept subsistence wages. The nature of the flexibility that is acceptable (an ability to change and be multi-skilled) needs to be clearly defined - and the economy sufficiently developed so that those creating the next round of jobs are well supported. It is very likely that there are ways in which this could be achieved (see Developing a Regional Industry Cluster: A Possible Generic Process on my web-site) which could make a real difference to manufacturing industry and related employment.

Finally it seems highly desirable to identify (and present a case in relation to) arguments which have against any strategic importance being attached to manufacturing (eg Economist, 'Making too much of manufacturing', Australian, 15/11/91)

9. Alternatives and Complements to the Society's proposals

The Society needs to identify and discuss the relative merits of alternatives to its proposals, and other options which might be complementary.

Several option that might be considered include: