<b>Craig Milne</b><br>Executive Director,<br>Productivity Council of Australia

Manufacturing in Australia; does it have a future?

Manufacturing has, from the earliest times, made an important contribution to Australian economic development. By the centenary of British settlement a thriving manufacturing industry had grown up, producing a range of goods sufficient to supply most domestic needs. Federation established a borderless national market and tariff protection, enabling Australia’s small-scale manufacturing sector to embark on a period of growth which would, within a few decades, transform the nation into a fully-fledged industrial state.

The opening of the Newcastle Steelworks in 1915 established the Australian steel industry. The building of the Ordnance Factory at Maribyrnong added an interchangeable part mass production facility in 1924 and, in the same year, Holden Motor Body Builders built a modern automotive body plant at Woodville. In 1936 the Commonwealth Aircraft Corporation was established at Fishermen’s Bend. During the war that shortly followed, these substantial investments in industrial capability paid great dividends; Australian manufacturing geared up for national defence, expanding its output and capability at an astonishing rate. In the peace that followed, new industries flourished and the golden era of Australian manufacturing ensued. By the late 1950s manufacturing accounted for 29% of Australian GDP.

By the 1960s, however, Australian manufacturing had begun to stagnate, as growth and productivity faltered. By the 1970s it was in decline and, forty years on, reduced by global economic changes and government policy, manufacturing accounts for less than 10% of Australian GDP, the lowest level since early colonial times.

The external cause of the collapse of Australian manufacturing has been the adoption and mastery of western-style manufacturing by a succession of Asian nations. These entrants, from Japan at the beginning to China in the present, have applied mercantilist ideas to the conduct of their trade policies. The mercantilist’s policy is to achieve trade surpluses, while holding down the value of the national currency to prevent the loss of competitiveness that would normally follow from such a policy. Mercantilism uses state power to suppress wages and force the rate of savings. It is protectionist and seeks to influence the structure of the nation’s industries, rewarding entrepreneurs whose endeavours align with national policy. Mercantilist regimes use their domestic firms as hammers to forge their nation’s future.

The internal causes of Australian decline are several and well known. The most important is that Australia is a high wage country, and has been since the 1820s. The initial causes were an abundance of land, a shortage of labour, the absence of a rentier class, low taxes, gold discoveries and generous British investment. After Federation, high wages were cemented in place by liberal reformers and trade unions. Australian governments were among the first to grant age pensions and other welfare benefits, the costs of which inevitably reposed on the productive sector. Australian manufacturing was rendered permanently uncompetitive against nations whose firms carried lighter burdens.

Another problem for Australian manufacturing was a small and dispersed national market. British colonies were strung around the Australian coast to exclude imperial rivals that might have chanced a settlement on the far side of the world, a policy which gifted Australia with a continent under a single national jurisdiction, but at the price of widely separated population centres. A small national market, fragmented into regions, made the acquisition of scale economies and labour-replacing technologies difficult to achieve.

Without exceptional technical and entrepreneurial talent, or a cultural tradition of producing highly esteemed goods, a nation with high wage and welfare costs and a small domestic market will struggle to make a success of manufacturing.

The stasis afflicting Australian manufacturing from the 1960s coincided with an era of social change, conflict and rejection of received values. A distaste for the discipline and drudgery of factory life, and a preference for white collar jobs, worked against manufacturing. Trade unions played a disruptive and divisive role through the pursuit of unreasonable claims, political campaigning and the subversion of productivity. Protectionism had encouraged the proliferation of sub-scale, inefficient firms. An excessive reliance on foreign direct investment had put too many branch offices of foreign corporations in command of key strategic sectors. The problem of Australian protectionism was that it was necessary to keep manufacturing afloat, but robbed it of vitality, enterprise and the pulse of innovation.

The policy responses needed to resolve these issues would have taxed the wisdom of Solomon. The Australian governing class tinkered, but was not equipped for the task. Instead, it found a handy alternative in the form of new mineral discoveries and a growing demand for resources by emerging Asian industrial nations. This offered a much easier pathway to riches than the grinding, competitive struggle of manufacturing. Australians wouldn’t have to do any of the hard, head-scratching stuff that other people did any more; they could shovel coal and iron ore into ships instead. Too easy. It was the line of least resistance and the governing class followed it.

Australian policy thus entered the era of “economic reform”, the essence of which was to abandon a century and a half of industrial development in favour of mining. Although the reformers spoke of a re-energised Australian manufacturing sector, responding to tariff cuts with an outward re-orientation that would stimulate innovation and boost productivity, this proved to be fanciful. Australian manufacturing went into precipitous decline instead.

Manufacturing has been reduced to a remnant. The firms that are left are those that have found specialist niches, those that need either little labour or a lot of energy, those whose customers require proximity or immediacy, the defence contractors, and the automotive assemblers and suppliers hanging on by their fingertips.

Given the continuation of current policy, further decline in manufacturing is assured. The conventional view is that this doesn’t matter; Australia’s future lies in mining and services. This is a foolish choice; Australia already has too many eggs in the commodities basket for its strategic good. More than that, the sanguine reliance on services is mistaken. It falsely implies that the migration of jobs from manufacturing to services is a movement to a “higher” stage of economic development. Services don’t thrive in Australia because they represent more productive allocations of labour and capital, they thrive because most service outputs are consumed at the point of production and are therefore highly protected. The form of this protection is the close regulation of the right to enter and work in Australia. Manufacturing is now exposed to least cost competition but most services, as part of the largest sector of the economy, enjoy an impenetrable level of protection.

There are strong arguments for Australia staying in manufacturing, and being prepared to pay a high price to do so. Manufacturing is the sector that contains and advances the skills and capabilities that prescribe membership in the ranks of the advanced nations of the world. For research and innovation, manufacturing provides the essential ground from which future streams of products and incomes can emerge. Whatever form the economy of the future may take; manufacturing will provide the enabling foundation for it.

Economic reform has not worked as well for Australia as its protagonists have claimed. For manufacturing, the most important sector of the economy of any technologically advanced nation, economc reform has been a disaster. It’s time that the dominant policies of the last forty years were re-considered; the nation’s future depends on it.