ECONOMY: by Colin TeeseNews Weekly
Manufacturing decline causes foreign debt crisis
, May 22, 2004
Economists are funny people. At least some of them are.
Last week's newspapers were full of the news that the trade deficit had stretched out to almost $2 billion for the month of March. Many economists had predicted - or more likely hoped for - a more encouraging outcome. They had based their optimism, so it seemed, on the expectation of a stronger world economy and some abatement of the drought conditions here in Australia. As to the drought they certainly were wrong; and, as for the signs of a global recovery, they were probably misguided. But were they looking in the right direction?
What about the more fundamental question? It is correct to assume that the state of our trading account, and, for that matter, the total external account of which it is part, largely reflects the presence or absence of circumstances beyond our control. Is it not at least as likely that these outcomes arise from the way we have chosen to run our domestic economy?Wages blamed
When things don't go according to plan - especially if you are an ideologue - it's always comforting to find someone or something to blame. The present Secretary of the Commonwealth Treasury provides a perfect example: Mr Henry is fond of asserting that the level of unemployment we currently have isn't the fault of the economy.
It is a matter of our choosing to maintain wage fixing policies, rather than letting the market determine wages. Markets, Mr Henry seems convinced, would deliver us full employment - though he does not go so far as to suggest that a free labour market would necessarily deliver a living wage.
Mr Henry, correctly, has identified policy as the real reason why we cannot employ the entire working population. But he has picked the wrong policy.
Instead, he should identify the real culprit - not wage fixing, but our free trade policies to which he is so committed.
Our Government and Opposition, in response to the urgings of Mr Henry's Treasury, have forsaken manufacturing industry in favour of a wholesale, ideologically-based commitment to free trade and the opening up of the Australian manufactures market to unrestricted import competition.
The consequences are there for all who want to see. We are now at the bottom of the OECD table of industrial powers.
And as Mr Henry Kissinger recently reminded Americans, the strength of a nation's manufacturing industry underpins its power. Our unemployment levels directly reflect that policy choice.
Over the last 25 years, we are one of only two industrial powers - Norway is the other - whose manufacturing output has failed to match population growth.
But that is not the end of it. By 1993 we were producing 4% fewer
industrial goods than 22 years earlier. Italy was producing 66% MORE over the same period. Japan 110% more
Not surprisingly, our policy approach has cost us 500,000 manufacturing jobs over the same period. And our trade deficit on manufactures is running at $70 billion annually. And that figure is about one and a half times our annual current account deficit!
In other words our present indebtedness, can be traced back, in whole, to the deliberate policy of running down our manufacturing industries: which, in turn, is a consequence of our commitment to free trade policies.
The reduction of our trade imbalance on manufactures from $70 billion to $23 billion (easily achievable on the basis of the figures) would bring our current account into balance; and, incidentally, would provide for enough jobs to wipe out unemployment.
For the past 25 years, we have been proceeding as if the only problem facing the Australian economy was that of inflation. And all our policy prescriptions have been directed to dealing with that problem.
The principal solution proposed and implemented to deal with that problem has been the opening up of the Australian market for manufactures to unrestrained import competition.
There can be no doubt that inflation was a problem, and that a means had to be found for dealing with it. Whether that means necessarily entailed the decimation of manufacturing industry is another question altogether.
Twenty-five years ago, inflation was a curse facing all of the world's developed economies, and yet Australia was almost alone in choosing to suppress inflation by attacking its own industrial base.
The truth is, in dealing with the problem of inflation in this way we created two other problems each of which were of at least the same magnitude as inflation itself. By subjecting our manufacturing industry to the full blast of unrestrained competition, our economic policy makers and the governments which followed their advice, induced the creation of an unemployment problem which now affects half a million Australian workers.
Worse still, what is becoming more evident every day, is that the consequences of that outcome are destabilising the very basis of our society.
There is the second induced problem: our international indebtedness. We are now less able to pay our way than we have ever been before. And, it is not as if we have accumulated debts over a period of adjustment and may now expect the situation to improve, and for the debt burden to decrease.
That, many will remember, was the belief - or, at least, the contention - of the incoming Coalition government some eight years ago. The debt problem, so it was said, was a Labor creation and the incoming Coalition would fix it. They didn't, and, in fact, the problem has become dramatically worse over the last eight years.
The reality which few in official circles will dare admit is that our debt problem is now what economists call 'structural' - which is to say it does not fluctuate between surplus and deficit - according to the ebb and flow of our economic fortunes - but is a built-in feature of our economy. And remember, when orthodox economic opinion prescribed their policy of free trade it was justified as a necessary response to the problem of structurally embedded inflation.
Who now among that group is arguing for reforms to deal with the policy-induced problems of structural indebtedness and unemployment?
Quite simply none will go that far. Though it is true that a few of their number are cautiously acknowledging, by implication, that the debt problem is structural, and are emboldened to assert that it does not matter, so long as we are capable of repaying the interest.
Now the curious thing about this view is that it denies the validity of another opinion held by the same group when it comes to borrowing by the States or the Commonwealth for, say, infrastructure development.
The fact that the finances of the Government are able to cover interest payment on a project is considered not prudent; such activities must be financed out of current revenues.
Surely what we should all be insisting upon - as we once did - so far as foreign transactions were concerned, was that the nation should pay its way, at the very least, as far as consumption expenditures were concerned. When we were not able to do that, we restricted the flow of consumption imports until earnings and outlays came back into balance.
It's about time we thought about re-introducing this practice. Even it could be called reform. Whatever, it is the only way we can deal with our debt and unemployment problems, and all the consequential problems which flow from them.