ECONOMIC AFFAIRS: by Patrick J. ByrneNews Weekly
Call for industry policy debate
, August 4, 2007
Former ACCC chief Allan Fels and former editor of the Australian Financial Review Fred Brenchley have both said that Australia needs "to start questioning its mindset that opposes discriminatory industry policy and discriminatory trade negotiations". Patrick J. Byrne reports.Ford Australia is planning to close its engine-plant in Geelong, Victoria, axing 600 jobs. In addition, an estimated 70,000 South Australian families are at risk from the state's car industry moving to China, according to Tony Bates, a senior executive at Holden, who is SA's Family First senate candidate.
BHP Billiton has announced a fall-back plan to process its Olympic Dam mine product in China. It may have been an Australian icon, but BHP, like a true modern multinational, will put its capital where it reaps the best return.
All these signal a disturbing picture of Australia's future, according to Allan Fels, former head of the Australian Competition and Consumer Commission (ACCC), and Fred Brenchley, former editor of the Australian Financial Review
, July 17, 2007).Future living-space
Both men argue that, as World Trade Organization talks on agricultural trade collapse and the high Australian dollar cuts a swathe through our exports, "Australia urgently needs to address its future growth strategies" as it struggles "to find a living space between the future Asian giants of China and India".
They admit that "some answers will confront economic orthodoxy", in particular the idea of "an active industry policy. Other countries do it, but here it is derided as 'picking winners'."
The loss of industry offshore and the need for picking some winners reflect the analysis by Ralph Gomory, IBM's former senior vice-president, and William Baumol, former president of the American Economic Association, in their book Global Trade and Conflicting National Interests
They point out that traditional free-trade theory is still valid, but a more sophisticated understanding is needed compared to David Ricardo's 200-year-old world of "agriculture, slow-moving technology, and tiny businesses". Free-trade outcomes then were relatively simple and straightforward: Portugal specialised in producing wine and Britain in cloth. Such country specialisation, based on natural advantages, would lift the welfare of all trading countries.
However, in today's world of expanded trade involving large-scale manufactures, industrial goods and even professional services, there are numerous possible outcomes for what a country should specialise in producing.
Grapevines still grow better in Portugal than in the UK; but the making of clothes, sports shoes, electronic goods and motor vehicles are not based on natural advantages. They can be done by an increasing number of regions that have the education and a skilled workforce.
The best industry outcomes can be the result of geography, or historical accidents, or war or particular entrepreneurial skills or scientific discoveries. Others are the result of "powerful government and an unambiguous history of industrial policy, plus a skilled and prestigious bureaucracy, able to carry out policy" (page 65).
Advanced economies need to focus on "retainable" industries that are difficult for low-wage, emerging economies to replicate. If an advanced economy can advance to the technological and production frontier, and establish a reputation for making intricate and sensitive products reliably, then it becomes difficult to beat. Sometimes, such production depends on clusters of high-tech industries where real synergies develop that keep local industries ahead of the rest of the world.
However, many industries are capable of being transferred overseas to low-wage countries where skills are transferable. Once these emerging economies attain real-world productivity levels, low wages afford them powerful advantages.
Lifting low-income economies through trade increases the welfare of all countries, until a point where "inherent conflicts in international trade" occur as developed nations begin losing substantial industry offshore without replacement industries emerging.
The number of these transferable, non-retainable industries is increasing at the same time as 1.5 billion new low-wage workers are entering the global economy via China, India and the old Soviet Union states.
Also, Gomory and Baumol show the nature of big corporations is changing. Once, the technology they developed was applied in the home country and only spread internationally over time. What was good for the company was good for the nation. For example, after World War II, the US specialised in semi-conductors and aircraft manufactures, which were traded to Japan in exchange for motor vehicles.
But today, corporations are truly multinational. New high-tech innovations may be developed in the US and applied immediately in China, bypassing the US altogether. Hence, what may be good for the corporation may not be good for the nation.
Indeed, it's not hard to envisage any combination of computing technology, or aircraft industry or automobile production being dominant in either the US or Japan or even China. The forces driving such outcomes are not merely market-driven, but can be the result of planning by government and industry or other factors.
For similar reasons, Fels and Brenchley point out that Australia needs "to start questioning its mindset that opposes discriminatory industry policy and discriminatory trade negotiations. BHP at least has a 'plan B' for Olympic Dam. Australia needs one as well."— Patrick J. Byrne