ECONOMIC AFFAIRS: by Craig MilneNews Weekly
Australian manufacturing: does it have a future?
, March 6, 2010
Australia is a relatively young country, but Australians have been manufacturing things for a long time. This is hardly surprising as the country was founded by the most advanced industrial and economic power of the 19th century. From the earliest times, the flow of capital and skilled labour from Britain was continuous and beneficial, providing Australia with a wonderful advantage in the development of its manufacturing capacity.
By the end of Australia's first century, local manufacturers provided for most domestic needs. Some of these businesses were quite large and technically capable as well. Australian firms were building machinery, steam engines and locomotives at a time when such things could only be done in North America and a few European countries (outside of Great Britain).
The colonial experience provided clear advantages for Australian manufacturing, but there were disadvantages as well. Three clearly stand out.
The first was that labour scarcity combined with an abundance of land and the absence of a rentier class meant that Australia quickly became a high-wage country. Without intervention, the market forces that delivered these benefits to labour would have taken them away as conditions changed, but this was not to be. Well-meaning reformers and trade union activists managed to get high wages entrenched after Federation through political action, setting a floor under wages and a ceiling over hours. The same activism achieved aged pensions, free health and education and unemployment benefits, along with all of the other cost-raising entitlements and burdensome regulations that now render Australian industry completely uncompetitive against countries that have avoided these burdens.
The second disadvantage was that the Australian market was relatively small and the main settlements widely dispersed. During the "workshop" phase of industrial development this did not matter; but the wide separation of population centres and expensive overland transport made the national market difficult to access and mass production hard to justify. As a result the transition to mass production was late in coming to Australia and by the time it did, after the mid-1920s, strategically important industrial opportunities, like automotive manufacturing, had already been occupied and secured by foreign firms.
The third disadvantage was that the product development and processing skills of Australian manufacturers were not always up to scratch. British settlement made industrialisation relatively easy, but it imposed limits as well. The best British technical talent stayed at home, where the main opportunities were, and the best that Australia produced went over there as well. People like Louis Brennan, Frederick Wolseley, Herbert Austin and Harry Hawker all got a start in Australia, but built their fortunes in Britain. The difficulty of gaining top-echelon status for Australian manufacturers meant that the disadvantages of high costs and a small market were hard to overcome.
Australian governments encouraged manufacturing, mainly through import regulation, as a way to create jobs, improve self-sufficiency and achieve national development.
Tariffs were first adopted in Victoria to foster manufacturing and keep gold-seeking arrivals in the Colony after small-scale mining became untenable. Victorian influence ensured that protectionism became national policy after Federation, but it was not universally popular. Until then, the main political divide was between free-traders and protectionists, with the pastoralists and miners in the first group and the manufacturers and nation-builders in the second.
At Federation the protectionists won and prevailed for most of the of the 20th century; but by the 1960s their hegemony was coming under pressure. A group of journalists, politicians, bureaucrats and economists worked assiduously to undermine the status quo. Their numbers were small, but their message aligned with the interests of important groups, such as businesses eager to move offshore to escape trade unions and Australian wage and welfare costs, and retailers seeking increased margins from cheap Asian imports. The traditional free-trade supporters, commodity producers in agriculture and mining, were re-energised.
Even members of the governing class were happy to unload trade-regulating responsibilities. Processes that involved "picking winners" inevitably attracted political enmity from those not picked, and unsatisfactory attempts at regulation attracted unwanted public scrutiny. The free trade ideology provided a useful cover for a governing class which, unlike their European, American and Asian counterparts, was then, as now, too inert, ignorant and inept to manage a successful industry policy.
New mineral discoveries offered the prospect of a much easier path to Australian riches than the hard work that manufacturing demanded. Generational social changes meant that self-indulgence was preferred over self-sacrifice. Nationalist and religious feeling was weakening.
A growing preponderance of jobs were now in the service-sector, jobs seen as preferable to the discipline and dirt of factory life. There was a cosmopolitan transformation of values and the rise of the idea of "post-industrialism". All of these factors worked powerfully against the idea of protection for manufacturing.
The first blow came with the tariff cuts and currency revaluations of 1973. Within months thousands of manufacturing businesses closed down. Whole industries disappeared, their jobs destroyed, their skilled workforces dispersed and their valuable stocks of capital turned to scrap. Subsequent governments opted for a more gradualist approach, but the results were the same — the steady, inexorable demise of Australian manufacturing industry.
From Federation, tariffs had been used to compensate trade-exposed manufacturing firms for the high wages and welfare loads that had been imposed upon them by political action. From 1973 onwards, this implicit contract was broken. Tariffs were cut, but the high wage, welfare and regulatory loads left in place. The reformers may have hoped that exposing Australian manufacturing to low-cost Asian competition would drive costs down and lead to the dismantling of a wage-fixing and welfare system founded in more favourable times.
This did not, and indeed could not, happen. Because most people now worked in "services", they were unaffected by low-cost Asian competition. They were like parade-ground soldiers, well away from the front line, out of reach of enemy fire. The manufacturers, on the other hand, were in the trenches bearing the full brunt of the attack from wave after wave of emergent Asian industrial powers, all equipped with every weapon in the mercantilist arsenal — low wages, highly disciplined workforces, undervalued currencies, coherent industry policies. Australian manufacturing lost; they won. The cosseted conditions that Australian workers in the services sector enjoyed came under no pressure at all.
The point is that a policy that seeks to practise social democracy at home and free trade abroad is doomed to fail. It is like attempting to violate the First Law of Thermodynamics. The pursuit of such policies, elsewhere as in Australia, has been a major cause of the progressive demise of the West, as the economic activities that really matter are progressively transferred to China.
According to the mainstream narrative of the Australian political elite, trade deregulation has been a marvellous success. It has improved consumer choice and lowered prices for manufactures. In that claim, the reformers are undeniably correct.
What they ignore, however, is the other side to the coin. Trade deregulation has caused a rapid decline of manufacturing and set Australia well on the way to becoming a dropout from the ranks of the advanced industrial nations. Ours is a place gifted to us by our colonial history, but very difficult to recover from the debased state towards which we are heading.
It has caused a massive rise in welfare costs through hidden unemployment and an increase in the size of government. It has led to a reliance on commodity exports and a risky over-specialisation of the national economic base. It has caused a massive increase in net foreign debt, which in turn has required interest rates to be higher than would be the case in a balanced trade scenario.
Despite the short-term gains from lower prices on manufactured imports, it has, by the destruction of the industrial base upon which future innovation and technological development are most likely to be grounded, virtually ensured a decrease in national income over the long term.
From this point of view, the trade-liberalising reforms that the governing class and its acolytes pride themselves on have been no success at all. Rather, they have been a national disaster.Craig Milne is executive director of the Australian Productivity Council, a private consultancy. This article is from a speech he delivered at the National Civic Council's national conference at Mannix College, Monash University, on February 6, 2010.