ECONOMIC AFFAIRS: by Ken AldredNews Weekly
Dow chief's plan for rebuilding Australian manufacturing
, November 24, 2012
Now that the inevitable end of Australia’s latest mining boom is upon us, debate has belatedly turned on to how to rejuvenate our other key industry sectors, especially manufacturing.
Given the complete absence of any serious policy consideration or formulation about manufacturing at the national level — and, in the case of the federal Treasury, an ongoing sullen hostility towards manufacturing — there is a now a pressing need for the issue of industry policy to be addressed.
A catalyst for the establishment of a coherent industry policy has recently been provided by Andrew Liveris, an Australian who is the global president and CEO of the multinational, Dow Chemical Company. Andrew Liveris is co-chairman of US President Barack Obama’s Advanced Manufacturing Partnership and author of Make It In America: The Case for Re-Inventing the Economy (Hoboken, New Jersey: John Wiley & Sons, updated paperback edition, 2012), which is a blueprint for revitalising manufacturing in the United States.
He has now conceived of a parallel plan to rebuild manufacturing in Australia. He originally launched it in March of this year at the University of Technology, Sydney (UTS), and shortly afterwards presented it to the federal Treasurer, Wayne Swan. More recently, on October 17, he provided an outline of his plan in an address to the National Press Club.
Australia, says Andrew Liveris, at the moment has all the ingredients to successfully develop manufacturing industry, but no recipe on how to do it.
Central to the Liveris approach are public partnerships between private industry and federal and state governments. He warned that a passive hands-off approach to industry policy is not a strategy for growth.
As he explained in March: “Australia’s current growth trajectory is unsustainable. Internal disparities will become exacerbated, and its global competitiveness will decline because other countries are maximising their value-adding capabilities.”
He urged the setting up of a plan here to encourage “advanced manufacturing”, by creating the right environment for manufacturing that is export-competitive and dependent on innovation, and by promoting partnerships among researchers, government and other firms.
As Tim Colebatch, economics editor of the Melbourne Age, said in a report on Liveris’s presentation at the UTS in March, the Dow CEO wanted to “increase investment in innovation, by lifting incentives for venture capital, co-operative research centres, and the “D” end of R & D, to bridge the gap between Australia’s world-class research effort and its rate of commercialisation”.
He went on to say Liveris’s approach would “require gas producers to reserve a big share of new gas fields for domestic use at well below world prices, making Australia’s huge gas reserves a feedstock for value-added industries, which would have a global competitive advantage”.
Colebatch added: “The plan, titled The Dow Chemical Company Advanced Manufacturing Plan for Australia, also urges new initiatives to increase the focus on science and mathematics in schools, and partnerships between business, universities and government to develop advanced manufacturing.”
As Andrew Liveris himself says: “Australia has all the building blocks of a global leader, including a vast quantity of natural resources [and] a highly skilled, talented workforce….
“We believe the government has a big role to play, not by protectionism, but through focused public policies. The current environment does little to address the challenges associated with commercialising new concepts here, and driving the creation of new markets.” (The Age, March 28, 2012).
Liveris is certainly right about the current inhospitable environment for manufacturing in Australia. Not only do our governments, federal and state, lack any real policies to deal with the challenges ahead, but the situation overall is frankly very depressing. The situation is worst in Victoria, the heartland of Australian manufacturing.
Dr Selwyn Heilbron, formerly a research consultant with the World Bank in Washington DC, and also a senior economist with our own Department of Trade in Canberra, now an associate of ITS Global, pointed out in November 2011, on the ITS Global website, that although Victoria accounted for 30 per cent of Australia’s manufacturing output, it was in decline and heading for oblivion.
He said: “Manufacturing’s share of gross state product (GSP) in Victoria has fallen dramatically — from 16 per cent in 1990 to 10 per cent in 2009. Nationwide manufacturing has fallen from 15 per cent of GDP to 8 per cent in 30 years — the downward trend is unmistakeable. Victoria’s manufacturing output in real terms and employment have been stagnant for two decades.”
He added: “Manufacturing is important. It has always played a vital role in the economic growth of nations. This is because of its powerful impact on wealth, capital accumulation and productivity and because it generates huge flow-on benefits in terms of incomes and jobs. No other sector can compare with manufacturing in the power of its flow-on effects.”
In a rapier thrust in the direction of the decision-making elite, Dr Heilbron also stated: “Policymakers and bureaucrats in Australia appear indifferent — if not openly hostile — to the future of large-scale manufacturing. They often claim they ‘do not pick winners’.
“But in the 1980s, when fundamental policy changes at the national level took hold in Australia, including the floating of the $A and unilateral reductions in protection, it was the services sector which was implicitly being picked as the winner to replace manufacturing.
“And yet when a crisis hits, like the recent GFC, and policymakers are under pressure, there is a scramble to bail out the services sector — particularly banking and finance.”
This dependence on services for economic growth led demographer Dr Bob Birrell and his colleague Dr Ernest Healy, at Monash University’s Centre for Population and Urban Research, to argue that Melbourne had become a “Goldilocks economy” (that is, one that is neither too hot nor too cold, but just right). They warned that if Melbourne’s booming economic activity was concentrated chiefly on city-building and people-servicing, it may not be sustainable.
They suggested, however, that if there was to be parallel growth in Victoria’s exports to interstate and overseas markets, then the outlook would be more positive. (Bob Birrell and Ernest Healy, “Melbourne: a parasite city?”, People and Place, September 2010).
Certainly, for the period from 2000/01 to 2008/09, that was not the case. The total value of Victoria’s exports to overseas markets of goods and services in 2000/01 was $30.1 billion, and the value of its imports from overseas was $45.4 billion, giving the state a trade deficit of $15.3 billion. The situation was even worse for 2008-2009. In that financial year, the total value of Victoria’s exports of goods and services was $34.5 billion, and the value of its imports was $70.2 billion, resulting in a trade deficit of $35.7 billion.
Parallel to these trends, and in fact underlining much of them, was the decline between 2000 and 2009 of Melbourne’s manufacturing workforce by 45,900, or 16.7 per cent.
This trend has been exacerbated further since the onset of the global financial crisis in 2007. In the wake of that crisis, a further 127,000 manufacturing jobs have been wiped out across Australia. This is one in eight of all manufacturing jobs.
Ted Baillieu’s Liberal-led government in Victoria, since being elected in November 2010, has made announcements of some infrastructure projects with promises of more to come. It is hoped that over time these projects will help strengthen the Victorian economy and provide significant new employment opportunities. However, Victorian manufacturing remains in a fragile state as evidenced in the numerous factory closures of the past year.
In the Melbourne Age in February this year, economist and former director of the Industries Assistance Commission, Martin Feil, took former Labor Senator John Black to task for boasting that professional consulting had almost doubled in size to 855,000 people and would “eventually overtake manufacturing” which now has fewer than a million employees.
Martin Feil scathingly remarked: “He has to be joking — one consultant for every person making something in Australia. This will, of course, increase the size of the already bloated Australian services sector and its associated hot air.” (The Age, February 22, 2011).
Given all these downward trends in productive economic activity, it is small wonder that, by the June quarter of 2012, the Australian Bureau of Statistics had recorded the following alarming data. On a seasonally adjusted basis, Australia’s balance on current account had accumulated a deficit of more than $11.6 billion, of which the deficit on goods and services was $1.4 billion, the deficit on net primary income was $10.2 billion and the deficit on net secondary income was $270 million.
The unacknowledged elephant in the room, Australia’s net foreign debt (discussion of which is forcibly discouraged in political and bureaucratic circles), was at June 2012 $756 billion.
Raising certain sensitive social issues may be politically incorrect. But, believe me, it is even more politically incorrect to mention the net foreign debt.
To quote Michael Caine playing Lieutenant (later Brigadier General) Bromhead, VC, of the South Wales Borderers in the historically-based film, Zulu (1964): “It looks bad in the newspapers and upsets civilians at their breakfast.”
It is true that the over-valued Australian dollar, pushed up by the pressure of the mining boom and also various other factors, is the final straw that has broken the back of Australian manufacturing.
Between 1985 and 2005, the Australian dollar fluctuated between US50c and 90c, generally averaging US70c. During 2012 it has been as high as $US 1.05, making our imports much cheaper and our exports much dearer.
However, that was only the climax. The problem has been building up for a long time, made worse by the absence of any serious consideration at the national level of a sustainable industry policy.
Our Canadian cousins are also experiencing the end of their mining boom. Unfortunately, the many benefits the boom bestowed on us made Australians at all levels intellectually and organisationally lazy. Why bother retaining and developing manufacturing, agriculture and other wealth-producing industries when mining was going to provide a new sheep’s back to ride on?
Andrew Liveris’s call for a partnership between industry and government to rejuvenate manufacturing is a sharp reality check. We had better heed it for our own immediate sake and for that of the generations to come.
Ken Aldred is a former federal Liberal member from Victoria and a former chairman of the Society for Australian Industry and Employment (SAIE).
Bob Birrell and Ernest Healy, “Melbourne: a parasite city?”, People and Place (Centre for Population and Urban Research, Monash University, Melbourne), Vol. 18, Issue 3, September 2010.
Martin Feil, “Manufacturing the truth”, The Age (Melbourne), February 22, 2011.
Andrew Liveris, Make It In America: The Case for Re-Inventing the Economy (Hoboken, New Jersey: John Wiley & Sons, updated paperback edition, 2012).
Andrew Liveris, The Dow Chemical Company Advanced Manufacturing Plan for Australia (March 2012).
Tim Colebatch, “Call for manufactured success”, The Age (Melbourne), March 28, 2012.