National industry policy needn't always be about picking the winners

Opinion Article

2011 August, 28

The meteorology was clear. Treasury, the Reserve Bank, the Prime Minister,  Treasurer and economic commentaries all saw the weather front of the country's  fast-speed resources sector brewing in the north and west. They also saw the  slow-speed non-resources sector weather front chilling under the high dollar in  the south and the east.  

This week the perfect storm exploded into clear view when BlueScope announced it would shed 1000 steel mill jobs.  

The remnants of Australian manufacturing are going through what economists,  following Joseph Schumpeter, call a process of creative destruction. But unions  and manufacturers view their predicaments with less equanimity, seeing the  destructive part and not convinced about the creative part. If they be wrong, who  can blame them for placing store in what is rather than what might be?  

Paul Kelly's midweek critique of the Gillard government's storm preparations  ("Labor turns the boom into a crisis") cut to the quick: "Given the centurydefining nature of this challenge, it had to be the supreme policy task for Gillard  Labor this term. That meant making the boom work in all its dimensions. Yet this  was not Labor's top priority. Since the election in August last year its priority in  terms of energy and political capital has been pricing carbon, not managing the  resource boom of the century: a strategic blunder.  

"If Labor had no political option but to proceed with carbon pricing it should  have been framed differently as just one part of the epic resources boom  challenge."

His devastating conclusion: "Yes, the government has been acting. The critique,  however, is it has not acted enough. Its political mismanagement of the mining  tax in early 2010 despite the convincing case for a new commonwealth-based  resources tax was a major blunder. Its corporate tax relief is too modest given  cost pressures. Its reregulation of the labour market has reduced flexibility and  diminished productivity. Its instinct for government initiative means excessive  red tape and regulation on industry.  

"Labor, in short, has had a competitiveness strategy but it hasn't been pursued  with enough conviction or whole-of-government rigour. Ross Garnaut kept  saying the adjustment from the resources boom would far outweigh the  adjustment from the carbon tax. The irony of this truism is Labor's priority has  been the smaller, not the bigger, adjustment. Now Labor is caught out. The  nightmare Labor faces in 2012 is rising unemployment when the carbon tax  begins."  

Kelly's pinpointing of the essential problem of Julia Gillard's prime ministership  here may well serve as the first draft of her government's obituary.  

In the face of the continuing decline of manufacturing, political leaders still declare their belief that Australia must "make things". Tony Abbott's words echoed what Kevin Rudd said in 2007. Throughout the Western world for three decades politicians have stood in front of rust-belt audiences talking about  revivifying domestic manufacturing. But its decline has been inexorable.  

Treasury, the Productivity Commission and the pointy heads who have driven  economic reform in Australia since the 1980s have come out in unison against  trying to resist the forces that threaten uncompetitive industries.  

This is where the hard head of neoliberal reform economics meets the hungry  heart of industry policy and jobs preservation. The conventional wisdom is  nothing can be done, and anyway new jobs are emerging in the service economy.  Economists tell us the shift from manufacturing to services is an inevitable  advance. Government should just facilitate the retraining of workers.  

That's the theory, and it has held policy sway over Western nations for decades  now. Our political leaders are torn. On the one hand they desire the country to  continue to make things, but are advised the decline and fall of domestic  manufacturing is irresistible and services are the future.  

The Darwin-born chief executive and president of Dow Corporation, Andrew  Liveris, has written an important book, Making It in America, which challenges  conventional economic theory and policy around manufacturing in the US. No  doubt Gillard and Abbott have been handed copies of this expatriate Australian's  book, written from the perspective of someone who has worked for Dow  Chemical since graduating from the University of Queensland as a chemical  engineer in 1976.

He may not be an economic theorist but Liveris presumably knows something  about manufacturing in the real economy, and he challenges the conventional  wisdom that has seen us collectively resign ourselves to the decline of  manufacturing.  

But Liveris's account is not in the vein of Robert Manne's Shutdown (1992),  lamenting the economic reforms instituted by Bob Hawke and Paul Keating. He  has no illusions about reviving the industries of the past. Instead he has  advanced manufacturing in mind.  

The Liberals' astute policy wonk, Arthur Sinodinis, this week commended the  Liveris blueprint. Rather than his specific policies, I am interested in where  Liveris's arguments challenge conventional positions on both sides of the  industry policy divide.  

First, Liveris advocates a national industry strategy for his adopted country from  a pro-globalisation, free trade position.  

Second, Liveris disputes the assumption that nations can succeed without manufacturing. Manufacturing generates more wealth and has the greatest multiplier effect of all industries: for each manufacturing job, many other jobs  are generated. The promise of the service industries is found wanting, with  limited high-end services and a profusion of personal services, many at the  menial end of the spectrum. The Economist pithily captures the trends: "Haircuts  up, widgets down."  

Third, the idea that innovation can take place in the US while manufacturing can  be sent offshore is being revealed as wishful transitional thinking. Liveris argues that innovation follows manufacturing. Not only will manufacturing end up in  Asia, so will the knowledge industries that work in tandem with it.  

Fourth, Liveris sees government as critical to the solution rather than being the  problem. Only government working with business can provide a strategic  framework to build new 21st-century manufacturing industries on home soil.  

This sounds like industry policy and governments picking winners: all the things  the prevailing economic reform paradigm eschews. I understand the great  resistance to talk of industry policy. I have an analogy from the reading wars:  when the phonics proponents won the evidentiary debate against their wholelanguage opponents, the latter started talking about the need for "a balanced  approach". Which in practice means largely sticking to the failed whole-language  policy.  

That's the problem with industry policy. It could describe the enabling policy  framework that only government could provide, but almost invariably it  degenerates into a cover for protectionism and waste. Industry policy hopefuls  such as me collectively groaned when the Rudd government redundantly gave  $30 million green car funding to Toyota for an already developed hybrid. God  help us when Bob Brown's mob starts picking winners from the proposed carbon  bank.  

Liveris points to Germany as the standout example of a Western nation that has  pursued intelligent national industry strategies with great success.  

Finally, Liveris says national governments must become active players in the  global marketplace, attracting manufacturing investment on home soil.  

In Australia we are familiar with state governments enticing investment through  land and tax concessions and minimising regulatory and other cost barriers.  State governments compete with each other and internationally to attract  investment.  

Liveris points to China, India, Brazil, Singapore and a host of other countries that  are active players in the global marketplace, along with their companies. Their  approach is distinct from the US and Australia. Liveris's point is that our companies do not just compete with the companies of Singapore, they compete  with the national government of Singapore that is ever-striving to create the  conditions to attract advanced manufacturing. Liveris says the US, and by  implication Australia, must get out there and compete.

National industry policy needn't always be about picking the winners