Five reasons why manufacturing is critical to our future
By Christopher J Tipler
Australia’s manufacturing sector is in crisis, courtesy of a high Aussie dollar and flat demand in domestic markets. Once around 30% of our economy, manufacturing has fallen to 12% of Gross Domestic Product (GDP) and is likely to push through the 10% level soon.
Yet, if we are to believe senior Treasury officials and newspaper columnists, we need not be concerned. It is all part of an inevitable long term structural adjustment towards a largely service-based economy where I mow your lawns (with my Chinese made mower) and you iron my Chinese made shirts. We must let the free market have its way and stick to our obligations under global tariff agreements (the GATT).
I don’t buy this, and I suspect you don’t either. There are five reasons why a vibrant manufacturing sector is critical to our future:
- Defense. I will start with the obvious point that we must be able to produce some of the basic weaponry needed to defend our shores, and to maintain the sophisticated defense equipment that we purchase from others. There is a threshold issue here; below a certain point we will not be able to maintain the required critical mass in heavy engineering, metal fabrication, electronics, and other fields. We may already be at, or below, this threshold.
- Paying the import bill. Much of the standard of life we enjoy in our Wunderland down under is due to a vast array of imports, the value of which has steadily risen as a share of GDP. Exports of mineral products largely pay for this, but we cannot assume the mining export boom will last forever. When it fades, who will pay our import bills? We will have a balance of payments crisis, necessitating severe belt-tightening. Another recession that we have to have, or worse. Broadening our export base around manufactured products is the only answer here, unless we are prepared to live with a permanent reduction in our standard of living.
- The multiplier effect. Manufacturing has very strong flow-on effects into other sectors – construction, retail, finance, and services, to name some of them. We need these effects to be positive, not negative.
- Education and skills. Manufacturing requires a very diverse range of abilities that straddle the full educational spectrum. Acquiring these skills gives our young people a truly interesting and worthwhile alternative to spending time on Facebook.
- Dignity and satisfaction. I don’t know about you, but I derive little satisfaction knowing that our prosperity comes mainly from quarrying finite resources, and there is not much dignity in me ironing your shirts, and you mowing my lawns. There is, however, both dignity and satisfaction in making things.
Affirmative action is needed now to arrest the decline of manufacturing in Australia, particularly as our currency is unlikely to weaken in the short-medium term. As we reflect on the policy options, we should remember that the economic success of nations has not been won on level playing fields. The opposite is the case. All of the success stories – the British and European empires, America, Japan, Taiwan, Korea, Singapore, China – have been based on economic and political manipulation. This has taken many different forms; military might, aid, taxation, restrictions and regulations. These mechanisms have not disappeared under the GATT; their execution has simply become more sophisticated and is no less effective. We must operate in this real world whether we like it or not; we are far too small to change the rules of the game.
A good starting point for affirmative action is to frame a set of principles, or decision rules, that will guide policy. Here are a few thoughts on this matter:
- Targeting. We should set a long-term goal for manufacturing as a share of the economy; not less than 15% of GDP by 2030. This target would create an excellent context in which to evaluate specific policy options.
- Stepping out from the core. Historically, we have built manufacturing activities around our core strengths in agriculture and mining, and we should do much more here. A really obvious example is timber products. Australia spends billions on imported timber products, most of which are sourced unsustainably (think garden furniture and decking made from Asian rainforest timbers such as Merbau). At the same time we trash our own native forests to make low value products such woodchips, pallets and fence palings. This is bizarre.
Our federal government should take the initiative and sponsor the creation of several large enterprises to manufacture, from native forest and plantation timbers, outstanding furniture and other products for domestic and international markets. At the same time, we should ban the importation of timber products that do not genuinely meet global sustainability standards.
- Directing consumer choice. We should use major taxing instruments such as the GST to direct consumer choice towards locally made products (which would have low or zero GST). I can already hear the theoreticians grinding their teeth and saying ‘we can’t do that under the GATT’, or ‘we should preserve the integrity of the taxation system’. Nonsense! We had differential rates of wholesale sales tax for years and the GST currently exempts food and other items.
These, and other, ideas will require imagination and a bit of common sense; qualities that have generally been lacking in industry policy. We will also need the courage to tell the theoreticians to be quiet; they have dominated the conversation to date but their prescriptions are not working.
If we make nothing in Australia we will surely end up making fools of ourselves. We have a responsibility not to impose that future on our children and grand children.
Christopher Tipler is an advisor to top management. He holds an honors degree in economics and has taught macro-economic theory at university level. He is the author of Corpus RIOS – The how and what of business strategy (corpusrios.com).