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AUSTRALIAN WELDING | DECEMBER 2016
Manufacturing (Still) Matters:
Decline is Not Inevitable By Richard Denniss (Chief Economist, The Australia Institute) and Dr Jim Stanford (Economist and Director, Centre for Future Work). The painful contraction in Australian manufacturing over the past several years has had a multitude of consequences for the national economy, including labour markets, incomes, productivity, and international trade. The relative importance of manufacturing in Australia’s economy has been declining gradually since the 1960s. However, Australia’s industrial decline has been unique, not typical, reflecting the failure of political will, rather than natural economics. In fact, globally speaking, manufacturing is here for the long run. For Australia to have its fair share of the work and subsequent prosperity, a modern, active policy approach by Australian governments will be required to rebuild Australia as a global manufacturing power.
Australian manufacturing has endured hard times for several years. So long, in fact, that Australians could be forgiven for concluding that industrial decline is a ‘normal’ state of affairs. The manufacturing sector has been in broad decline since 2008, and real output has now contracted every single quarter since September 2011. Over 200,000 manufacturing jobs have disappeared since 2008, and the rate of job loss is accelerating: employment fell 6% in 2015 alone. Perversely, some analysts and economists have tried to justify and even celebrate this industrial carnage. Manufacturing is portrayed as an old, dying industry. Something that Australia shouldn’t worry about. Free market forces will ensure we automatically specialise in other industries, in accordance with our ‘comparative advantage’. Manufacturing is in decline everywhere, it is argued: the problem isn’t unique to Australia. And at any rate, government certainly shouldn’t interfere with this natural, inevitable, even beneficial process. It’s best to let markets do what they will. This complacent view is wrong on several important grounds.
Manufacturing is Not ‘Old’ Manufacturing is not an ‘old’ industry. It is, in fact, the most innovationintensive sector in the whole economy—and no country can be an innovation leader without the ability to apply innovation in manufacturing. In addition, advanced manufacturing continues to open new frontiers of technology and productivity. Manufacturing is Not Declining Everywhere Manufactured goods account for over two-thirds of world merchandise trade, making it the dominant component of all international trade. In fact, global manufacturing output is growing rather than shrinking, as is Australian use of manufactured products. A country that cannot successfully export manufactures will be shut out of most trade. Australia is Not Too Expensive, Nor Too Remote to Compete Production costs in Australia are not expensive relative to other industrial countries, so long as the exchange rate for the Australian dollar is maintained at a normal level (in the low US70 cents or lower). At that exchange rate, costs are fully comparable to other industrialised economies.
Many countries around the world (including high-wage industrial countries) are expanding manufacturing output, creating new manufacturing jobs, and boosting manufactured exports. Australia’s experience is not at all representative of the experience of other industrialised countries. Even small remote countries (like Korea, Ireland, New Zealand, and Israel) are growing manufacturing output, and preserving and creating manufacturing jobs—we can’t blame geographic isolation. Free Trade Will Not Necessarily Replace Lost Jobs The Australian Government (and general public) cannot simply assume that free trade will replace lost jobs. Unfortunately, free trade is not always balanced or two-way, and a trade deficit can further destroy employment opportunities. The result is idle labour: unemployment, underemployment, and low-wage jobs in non-tradeable sectors. Government Can and Do Support Particular Sectors There is no reason why the Australian Government cannot help maintain a robust manufacturing sector. After all, the Coalition clearly favours certain sectors, including