Ross Gittins has a piece, drawing on research by Jeff Borland of the University of Melbourne, in which he presents a “glass half-full” view of the Australian manufacturing sector. He makes some good points, but the overall picture is misleading.
It’s true that, on standard statistical definitions of the manufacturing sector, there’s still a fair bit of employment and output, though both have declined in recent years and will almost certainly continue to do so, given the recent closure announcements. But what’s left of manufacturing looks very different from the mental image the word ‘manufacturing’ produces, at least for me: a large factory, with hundreds of manual workers producing complex industrial products (consumer goods, motor vehicles, industrial equipment and the like).
A closer look at Borland’s data reveals the following:
* Within manufacturing, the main growth area is food processing typified by the production of meat, bread, milk and wine. More traditionally manufacturing-oriented parts of the sector like canning fruit are in decline as we saw recently with the near-closure of SPC.
* As regards employment, the share of managerial and professional staff is expanding, while that of laborers and machinery operators, the kind of jobs we would typically think of as ‘factory work’, is falling. [1]
On the latter point, Borland shows that laborers and machinery operators now represent 30 per cent of a manufacturing workforce of 955 000, implying around 285 000 jobs in total, around 2.5 per cent of all employment. By contrast, in 2011, there were 290 000 schoolteachers in Australia.
To sum up, manufacturing in the traditional senses of the term, is no longer a significant part of the Australian economy. This has a number of implications.
First, for better or worse, the “protection vs free trade” debate is over, at least as regards trade in manufactured goods. There is, for practical purposes, no manufacturing sector left to protect, and no way of bringing back what has gone.
Second, the kind of Laborism that sees factory workers (typically caricatured as having reactionary social attitudes) as the archetypal base of the labour movement and the ALP, in contrast to middle-class parvenus like schoolteachers (caricatured as latte-sipping lefties), needs to be consigned to the dustbin of history.
Third, ideas about industry policy need to be brought up to date, with a focus on services rather than goods. This is likely to imply more scope for intervention rather than less, since the traditional arguments for free markets and free trade are often a lot less convincing in relation to services.
fn1. The share of technicians and skilled trades (within a falling total) has remained stable, but I suspect that within that group, there has been a shift towards technicians and away from manual trades.
John Quiggin 
John, are you concerned that “manufacturing in the traditional senses of the term, is no longer a significant part of the Australian economy”?
Does this portend dangers for the future? If a country can’t “make stuff” does this make it more strategically vulnerable to anything from war and blockades to trade embargoes? US and EU manufacturing are also declining I believe. In this “Asian century” will the West make anything significant at all in say 20 or 30 years time? Or will the hollowing out of the West’s manufacturing capacity reach a limit when Asian and Third World wages rise (if they do)? Or does automation negate the wage issue?
These are honest questions although some are leading questions for sure (i.e. I have a view on some). What I mean is the above is not a gish-gallop but a set of honest questions seeking your broader views. I would have thought a dirigist program seeking to position us as manufacturers of solar power, wind power and electric cars and transit would have been a good idea. For a G20 country of large area and resources relative to population (and population still growing) to give up on manufacturing?? Isn’t that a self-made trap?
Pr Q said:
I would not write off the blue-collar class just yet. Even allowing for the decline of manufacturing industry there are still plenty of blue-collar employees toiling away in the AUS economy. Whilst AUS does not produce many manafactured goods, it still has to distribute them through the largely blue-collar (and casualised) supply chain (wharfies, forkies, storemen, truckies). Bernard Salt, taking a break from his relentless immigration boosterism, reminds us that whilst the relative share of blue-collar to white-collar is declining, the absolute size of blue-collar is still large:
Moreover the social distinction between white-collar and blue-collar is slowly blurring. Many so-called “white-collar” jobs are not particularly intellectually demanding (retail sales, data processing, call centres). Whilst the remaining “blue-collar” jobs tend to be multi-skilled and require further technical education, for example cable guys and tradies.
More generally, the whole blue-collar/white-collar distinction looks like its going to be consigned to the Dustbin of History, by institutional and more so instrumental changes. White-collar jobs are increasingly part of the casualised contracted-out “precariat”, thats when they are not off-shored, and ultimately replaced by robots.
Unless we are part of the 1% we are all, irrespective of collar-chromatic, going to be in the same leaky boat, comrades!
Pr Q said:
I thought this “kind of Laborism” was “consigned to the Dustbin of History” with the replacement of Arthur Calwell by Gough Whitlam as leader of the ALP, a mere fifty years ago. Wikipedia records:
Way back in the 70s (Kim Beasley snr) famously remarked: “In the 1950s the Labor Party represented the cream of the working class now it represents the scum of the middle class”. The last blue-collar worker to sit in parliament for the ALP was Mick Young, It was significant that Whitlam, a Left-wing Labor leader, was the first Australian PM to break down the manufacturing protection barriers with his 25% tariff cut.
In any case, “latte-sipping school teachers” and the like have long since defected to the GRNs or the Emilys List faction of the ALP. Whose idea of “leaning in” is to lobby for safe seat quotas for female candidates. You go, white-collar gir-r-rl!
Those of us in AUS (and even more so in the EU) with “reactionary social attitudes” have long since transcended our blue-collar manufacturing base. This is obvious going by the great strides AUS “reactionaries” have made in politics during the naughties and tennies (saving the monarchy, stopping the boats, organizing the Intervention, reversing the hyper-secular trend in education).
We are surprisingly wide-spread throughout the social structure (from cashed-up bogans right up to Catholic cabinet ministers). Although for obvious reasons our agenda has to be articulated sotto voce. This is largely welcomed in the general public and gets us a respectful hearing from the wiser heads in both major parties. Nicely out of ear-shot from the hysterically censorious media-academia complex.
The problem that I have with the services sector is how much of that is taxpayer dependent? It is fine to say that there are 290k teachers but the majority of them would be receiving their salaries from the taxpayer.
Ikonoclast does make a valid and pertinent point. Right now the response from ‘the West’ to Russia regarding Ukraine (and no I don’t want this thread to go there just using it as an example) has not been unified because the Germans receive about 30% of their energy needs from Russia and German companies headed by Siemens (according to the Financial Times) are lobbying very hard to prevent sanctions. Similarly, William Hague talks tough but The City is lobbying hard against any sanctions as well.
Eliminating manufacturing from the Australian landscape will eventually leave Oz to be in a much weaker position than in the past.
Apart from this partial reference
“Third, ideas about industry policy need to be brought up to date, with a focus on services rather than goods”
You fail to take account of the most vital balance in any business, that being the ratio of overheads to production (manufacturing, farming, mining, provision of external support). To lose sight of this vital business indicator is to invite failure regardless of the organisational scale. The US has lost the ability to manage this balance due to its preoccupation with private wealth creation at all costs. Europe is being pushed to the tipping edge of economic instability due to incessant pressure to abandon domestic farm production in favour of cheap goods from many other nations.
The business fundamental is that there needs to be sufficient invoicable production to cover costs, overheads, and taxes, else the business fails. The problem at the national level is that few people fully appreciate what maintaining invoicable production means for an economy as a whole. We all can appreciate that exports and tourism improve our position, but to what degree can internal productive activities be altered and in what manner before economic instability becomes a seriuos concern? Further where there is variability in export over import revenue what degree of internal productive performance should be maintained in order prevent sudden economic stress when trade balances turn negative.
Simply put if a nation does not produce its own food or its own goods it must have some other commodity to trade to have those needs filled or it will suffer. In Australia’s case we have minerals (and wool, wheat, our natural beauty, and intellect) in large volume per head to trade, but while we have this trade wealth we are alliwing our muscle (manufacturing) to waste away and be turned into the fat of consumptional exploit (interpersonal services). As a nation we have a vulnerability and are steadily eroding our economic agility.
To use Ikonoklast’s conclusion “isn’t that a self made trap?”
Beyond the issue of outsourcing of manufacturing to Asia, is the issue of outsourcing of both physical and mental labour to machines. In the short term, growth in unemployment in effected industries, and the growth of a managerial class, are obvious. Longer term, things not so obvious. If you can cheaply 3D print most things you currently spend most of your life working for – cars electronics, houses – the issue becomes; what service would you like to do to, and, how much tax are you willing to pay in a service economy?
Services have more natural barriers to trade across borders. It is hard to outsource plumbing to some company in east Asia. That said the outsourcing of call centres, accounting services, legals services, IT services to foreign places doesn’t look like slowing down any time soon. In the financial sector large slabs of the back office are heading abroad to find cheaper labour. I’m not aware of what intervention anybody is seriously advocating in this space. The only intervention that seems to have champions continues to be in the traditional areas of education and health. In my view both are ripe for serious reform but both major parties treat them as a sacred domain in terms of government ownership/provision.
It is an interesting observation, Iain.
The fact is that Australia has one of the longest zero tax histories. People have lived on this continent for some 40,000 years anfor but the last little blip of time have not paid any tax other than public service and ceremonial duties. That has got to bight hard on any keen Libertarian.
The problem with your example is that 3d building machines are complex, require servicing, require replacement, and require in put materials. ie you are not goung to like the food that comes from your plastic parts 3d builder and to build your house it is going to need a huge amount of material.
If , however, you are looking at a limited resources future then your comment has considerable import. Sadly I think that there is a war in between now and when your question can be answered.
Fortunately our political structure is well equipped to answer that question: you will work. From the time you leave school until you’re old enough to be allowed to retire, you will work. You will work as many hours as possible, leaving you just enough time to form a family, but not enough to act on any critical thinking you might be exposed to. Or you will spend more time trying to get unemployment benefits from the state than you would otherwise spend working.
I find it interesting that the proportion of GDP going to “profit and investment” keeps rising, and as the need for labour goes down, so does the share of GDP it gets. Fixing that, rather than any technological change, is what’s needed to allow people to ask “what would you like to do, if you have the choice?”
FWIW, I work in “manufacturing”, where we design the electronics and so forth in Australia, they’re manufactured in Asia then tested, assembled and packaged here. Enough of the cost is here that it qualifies as “Made in Australia”, but most of the jobs are overseas (although most of the wages are paid here). The day their wages go up is the day it will make sense to insource production, most likely by using an Australian or New Zealand electronics assembly house (they chase our business, since they make our prototypes – purely because the turn-around is faster).
Long standing and prospective MPs from the Nationals and Palmer United Party seem to talk a lot about value adding of resources. I take that to mean some degree of domestic downstream processing rather than export as raw materials. To take an unpleasant example sheep and cattle would not only be less stressed slaughtered in Australia rather than exported live but we should also be able to get a higher price per kilogram.
We seem to be in rush to get out of value adding. I believe some of the bauxite to alumina conversion that was done at Gove NT may be done in Asia where they have that magic ingredient lack of carbon tax. There are other downstream examples which are not high carbon such as wool processing. True Asian manufacturers may have lower wages and economies of scale but the bulky raw materials have to travel between hemispheres. Not all of our manufacturing plant is old and decrepit; for example Bluescope’s remaining steel mill at Pt Kembla is said to be quite efficient and is largely exempt from carbon tax. We should encourage local manufacturing in subtle ways like legitimate carbon tariffs on competing imports and preferential purchasing.
@jack strocchi
I am amused at the idea that you should describe anybody else as being hysterically censorious.
That’s an argument by assertion. Furthermore, if it were sound without any further qualification, it would have made it impossible to introduce any of that into Australia in any of the period after 1788, since that was the situation that obtained at the end of that year. At the very least there must be some unstated and unexamined assumptions being smuggled in there.
For what it’s worth, this related page of Ross Gittins’s at the Melbourne Age has some interesting comments: http://www.theage.com.au/comment/death-of-manufacturing-nothing-to-whine-about-20140415-zquwd.html – they pick up on Ross Gittins’s specialised way of looking at things.
Now that we have the freedom to buy what we want, perhaps it’s time to have the freedom to employ who we want? That is, freer immigration. It’s unfortunate that the immigration debate in Australia often seems to be confined to discussing whether to be nice or nasty to illegal immigrants, ignoring the possibility of reducing global inequality and increasing our standard of living.
As more things get manufacture by machines, a reduction in the number of people involved in manufacturing was going to decline and the number employed to keep the machines going was going to increase.
Australia has a very high standard of living, the question is, do we have to own the machines for it to continue.
ElPoppin
April 20th, 2014 at 11:33 | #3
Reply | Quote
The problem that I have with the services sector is how much of that is taxpayer dependent? It is fine to say that there are 290k teachers but the majority of them would be receiving their salaries from the taxpayer.
Do you consider that they have no value because the community as a whole pays for their service?
The current problem with the economy is the ability to produce more than can be consumed, you need a top up. War is handy; replacing coal fired stations with renewable energy sources would have been a better lurk; fibre to the home would have worked. We now seem to have in power a group that can see non of this. Knights and dames and other culteral wars seems to be their interest; nothing much that actually involves building something.
Pr Q said:
I had a political argument with a very savvy guy the other day, an AI engineer designing software for a Hong Kong-based hedge fund (yeah, Mad Scientist meets Masters of the Universe). He insisted that the Age of Big Government was over, like it was 1996.
I pointed out that the US government had spent the past half-decade part-nationalising the auto and financial industries. Okay, that was an emergency bailout, but normal prohramming will be resumed shortly.
Then I pointed out that Obamacare had just part-nationalised the health insurance industry, which distributes 16% of US national income. This made him pause for a moment.
I didn’t have the heart to point our that the US government was going to have to play baby sitter for infant renewable energy industry. Not to mention being sugar daddy when this industry starts to feel its oats.
It would be worthwhile constructing an income elasticity of demand curve for (stereotypically government provided) human capital services. My impression is that such services come under the rubric of “superior goods”, that is their income elasticity of demand. Certainly consumers, the richer they get, demonstrate a preference for spending a higher proportion of their income on health, education and income insurance.
It does seem that national governments have an inbuilt advantage in providing such services, particularly if equity in distribution is as important consideration as efficiency in production. But much depends on the political demand for public goods and the degree of resistance to higher price (rising taxation).
I would respectfully point out that a culturally homogenous population has a better chance of sustaining a robust and consensual demand for higher public expenditure. The more diverse the population, the harder it is to provide one-size-fits-all service, and the bitterer the fight over who picks up the tab. cf the US over the past two decades.
@Ikonoclast Logically if someone is selling Australia guns, ammo and war machines then turns around and decides to invade us then we are in trouble.
In a nutshell I think 3D printing is the answer. I’m sure you’re well versed in the theory already? My experience of the 3D printers at my institution is that they require very little labour to function. As such I would argue very strongly that one day every household will have one.
I’m interested in this issue of restructuring so did some looking around at ABS figures, the interpretation is mine. Aust. Industry 8155.0 and Year Book 2011/12 show 90,228 mfg businesses, with the numbers employed by each of the small, medium, large fractions as about the same ie. 1/3 each of the 929,000 total employees. These proportions suggest lots of small mfrs and jobbing shops with natural protection, although I guess many are dependent on the disappearing large firms. But if disposable income levels stay up and the demand for more tailor-made and craft production grows (think beers, foods, furniture, clothing, household goods), then small/smaller might become beautiful again, with higher value-adding maintaining worker incomes.
Against this, low skilled labour transferring from mfg to the services sector probably means reduced pay: the latest AWE figures show Mfg as roughly twice compared to the Retail trade, and Accommodation and food services sectors which is not conclusive (without knowing hours worked, occupational composition etc.) but double is a big difference. And then there’s driving, security, cleaning, personal care. Less job security and union leverage and still hard grind. The johns and janets are not going to feel excited to be “liberated” from the production line as our PM helpfully advises.
But as far as govt doing more than soothing the transition especially for workers, I feel pessimistic about doing anything else than waiting for the fickle finger of fate (aka foreign customers, preferences, exchange rates) to decide what our economic structure will be. The much greater business risk and uncertainty nowadays seems to undermine even a minimalist ‘picking winners’ approach: our scientific and medical researchers are footloose and liable to follow the money overseas, the international education and training bubble has been pricked as catch-up by other countries proceeds, and is likely to expand its presence in source countries. In fact I’m unconvinced of just about any planning except for a “supportive environment” – including infrastructure – to our natural endowment sectors of minerals, agriculture, tourism. Does fostering industry collaborative networks/precincts undermine the competitive entrepreneurial juices? I don’t know, Adam Smith had a view but we live in a complicated world of business alliances and supply chains where the customer can become the competitor or the research partner.
Many in ruling circles talk up unconvincingly their aspiration to a high-tech/wage economy in the future: a govt minister recently answered questions about Qantas and Toyota with the example of Boeing as a harbinger of the future, just before 300 sackings were announced. The future looks like more footloose industries, therefore low sunk cost industries, which may be unavoidable, but are not good for investment and long-term committment to investment in physical and intangible capital here.
No doubt the neo-liberals will say it’s a trade-exposed economy and promotes competition stupid, get over it, but it seems rational to hedge the risk of economic insecurity (traumatic at the household level) with some diversification of risk and cushioning of e-rate shocks. How to do it? And while a roadmap may be over-engineering when the road is moving, a vision of the future would give coherence and purpose.
John, I wonder if you could tease this out a bit? If you’re talking about IP issues, it sounds like the US on behalf of Hollywood and Microsoft, have already stitched us up. Alternatively you could mean that Health and education are the growing revealed preferences of consumers, and big subsidies are already being paid to privates, which should be re-assessed. Services of the personal care and health type to an ageing population are large and increasing (plus NDIS), and likely to be largely public funded, so need closer regulation for quality, affordability, equity, legal rights for users/consumers etc.
You could mean all or none of these, but it was industry policy you led with, so I’m thinking it’s different to regulation. Perhaps a subject for another post?
@Charles
I value teachers very highly – all I have is solely due to my teachers and parents. I offered teachers as an example. Other valuable but also taxpayer dependent professions are the police, paramedics, firemen, the courts, etc. My question was if the services sector keep expanding then how many of these jobs will be taxpayer dependent. Ultimately we need other sectors of the economy that be taxed.
Jack Strocchi @ #15 said:
Correction:
More generally it would be nice if economists could give us a table of income (Y) elasticity of demand co-efficients for interesting goods, such as AI engines, human capital services, leisure and so on. This would be better than most crystal balls at discerning the future.
In similar vein, Picketty’s Capital greatest achievement is to resurrect and revise the Marxian* theory of wealth polarisation by building a simple model of income distribution which shows that in a pure capitalist system, asset return (r) will be greater than income growth (g), implying rent-seeking and a dynastic dynamic, ie crony capitalism and a hereditary ruling class.
FWIW I have been banging Marx’s drum ever since Dr K raised me from a pup, back in the early eighties. With especial vehemence after I toured Wall Street in the aftermath of the S&L bailout in 1993 and noticed the plethora of “titty bars” popping up in the district to cater for stressed out screen jockeys. Your taxes at work!
Most recently I argue for a Marxian approach to the technological singularity.
*Of course Marx thought that asset returns (r) would decline over time (Falling Rate of Profit), given greater capital intensity K/L as capitalists substituted labour with machinery. But this prediction was premised on a faulty Labor Theory of Value.
Jack Strocchi @ #15 said:
Correction:
More generally it would be nice if economists could give us a table of income (Y) elasticity of demand co-efficients for interesting goods, such as AI engines, human capital services, leisure and so on. This would be better than most crystal balls at discerning the future.
In similar vein, Picketty’s Capital greatest achievement is to resurrect and revise the Marxian* theory of wealth polarisation by building a simple model of income distribution which shows that in a pure capitalist system, asset return (r) will be greater than income growth (g), implying rent-seeking and a dynastic dynamic, ie crony capitalism and a hereditary ruling class.
FWIW I have been banging Marx’s drum ever since Dr K raised me from a pup, back in the early eighties. With especial vehemence after I toured Wall Street in the aftermath of the S&L bailout in 1993 and noticed the plethora of “titty bars” popping up in the district to cater for stressed out screen jockeys. Your taxes at work!
Most recently I argue for a Marxian approach to the technological singularity.
*Of course Marx thought that asset returns (r) would decline over time (Falling Rate of Profit), given greater capital intensity K/L as capitalists substituted labour with machinery. But this prediction was premised on a faulty Labor Theory of Value.
Should software development be considered as manufacturing? And, if so, is it significant?
Yes, and yes, extremely significant manufacturing.
Garry Claridge @ #22 said:
No and Yes.
Basic database software is automated book-keeping and therefore comes under the rubric of (white-collar) professional services, such as accounting. More advanced software designed to manage complex mechanical systems essentially replace the job of engineers and technicians. Obviously they work for manufacturing industries but are designed to steadily whittle away the size of the manufacturing workforce, which is the point of the OP.
IMHO AI software (embodied in mechanical apparati) will pretty much replace all manual and mental labour, including managerial and professional jobs. The only occupations that robots cannot do will be owning material goods and providing moral services, for these tasks one needs legally responsible conscious persons. So yes, software will be “significant” alright.
More generally instead of debating “the end of manufacturing industry” we should be looking at “the end of economics”, (title of a book I am working on) at least as it applies to humans working for a living. The foundations of economics are micro-economic factoral scarcity and macro-economic financial circularity. Neither will survive human equivalent AI.
To expand upon that, GC, there has been a lot said about the leisure future and what will people do to fill in their time when they do not need to work due to automation and wealth.
The way it has turned out is that the population has blown out to 7 billion and resources are over committed many fold. People filling their time can be very resource intensive with outdoor pursuits. The one key development to mitigate that recreational resource consumption has been the combination of software and mobile computers.
The forefront of the explosive growth in this area is with smart phones tablets and most importantly “apps”. Apple kicked this whole transformation into life with their ipod concept followed some years later with the iphone. It would be hard to definitively layout what happened after that, but the next most significant step was the development of the Android platform.
The status right now is that much of the PC software is being rewritten to run on the Android phablets and tablets (I can’t speak for Apple). An example of the transition is in one of my favourite apps SailForms. This a full featured data base that is improving almost daily. This software running on my NoteII now contains most of my machine production data. Another package that is making waves is Invoice2go. This is an invoicing, quote, and purchase order package that is with a person where ever they go. Another spectacular package is MDScan. If someone were to revive Lotus123 on Android I would be over the moon.
We are talking here about a complete business software suite…..in the pocket……synchronised via the cloud…….paperlessly transferring data in PDF form to anywhere in the world.
Yes software is a significant manufacturing component. You are in the right industry for the future.
We should include baristas when counting manufacturing jobs! They make really useful (if short lived) stuff, and it is more or less factory work…
I think the role of technology in changing what we all understand by “manufacturing” is understated. Retail 3D printers spring to mind, although I cannot claim to know a lot about them, they certainly seem able to be a real game-changer in worldwide manufacturing industries. Is manufacturing destined to become a diminishing industry around the world?
JQ: “… needs to be consigned to the dustbin of history …”
I suggest consigning this cliché to the dustbin of history.
The problem is that dustbins and rubbish tips are as useful to historians as they are to detectives, celebrity-hacking journalists and the extremely poor in Cairo. Where would archaeology be without middens?
I agree that the picture of Australian manufacturing that Ross Gittins tries to portray—one in which job losses are almost all about productivity increases rather than trade and the manufacturing industry is successfully reshaping itself to fit Australia’s comparative advantage—is misleading. In fact, I’d describe the piece as shamefully mendacious.
It’s hard to understand why somebody would respond to people’s concerns about the impending collapse of the motor vehicle manufacturing industry by talking about automation—as if people can be fooled into thinking that their cars are going to be made by robots rather than German and Japanese workers.
In a piece full of statistics, Gittins for some reason doesn’t find space to mention that the value of Australia’s manufacturing imports is more than twice the value of its manufacturing exports. He also doesn’t find space to put Australia’s 8.0% manufacturing employment share into context, by, say, comparing it with the 15.4% share for the EU, which is roughly balanced in terms of manufacturing exports and imports, or the 12.5% share for the OECD group of nations.
But the worst part of the Gittins article is this:
“Many people would explain this [manufacturing employment] decline in terms of the removal of protection against imports in the ’80s and the very high dollar since the start of the resources boom in 2003. But, in fact, the great majority of it is explained by nothing more than automation. How do I know? Because if you look at the quantity (or real value) of manufactured goods we produce, it reached a peak as recently as 2008, and has since fallen just 6 per cent.”
This argument makes no sense whatsoever. The fact that Australian manufacturing output was still rising tells you nothing about the extent to which Australia was relying on imports to meet its demand for manufactured goods. He doesn’t even look at manufacturing output *per capita*, for crying out loud!
According to the OECD’s Trade in Value Added statistics, in 2009 foreign manufacturing value added embedded in Australia’s final demand amounted to 6.9% of Australia’s GDP, while the corresponding contribution of Australian manufacturing value added to foreign final demand was 2.9% of Australia’s GDP. There was thus a 4% gap. Given that Australian manufacturing amounted to 9.3% of GDP in 2009, this implies that Australia’s manufacturing share of value added was 70% of what it would have been if Australian production reflected Australian final demand.
The discussion about Australian manufacturing realigning itself to fit with Australia’s comparative advantage by increasingly focusing on food and beverages is misleading too. Of course, in percentage terms, increases must occur somewhere to offset decreases elsewhere. But Australia’s food manufacturing industry is no more export-oriented than Australian manufacturing as a whole. Its relative strength is solely down to the fact that it commands about 80% of the domestic market, whilst other industries are subject to much higher degrees of import penetration. The value added by Australia’s food manufacturing industry is only 10% greater than the food manufacturing value added embedded in Australian final demand; it claws back the value added gap from 4.22% to 4.05%. It’s a piffling amount.
@Luke Elford
Luke, I don’t think the imported cars etc. are going to be made by Japanese and German workers, more likely by Korean, Thai, Chinese workers. High productivity production, which protected mfg in advanced countries is no longer exclusive to them. No surprise that countries in the EU, a contiguous and large market largely free of barriers, can export to one another easier than we can. There will always be an advantage to some mfrs by being local, but the horse has bolted on cars etc. Some foods will have that natural protection for cultural, cost and geographical reasons, but our rice, meat, wheat industries are highly efficient, green and cater to foreign buyer preferences so there is a future here. Mercantilism per se is not the answer I think, but I’d like to hear how we can support what is going to work with some probability.
Thank you for a most interesting article, and sequence of correspondence. I cannot offer any educated comments on economics, only the following reflection discovered whilst working in the Victorian construction industry in the 1970’s and 1980’s.
While working in the company’s head office in the early 1990’s I was intrigued as to when was the most recent construction of a factory in Victoria. After little research I discovered that the last time this major construction company had built a factory was 1968. Until that time I had considered Australia as a country looking for development, looking to position itself reasonably well in the developed world. Even after considering the commercial nature of the construction industry this huge break in the construction work rather disturbed me.
I left Australia in 1993, to work in various Asian countries and I am still working away. Every time that I return I find the diversity of industry in Australia has decreased, and the recent occurrences are very disturbing.
@Deena Bennett
Deena, as factories are physical sites and a framework for production, I don’t think increases in the number of factory buildings is a measure of economic growth in a builtup location, compared to what happens inside them or on the site. When existing buildings are recycled to facilitate higher value usage, most obviously in the inner city areas and including residences, intensive growth rather than extensive growth is happening. Not many high value locations and buildings can afford to stay empty for long here, our big cities are not US rustbelt cities like Detroit.
Maybe new saw-tooths are out but I would have thought the extensive growth of tiltup concrete buildings in suburban industrial zones continues apace. Not only mfg but construction is changing.
I totally agree with the contents of John’s post.
@kevin1
I chose Germany and Japan because they’re the main suppliers of cars to the Australian market at the moment. I don’t think that this will drastically change in the three years within which Holden and Toyota will shut down—and these countries are going to have to continue exporting something, if they want to import minerals, clothing, etc.—but I agree that the other countries you mention are likely to play a larger role over time.
I think it’s interesting to consider what the future for Australian manufacturing might hold if and when we’re no longer in a position to export huge amounts of coal and iron ore, but unfortunately I don’t have any bright ideas about this.
The problem with food manufacturing is that those parts which are closely tied to primary production—meat processing, dairy products, sugar, etc., all of which Australia exports in net terms—can’t grow much without large increases in the corresponding output of primary products. For other parts of the food manufacturing industry, the key advantages lie either in being close to markets, as you note, or having cheap labour.
Looking at the Trade in Value Added statistics for New Zealand, they offset about half of their net imports of chemicals, metals, machinery and equipment, transportation, and other manufacturing value added (3.99% of GDP) with net exports of food manufacturing value added (2.05% of GDP, cf 0.17% for Australia). (Net exports of wood/paper/printing/publishing value added contribute another 0.83%.) But on a per capita basis, New Zealand has 11 times as many dairy cattle, about as many beef cattle, and three times as many sheep as Australia.
I think it’s realistic to expect Australian manufacturers to have some success as component manufacturers and ‘niche’ manufacturers in transport and machinery and equipment manufacturing, if minerals exports wane, but obviously not in the mass production of motor vehicles, consumer electronics or standardised machinery.
But more than anything, I just think it’s important to be honest and realistic about what’s happening with manufacturing in Australia. It’s quite remarkable—even by the standards of other countries that people usually think of as not really doing manufacturing anymore, such as the US and the UK.
@Luke Elford
In violent agreement re#29! Well put Luke.
I can be persuaded, reluctantly, that our declining manufacturing sector may not mean a decline in our quality of life or standard of living. But I would still like to see a argument made, in clearer terms than have been used in this discussion, stating why we can continue to import indefinitely most of our clothes, electrical goods, cars, furniture, machinery, medical equipment, and sundry household items that make life easy or pleasant. I guess the key word there is ‘indefinitely’. Over time our terms of trade will change as, more than anything else, our mineral wealth as current reserves are diminished and new reserves are exploited. Worrying about a loss of our natural advantages is irrelevant to the near and medium term, and for aluminum and iron, the long term.
Two of the arguments I see being made in favour of Australian manufacturing are about the stability of mixed economies and the needs of national security. The argument that mixed economies are more stable is more relevant to countries with larger populations or fewer natural resources, or both. And it could be argued that with mining, agriculture, health, education, finance, retail and other services, our economy is mixed enough. The argument that a strong manufacturing sector is necessary for national security would seem to be more emotion based and from a time when war was as important to international relations as trade. The skills and expertese need to maintain our standard of living would appear to be present in our country despite the fact that we don’t make everything we need for our standard of living, so if the rest of the world stopped producing the goods we needed for some reason we would manage, wouldn’t we?
The fact that other countries with strong manufacturing industries often heavily subsidies those industries is often made. Would this be because these nations don’t have our natural advantages and have to maintain the economy some other way? It also seems that manufactures are leaving Australia despite government support. I’m thinking mostly of the car industry here.
have to go, keen to know peoples thoughts
@Cameron Pidgeon
Because Australia has run current account deficits for most of its history, the inward capital flow to finance it has influenced our industry structure and ownership (you may find BOP identity at Wikipedia useful) and our living standards and wealth have continued.
A lot of the service sector, especially the growing parts, look like low skill, low wage, casual jobs which is not a basis for higher living standards and a smart culture. If the future for high skill service workers is overseas, why would Australian universities continue to train them, and government to support them rather than further run down public education ? What does a viable, progressive, service and educational sector which enhances Australian society (beyond delivering private benefit) look like?