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The deindustrialisation of the Australian economy

By Bill Lucarelli - posted Thursday, 22 September 2011

It will be argued that the manufacturing sector acts as the main catalyst for sustained, cumulative growth.

While manufacturing has been declining, both in terms of value-added and employment, its high technology segment (i.e, computers, electronics, aerospace and pharmaceuticals, etc) has expanded in most countries. Indeed, an integrated manufacturing-services sector has emerged as one of the most dynamic growth poles in the more advanced economies and has generated the fastest growing exports.

Like most OECD countries, Australia has experienced a shift away from traditional manufacturing and towards service industries. However, the evidence also suggests that there has been an unfavourable bias towards the low value-added and low skilled services like tourism and hospitality. The impact of the high Australian dollar also suggests that Australia’s manufacturing sector has been “hollowed out” as a result of the “Dutch disease.”


I. Negative Deindustrialisation

Rowthorn and Wells distinguish between positive and negative deindustrialisation.

Positive deindustrialisation is defined as the normal result of sustained economic growth in a fully employed and highly developed economy. Productivity growth in the manufacturing sector is quite rapid and sustainable, which means that employment in this sector tends to decline relative to services. Most of the new jobs are generated in the “knowledge-intensive” services that are linked to the productive sector. In order to maintain a rise in output at the same rate, in the two broad sectors would require a continuous shift in the pattern of employment.

This form of deindustrialisation is not primarily caused by a shift in demand from industry to services, but is mainly due to the productive dynamism of industry and the high rates of productivity growth made possible by technical advances. The rise in the level of incomes has increased the demand for services relative to goods. Hence, the prices of goods have fallen relative to the prices of services, and employment growth in services has exceeded the growth of employment in industry. This decline can be explained by the “productivity price paradox” in which the relative price of the outputs of industries with higher productivity declines against those industries with lower productivity. Therefore even if manufacturing increases its volume of output, its share of GDP may decline relative to services, which exhibits a lower rate of productivity growth.

Negative deindustrialisation, on the other hand, is a pathological condition and is symptomatic of industrial decline. It will be argued that Australia is an example of negative deindustrialisation. Since most of the labour shed in manufacturing is reabsorbed into low wage services, the economy is characterised by high levels of precarious, casualised and low productivity service employment (e.g., tourism, hospitality, etc). At the same time, the long-term decline in capital formation and expenditure on physical and social infrastructure has reinforced these structural features of retrenchment.

Australia’s industrial anatomy has inherited dualistic features in which industrial enclaves are dominated by foreign owned subsidiaries of Transnational Corporations (TNCs) and are usually surrounded by a cluster of smaller, local enterprises, which service these foreign subsidiaries.


A deficiency of local investment has induced a type of “dependent industrialisation” characterised by a dual industrial structure, which has been highly dependent on government support.

In other words, the phase of industrialisation was essentially governed by the inflow of foreign investment. This type of industrial bifurcation has inhibited the development of vertically integrated sectors, while the smaller domestic firms have found it increasingly difficult to compete with the large TNCs based in countries possessing large technological bases and greater power in world markets.

These relatively weak vertically integrated linkages suggest that the Australian economy lacks structural cohesion. This is most evident in the absence of a well-developed capital goods sector. As a relatively small, open economy, Australia continues to rely on the importation of high technology capital goods. In the more integrated, relatively closed industrial economies, which enjoy the benefits of a large domestic market, the impact of an increase in private investment is most favourable to domestic growth, if it increases the demand for domestically produced capital goods.

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About the Author

Bill Lucarelli is senior lecturer in the School of Economics and Finance at the University of Western Sydney.

Other articles by this Author

All articles by Bill Lucarelli

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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