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Why the fuss about the manufacturing industry?

By Ian McAuley - posted Monday, 26 September 2011


More importantly, we tend to forget that manufacturing involves a spectrum of employment, from some of the highest skills through to some of the most deadly jobs imaginable.

In my own time as an engineer in a factory I remember a press line where each worker would take a blank sheet of steel from a bin, insert it in a press, and drop the formed part in another bin, a process repeated 6300 times a day.

The high-skill manufacturing jobs are in research, design, plant engineering, production control, modifying machinery, and special one-off or short-run production, to name a few areas. Rather than thinking about "manufacturing" as a generic category, we should be thinking about types of activities – occupations rather than industries. Many of these jobs can be located in Australia, while operations such as labour-intensive assembly can be performed in other countries.

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Another distraction in the current debate is our political tendency to think of import protection whenever we hear the word "industry policy." Such a mental association makes it easy to deride industry policy, because as economists of both left and right persuasion point out, tariffs and import quotas are very expensive ways to support industries.

They operate as largely unseen taxes, they entrench complacency and reward rent-seeking over innovation, their costs fall most heavily on those with least political power or capacity to pay, and, they are indiscriminate in that they support not only good jobs but also mind numbing assembly line jobs.

In dismissing the idea of tariff protection however, it is a mistake to dismiss industry policy. There is much governments can do without breaking WTO rules or violating the principles of sound economic management. There are certain public goods needed by manufacturing but which will be under-supplied in unregulated markets. These include research, education, and transport and communications infrastructure.

Some such services, such as our annual billion dollars of budgetary assistance for research and development, assistance to adjust to carbon pricing and other measures can be targeted to specific industries. While other public goods, such as education and transport are more diffuse in their benefits, and, for bureaucratic reasons, do not show up under the heading of "industry policy."

Nor should we dismiss the idea of "picking winners." It is true that governments don't have a great record in picking winners. Winners emerge, however. Sometimes there are simple natural explanations, such as our expertise in mining technologies. More often they turn up almost at random: Who could have guessed, for example, that we would develop a world market in catamaran ferries? Governments can give limited but important support to such emergent winners, and, above all, can make sure that they don't kill them when they do emerge – as has largely happened to our photovoltaic industry.

More generally, we can do something about our investment climate. There is ample awareness of the competitive disadvantage resulting from a high exchange rate. So far no serious commentator is urging us to turn the policy clock back to the days of a managed exchange rate: The price of a fixed rate is a loss of control of money supply and of interest rates.

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But we do need to acknowledge that the volatility in our exchange rates makes for an extremely difficult business environment – quoting for export, estimating the costs of imported equipment, and making long-term plans for location of facilities. Some short-term trades can be hedged, but only at high cost.

Our currency is hostage to sentiment and the speculative carry trade. Our dollar has become the fifth most traded currency in the world. It rises when people are feeling optimistic about the Chinese economy, or when speculators believe we may raise interest rates to combat inflation. Counter-intuitively, it falls when there are jitters about the US economy and people seek the "safety" of US bonds. Whenever a European politician mentions the word "Greece" our exchange rate is moved in a random process unconnected to underlying economic conditions.

There are measures we can take to reduce this volatility, such as a small tax, say 0.1 percent, on all foreign exchange transactions – enough to dampen speculation, but not significant enough to discourage genuine import, export or real investment transactions.

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About the Author

Ian McAuley lectures in Public Sector Finance at the University of Canberra and is a Centre for Policy Development Fellow.

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