Protectionism and industry policy

The current increase in competitive pressures on manufacturing (and other industries such as education) must also be seen from a longer-term perspective. Just as the relative contribution of agriculture to GDP has fallen over time  (from 20 per cent in 1950 to 2 per cent today), so has the contribution of manufacturing industry (from about 14 per cent in 1982-83 down to less that 9 per cent in 2009-10).

Until about 2002-03 the actual level of manufacturing production (measured in real terms) was increasing, but it has been virtually stationary since then. Employment in the manufacturing industry has fallen progressively from 1.4 million in 1971-72 to under one million at present, at which level manufacturing jobs constitute less than 9 per cent of total employment and jobs in construction, retail and health care and social assistance now exceed those in manufacturing.

This reduction in manufacturing employment is not simply because of reduced competitiveness. The increase in productivity in manufacturing as a result of technological innovation has reduced the “need” for labour in that industry, just as it has reduced it in agriculture. It is also relevant that the decline in manufacturing employment has not resulted in rising unemployment: To the contrary, the rate of unemployment has been falling even as the proportion of the working age population that is employed has increased.

Thus, while the manufacturing industry continues to provide an important source of employment, other industries have grown faster and have provided jobs for those who would in earlier times have found those jobs in manufacturing. This has occurred even during the recent period when there has been a sharp loss of competitiveness.

Australia’s experience in regard to manufacturing is similar to that in all developed countries. This reflects the accumulation in those countries of many manufactured products and their relative fall in consumption, coupled with the faster growth of service industries. The reverse has occurred in developing countries as their increased income levels have allowed their citizens to afford such products and more automated technology and cheap labour has allowed them to expand their own manufacturing industries.

The increased competitive pressure on Australian manufacturing provides a challenge to respond with improved policies in other areas, particularly in workplace relations. But for the reasons outlined, we should avoid responding by increasing protection or deterring expansion in mining. A reduction in government expenditure would help make room for the latter and contribute to reducing possible interest and exchange rate pressures on manufacturers.