Every crisis provides an opportunity and Covid-19 is no exception. Not only has it exposed the gaps in Australia’s manufacturing supply chains, but it has also more broadly demonstrated the vulnerability of a commodity-based economy to external shocks and the need to reverse the now all too apparent hollowing out of manufacturing capability.
Prime Minister Scott Morrison said as much in referring to the battle against Covid-19 as a battle for the nation’s “economic sovereignty”. To this end, he has established a new taskforce, led by former Dow Chemical CEO Andrew Liveris with both union and industry leaders, to explore ways to rebuild manufacturing in Australia – not necessarily like it was but as it could and should be.
In capitalising on this opportunity, no one could claim that past experience has been an unalloyed success. While we have enjoyed almost 30 years of continuous economic growth, this record has been marred in more recent times by a productivity slowdown, wage stagnation and the “financialisation” of large corporates as they preference share buybacks and executive bonuses over investment in research and innovation.
Moreover, we have had to endure a paralysing decade-long debate over climate change where evidence mattered less than ideology. As a result, we have become disempowered bystanders to the existential impact of global warming and environmental degradation, including the recent catastrophic bushfires, species extinction and coral bleaching on the Great Barrier Reef.
Economic complexity
If there is a single factor linking the constituent parts of this experience, it is Australia’s overwhelming reliance in recent years on the export of unprocessed raw materials to drive our growth and prosperity. However sophisticated the method of resource extraction, the truth is we sustain our first world lifestyle with a third world industrial structure.
This was the message of the Harvard Atlas of Economic Complexity which ranked Australia poorly for the “complexity” of its economy, measured by the diversity and research intensity of its exports. It is also the logical endpoint of the theory of “comparative advantage” which asserts that we maximise gains from international trade by exploiting our abundant natural endowments in return for imported consumer goods from places that produce them more cheaply.
Even if this theory was true in the past, it no longer holds in a world where manufacturing is undergoing massive transformation in a fourth industrial revolution. This is sometimes titled “Industry 4.0” – encompassing robotics and automation, artificial intelligence, machine learning and data analytics. This transformation will only be accelerated by the Covid-19 crisis.
As Andrew Liveris put it, “we’ve spent many decades being a resource commodity exporter and more lately a service industry based on tourism, education and some digital”. But the model of Australia being “willing to export commodities and import finished goods is old and broken… Support for R&D has basically gone whereas other countries have massive credits to encourage innovation and scalability”.
For economies like Germany, Switzerland, Japan and Korea, manufacturing and related services underpin high productivity, high skill jobs. Competitive advantage is achieved no longer through low cost mass production but through “smart specialisation” in global markets and value chains, with an unrelenting focus on quality, design and innovation.
By contrast, Australia has allowed its manufacturing capability to decline to dangerous levels, now 6 per cent of GDP from 30 per cent in the 1960s and 1970s. Even many of the companies that survived the removal of tariff protection in the 1980s and 90s eventually succumbed to the high dollar associated with the mining boom, and have not bounced back.
Post-mining boom transition
Despite expectations of a post-mining boom transition to a more diverse, knowledge-based economy, current examples of manufacturers with a global presence are few and far between. While some are the best at what they do, they also tend to be small players in their specialised markets. It is clear from both theory and experience that Australia’s problem lies not in any lack of talent but in the absence of a coherent and effective national industrial strategy.
While the Covid-19 crisis has exposed and accentuated this problem, it also provides the opportunity for a fundamental reassessment and redesign of our outdated industrial structure. During the “hibernation” phase of the crisis, the Government will rightly do what it can to support jobs, strengthen the social safety net and ensure production of urgently required medical equipment.
However, in planning for the longer term, the Prime Minister has also made reference to the bridge that must be constructed to a “better, stronger economy”.
According to Industry Minister Karen Andrews, “What we’ve learned out of this is that there are some things that we have to be self-sufficient in. So let’s not look to what’s going to give us the cheapest price”.
Australia is a relatively small, interdependent economy and would reject globalisation at its peril. But that doesn’t mean we can’t take steps to rebuild and reinvent our manufacturing capability, with an eye to new global opportunities as well as domestic supply chain gaps. Treasurer Josh Frydenberg has already raised the prospect of industry support that is “niche, targeted and purposeful”.
US economist Richard Baldwin recently made the point that, “governments will have to undertake detailed thinking on production networks not undertaken since the 1940s. The containment policies will need to be intelligently crafted. And the longer the containment policies last, the more important it will be for them to be intelligent, flexible and well-informed.
Some may recall that the last Labor Government also established a manufacturing taskforce in 2011, at that time in response to the huge loss of manufacturing jobs during the mining boom. This taskforce made some compelling recommendations, but faced pushback from the neoliberal orthodoxy ascendant in the central agencies, explicitly ruling out, for example, gas reservation and a sovereign wealth fund.
The truism that timing is everything in politics now gives the Coalition its best chance to shape Australia’s economic and industrial future, possibly for generations to come, provided they measure up to the scale of the task. While Labor has yet to play its hand in this area beyond negotiating agreement on the rescue package, we can expect that they will make a constructive contribution to the public discussion of longer term strategy in due course.
In Part 2 of this article, I will set out some building blocks for a national industrial strategy.
Professor Roy Green is Emeritus Professor at the University of Technology Sydney and Chair of the Advanced Robotics for Manufacturing Hub. This article first appeared as a discussion starter for the Australian Manufacturing Forum @AuManufacturing
Roy Green is Emeritus Professor at the University of Technology Sydney. He is currently Chair of the Port of Newcastle and the Advanced Robotics for Manufacturing Hub. He is also a member of the Innovative Manufacturing CRC Board and Research Committee of the Centre for Policy Development.
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