Pearls and Irritations

There is a myth that we are heading toward a ‘post-industrial’ economy, in which manufacturing doesn’t matter anymore. In reality, we use more manufactured goods every year – and they are vital to all other jobs, too (including in resources and services).

New research shows Australia has the most undersized manufacturing base of any OECD country. The good news is that revitalising this sector could play a huge role in rebuilding the national economy after COVID.

The COVID-19 pandemic has reminded Australians of the importance of being able to manufacture a full range of essential equipment and supplies. Global supply chains were disrupted by travel restrictions and political interference (like Donald Trump’s instructions to divert medical supplies to U.S. consumers, rather than for export). The frightening prospect that Australia could run out of high-tech medical equipment (like ventilators), or even relatively simple supplies (like masks), caused Australians to reconsider the assumption that buying stuff for cheap, no matter where it comes from, is always the best.

Meanwhile, the COVID recession has created a large economic void that a revitalised manufacturing sector could help to fill. Manufacturing can and must play a critical role in rebuilding the national economy after the pandemic. With unemployment and underemployment set to persist for years to come, Australia will desperately need the investment opportunities, the innovation, and the high-quality jobs that are associated with manufacturing.

A renewed focus on building value-added industry in Australia could make a contribution to other public policy goals, too: including sustainability (by incorporating new renewable energy developments into a sustainable manufacturing value chain), social equity (by helping to limit and reverse the shift toward part-time, precarious jobs), and innovation (since manufacturing is the most innovation-intensive industry in the national economy).

Australia was once one of the world’s leading manufacturing nations, but complacency by policy-makers set the sector on a long decline, beginning in the 1990s. They assumed that exports of abundant natural resources in unprocessed forms could support Australian living standards indefinitely. But an economy based on extraction and export of raw non-renewable resources is clearly unsustainable, in both economic and environmental terms.

The legacy of that neglect and complacency is a manufacturing sector that ranks today as the most undersized industrial base of any developed country in the world. New research by the Centre for Future Work shows that Australia ranks dead last in manufacturing self-sufficiency among all 36 OECD countries by a measure of manufacturing ‘self-sufficiency’. Australians use $565 billion worth of manufactures each year, however we only produce $380 billion worth. Therefore, Australia produces only 68% (just over two-thirds) of what we use: a lower ratio than any other OECD economy.

Most industrial economies (including high-wage jurisdictions like Germany and Sweden) produce more than 100% of their net manufacturing needs. So the traditional claims that developed economies don’t need manufacturing, or that manufacturing is unviable in a high-wage economy, are false.

There is another myth, equally unfounded, that manufacturing is an ‘old’ industry that is naturally declining, as the economy shifts onto a ‘post-industrial’ or ‘information’ trajectory. To the contrary, Australians purchase and use more manufactured goods over time, not less. And manufacturing output is growing around the world. The problem is not that we don’t need manufactures anymore: they are in fact a vital input to every sector, and every job, in the whole economy (including services and resource industries, all of which depend on manufactured goods and equipment as vital inputs to their own production). The problem is that we don’t manufacture enough, relative to our needs. Allowing domestic manufacturing to decline, while our use of manufactured products grows, directly undermines national economic performance in many different ways.

In short, manufacturing is not just ‘any other sector’ of the economy. Manufacturing possesses notable qualitative attributes which make it crucial to overall prosperity, far out of proportion to its (now) modest share of total employment and output. For several concrete reasons, manufacturing carries a strategic importance to broader national prosperity and security:

• Manufacturing is the most innovation-intensive sector in the whole economy. Despite recent downsizing, Australian manufacturers invest over 4% of their value-added back into new R&D – four times the national average. No country can be an innovation leader without a strong manufacturing base.
• Manufactured goods account for over two-thirds of world merchandise trade. A country that cannot successfully export manufactures will be shut out of most trade. Right now Australia experiences an annual deficit in manufactured products exceeding $180 billion per year: a costly drain on our balance of payments.
• Manufacturing anchors hundreds of thousands of other jobs throughout the economy, thanks to its long and complex supply chain. Some $240 billion per year in Australian-made supplies and inputs are purchased by domestic manufacturers, supporting many other sectors of the economy.
• Manufacturing offers high-quality jobs, full-time hours and above-average incomes. Over 85% of manufacturing jobs are full-time, providing an important counter to the growth of part-time, insecure employment in other sectors. And thanks to strong productivity growth and the capacity to apply modern technology, manufacturing pays above-average wages, that could increase further in the future.

For these reasons and more, modern economists (including leading figures such as Joseph Stiglitz, Dani Rodrik and Mariana Mazzucato) accept that there is a legitimate economic case for active interventions to nurture a stronger domestic presence of desirable industries (like manufacturing). The social pay-offs from stronger innovation, productivity, and exports justifies the investment of public regulatory capacity (and public money) in deliberately shaping the economy so these industries have a larger footprint. The traditional neoliberal view that government should avoid trying to ‘pick winners’ is increasingly out of step with the consensus in economics.

And there exists an entire inventory of tried and proven policy tools that could help rebuild Australia’s manufacturing sector to a size proportional to our domestic needs for manufactured products. These include:

• Sector strategies to nurture key segments of manufacturing and engage all stakeholders in initiatives to expand investment, output and exports.
• Strong domestic content targets for manufactured inputs in public infrastructure and public service projects.
• Practical and mission-oriented support for innovation efforts, tied to domestic applications in production.
• Fostering an ‘eco-system’ of production networks and clusters, whereby companies can build on each others’ strengths.
• Targeted fiscal supports for incremental investment (like accelerated depreciation provisions), rather than no-strings-attached company tax cuts.
• Public investments in industrial infrastructure: everything from ports and transportation facilities, to public research bodies, to stronger vocational training systems.
• Wielding public and social capital as a resource to support investment in strategic sectors, including public equity partnerships (using the successful Clean Energy Finance Corporation model, or through a public investment bank) and superannuation funds.
• Leveraging Australia’s unmatched renewable energy resource as a new, cost-competitive, and reliable source of competitive advantage for domestic manufacturing – and ensuring maximum Australian content in the manufactured products used in renewable power developments.

Here is an ambitious but reasonable target for the sector’s future revitalisation: let us work toward rebuilding Australian manufacturing so that we produce, in aggregate, as much manufactured output as we consume. This is not a utopian goal: most other OECD countries produce as much, or more, manufactured output in aggregate as they consume. And enormous benefits would be generated by rebuilding manufacturing back to a size proportional to our national needs.

The Centre for Future Work’s research suggests that if Australia’s manufacturing output matched its annual purchases of manufactured goods, this would provide a badly-needed boost to several key economic indicators: including $180 billion in new manufacturing shipments, $50 billion in additional GDP, over 400,000 new direct jobs, and 265,000 more indirect jobs in the sector’s long and varied supply chain.

Australia has proven in the past that it can be a global manufacturing leader, despite our small population and geographical remoteness. It didn’t happen by accident, nor was it the result of automatic market forces and private business decisions. It happened because Australians made it a national priority. We wanted an economy that was diversified and sophisticated, and less subject to the vagaries of international commodity prices and shifts in foreign appetites for our various resource-based staples.

For many reasons, the old recipes of resource extraction and business-led growth are clearly inadequate to the challenges of the post-COVID moment. The goal of producing a ‘fair share’ of manufactured output, proportionate to our (growing) needs for manufactures, would generate enormous benefits flowing to all parts, and all sectors, of Australia’s economy. And there is a toolbox filled to the brim with policy measures and levers that would help achieve that goal.

All we now need is policy-makers with the ambition and confidence to pick up those tools, and use them.

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