Innovate to grow

This week’s cover subject – colourful miner Clive Palmer – has a cure for the two-speed economy. He thinks that rather than punish the resource-rich states with a mining tax, government’s role should be to fund manufacturing plants in the poorer states that could turn what Western Australia and Queensland are digging up into finished products to export. By turning NSW into a mini-China, he thinks it would make us the second-largest economy in the world.

Initially Palmer’s suggestion seems poorly thought-out: even with a proximity to the basic materials, our high-cost labour market cannot compete with that of Asia’s. However, it comes at a time when the future of manufacturing and government’s role in that future is up for discussion.

Nations historically created wealth by making things to sell to consumers and we are psychologically attached to being a manufacturing power. However, manufacturing has been in decline since the 1960s when it accounted for one in four dollars of national output. Now it accounts for less than one in eight. This is not just in Australia, the decline of manufacturing strength is a hallmark of developed, rich nations. The growth hasn’t been in mining, which makes up a relatively small part of the economy, but in services as consumers and businesses have outsourced more of what they used to do themselves.

Support for the manufacturing industry is controversial. Undoubtedly governments, particularly the current Labor government, subsidise industries to protect jobs and ultimately curry political favour. While protecting jobs hits the right emotional note, it is poor policy. Government’s responsibility to workers in declining industries is to ensure access to training and aiding transition to other industries.

However, the discussion over protecting jobs is a distraction. Manufacturing’s biggest contribution to the economy is not employment (it is now the fourth-largest employer with just under 1 million people but IBISWorld predicts it will be overtaken this decade by professional services and education) but rather to innovation, where it accounts for nearly half of our research and development spending. We can’t necessarily directly equate innovation to R&D spending but it’s the closest approximation we have. The question that has to be asked is not how to save jobs but if manufacturing declines, how do we ensure continued innovation?

Manufacturing covers so many businesses we should be wary of sweeping statements about protectionism every time the government intervenes. The recent handouts to the car industry is a particularly bad example – car manufacturers are not just being sheltered from the high dollar but from their own inefficiency, global competition and their failure to deliver the smaller more fuel-efficent cars consumers want. Other areas of manufacturing that are productive and innovative may well be worthy of government help.

A Productivity Commission report in 2003 noted that manufacturing has thrived where it has moved up the value chain, spent more on R&D and been linked to areas where we already have a natural lead, such as manufacturing that services the agricultural and mining sectors. Put that way, Palmer’s idea doesn’t seem so batty after all.

Harness the power of knowledge - become a subscriber to access 20 years of BRW’s archives.

Kate Mills

BRW

Comments (0)