tag:theconversation.com,2011:/us/topics/industry-assistance-10421/articlesIndustry assistance – The Conversation2017-07-28T23:22:21Ztag:theconversation.com,2011:article/817032017-07-28T23:22:21Z2017-07-28T23:22:21ZThe government is backing the wrong industries, as our economy changes: Productivity Commission<p>The Australian government is still protecting industries that employ a small number of people. This is while the largest employer, the services sector, is subject to the largest tariffs, a recent Productivity Commission report demonstrates. </p>
<p>As a whole, manufacturing still receives 77% of net assistance, largely due to the remaining small levels of tariff assistance, plus some budget measures, according to the report. </p>
<p>“Input tariffs” increase the costs of imported goods and services that go into making things. This makes a business’ activities more expensive for the consumer. And even though the services sector accounts for around 85% of employment, current government policy is penalising this sector, which has the best prospects for future growth.</p>
<p>However, as the report states, it’s the construction industry that is most affected by input tariffs (A$1.5 billion worse off), followed by property and real estate (A$337 million), then accommodation and food (A$294 million). All of these sectors are labour intensive and employ substantial numbers of people, yet are forced to pay unnecessary tariff costs. </p>
<p>Despite all of this, the government is still protecting primary industries such as horticulture, sheep, beef and grains, and in the manufacturing sector in food and metal production, wood pulp and oil and chemicals. All of these latter industries are basic supply or processing industries, that provide inputs into other industries, but not usually the final products.</p>
<p>Tariffs against foreign goods are reducing and now only provide modest assistance to a few industry sectors. The report says this is worth A$4.6 million to manufacturing, and within that sector food and beverages, metal fabrication, wood and paper petroleum and chemicals enjoy the most protection. Together these industries provide a relatively small proportion of total employment (around 7% or just under 1 million employees). </p>
<p>The popular image of our government protecting the motor vehicle and component industries seems to be less true according to these latest statistics.</p>
<p>In terms of budget assistance from the government, it’s not cars but finance and insurance services that benefit most from the public purse followed by sheep, cattle and grain industries. Vehicle production now receives less than half the budgetary support it received eight years ago – down to approximately A$290 million from A$600 million in 2008-09. The government has given up on the motor vehicle industry and its capacity to provide jobs into the future.</p>
<p>More particularly, the Productivity Commission is critical of governmental assistance to the Spencer Gulf industries in South Australia and to the bail-outs for the Arrium steel works in Whyalla, in the same state, which it considers wasteful and distortionary. Arrium went into voluntary administration before an overseas buyer was procured. </p>
<p>The commission is also hostile to green energy production and storage and to the politically sensitive Northern Australian Infrastructure Facility, which it considers a pork-barrelling exercise open to political pressure. It says this facility is likely to fund non-available projects, that will sit on the public books for years, and this is a misapplication of investment resources. </p>
<p>Finally the wrath of the Commission is piqued by the re-regulation of the sugar industry (another declining industry in employment terms) and especially at the granting of charity status to the main marketing arm, Queensland Sugar Ltd. This body must be one of the last remaining marketing monopolies in the primary industries.</p>
<p>Governments will have to look at winding back the remaining (smallish) tariffs affecting domestic service industry sectors – especially those affecting construction supplies, retail and property, accommodation and food. </p>
<p>These impacts flow into local costs that are making Australia a more expensive place to consume or do business both for Australians and overseas visitors.</p><img src="https://counter.theconversation.com/content/81703/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Wanna does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Under current government policy we are penalising the sector of the economy where there is the largest proportion of existing employment and the best prospects for future growth.John Wanna, Sir John Bunting Chair of Public Administration, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/286162014-07-01T19:12:18Z2014-07-01T19:12:18ZProductivity Commission’s myopic failure on industry assistance<p>Every year the Productivity Commission (PC) produces an annual report card on Australian government assistance to industry. And every year it singles out the “usual suspects” for attention, particularly the manufacturing industry. This year’s <a href="http://pc.gov.au/annual-reports/trade-assistance/2012-13">Trade and Assistance Review 2012-13</a> is no different except that the government itself has announced an “end to the age of entitlement”.</p>
<p>Does this signal the end of debate about the government’s role in the economy, or the beginning of a new one? Is the PC, like the apocryphal military commander, simply fighting the last war? While governments around the world may be jettisoning traditional policy approaches, they <a href="https://theconversation.com/for-want-of-industry-policy-our-living-standards-are-set-to-fall-23317">increasingly recognise the importance</a> of promoting economic complexity, innovation and competitiveness in global markets and value chains.</p>
<p>By contrast, the PC estimates the value of industry assistance, such as tariffs and tax concessions, with reference only to the cost to consumers and other industries that use the output of assisted industries as inputs in their own production. The analysis reflects the neoclassical economic orthodoxy in which economic welfare is best secured through the unimpeded market mechanism, and the legitimate role of government is confined to a very limited set of “market failures”. </p>
<p>This approach has dominated policy thinking in Australia not just because it channels the logic of a mathematical theorem, but also because it has self-evident intuitive appeal. However, both the <a href="https://theconversation.com/does-manufacturing-have-a-future-in-australia-3098">logic and appeal of such an approach are increasingly under challenge</a> by developments in the real world of production and trade. As a result, there are at least three areas of contention in the PC Review.</p>
<h2>Comparative advantage</h2>
<p>First, the review starts from the principle of “comparative advantage between nations”, which asserts that two nations will be better off if they specialise in producing and trading those commodities in which they have a relative cost advantage, even if one of them has an absolute cost advantage in all commodities. This advantage is governed by the relative proportions of labour, capital and land in each nation. </p>
<p>However, the assumptions required for this principle to operate are wholly unrealistic. They include no international movement of capital and labour; no scale economies in production; identical commodities produced and traded in each country; and identical technologies. Even <a href="http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1970/samuelson-bio.html">Paul Samuelson</a>, who established the mathematically rigorous form of comparative advantage 65 years ago, recognised its inapplicability to the real world of trade. </p>
<p>This world is characterised by large-scale capital flows, uncertainty, increasing returns, product differentiation, oligopoly and constant technical change. Comparative advantage predicts inter-industry trade (nations specialise in making and trading either clothes or cars), but in reality intra-industry trade dominates (nations produce and trade both clothes and cars). For example, <a href="http://fibtex.lodz.pl/article835.html">Germany is not only the leading exporter</a> of advanced motor vehicles and machine tools but also “the 2nd textile and 4th greatest clothing exporting country in the world”. </p>
<p>It is <a href="http://www.economistinsights.com/sites/default/files/EIU%20-%20Siemens%20-%20Networked%20manufacturing%20The%20digital%20future%20WEB.pdf">precisely because of these characteristics</a> that advanced manufacturing and services require government support through R&D tax breaks, public procurement, technology transfer programs, network brokering and big investments in school, university and technical education and specialist infrastructure. Such support creates <a href="http://www.ft.com/cms/s/e8937448-fd39-11e3-8ca9-00144feab7de,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Fe8937448-fd39-11e3-8ca9-00144feab7de.html%3Fsiteedition%3Duk&siteedition=uk&_i_referer=#axzz362F4alqC">high skill, high productivity jobs</a>, builds the science and technology base and enables technology spill-overs across the economy. </p>
<p>The PC Review finds that since 1970 the effective rate of assistance to manufacturing has fallen from 35% to 4%. Clearly not all past assistance was well conceived, but does this justify indifference to manufacturing decline? <a href="https://theconversation.com/corporate-australia-wasnt-really-the-budget-winner-after-all-26522">First world living standards will be difficult to maintain</a> in a third world economic structure with a small number of high paid jobs in mining and finance and the rest in low productivity, low wage services such as aged care and retail. </p>
<h2>Arbitrary definitions</h2>
<p>The second problem with the PC approach is that the definition of “government assistance” is entirely arbitrary. The review’s estimates are initially said to cover “those measures that selectively benefit particular firms, industries or activities, and that can be quantified given practical constraints in measurement and data availability”. This would seem to capture any kind of preferential support for industry, either directly or indirectly.</p>
<p>However, the review restricts assistance to tariffs, a limited number of tax concessions such as those for R&D, and direct budgetary assistance such as funding to the CSIRO and car industry. It explicitly excludes: </p>
<blockquote>
<p>“regulatory restrictions on competition… tax concessions for superannuation… government programs affecting a range of services industries, mainly relating to the provision of health, education, and community services… [and] resource access arrangements including to mining, forestry and fisheries”. </p>
</blockquote>
<p>The effect is to portray manufacturing as a mendicant industry imposing high costs on other industries, especially services. </p>
<p>If just some of these excluded measures were to be included, a completely different picture of the scale and distribution of government industry assistance would emerge. For example, imagine evaluating “regulatory restrictions on competition” in the context of the <a href="http://www.apra.gov.au/AboutAPRA/Publications/Documents/cr12308%5B1%5D.pdf">International Monetary Fund finding</a> that Australia has the most concentrated and profitable banking system in the world. </p>
<p>Or to take another example, <a href="http://www.treasury.gov.au/%7E/media/Treasury/Publications%20and%20Media/Publications/2014/TES%202013/Documents/PDF/TES-13-Consolidated.ashx">compare the estimate</a> of A$7.12 billion net manufacturing assistance with the A$32 billion allocated over 2013-14 to the superannuation industry in foregone tax revenue, comprising capital gains concessions and tax concessions on contributions. <a href="http://www.tai.org.au/content/mr-super-tax-breaks-hindenburg-federal-budget">It has been calculated</a> that these tax concessions are equivalent to annual expenditure on the age pension. Similarly, the 30% private health insurance rebate is a A$1.5 billion tax concession intended to “distort” consumer spending towards this industry.</p>
<p>There are other examples but the most significant relate to the resources sector, again excluded from the definition of government assistance. Taken together with the huge public investment in mining infrastructure, for which the <a href="http://www.tai.org.au/content/mining-age-entitlement">states alone have been estimated</a> to provide A$3 billion annually for the last six years, the <a href="http://www.tai.org.au/content/pouring-more-fuel-fire">A$4.5 billion annual expenditure on the diesel fuel tax rebate</a> and other tax subsidies ensures that mining qualifies for the “mendicant” status of manufacturing, but apparently without the stigma.</p>
<p>The campaign by mining companies against a resources rent tax, which might have laid the foundations for a Norwegian-style sovereign wealth fund, has now been compounded by claims of legal but costly tax avoidance. <a href="http://www.smh.com.au/business/glencore-tax-bill-on-15b-income-zip-zilch-zero-20140626-3awg0.html">It was reported last week</a> that Australia’s largest coalminer “paid almost zero tax over the past three years, despite income of A$15 billion, as it radically reduced its tax exposure by taking large, unnecessarily expensive loans from its associates overseas”.</p>
<h2>Costs and benefits</h2>
<p>Finally, the modelling in the PC Review has the effect of maximising the costs of government assistance and minimising its benefits. For example, <a href="https://theconversation.com/australias-choice-the-high-road-to-productivity-or-a-race-to-the-bottom-10695">the Review does not attempt to estimate</a> the increase in R&D and productivity arising from business innovation support measures. Similarly, government spending on the CSIRO is, in the accounting framework of the PC, a net cost to taxpayers and industry. These measures are simply assumed to be ineffective or just a “deadweight” cost. </p>
<p>Whatever the merits or otherwise of assistance to the local car industry, the cost of this assistance is not balanced in the review against the income, company and GST tax revenues arising from the output of the industry. As the <a href="http://www.industry.gov.au/industry/automotive/Statistics/Documents/KeyAutomotiveStatistics2012.pdf">local car makers had an income</a> of A$19.6 billion in 2011-12, receipts from these sources would have more than offset the value of assistance estimated at A$1 billion for 2012-13.</p>
<p>To discount income received by the government from the car industry but only include the cost of assistance, the PC assumes that labour and capital in the car industry would be fully employed in the absence of assistance. What we know, however, is that when the local makers withdraw around 2016-17, capital will be either repatriated to the parent company or invested in car production in, say, Thailand. </p>
<p>Similarly, <a href="http://www.bookdepository.com/Refashioning-Rag-Trade-Michael-Webber/9780868405407">research on labour redundancy from manufacturing plant closures</a> suggests that about one-third leave the labour force, one-third get a lower quality job and only one-third get an equivalent or better job. This finding <a href="http://www.fishpond.com.au/Books/Impacts-of-Automotive-Plant-Closure-Andrew-Beer-Edited-by-Holli-Evans-Edited-by/9780415543347">has been confirmed by more recent studies</a> of car plant closures. </p>
<p>Should the Australian government have increased its co-investment in car assembly manufacture to retain a local presence, should it have redeployed support to car components suppliers or to other industries with greater innovation, growth and export potential, or should it have wound back support to all industries, irrespective of status and significance? Unfortunately, a reader of the PC Review will be none the wiser.</p><img src="https://counter.theconversation.com/content/28616/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Phil Toner does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.</span></em></p><p class="fine-print"><em><span>Roy Green does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Every year the Productivity Commission (PC) produces an annual report card on Australian government assistance to industry. And every year it singles out the “usual suspects” for attention, particularly…Roy Green, Dean of UTS Business School, University of Technology SydneyPhillip Toner, Adjunct Professor, UTS Business School, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/265222014-05-15T01:52:34Z2014-05-15T01:52:34ZCorporate Australia wasn’t really the budget winner after all<figure><img src="https://images.theconversation.com/files/48557/original/c3gp72zg-1400118447.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Industry assistance cuts will have long-term impacts on Australia's international competitiveness. </span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>The 2014 Budget has been variously celebrated and reviled as a “budget for corporate Australia”. But this assessment is based on the premise that corporate tax cuts and infrastructure spending will provide the major source of future growth and competitiveness in the aftermath of the commodity prices boom.</p>
<p>What if this premise is wrong? What if [the evidence shows](http://www2.itif.org/2014-federally-supported-innovations.pdf](http://www2.itif.org/2014-federally-supported-innovations.pdf) that well targeted government programs to promote science, technology and innovation are a more effective mechanism for creating long-term growth and jobs? In this case, we may be witness to one of the larger public policy mistakes of recent times, with serious implications for the structure and performance of the Australian economy.</p>
<p>Essentially, following the advice of the <a href="http://www.ncoa.gov.au/">National Commission of Audit</a>, the budget envisages cuts to the industry portfolio of A$2.5 billion over the next four years. This is not just about the much publicised end of subsidies for car assembly manufacturing but also the scrapping or “consolidation” of programs that are designed to encourage entrepreneurial start-ups and the repositioning of established firms in global markets and value chains, including the car components sector.</p>
<h2>Industry assistance cuts will hurt</h2>
<p>While other countries are stepping up their commitment to the creation of knowledge-based products and services, Australia will be closing down Commercialisation Australia, the Innovation Investment Fund and Clean Energy Finance Corporation, which have already repaid the taxpayer many times over with new venture creation in areas of home-grown expertise and ingenuity. </p>
<p>Once abolished, such institutions are much harder to rebuild, should it be realised subsequently that they are critical to achieving competitive advantage for a high cost economy.</p>
<p>While other countries are promoting “smart specialisation” by their small and medium enterprises, we will be scrapping the Australian Renewable Energy Agency and Enterprise Connect, a program acknowledged by industry itself to be one of the most successful in our history for accelerating business improvement and transformation. Again this is a program that required a huge effort to build up, but is so much easier to tear down; just as the Howard government did with its predecessor, the National Industry Extension Service in the 1990s.</p>
<p>While other countries understand the importance of business-university collaboration, Australia languishes at the bottom of OECD rankings of collaboration intensity and knowledge exchange. Yet the government will cease public support for the longstanding Cooperative Research Centres program, which has made isolated but significant progress in driving such collaboration, and it will not proceed with the Innovation Precincts program, which might have ensured a more systemic approach to the development of enabling technologies, skills and business models in world competitive clusters.</p>
<p>While other countries are creating new institutions and enhancing existing ones for research and innovation ecosystems, such as the UK’s Technology Strategy Board, the US National Manufacturing Institutes and the German Fraunhofer Institutes and Research Campus program, what will Australia be doing? We will be imposing massive cuts on CSIRO, our premier science and technology organisation, and stripping all public funding from NICTA, which is contributing to Australia’s R&D capability for the digital economy. The new Medical Research Future Fund can hardly be expected to make good the resultant damage.</p>
<h2>Vindictive destruction</h2>
<p>The scale of this vindictive and ideological destruction of public institutions has yet to be fully comprehended by the leaders of corporate Australia, who are deluding themselves if they believe that very many businesses outside the mining and finance sectors are likely to be the beneficiaries of this budget. </p>
<p>Less R&D will originate in Australia, more of our start-ups and early stage ventures will go offshore, and fewer domestic firms will be in a position to engage in strategically focused clustering activity or participate in fast moving international markets.</p>
<p>As part compensation for the loss of these major public programs and institutions, the government proposes to establish an Entrepreneur’s Infrastructure Program to “improve the capabilities of small to medium enterprises and streamline business access to government programs”. </p>
<p>However, there is no detail provided on how such a program would operate, let alone a vision of the future for Australia’s economy, beyond free trade agreements providing access to our markets in exchange for export opportunities for primary commodities.</p>
<p>And this is the rub. Without world competitive knowledge intensive industries, including advanced and specialised manufacturing, which can capture value from global markets, we face the prospect of our very own “Argentina moment”. This is when a first world lifestyle, dependent on the import of high value consumer goods, can no longer be supported by a third world economic structure, based on the export of unprocessed raw materials. Surely we cannot allow it to come to that.</p><img src="https://counter.theconversation.com/content/26522/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Roy Green does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The 2014 Budget has been variously celebrated and reviled as a “budget for corporate Australia”. But this assessment is based on the premise that corporate tax cuts and infrastructure spending will provide…Roy Green, Dean of UTS Business School, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.