The Theoretical Rational for Industry Policy
Teresa Dwight
The theoretical rational for industry policy contains roots in Marx’s capitalist crisis theory of disproportionality which refers to the inability of capitalist economies to ensure that each sector is producing in proportion to what the other sectors need and that supply is working with demand. The counter-tendency is industry policy. Further rationale is that industries have inherent requirements such as available capital, maintenance of relationships of interdependence, and industrial linkages that natural market mechanisms fail to provide (Higgins 1994:244 in Brett et al). Industry policy is also supported by Keynes in the context of investment control and Frederich List in the context of protection of infant industry (Crotty 1999:555).
In Australia, the major case for industry policy is correlated with the case for manufacturing (Bell 1997:10; Boreham, et al 1999:26). Decline in the manufacturing industry has meant an increase in unskilled unemployed. While the average rate of tariff assistance has declined from 25 percent in 1983 to 6 percent in 1997, the size of the manufacturing industry has declined considerably in terms of the people it employs (Boreham 1999:24). Manufacturing is also a basis for long term investment (Emy 1993:150). If industry is left to the mercy of the market, key export sectors, particularly manufacturing would be harmed (Bell 1997:11) and this would have adverse effects on a major part of the Australian export industry and the industry links that manufacturing has with almost every other industry sector (Higgins 1994:244 in Brett et al).
The industry policy debate in Australia is between the neo-liberalists or free traders and the interventionists or protectionists (Bell 1997:6). On both sides of economic theory, arguments submitted relate to approaches to the market and its ability to provide superior economic outcomes and preferred types of policy implementation. Comparative advantage theory, advocated by most liberalists, asserts that domestic economies should focus on their strongest export industries in order to compete on the global market (Emy 1993:151). However, interventionists point to shifts toward closed economies, and increased protectionist policies, particularly by the US and Japan (Robins 1993:193). The pursuit of a level playing field in trade policy is not warranted if it is purely unilateral (Walsh 1993:19 in James et al). In addition, the breakdown of trade policy arrangements such as the GAAT is due to the increasing trend of trading partners to pursue protectionist policies (Robins 1993:190).
The advocates of a stronger industry policy point to the Asian experience of industry policy and outcomes to assert that industrially successful economies require structural transformation in mature economies (Boreham et al 1999:216). Japan’s use of sector policies exemplify that it is possible to employ industry policies which maximise productivity by targeting specific industries (Robins 1993:189). However, Walsh (1993:19 in James et al) refutes the Asian example by reference to the development path taken by Asian economies including the existence of low economic bases from which low wages and production methods could be exploited to bring economic boosts, and further, the citing that, in the cases of South Korea and Taiwan (Capling and Galligan 1992:13), economic growth was preceded by a major crisis which allowed government to direct attention towards national growth strategies. Nevertheless, countries with middle range interventionist policies in industry, such as Canada, Germany, Sweden and Netherlands show results that suggest a positive correlation with industry policy and economic success (Stewart 1994:112).
The pre-1985, Australian economy that was dependent entirely on commodity exports (Walsh 1993:16 in James et al), can no longer be maintained. Due to technological innovations, it was, and continues to become increasingly necessary to aim for a high value-added economy rather than commodity based (Bell 1997:9). Characteristics of the Australian economy point to a focus on raw materials (Robins 1993:190). Rationalists and interventionists can agree that Australia needs to invest in high value added exports but the conflict is over how to achieve this (Bramble 1994:84). Neo-liberal policy is arguably taking the ‘low road’ to economic growth in the form of general reduction in activity and cost cutting (Hart 1992:7). Bell (1997:10) however, argues that the ‘high road’ by restructuring towards high value added innovation and product differentiation is going to be the only appropriate policy in the globalising market.
Australia’s history of industry protectionism is criticised by economic rationalists on the basis that tariffs caused inability of industries to compete overseas, and higher costs for consumers and primary producers (Walsh 1993:17 in James et al). In 1985, Australia’s manufacturing exports represented 16.3 percent of Australia’s total exports down from 19.7 percent in 1970 (Walsh 1993:16 in James et al). Advocates of free trade argued that freer industries operating in a more flexible economy will allow industries to trade more aggressively with the rest of the world (Walsh 1993:17 in James et al). However, an analysis of current figures that show continued decline in the manufacturing sector seems to contradict the assertion that a freer market would assist manufacturing (Emy 1993:152).
Current conditions and policies reveal that the neo-liberalists are superior in contemporary politics (Bell 1997:11). The advocates for a free market approach to industry include members of the Treasury and the stance of the Industry Commission (IC), while interventionists mostly tend to be trade union leaders or members of councils within industry (Hart 1992:4). Howard government policy, while acknowledging the loss of manufacturing employment, growing debt and foreign ownership of Australian industry and low levels of business expenditure on R&D, has reduced export assistance by 20 percent in 1996-97, abolished the Tariff Concession Scheme and 38 other industry programs (Bell 1997:12). The abolition of these schemes is not a problem in itself, only the lack of government schemes that replaced them. Furthermore, there is no alignment of industry policy with fiscal or monetary policy in Australia and no tax incentives to enter export markets (Robins 1993:189). Furthermore, Australia has a number of political weaknesses in implementing industry policy, in particular the proliferation of industry and departmentalised policy processes (Robins 1993:188; Hart 1992:20).
Due to the fact that debates extend to the very foundations of industry policy and its existence, attempts to subject industry restructuring and development to policy consistently encounter political conflicts at implementation. Types of industry policy and implementation can be categorised into three parts according to; direct forms of industry protection in the form of tariffs, quotas and subsidies, more indirect implementation through domestic regulation, currently in the form of deregulation, and sectoral specific regulation, which tends to run into implementation problems associated with federal verses state conflicts (Robins 1993:187). Although indirect, domestic regulatory measures which include local investment, venture capital, support for research and development (R&D) and alternative investment are argued to be the most effective forms of industry policy (Boreham 1999:25). Emy (1993:150) also adds demand management as a possible government strategy for influencing determinants of growth. The inherent nature of these essential elements that are essential in industry, asserts the inescapable nature of industry policy even in a free trade economy like Australia (Stewart 1994:120).
However, the history of industry policy of the Australian government is focused primarily on tariffs and general policies (Bell 1997:6). In the context of a more open global economy, industry policy is becoming more closely linked with international trade policies (Hart 1992:3). The liberalist argument is that capable firms respond positively to market pressures, and those that don’t survive are inefficient and a waste of resources (Emy 1994:142). This argument clearly ignores the existence of ‘market failures’ and the danger of risking important industries. The protection of new industries and old industries is necessary due to their special capital needs (Parker 1996:50). Liberalists argue for national competitions policy and a general retreat from government responsibility in the private sector. In Australia, approaches to implementation of industry policy appear to follow a profit orientated model as opposed to a more desirable production orientated model (Boreham et al 1999:217). This will have an affect on the projected outcomes of industry policy implementation in Australia (Schmidt 1996:241).
Financial regulation is a necessary implication of industry policy because access to venture capital is a basic requirement for any industry (Emy 1993:132). Financial regulation can be achieved by aiming toward long term access of capital and fiscal consolidation (Boreham et al 1999:26, 27). Unfortunately, liberalist policies argue for no budget deficit and this is enacted in limited public sector spending and decreases in tax concessions and fiscal incentives for industry (Bell 1997:11).
Bell (1997:11) argues that Australia is not able to meet the needs of industry policy due to inadequate infrastructure. Free traders and liberalists advocate policies that lift domestic savings and private sector investment in order to encourage free market competition (Walsh 1993:20 in James et al). This also has the effect of reducing government intervention. However, in the absence of any public investment, private industry growth could squeeze out smaller or new industries (Higgins 1994:245 in Brett et al).
Research and development (R&D) needs to be encouraged to stimulate innovation and alternative investment in the aim of developing high value added production (Robins 1993:190). It can be stimulated by selective tax incentives or concessionary benefits (Shaw and Hughs 2002:214 in Bell). In Australia’s profitability orientated economy, technology to replaces labour in industry and skilled workers are replaced with unskilled workers (Boreham et al 1999:217). On the other hand, industry productivity orientated countries integrate technical and productive process and skilled labour (Schmidt 1996:240).
Labour market policies of training and education affect the structure of industry internally (Boreham et al 1999:217). Retraining and relocation is important to minimise the effects of displaced workers from declining industries (Stewart 1994:120). The liberalist argument is aimed at microeconomic reform with a hierarchical organisation structure, which compares to training and skills at all levels in productivity orientated countries (Boreham 1999:217).
Further, industrial relations policy that balances the conflict between labour and capital can be positive for industry restructuring or development (Boreham et al 1999:217). The differences between more successful countries such as Germany and Sweden who follow the productivity model and liberal countries like Australia is the liberal focus toward financial deregulation across board, as opposed to industrial democracy which is aimed at increasing efficiency and productivity at all levels. Less downsizing can be a positive thing for industry policy in the sense that much corporate memory and organisational capacity is lost in Australian industry (Boreham et al 1999:217).
A final aspect of industry policy includes welfare policies that relate to displaced workers from affected industry sectors (Stewart 1994:124). These policies are aimed at employment of workers from displaced sectors. Walsh (1993:16 in James et al) concedes that initially, free trade policies may lead to unemployment. However, he argues that this would be frictional unemployment and would flatten out over time (Walsh 1993:18 in James et al). However, as free trade policies are often accompanied by a demand for reduced welfare protection (Boreham et al 1999:217), this is an unlikely outcome in a liberalist economy.
Neo-liberalists argue that it is not desirable for public principles to control industrial transformation on the basis that industry development is best left to the market (James et al 1993:19). While it is noted that the unpredictability of ‘market failures’ cause potential problems in a liberal economy, it is important to recognise that inefficiency and incompetence of state intervention can cause potential problems of policy (Shaw and Hughs 2002:200 in Bell). Furthermore, Australia’s political weaknesses such a federalism and lack of coordination between government departments is also a major political weakness in Australia (Stewart 1994:135). It is commonly recognised that bad industry policy can have negative effects on the economy (Robins 1993:187; Walsh 1993:20 in James et al; Bell ; Caplin and Galigan 1992:76). Despite this, is it still arguable that some degree of policy is necessary and preferable to leaving industry entirely to market principles (Shaw and Hughs 2002:205 in Bell). However, there is a necessary balance between no intervention and the wrong type of intervention (Bell 1997:8). Walsh (1993:20 in James et al) submits that, “there is a role for government in industry policy.” However, he quantifies that government intervention is limited in regards to economic outcomes (Walsh 1993:20 in James et al). A balance between economic and political weakness is necessary in order to structure an effective industry policy (Capling and Galigan 1992:76).
A major complaint of Australia’s industry policy has been the absence of clear, national economic goals (Robins 1993:187). A clear strategy is an essential requirement in all policy in order to correlate expected outcomes with effective implantation strategies. The key innovation of industry policy is to providing the conditions for a strong industry to develop (Stewart 1994:135). Bell (1997:16) argues that the entire context of industry policy needs reform and, “political, ideological, financial, managerial and administrative system reform.”
Despite arguments for free trade, industry policy is an inescapable element of government management. Whether the government follows a liberalist or Keynesian approach to intervention in industrial growth and development, policy is required in all the key areas. Furthermore, there are several vital areas necessary for industry growth where market mechanisms lack the ability to affect. However, there is a wide scope for industry policy to run into problems. This means that application of industry policy must take into account deliberated outcomes, means of policy implantation, whether on the macroeconomic, domestic or sectoral levels, and appropriate modes of regulation in all elements.
copyright, 2004