Back to the future with industry policy

Selective industry subsidies and requirements for higher local content in major project developments form the centerpiece of the Gillard government’s “Industry and Innovation” statement.  Ostensibly this targets lifting manufacturing productivity.  Union campaigns that have reduced local suppliers’ competitiveness have been instrumental in making such support necessary.  The government is unable to address these root causes especially under Minister Greg Combet, who led the union campaign against productivity improvements on the waterfront.

The relationship between industry policy departments and the industry sectors with which they interface has changed over the past quarter of a century.  Previously, policy approaches came from two directions.

The first entailed protecting industries into which supposedly inflexible capital and labour resources were sunk.  The second sought to shift the economy’s resources into activities that build upon natural advantages and where growth prospects were good.  In the main this meant manufacturing that capitalized on local mineral resources and the “smart” industries that would harness Australia’s “clever country” credentials.

The Hawke Government sought to reconstruct industry along corporatist lines and established industry councils to enhance competitiveness in the different manufacturing sectors.  Though initially envisaged as an updated system of sectoral encouragement, this approach evolved into tariff dismantling that reflected global trade liberalization. 

Ms Gillard’s  new “Industry and Innovation” policy takes us back into selective industry support with three new “high-tech” areas identified for subsidy.  And it requires major developments firms to hire officials in their global supply offices to boost local content.  As Minerals Council chief, Mitch Hooke, has said, these commissars, “will embed public servants inside companies”.  The Industry and Innovation approach returns to a more traditional protectionist approach in other ways, including placing impediments to low-cost imports with tougher anti-dumping procedures.  These build upon the naked protectionist approach still seen in motor-vehicle subsidies.

Over the past twenty years, industry policy had downgraded sector-specific support measures. Industry departments, which previously sought to promote industry development – albeit with misplaced confidence in their abilities to do so – shifted much of their focus to encouraging industry adaptation to government policies that impede their development.  Many of these policies stem from environmental lobby pressures.

This shift in the industry departments’ approaches is apparent from annual reports of the agriculture, manufacturing and minerals departments.

Agriculture, Forests and Fisheries with staffing of 5,000 people spent $800 million in 2011–12. Some of its activities stem from government maladministration, including compensation for forbidding timber getting, and the suspension of live exports.  Others focused on “clean energy”, “climate change adjustment”, rural financial counseling, adjustment and drought assistance as well as chasing myths of human land despoliation with landcare support.  The more useful community-wide functions, like quarantine allocation and management of property rights in fisheries, account for a small part of the department’s funding and manpower.

The manufacturing industry department (Industry, Innovation, Science and Research and Tertiary Education) spends about $4 billion a year and comprises:

• Research entities, with CSIRO the most heavily resourced, at over 5,000 people; climate change in its various guises claims a very high proportion of the research staffing and spending.

• Mainline units comprise 17 divisions with 2,500 officials who purport to be able to offer advice on matters like industry skills, innovation, venture capital, research funding, international strategy and the like.  These Departmental elements have few relevant skills and Bill Scales is correct in suggesting almost all of them should go.

Resources Energy and Tourism has about 1,500 staff, half of whom are in heavily bloated policy advisory areas which mainly duplicate state government agencies.  As in so many government departments, staff positions are loaded with confected duties involving energy savings and greenhouse issues.  Most of the rest are in Geoscience Australia, which undertakes useful tasks, although these, too, have become infected with environmental and greenhouse duties.

In aggregate terms, the number of public servants increased by 11 per cent in the last five years. There are claims that Finance Minister Penny Wong is now slicing into departmental fat but the forward estimates show only a one per cent reduction planned for this year – and the three industry departments actually have a three per cent staffing increase.

Excessive staffing is difficult for the ALP to address because its green orientation leaves many obvious areas of waste untouched.  This adds to a predisposition among politicians to see a need for controls to combat what they perceive to be numerous market failures.  Understandably, career-threatened bureaucrats will reinforce such proclivities.

Dr Alan Moran, Director of the IPA’s Deregulation Unit, is an economist who has made a specialty of regulatory matters. A shorter version of this column first appeared in The Australian