AT THE HEART of South Australia's post-World War II prosperity was the spectacular growth of manufacturing industry. Manufacturing production accounted for about 41 per cent of total SA production in 1933. By 1965 it had risen to about 60 per cent of production. And while manufacturing remains a significant contributor to the state economy, it is under threat.
The post-war industrialisation of SA was no accident. The Playford government was successful in securing a large share of munitions factories in SA during World War II. This military "pump-priming" of the state economy laid the foundations for industrialisation. The establishment of the Housing Trust was a master stroke of state industrial policy, providing land and infrastructure to entice firms to locate here, and housing for industrial workers and their families. By 1965, the Trust had built about 56,000 homes and 50 factories. Playford, like many of his successors, used tax breaks to lure businesses to the State. Investments in the Morgan-Whyalla pipeline and nationalisation of the electricity industry were part of a plan to meet the infrastructure needs of industry and offer lower electricity costs. SA's relatively low wage costs and low rates of industrial disputation were actively marketed then, as they are today.
Firms such as General Motors and Chrysler chose to invest in SA because they had a great deal to gain. The State Government provided them with the land and much of the infrastructure and support they needed to get established. They didn't have to fight with overseas competitors for market share. High tariffs on imported vehicles ensured that they dominated the domestic car market. They had access to a pool of skilled workers housed close by in low-cost housing built by the Housing Trust.
The capacity of state governments to attract new manufacturing investment has been diminished by the phasing out of tariff protection by successive Commonwealth governments. While exposing local manufacturers to international competition can lead to higher productivity levels and benefit consumers through lower product costs, these benefits do not outweigh the costs of eroding our domestic manufacturing industry. This would be a triumph of ideology over common sense.
Recent job losses and company closures in SA don't signal terminal decline of the state's manufacturing sector but do tell us that the sector is under stress - the main source being the pace of tariff reduction on manufacturing industry. To varying degrees, this has influenced the downsizing of Mitsubishi, Motorola and Sola Optical, and the closure of the Mobil Oil Refinery, Fletcher Jones, Electrolux, Sheridan, Aunde Trim, JP Morgan and Pilkington. The net result is likely to be the loss of about 2000 jobs. While this is cause for concern, it's more disturbing that manufacturing employment has declined so dramatically as a proportion of employment since the 1970s, when the first round of tariff reductions on imported manufactured goods was introduced. Between 1939 and 1965, manufacturing employment increased from about 16 per cent to about 28 per cent of total employment in SA. It is now about 14 per cent.
The recent job losses and company closures signal that competition in the manufacturing sector is intensifying as a result of global competition. While circumstances surrounding the companies' decisions are all different, they all recognise the incredible difficulty labour-intensive manufacturers have competing with low-wage manufacturing countries such as China - a vortex for such manufacturing activity. Not all struggling manufacturers will re-locate to China but many will. Next to the US, China is now the destination for the largest share of foreign direct investment, and much of this new investment is in labour-intensive manufacturing.
The Chinese economy is growing twice as fast as the world as a whole. It may soon rival the United States as the global economic super-power. According to the Australian Bureau of Agricultural and Resource Economic,s the US share of global GDP is about US$10.7 trillion, followed by China with about US$6.7 trillion. To put this in perspective, the value of Australia's GDP is around $600 billion. China is projected to grow at around eight to nine per cent a year over the next five years, compared to just three per cent growth for the US and Australia.
As China grows, it will continue to demand Australia's raw materials, commodities and educational services. Yet while Australia's monthly merchandise exports to China doubled from about $300 million in August, 1994, to about $650 million in August, 2003, the nation's monthly merchandise imports from China increased fivefold, from about $320 million in August, 1994, to $1.6 billion in August, 2004. South Australian merchandise imports from China rose from about $8 million in August, 1994, to $43 million in August, 2004, while merchandise exports to China averaged about $34 million per month over the last four years.
China's industrial revolution has resulted in industrial production growing at about 18 per cent annually. Over the 12-year period to 2002, China's industrial production as a share of total production grew from 42 per cent to 51 per cent. Today, about 90 per cent of China's exports are manufactured goods.
The next 10 years will be a difficult period for SA manufacturers as the global pressures unleashed by the evangelists of free trade intensify. Fortunately local manufacturers seeking to remain profitable are not able to pay their workers subsistence wages or recklessly abuse the environment. They are, however, engaged in a Darwinian struggle of the survival of the fittest, competing with countries on terms that if adopted here would guarantee a decline in Australian living standards. The only way many will survive is if a sensible tariff protection regime is maintained in Australia. The introduction of non-tariff barriers such as requirements that all imported goods adhere to minimum environmental and labour standards must also be on the table.
Bidding for business
THERE is little disagreement that governments should provide assistance to industry but there is a debate raging about what are the most appropriate forms of assistance. The State Government has rejected the former Liberal government's strategy of providing assistance packages to firms, arguing that it aproximates as corporate welfare. The Brown/Olsen government provided about $230-million in government assistance to industry during the mid-1990s. The Liberals maintain that these were good investments, though there have clearly been significant failures.
Despite its criticism of corporate welfare, the State Government has not completely abandoned the provision of assistance to individual firms. This year it made a modest contribution to the Mitsubishi "industry adjustment" package in response to the announced closure of the Lonsdale engine plant. It is likely the government will make some contribution if contractors win a share of the Federal Government's naval ship building contract for SA. Pragmatism is likely to prevail over ideology in determining whether state governments provide assistance to firms. The prospect of jobs and investment usually proves irresistible.
Most firms benefit from government assistance and investments anyway. Billions of dollars are spent each year on apprenticeship programs that heavily subsidise employer training costs. Many firms have benefited from payroll tax rebates, assistance for business planning and marketing, research and development, export development and trade missions. Most governments provide businesses with support for networking and clustering initiatives, the uptake and diffusion of technology and fostering innovation. None of this attracts much controversy.
Most of the recent concern regarding government assistance to industry has centred on the use by the former Liberal state government of specific assistance packages to lure firms to locate in SA, including Motorola, Bankers Trust and JP Morgan Investor Services. The Brown/Olsen government also used the promise of government outsourcing contracts as a way of attracting new business investment. It built industry development targets into the whole-of-government information technology contract with EDS and the water contract with United Water. The expectation was that each of the firms should reach specific export targets. There is no independently verified evidence that they have.
The combined assistance to Bankers Trust and Motorola for building premises was more than $20-million. Motorola benefited from being named as the preferred supplier of the state government mobile radio network. This commitment was valued at $60-million in 1996 but blew out to over $100-million when the network failed to meet expectations. In a global round of job-cutting, Motorola recently cut about 120 jobs in SA.
JP Morgan Investor Services is one of the more recent casualties, announcing that it would close down its Adelaide operations, leading to the loss of about 170 jobs. This company was the beneficiary of a $3.8-million financial assistance package and purpose-built premises estimated to cost the Olsen government about $20-million.
There may be some immediate benefits to a region from attracting a firm from interstate or overseas but it is often the case that there are few net benefits to Australia. Costs associated with entering into interstate bidding wars are likely to be high; when assisted firms close, re-locate or lay off workers, there are political losses and economic damage. To avoid being pitted against one another in a race to the bottom for footloose firms, a strategically informed and less opportunistic approach to investment attraction is required.
Competing for new investment through strategies which drive down business and labour costs is a low road to growth that condemns South Australians to declining living standards. SA cannot compete with low wage countries such as China and India for a share of labour-intensive manufacturing and call centres. The alternative high road to growth involves a commitment to a knowledge and technology-intensive approach to industry development, where government assists both industry and the broader community by increasing its investments in education, skill formation, networking and cluster development, research and development and infrastructure development.
The role of industry assistance in this context is to complement initiatives through measures that promote collaboration between indigenous firms, attract and ``embed'' new complementary investment and act as a catalyst for innovation and technology transfer. Better balance is required between investment attraction and local re-investment, and the forces of export and import replacement. This may hold the key to a more prosperous future for the state.
The main task ahead for SA should be to promote and support higher rates of investment by locally-based firms and attracting only those investments that deepen and strengthen the State's industrial and employment base.
The challenge for the State Government is to build on the state's strengths by developing a skills and infrastructure base to attract knowledge and technology-intensive investments. At present, SA's manufacturing industry is heavily reliant on the production of machinery and equipment. The aim of policy should be to diversify the manufacturing base, to increase the production and export of elaborately transformed manufactures and achieve import-replacement objectives. Increased government support for the development of industry networks and clusters will be one key to strengthening and diversifying the state's industrial base. Reform of Commonwealth tariff and non-tariff barrier protection also will be necessary.
It will not be possible for SA to retain a critical mass of manufacturing industry without sensible and enlightened industry policy at a state and federal level. The living standards of South Australians will be determined by how successfully this policy challenge is met by government, industry and unions.
