For want of industry policy, our living standards are set to fall
By Goran Roos, Professor of Business and Strategic Design at Swinburne
University of Technology 15th April 2014
http://theconversation.com/profiles/goran-roos-116975/profile_bio
http://theconversation.com/for-want-of-industry-policy-our-living-standards-are-set-to-fall-23317
Australia faces a fall in living standards unless policy action is taken.
This is due to de-industrialisation and a loss of economic complexity.
The higher the economic complexity, the stronger the economy’s value-creation
prospects.
Australia languishes at 79th in the global ranking of economic complexity.
Modern industry policy could help correct this but is poorly understood. Hence
it is frequently maligned in Australia.
Any intervention should aim to improve business environments or influence a
shift in the economy. The goal should be a structure that generates higher
economic benefits. That, in turn, provides all the desirable social good.
Australia needs a consistent long-term industry policy to tackle the following
challenges.
Increase the nation’s economic complexity
Policy should help broaden and deepen the available industrial commons. This is
the shared concentration of knowledge, capabilities and resources within an
industrial sector. Some liken it to an ecosystem supporting production.
The industrial commons does not reside in one organisation. It is spread out
over many organisations and individuals - normally within a localised area or
region.
A broad base of industrial commons with different expertise and dispersed
nationally creates high economic complexity. This is related to the useful
knowledge embedded in the economy. Economic complexity enables a modern society
to amass and effectively use large amounts of productive knowledge distributed
among its members.
Countries and regions that achieve high economic complexity develop a basis for
competitive advantage as distinct from standard price-based competition. This
is evident in high-cost manufacturing economies that succeed regardless of
low-cost competition.
This is of vital importance, particularly for high-cost countries like
Australia that are in danger of losing significant manufacturing capabilities.
Add value to manufacturing
Greater economic complexity aids the transition to high-value-added
manufacturing. This process depends on the interaction of the knowledge of
specialists (designers, marketers, finance experts, engineers, technology
experts from various disciplines, human resource managers, legal experts,
environmental scientists, social scientists etc). Where economic complexity is
lower, it is not possible to make products of the same high added value.
The more the interdependencies required to make high-value-added products can
be located within a nation or region, the more the benefits of locally based,
complex value chains can be captured.
To achieve high complexity, an economy needs a high presence of product groups
(or communities) requiring or generating complexity. These are found in
high-value-added manufacturing like machinery, chemicals, medical devices,
electronics etc.
As can be seen in other countries, most high-value services are closely
interlinked with manufacturing. A service economy without high-value
manufacturing is not a viable economy (as the UK discovered).
A highly complex economy is more likely to benefit from a random
entrepreneurial event. In a less complex economy, the entrepreneurial start-up
will engage lead customers and access specialist suppliers in places with high
economic complexity. Over time, this leads to the start-up firm migrating to
economies with higher complexity and greater scale.
This has all too often been Australia’s fate. The loss of several industrial
commons as well as the decline of firms and industries with high complexity is
reducing economic complexity.
Follow clear rules for restructuring
The stronger the international competition, the lower the prices that national
firms can charge for their products. The result is lower-value returns to
owners and employees. They then have less money available for consumer spending.
It is critically important that Australia sells its products and services for
as high price as possible while buying imported goods and services as cheaply
as possible. The relationship between multi-factor productivity (MFP) in an
industry and competitiveness in global markets for its products determines the
share of achieved MFP that becomes available for domestic consumption.
Identify manufacturing sweet spots
Australia has around 35,000 manufacturing firms with more than one employee.
Only a minority, about 2500, are high-performing, globally competitive firms.
Most of these produce goods with these characteristics:
* low volume (meaning limited benefits from economies of scale and clear
benefits from economies of scope);
* high variability (e.g. through short product life cycles or high levels of
customisation);
* high complexity (of products, services or a combination of these, a complex
production process, or complex production systems);
* high value added (which could mean offering luxury products where price and
costs are disassociated, through control of brand, relationships etc enabling
monopoly or scarcity rents, through extremely high customer relevance, to
highly effective business models allowing the appropriation of most value
created for the customer etc).
Industry policy should focus on creating an environment in which such firms can
emerge. If policy encourages these firms to operate in or link to domains where
Australia has a comparative advantage, firm-based competitive advantages can be
developed.
Examples of sustainable high-value industries that could be established
include:
* Luxury and functional food goods for Asia;
* Customised cross-laminated timber construction elements;
* High-value chemicals extracted from sustainable cellulose raw materials as
petroleum substitutes;
* Inorganic nanoparticles for additive manufacturing equipment (which would
increase the price from a few cents for a kilogram-equivalent of ore to about
$300 per kilogram of nano particles);
* Highly efficient solar cells that broaden absorption into infrared and
ultraviolet using properties inherent in specific local minerals;
* Assisted living for improving quality of life and cutting health costs;
* Medical devices to replace drug treatment, thereby increasing quality of life
and reducing health costs;
* Unconventional gas product-service systems specifically adapted to the
Australian geological and geographic environment;
* Produce components, sub-systems and sub-assemblies for the global automotive
industry in the domain of CO2-based drive trains using catalytic technology
based on mineral properties.
These are just a few of the manufacturing possibilities.
Tactical and strategic objectives
The mostly tactical policy objective is to ensure a value-creating industrial
base able to maintain Australia’s standard of living.
The mostly strategic objective is to ensure a broad and deep industrial commons
that increases economic complexity. This enables the country to benefit from
entrepreneurial activities so growing firms replace declining uncompetitive
ones.
These and other opportunities are not being pursued. The result is continuously
reduced value creation and value appropriation in Australian industry.
We can see the warning signs. Federal and state budget deficits are growing.
Goods made in Australia comprise a declining share (about 7%) of the economy.
The consequence is that Australia will suffer a reduced standard of living.
--
Cheers,
Stephen
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