'Australian disease' has entered its terminal phase

[Road_Warrior]

An interesting opinion peice on where we are headed now with car manufacturing being shown the exit.

http://www.abc.net.au/news/2014-02-1...-phase/5251418

Australia consciously chose economic goals that left manufacturers in the cold, and with auto makers exiting and the mining boom ending, the chickens are coming home to roost, writes David Llewellyn-Smith.

It's official: Australia's car assembly industry is dead, with Toyota last night announcing that it will cease local operations in 2017, citing high costs, the elevated Australian dollar, and increasing competition from free trade agreements.

With the announced closure there will be 2,500 job losses from Toyota's assembly plant, which comes alongside the 1,200 job losses at Ford and 2,900 job losses at Holden by 2017. Total job losses across the economy will be much greater, however, with tens of thousands of job losses likely across component makers, let alone those indirectly reliant on the industry. Some estimate as many as 200,000 jobs are now in jeopardy.

There are three questions to answer today. Why has this happened? Does it matter? What does it mean for the future?

On the first, there is no need to look beyond the obvious of what all three manufacturers have told us: they can't compete from Australia. Business is about efficiency and it's cheaper and more profitable to make cars elsewhere and ship them to Australia. It's wages. It's the currency. It's many other input costs including, I'm sure, land costs.

Why is it so expensive to manufacture here? It's not because of some natural order of things. Nor is it because of the rise of cheaper emerging markets. It's a choice we've made for a dozen years and more to prioritise certain forms of growth. Across the millennium we chose to invest heavily in houses and consumption, we chose a tax regime that supported it, and established a higher inflation target band for the Reserve Bank than other countries. The result was predictable in a debt borrowing surge, consumption led growth via wealth effects, and high wages growth in non-tradable sectors.

For a while we were protected by a low currency as the world fixated on other things. But when luck turned our way, and the commodities boom arrived as our consumption boom departed in 2003, the inflationist path we had chosen began to bite with a higher currency. Our real effective exchange rate (REER), that which summarises all of a country's costs versus others, began to climb.

Competitiveness in all tradable goods sectors began to feel the pinch. But until 2008, our existing settings of inflating asset prices and consumption were boosted by our next choice, which was to recycle the benefit of the commodities boom into the local economy for immediate gratification. Rather than correct, we boomed!

Then came the global financial crisis, which pulled down all other Western economies with similar business models to our own, as the debt which underpinned growth became too expensive to service. Our luck held, however, and the commodities boom returned in an even bigger form, driven by emerging countries like China which stimulated building in their own desperate attempt to ward off the GFC.

All but one institution again chose to devour the raw proceeds of the boom. Any attempt to save some of the commodity revenues for the future or to slow it down were smashed by a self-satisfied political economy. The one exception was the Reserve Bank which chose to inflate our already high interest rate structure and currency to prevent inflation getting completely out of hand.

The result was a second leg up in the REER. And now any tradable business not bolted down by extreme competitive advantage was swept offshore, including car manufacturing, as well as an increasing number of other famous Australian manufacturing brands. So much for where we came from. Does it matter?

There are prior examples of similar episodes in other countries. The most infamous being The Netherlands and what is described as "Dutch Disease".

In the 1970s, The Netherlands enjoyed a North Sea gas boom. But the resulting macroeconomic impact of a rising real exchange rate meant that it also suffered a material decline in manufacturing output. At the time, The Economist magazine described this phenomenon as Dutch disease. It has since been described in various forms as the "resource curse" or in Australia as the "Gregory effect" after economist Bob Gregory.

What I call Australian disease has two key differences to the Dutch experience. The first is that even during its episode of tradable pressures, Dutch manufacturing never fell below 20 per cent of GDP in output terms and when the boom ended manufacturing output rose to new highs.

In Australia's case, manufacturing output is already down to 7 per cent of GDP, the lowest in the OECD and equal with Luxembourg. With cars gone that will shrink towards 5 per cent very quickly. So when one asks if it matters that we won't be making cars any longer, it's not an easy question to answer because no developed economy has ever tried to thrive without an industrial base. In relative terms, that's where we're headed. The falls in the total number of people employed in manufacturing and the sector's employment share are going to accelerate, and manufacturing capital expenditures (capex) will go the same way.

That brings us to the future and the second difference to the Dutch experience. Our commodities boom is thought to be more permanent. The gas, coal and iron ore deposits that underpin it have longer duration reserves and it is likely that global population pressures will keep commodity prices higher than before the rise of China. This is the deliberate gamble taken by Australian authorities in their management of this process. They reckon we'll be all right on the mining truck's back.

They may be right long term, but not the in the short and medium terms. One immediate impact of the closure of car manufacturing is that it is colliding with the end of the commodities boom. Australian business investment is headed off a historic cliff for the next three years as the boom winds down. The labour market will be under pressure for much of that period despite the steady rise in exports as projects move from construction to production because they need MANY fewer people to operate the plants than it took to build them.

Another hit to business investment and the labour market is the last thing the economy needs in the next three years, and Ford has already said if sales don't improve it will be leaving earlier than planned, meaning all three may follow in the heat of the worst of the mining capex cliff. That is an unhappy prospect.

Longer term, Australian authorities may be right but it's a punt without historic precedent and comes with a number of risks:

the huge supply response in commodities that Australia is a part of may be more effective than we bargain for. It always has been in the history of capitalism. Alternatively, demand for our commodities may be lower than we bargain on. China is already slowing more than Australian authorities reckoned and there are very strong arguments that it will have to slow much further and become far less resource intensive to become sustainable. If either of these are true then that will mean commodity prices fall much further than we hope, exposing our lack of alternatives for export growth;
second, manufacturing is the key sector that generates productivity gains in an economy. Without it, an economy may face peak productivity and that means decline;
third, a total reliance upon commodity exports, especially those that come from a very limited number of multi-national firms, risks unbalancing the political economy of the nation in favour of those firms. That is, it can undermine democracy and the economy as rent-seeking supersedes the commons. It also means you are implicitly eating you nation's future for those come after;
fourth, and more speculatively, if the world turns nasty, as it does occasionally, you are left without the people or intellectual property to defend yourself militarily.

These four are the symptoms of Australian disease. An economy struggling to grow at potential and unable to increase its efficiency. A political economy where miners rule the roost at the expense of every one else and future generations are ignored. An overly dependent ally that can't carry its own weight strategically.

Can anyone really say with a straight face that they see none of these symptoms in Australia's shaken frame?

This piece was originally published at MacroBusiness.

David Llewellyn-Smith writes as House and Holes at MacroBusiness, where he is editor-in-chief and publisher. View his full profile here.

I think this paragraph sums it up well:

In Australia's case, manufacturing output is already down to 7 per cent of GDP, the lowest in the OECD and equal with Luxembourg. With cars gone that will shrink towards 5 per cent very quickly. So when one asks if it matters that we won't be making cars any longer, it's not an easy question to answer because no developed economy has ever tried to thrive without an industrial base. In relative terms, that's where we're headed. The falls in the total number of people employed in manufacturing and the sector's employment share are going to accelerate, and manufacturing capital expenditures (capex) will go the same way.

[EDManual]

Its a disaster.

As far as I see, near everyone has a nothing job.

If you service anything apart from something that can be exported you are a cost to the country. Including myself...

If you are a building houses or buildings, if you work in health or are a cop, etc etc, they are nothing jobs that just service ourselves. It annoys me when Abbott says coles is going to ad 3500 jobs in Victoria, they are again not real jobs, just servicing ourselves.

Cant believe whats happening. :-(

[99AUXR]

They really did **** up.

[jpblue1000]

Originally Posted by EDManual

Its a disaster.

As far as I see, near everyone has a nothing job.

If you service anything apart from something that can be exported you are a cost to the country. Including myself...

If you are a building houses or buildings, if you work in health or are a cop, etc etc, they are nothing jobs that just service ourselves. It annoys me when Abbott says coles is going to ad 3500 jobs in Victoria, they are again not real jobs, just servicing ourselves.

Cant believe whats happening. :-(

There is nothing wrong with servicing yourself (pardon the pun)
In a closed economy you export to your neighbor. Of course you need to manufacture things in a closed economy. You need to provide your own services and infrastructure and stuff. But it can work, but we are not a closed or inward looking economy. we are trying to exploit the big bad global economy and failing.
JP

[BroadyFord]

Rest assured that we won't be servicing ourselves exclusively, but rather ourselves and all the tourists who will come to marvel at our beaches and national parks!

I also don't buy this whole "lets replace our manufacturing with big transport infrastructure projects". What's the point of new freeways and tunnels when there is less traffic on the road as less people have jobs to get to?

[b0son]

Originally Posted by EDManual

If you service anything apart from something that can be exported you are a cost to the country.

Ford didn't export. Holden exported bugger all, and what little they did was at a loss. Toyota exported, but again, at a loss.

For all intents and purposes, our car industry was also a self-service industry. Exports need to bring money into the country, not send it out.

[Adamz Ghia]

If the government wants out if manufacturing then that's fine. But they don't seem to have a Plan B. They've tossed out an entire industry but have nothing to replace it with. Apparently we're the food bowl of Asia but they're happy to let SPC fold. What's that being replaced with...?

I fully agree with their principal that companies should be able to fund themselves, but a the same time they need an environment that is sustainable and competitive on a global scale. We don't currently have that. The red and green tape we have in this country is a joke (our council considered requiring permits to play a radio in the workplace).

This is going to sound red neck, but I strongly believe we employ far too many people behind desks in this country with nothing better to do all day than to think up new crap to make life harder. If half of them were sacked the ones left might actually have to work a little harder and things would work a little more in our favour.

[b0son]

Originally Posted by BroadyFord

I also don't buy this whole "lets replace our manufacturing with big transport infrastructure projects". What's the point of new freeways and tunnels when there is less traffic on the road as less people have jobs to get to?

Transporting our resources and agricultural products to port.

There's a very good reason why so many foreign multinationals are buying into local agriculture. There's a buck to be made. Maybe not today or tomorrow, but soon. Populations are growing, available land is reducing, at some point we'll be in an excellent position to profit.

We poured $30bn into cars over the last decade, and for what? Imagine we had done the same for the agriculture sector.

[b0son]

Originally Posted by Adamz Ghia

They've tossed out an entire industry

They did no such thing. We gave Holden $275mil in 2012. Holden promised to stay for another decade. Barely 18mths later and they broke that promise, no doubt because VF sales didn't meet expectations.

If we truly wanted a local industry, we'd have bought the local product. Governments at all levels for a number of years (not just the current LNP) can be thanked for not insisting on locally-sourced fleets.

[Brazen]

Originally Posted by b0son

Transporting our resources and agricultural products to port.

There's a very good reason why so many foreign multinationals are buying into local agriculture. There's a buck to be made. Maybe not today or tomorrow, but soon. Populations are growing, available land is reducing, at some point we'll be in an excellent position to profit.

We poured $30bn into cars over the last decade, and for what? Imagine we had done the same for the agriculture sector.

You seem to add a zero every time you quote a number, it was 2 billion over the last decade which generated 210 billion in economic activity. The Government spends roughly the same on advertising.

To put it further in perspective, the Government spent $17billion on the ABC over the same period of time.

[b0son]

Originally Posted by Brazen

You seem to add a zero every time you quote a number, it was 2 billion over the last decade which generated 210 billion in economic activity. The Government spends roughly the same on advertising.

sorry, it was $30bn in the last 15 years, not 10.

http://www.businessinsider.com.au/au...dustry-2013-12

[Dr Smith]

Originally Posted by b0son

Transporting our resources and agricultural products to port.

There's a very good reason why so many foreign multinationals are buying into local agriculture. There's a buck to be made. Maybe not today or tomorrow, but soon. Populations are growing, available land is reducing, at some point we'll be in an excellent position to profit.

We poured $30bn into cars over the last decade, and for what? Imagine we had done the same for the agriculture sector.

Sure it's perfectly reasonable to argue the level of support given to the car industry but the car manufacturers didn't just pocket it and send it back Overseas, they spent it locally and more importantly put in multiple amounts more themselves. Remember, what they were given had to always be matched by 2-3 times their own. The Aust. mining sector makes profits no-one else apart from our banks matches, so why do they need fuel subsidies?

[Trump]

One thought that has been going through my head since the Toyota announcement has been about profit. Were they really losing money or were the books cooked to make it appear as though they were?

I have been involved with mediun sized companies that moved all production overseas with creative accounting. They were making consistent profits year in year out but someone in the managerial foodchain wanted more. So the beancounters began writing crap off, the net result of which is paper losses and enough fuel to pull the trigger on a local shutdown.

Have such dodgy moves contributed to the demise of Australian manufacturing, hell yes. Have they contributed to the Australia Disease, they sure have.

[Adamz Ghia]

Originally Posted by b0son

They did no such thing. We gave Holden $275mil in 2012. Holden promised to stay for another decade. Barely 18mths later and they broke that promise, no doubt because VF sales didn't meet expectations.

If we truly wanted a local industry, we'd have bought the local product. Governments at all levels for a number of years (not just the current LNP) can be thanked for not insisting on locally-sourced fleets.

You've missed my point. It's fine for the govt to say 'support yourself' but they need a replacement industry which they haven't got.

[cheap]

Originally Posted by b0son

sorry, it was $30bn in the last 15 years, not 10.

http://www.businessinsider.com.au/au...dustry-2013-12

Numbers are numbers, mostly based on bullshit analysis. The real question is where do we want Australia to be in 10, 20 and 50 years time. The Socialist notion of government taxing it's citizens so that an industry which would otherwise not be able to exist is what delivered the Ford/GMH/Toyota disaster.

So let's get back to basics, for industry we need an abundance of cheap reliable clean fresh water, ultra cheap electricity and transportation. We need government to invest in water, road and power infrastructure. We also need a fair and equitable tax system and minimise red/green tape. The unions also need to readjust and reset their expectations as fewer and fewer people belong to unions. We need less lawyers, a lot less accedemics/greenies/social conscience warriors and we need to withdraw from a raft of international treaties which do not assist Australia in the slightest. The services industry is a mirage, so called local skills have easily been shifted to Bangalore and Madras. We need to be building stuff just like China is. Just a few of the things needed...

[StealthAu]

Originally Posted by cheap

Numbers are numbers, mostly based on bullshit analysis. The real question is where do we want Australia to be in 10, 20 and 50 years time. The Socialist notion of government taxing it's citizens so that an industry which would otherwise not be able to exist is what delivered the Ford/GMH/Toyota disaster.

So let's get back to basics, for industry we need an abundance of cheap reliable clean fresh water, ultra cheap electricity and transportation. We need government to invest in water, road and power infrastructure. We also need a fair and equitable tax system and minimise red/green tape. The unions also need to readjust and reset their expectations as fewer and fewer people belong to unions. We need less lawyers, a lot less accedemics/greenies/social conscience warriors and we need to withdraw from a raft of international treaties which do not assist Australia in the slightest. The services industry is a mirage, so called local skills have easily been shifted to Bangalore and Madras. We need to be building stuff just like China is. Just a few of the things needed...

Less academics? how would a less educated population help in any way?
Less greenies too? Should we not strive to minimize the negative impact we have on our habitance for the better of future generations? Is taking such action really as damaging to social wealth as portrayed, or is this tactical from those profiting from current means?
Less social conscience as well? We see this with those profiting from the despair of the general populous, is individual greed a better solution than focusing on what would be best for the population in general?

When Holden were negotiating a pay cut for the factory workers, what were the guys at the top earning?

[zilo]

Originally Posted by cheap

Numbers are numbers, mostly based on bullshit analysis. The real question is where do we want Australia to be in 10, 20 and 50 years time. The Socialist notion of government taxing it's citizens so that an industry which would otherwise not be able to exist is what delivered the Ford/GMH/Toyota disaster.

So let's get back to basics, for industry we need an abundance of cheap reliable clean fresh water, ultra cheap electricity and transportation. We need government to invest in water, road and power infrastructure. We also need a fair and equitable tax system and minimise red/green tape. The unions also need to readjust and reset their expectations as fewer and fewer people belong to unions. We need less lawyers, a lot less accedemics/greenies/social conscience warriors and we need to withdraw from a raft of international treaties which do not assist Australia in the slightest. The services industry is a mirage, so called local skills have easily been shifted to Bangalore and Madras. We need to be building stuff just like China is. Just a few of the things needed...

Advocating an exponentially expansionist economic model that throws all environmental concerns out the window with an assumption that energy resources are infinite is unsustainable.

Unfortunately that system is the root cause of the problem, especially the reliance on consumption.

[jpblue1000]

Originally Posted by cheap

So let's get back to basics, for industry we need an abundance of cheap reliable clean fresh water, ultra cheap electricity and transportation. We need government to invest in water, road and power infrastructure.

For traditional industry to continue down the same path yes, But a new industrial future may be coming, the second machine age, or the knowledge economy. Short term turmoil followed by another age of prosperity is coming as happened before and again before that. As with the transition from agrarian to industrial and industrial to consumer ages there will be hurt, those that can transform, innovate and manouver will benefit, those stuck in the old ways will struggle.

Long article but interesting reading with historic analysis and feasible futures.
http://www.economist.com/news/briefi...yment-not-less

JP

[MAD]

It will be a tough ride, but perhaps this is the trigger we need to return to building niche, high quality products.

Competing on a global scale clearly doesn't work, we will need to focus on REAL value adding, and sustainable SMALL businesses.

[cheap]

Why am I not surprised by the responses and the self congratulations...

[jpblue1000]

and an interesting article on why Agriculture wont save jobs but in fact contribute to more unemployment yet greater profits.

Automation, biological manipulation and synthetics and divorce of production from th eland, the environment and the end of the farmer

http://www.converge.org.nz/pirm/nutech.htm

JP

[jpblue1000]

Originally Posted by cheap

Why am I not surprised by the responses and the self congratulations...

I like to think the congratulations go to the Industrialists and those who desperately hope to one day be like them. The incessant drive for profit over anything else will continue to lead to ever more automated processes, substitution of natural means and reduction in human input to the point that human Jobs are no longer necessary. All for the goal of an abstract construct of value and wealth. Yet ignoring the true value of life.
I know that money makes the world go round but does continual economic growth just make the world go around faster, which as a physicist will tell you is bad for life!
I subscribe to steady state economies where the land is intrinsically valued as an asset not as an economic input. I make no apologies for that.
I wont subscribe to any idea that suggests our current economic model is better as I see inequality, social and environmental degradation and resource (food, money, freedom) scarcity rising. Issues I consider to the be basic tenant of an economic model as opposed to greed, satiation and unbridled growth.



JP

[MAD]

Originally Posted by jpblue1000

I like to think the congratulations go to the Industrialists and those who desperately hope to one day be like them. The incessant drive for profit over anything else will continue to lead to ever more automated processes, substitution of natural means and reduction in human input to the point that human Jobs are no longer necessary. All for the goal of an abstract construct of value and wealth. Yet ignoring the true value of life.
I know that money makes the world go round but does continual economic growth just make the world go around faster, which as a physicist will tell you is bad for life!
I subscribe to steady state economies where the land is intrinsically valued as an asset not as an economic input. I make no apologies for that.
I wont subscribe to any idea that suggests our current economic model is better as I see inequality, social and environmental degradation and resource (food, money, freedom) scarcity rising. Issues I consider to the be basic tenant of an economic model as opposed to greed, satiation and unbridled growth.



JP

Agree 100%.

I'd like to add this...
Who decided that it was necessary to have less and less quality issues with products?
Who decided that we need to make 10000 items per hour or it won't be enough to sustain the business?
Same group both times.... shareholders.

I'm an engineer so I have a built in desire for efficiency, but there comes a point when you need to step back and ask if it's really worth it.
As you pointed out with every advancement in automation, comes the need for less people.
The world population is growing, the need for workers is decreasing. How is this going to play out?

We're heading towards a place where there just won't be jobs for people.
What then? Healthcare, schools, homes. How will this work? Free houses supplied by the richest? free rent? free healthcare? free education? (what for? no job to get anyway)

It really is a scary scenario to play out in your head.


I think the Amish might have had the right idea all along.

[cheap]

Originally Posted by jpblue1000

and an interesting article on why Agriculture wont save jobs but in fact contribute to more unemployment yet greater profits.

Automation, biological manipulation and synthetics and divorce of production from th eland, the environment and the end of the farmer

http://www.converge.org.nz/pirm/nutech.htm

JP

You still need water, transport and power.

[BroadyFord]

Interesting fact I read today that in the past 12 months the Victorian economy has seen the biggest deindustrialisation of any world economy bar North Korea!

Sydney is also now Australia's biggest manufacturing center, and that's even before the car industry shuts down.

[cheap]

Originally Posted by jpblue1000

I like to think the congratulations go to the Industrialists and those who desperately hope to one day be like them. The incessant drive for profit over anything else will continue to lead to ever more automated processes, substitution of natural means and reduction in human input to the point that human Jobs are no longer necessary. All for the goal of an abstract construct of value and wealth. Yet ignoring the true value of life.
I know that money makes the world go round but does continual economic growth just make the world go around faster, which as a physicist will tell you is bad for life!
I subscribe to steady state economies where the land is intrinsically valued as an asset not as an economic input. I make no apologies for that.
I wont subscribe to any idea that suggests our current economic model is better as I see inequality, social and environmental degradation and resource (food, money, freedom) scarcity rising. Issues I consider to the be basic tenant of an economic model as opposed to greed, satiation and unbridled growth.



JP

Sounds a lot like socialism/communism with a splattering of Gaia thrown in to sweeten the unsavory taste. No thanks.

[jpblue1000]

Originally Posted by cheap

You still need water, transport and power.

Thats the point for traditional 'now' manufacturing you are right. We are heading for a time, through technological advances, pushed by a desire for more profits (had to add that dig) where the input of water, air, transport and power will be greatly reduced. Why farm pigs in the country when a synthetic protein can more profitably be created in an automated laboratory next door with no input other than knowledge. The new developing business models are driving out the use or significant reliance on those inputs, for which they have little control over cost to maximise profits or the balance sheet.

By the middle to later half of this century I dont believe we will recognise our productive world. Some of us will be dead so who cares, but for those who do care about the future generations it is worrying. This does not make us bad people or fools or any of those other negative words attached to us. It makes us different and as equal memebers of society we have a voice.

JP

[Raptor]

Originally Posted by MAD

....
Who decided ...
Who decided ...
Same group both times.... shareholders.

But don't you have a super fund that you like to see growing every year?

Where do you think that growth comes from? It's funded at least in part through investing in the stockmarket. You're probably one of those shareholders too, even if you didn't realise it.

I'm an engineer too and I really don't like where this country is headed regards manufacturing and think it's a really short sited move. But I guess that's what you get when you focus on the next profit/loss statement or just want to win the next popularity contest we call politics in this country.

[mik]

To me it is just plain wrong to sacrifice manufacturing, there will always be a need for this type of work, along with ditch diggers, truckys, process workers, welders ,steel workers, fitters, skilled and non skilled labor alike.

Even if we didn't have a need for them it is worth having these type of industries even if we have to pay a bit out of the pocket for it(although it is probably too late now.
I sound like a broken record but there will always be people that leave school that are not suited to being a rocket scientist, or a chemist, or etc,etc, and it is ten times better to to have people working spending money , paying taxes, feeling good about themselves adding value to the community and the economy.


have look at the ailments in society already, do we need more people on the dole, do we need more people not paying taxes? do we need more people in the poor house not spending money? and not forgetting a biggy, what commonly comes from people in poverty is crime,.................... also there is the loss of skills in the industry,
some old timers that have a life time of valuable skills (some of which will be lost forever)close to retirement will finish up and never work again.

A lot of jobs have already disappeared and continue to disappear due to automation and here we are killing off a big section of valuable assets for a few dollars.


I don't directly blame the current govco for this, this has been happening for years,
our pollies sacrificed this industry decades ago among others, and consecutive party's continued on with the party idealistic direction,

some of which stemmed from becoming UN lackeys giving other 3rd world countries 30% of our manufacturing ( and it is documented if you research it), and no one has lifted a finger to change direction .
despite certain politicians hypocritically now playing the blame game and crying crocodile tears , these very people and their party played a very big part in destroying what we have already lost over the years and what is yet to come, all parties played a part , and we let them !

The OP article has merit imo.

[MAD]

Originally Posted by Raptor

But don't you have a super fund that you like to see growing every year?

Where do you think that growth comes from? It's funded at least in part through investing in the stockmarket. You're probably one of those shareholders too, even if you didn't realise it.

I know!
I need to have some sort of security blanket to feel somewhat safe in this world and for the future.

Nevertheless, the constant drive for growth is an ideological concept, when coupled with multiple business plans, can only result in racing to the bottom.