The elephant in the room in any discussion of Australia in the 21st century is the mining boom. That boom provided a lift in living standards that helped disguise existing problems. In some cases it added to them. Our leaders helped squander the windfall that everyone knew could not last. The July federal election is the first ballot since the end of the boom - politicians need to be frank about what necessary adjustments that they, and we, must make to live as well as possible in this new world. They are falling short because of fear of offending anyone. To give leaders some benefit of the doubt, there are no easy solutions. But ignoring the problem denies any solution and lets the market reach its own likely low-level outcome.
By 2013, the boom (beginning about a decade before) is estimated to have raised real per capita household disposable income by 13 per cent, raised real wages by 6 per cent and lowered the unemployment rate by about 1¼ percentage points. These improvements were almost unprecedented here, or in many other countries. Except for domestic firms supplying mining equipment, the boom years did manufacturing few favours. In a staff paper published 18 months ago, the Reserve Bank has modelled
the effect of the mining boom on the Australian economy. The study compares actual economic outcomes caused by the boom and compares them with what might have happened had the boom not occurred. The paper identifies benefits and costs. The latter included costs to manufacturing that had nothing to do with any reductions in Australia’s trade barriers. For example the modelling estimates that, as a result of the mining boom, the real exchange rate of the Australian dollar was 44 per cent higher in 2013, relative to its likely level in the absence of the boom (Graph 4). That is, the exchange rate would not have appreciated, had the boom not occurred, but would have remained around the same levels as the previous 20 years. This extraordinary movement dwarfs any reduction in manufacturing protection that occurred (mainly through FTAs) during the boom. Agricultural exports were also reduced by the high exchange rate.
The RBA modelling estimates that manufacturing output in 2013 was about 5 per cent below what it would have been without the mining boom. Consumer demand for motor vehicles and other consumer durables increased strongly, reflecting lower import prices and strong income growth. Little or none of the increase in motor vehicle sales came from domestic production. Growing consumer preference for SUVs was the major factor in the contraction in the market share of locally manufactured vehicles. Australian manufacturers, except Ford, did not manufacture these vehicles and could not adapt to this change in consumers' preferences. The paper’s Graph 9 reveals that motor vehicle sales were above 40% higher than they would have been in the absence of the mining boom. The local auto industry declined, despite the very large growth in incomes. The sales increase
in 2015 was accounted for solely by SUVs, especially small ones. Protection could not assist local industry in these circumstances..
There are international examples of where industry protection has fostered economic growth, mainly in the early stages of industrialisation or when a country was recovering from wartime devastation. The USA, Germany, Japan and South Korea are among those countries. Import protection is not what sustains their industries now. Historically, protection in Australia has helped many industries. Few have ever managed to become securely mature, able to stand on their own feet without assistance. Protection went hand-in-hand with the strategy of developing Australia in the second half of the twentieth century. Protected industries provided employment for the immigrants that Australia encouraged for thirty or forty years after the War. Even if protection were reintroduced here there is no guarantee that new businesses would be established in those areas now in decline. Government finances (maybe NSW excepted) would prevent the States from offering the tremendous incentives of the past, so critical in SA’s industrialisation. As in the oil refining industry, economies of scale applying to new manufacturing plants would not be available to an auto maker producing only for the Australian market - reducing the influence of any hypothetically possible level of tariff protection.
The consequences for regions heavily reliant on manufacturing, especially vehicle manufacturing, are grim. The 2006 Flinders/Mitsubishi study
cited by don_dunstan, identifies the human and social costs of concentrated unemployment that had then only just begun. Things have got no better, and will likely worsen, with the Holden closure next year. It’s hard to disagree with dd’s comments on the lack of alternative employment opportunities and the largely futile retraining programs. Some American cities, e.g. Pittsburgh, have been able to initiate new employment-generating programs post de-industrialisation, based mainly on industries, including computer software, biotechnology, education and health care. Others, Detroit and Cleveland, come to mind, have had much less success. Pittsburgh’s success is not easy to emulate quickly. Its new industries hardly resembled the ones they replaced. A New York Times article
in 2009 reviewed Pittsburgh’s experience.