ARPA: The Evolution of industry policy under Howard

Industry policy is the sleeper of any Australian government. The conventional economic wisdom is oriented to austere macroeconomic policy (budgetary surplus, anti-inflationary monetary policy) and eradication of impediments to free market operation (‘microeconomic reform’). A classic statement of this vision is in a federal Treasury document prepared for the 1999–2000 Budget (Department of Treasury 1999).

Industry policy refers to any form of active support (whether monetary or administrative) by government to industry. Because industry policy contravenes or complements ‘market’ imperatives, it falls outside English-language economic orthodoxy by definition. Although the conventional economic wisdom exerts extraordinary influence on policymakers, governments cannot afford to be purist if their electoral prospects are harmed by perceived industrial crisis and decline and personal hardship.

All governments thus engage in industry policies of some kind. But because the dominant policy culture is antagonistic, the specifics of industry policy in Australia cannot be ‘read’ from an understood policy framework. And the tension between an antagonistic policy apparatus/culture and the imperatives of realpolitik is likely to produce policies that are fragmented, poorly devised and monitored, and unstable. The impoverished policy apparatus for industry policy is reflected, for example, in the low status and poor performance of the federal industry department, currently called the Department of Industry, Tourism and Resources.

THE UNPROMISING EARLY HOWARD YEARS

The Coalition’s 1996 electoral platform promised an activist industry policy (Liberal Party of Australia 1996) but they immediately negated the promise on obtaining office. The first Budget’s priority was the slashing of expenditure, a vehicle for contrasting the Coalition’s fiscal credentials with Labor’s seeming fiscal profligacy, which was given legitimacy by the hastily contrived National Commission of Audit (1996). Labor’s industry support programs were not attacked as savagely as were Labor’s Working Nation labour market programs. However, the Government reduced the maximum tax deduction on R&D expenditures from 150 per cent to 125 per cent, estimated to save $450 million (57 per cent of 1995–96 budgetary cost).

Business hostility to the Government’s action led to the establishment in late 1996 of a review nominally under businessman David Mortimer. The Mortimer Report, Going for Growth, was delivered in June 1997. Conceived by the ‘dry’ Secretariat drawn from the then Department of Finance, the Report recommended abolition of many programs (without examining their performance), parsimonious generic business programs, administrative clean lines at the expense of functionality, and greater emphasis on cost recovery (Jones 2000, p. 63). Yet, contrary to this dry agenda, the Report also recommended a 5-year $1 billion incentive package to attract foreign investment.

Fortunately, the Government ignored the Report. Six months later the Government responded with the Investing for Growth statement (Commonwealth of Australia 1997). The statement comprised a grab bag of programs with no evident underlying motif. Its ‘bitsiness’ was reminiscent of broad policy statements by Labor between 1991 and 1994, the difference being that many of the programs in Investing for Growth involved a resurrection or extension of programs previously forged by Labor (Jones 2000, p. 64).

The status of Investing for Growth was further compromised by obfuscation on the expenditure quantum. The formal commitment was for additional spending of $1.26 billion. However, the ensuing Budget (1998–99) clouds the figures for the relevant categories; the foreshadowed additional sum involved considerable repackaging of existing commitments. The net additional planned expenditure was less than the promised sum.

In short, the Coalition Government wasted two years through apparent cynicism and indifference towards the industry policy portfolios. In 1998 and after, a more stable regime was effected. Elements of this package include (with Labor antecedents in parenthesis):

IMPORTANT CONTINUITY: THE AUTOMOBILE AND TEXTILES, CLOTHING AND FOOTWEAR PLANS

The automobile and textiles, clothing and footwear (TCF) industries are the sacred cows of Australian industry. A range of features (technology, defence, size, and location of employment) allow these industries special treatment. Tariffs have been reduced more slowly than for other industries. More importantly, the passive support from tariffs has been replaced by innovative restructuring mechanisms, which have been atypically intelligent industry policy for Australia.

The plans began in a small way under the Fraser Government in 1980 and were substantially revised and expanded during the Hawke years (autos in 1984, TCF in 1986) under Industry Minister John Button (Capling & Galligan 1992). They have been retained and revised under Howard. The Automotive Competitiveness and Investment Scheme (ACIS) was developed in mid-1998 and commenced in 2001 to replace Labor’s expiring Export Facilitation Scheme. ACIS gives import duty relief for investment in productive assets and for R&D expenditure. ACIS is presently planned to be operative until 2015. The complementary Automotive Market Access and Development Strategy was devised to enhance automobile exports.

Revisions to the Labor TCF scheme were approved in July 1998 for introduction in mid-2000 as the TCF Strategic Investment Program (SIP) Scheme. Subsidies are granted for investment in R&D and in the upgrading of plant and equipment, especially for enhancing export capabilities. A complementary scheme allows duty-free entry to clothing imports (especially from Fiji) that embody Australian-made textiles. The SIP Scheme was renewed in mid-2005, and is also due to run until 2015.

BACKING AUSTRALIA’S ABILITY

While in opposition, the Coalition denigrated Labor’s efforts at understanding and supporting the innovation process (Jones 2005a, p. 46). In office, the Coalition Government ignored the general phenomenon for three years. Then in 1999 the Government initiated institutional developments that imply a serious endeavour. Just as industry had complained about early government indifference, so also the science community had been simmering with discontent over the Government’s neglect of that stakeholder. What followed appears to have been driven less by conviction than by electoral concerns.

In August, the Chief Scientist, Robin Batterham, was commissioned to ‘review the effectiveness of our science, engineering and technology base in supporting innovation’ (Commonwealth of Australia 2001, p. 9). Batterham’s Committee reported in The Chance to Change in November 2000. In December 1999 the Government issued Knowledge and Innovation, which embodied a funding framework for higher education research and training. In February 2000, the Government, in conjunction with the Business Council of Australia, convened a National Innovation Summit; major recommendations were outlined in Unlocking the Future. Finally, in 2001, the Government issued Backing Australia’s Ability, an ‘innovation action plan for the future’ (the statement’s sub-title).

Backing Australia’s Ability (BAA) has since been the generic vehicle for several research infrastructure and research grant programs. A second-stage BAA was announced in the May 2004 budget. A sizeable annual report is now issued under the label (see, for example, Commonwealth of Australia 2005). In principle, this vehicle is an admirable development. Program development, subject to fragmentation and possible disparity, is now brought under an umbrella. Even if the initial corralling was opportunist, lessons will presumably be learned in proximate program placement and analysis.

Into BAA was placed the plethora of innovation-related programs that had been reconstructed or developed after 1998, as listed above. Some of these programs have been further developed under the BAA ‘banner’. For example, the R&D Start program has been expanded into the Commercial Ready program, with emphasis on small and medium enterprise applicants (AusIndustry 2006).

If there is a centre of gravity of new initiatives, it is in the funding of various research structures or training structures that would hopefully lead to enhanced research capacity. This centre of gravity relates more to public infrastructure than to commercialisation. Key blocks of this new edifice were the expanded budget, from 1999, for the National Health and Medical Research Council (NH&MRC) grants program, and an expanded budget, from 2001, for the Australian Research Council (ARC) grants program. There was funding for institutional initiatives in ‘key enabling technologies’ of information/communication and biotechnology, including funding for training initiatives in both secondary and tertiary educational establishments.

The 2004–05 BAA report conveys the presumption of a meeting of minds from divergent arenas. There is the perennial political hubris behind the rhetorical padding. But there is also a semblance of coherence in the evolving organisational framework—the organisational grid by sectors, the layered structure of programs fostering commercialisation, and the layered structure of educational/training programs.

BAA also includes a disembodied list of ‘national research priorities’, purportedly announced by the Prime Minister in late 2002—An Environmentally Sustainable Australia; Promoting and Maintaining Good Health; Frontier Technologies for Building and Transforming Australian Industries; and Safeguarding Australia.

Ironically, an unintended merit of the orderliness of the BAA structure is that one can observe not merely the strengths of the current industry policy regime but also the gaps. The education and training programs are desultory. The ‘priorities’ (of which the public appears ill-informed) are a mixture of farsightedness (Frontier Technologies), glibness (Good Health), incoherence and potentially adverse influence by both ideology and vested interests (Environmental Sustainability) and political cynicism (Safeguarding Australia). There is also an authoritarian strand in the top-down character of the implementation of these research priorities, some of which are vague on detail.

BAA reports are also prefaced by an annual ‘Innovation Scorecard’, an admirable component (Commonwealth of Australia 2005, Ch. 1). The Scorecard is dominated by OECD indicators, understandable because national comparisons are now locked into such measures. The Australian performance is above the OECD average for ten of the fourteen headline indicators, equal for one and below the OECD average for three. These outcomes appear attractive, although there has been only marginal variation in the 2004 ranking compared to the 2002 ranking when the scorecard was constructed. The only indicator for which the Australian ranking has improved significantly is ‘investment in venture capital as per cent GDP’—and deservedly so. Of the three indicators for which Australia has a below average performance, two are significant criteria (‘number of US patents per million population’ and ‘business sector R&D expenditure as per cent GDP’), and the relative performance is extremely poor.

It is important that pursuit of improvement on such rankings does not detract from a critical perspective on the value of the indicators themselves. The BAA OECD-based Scorecard carries a danger of passivity on the relative merits of various indicators, and passivity in accepting such indicators as a tangible measure of success rather than as imperfect proxies for the subtleties of substantive qualitative improvement.

THE CSIRO

Under the Howard Government, the Commonwealth Scientific and Industrial Research Organisation has been the subject of the most controversial, indeed bitter, debate. The CSIRO is a peculiar beast. Established in 1926 as an omnibus vehicle for publicly funded research (albeit for long dominated by rural research priorities), it has long been an anomaly in a political culture devoted to pragmatic fixes and indifferent to the demands and advantages of science and technology. The CSIRO’s history has not been without controversy; perennially it has involved conflict over imperatives to purist scientific ‘detachment’ and ‘real world’ demands. Since the mid-1980s, the real world demands have come in the form of commercialisation imperatives. In 1988, the Labor Government imposed the requirement that the body source 30 per cent of its budget from commercial income. This requirement has involved a wrenching of culture, and it is not clear that the requirement has been consistently achieved.

In 2004 the Howard Government introduced the National Research Flagships program. This program has involved probably the most substantial reconstruction in the CSIRO’s history. The program marks an end to the sanctity of the divisional structure, with resources being drained from many Divisions for the funding of the Government’s priority research areas. The six Flagship areas are in health, water, energy, food, light metals and oceans.

Participants and commentators have evinced strong opinions about the Flagships program, not merely lumped into two groups for or against the flagships concept. One informed observer interviewed by this author claims that the large generalist research organisations, whether public or corporate, have had their day. Driven by primarily scientific imperatives, their commercial returns have been relatively low.

From this perspective, a more appropriate model can be found in the Cooperative Research Centres and in research funded under the Rural Industries Research and Development Corporation and the industry-funded AMIRA (formerly the Australian Mining Industry Research Association). Such research is focused on pressing technical problems the solutions to which have ready commercial implications. The groupings formed to research these problems combine scientific, technical and commercial expertise and are finite both in duration and committed resources.

Regardless, the Flagships were chosen and introduced without appropriate consultation within the scientific and industrial communities. Moreover, management under CEO Geoff Garrett is managerialist and brash in style. The process of corporatisation of CSIRO’s culture began under Labor. From casual evidence of job advertisements in the financial media and of emotive public exchanges by combatants, the CSIRO now labours under an expanded bureaucracy of highly-paid commercialising agents and public relations staff.

The CSIRO has just issued a research priority statement on 30 January (CSIRO 2006), and the Flagship priorities are emphasised, if obliquely. Appropriation funding will expand only slightly to $608 million for 2006–07, up $14 million from 2005–06. The increment highlights that the flagships are being funded at the expense of existing programs. Garrett’s aim is to enhance the flagships’ proportion to between 30–40 per cent of appropriation funding. The 2005 ratio was less than 23 per cent; the 2006 ratio is expected to be more than 26 per cent; so we can expect further redistribution.

Officers of the CSIRO staff association have assertively criticised how the Government has treated the CSIRO and the Science portfolio in general (Borgas & Gallagher 2006). They claim that science is wrongly placed in the education mega-department and that its priorities were neglected by its previous minister, Brendan Nelson. Senior scientists are being retrenched to be replaced by casual staff, and the general culture of the institution is under threat of debilitation.

SMALL BUSINESS

The Coalition is presumed to be the natural repository of the small business vote, yet the Government’s agenda for small business ranges from lacklustre to negative.

Immediately the Government came to office, it abandoned the specialist small business Commonwealth Development Bank to abolition by the Commonwealth Bank, its privatised parent. On the day that Investing for Growth was announced, the Government mooted the abolition in June 1998 of a number of cost-effective Labor programs (Jones 2000, p. 68). AusIndustry now administers some skills programs—the Enterprise Culture Program and the Incubator Program. But they are marginal compared to state government based Business Enterprise Centres, and they might have more productively enhanced the Labor Government’s successful National Industry Extension Service.

The small business portfolio is inconsequential in the Howard ministry. The rhetorical emphasis has been on the reduction of ‘red tape’, with the government taking that emphasis seriously. The government’s de facto emphasis has been upon wage labour re-regulation, with small business presumed to benefit indirectly through the diminution of labour’s rights in such matters as unfair dismissals and retrenchment benefits.

A major problem small businesses face is structural subordination to corporate business in their market relations (Jones 2005b). The law reinforces this subordination. Upon gaining office, the Government soon agreed to an inquiry on these matters. The inquiry found widespread abuse (House of Representatives Standing Committee on Industry, Science & Technology 1997). The Government responded with some changes, notably the introduction of Section 51AC proscribing business to business unconscionable conduct into the Trade Practices Act. Experience since has highlighted that the relevant sections of the Act (including the new 51AC) are paper tigers (Jones 2005b). Small business effectively remains without legal redress against corporate predation, and the corporate business lobby has ensured that the Government remains inactive on this front.

The Government’s policy towards small business has been essentially laissez-faire—small business should swim on its native abilities or sink.

THE THREAT OF DE-INDUSTRIALISATION

The manufacturing sector has survived the death of protectionism, if at a reduced scale. The Australian economy now faces a threat of potential de-industrialisation, with the full spectrum of manufactures being sourced overseas because of skills and cost advantages. Industrialising China has hastened this threat.

The automobile industry, and its component suppliers in particular, is at the centre of this threat. Several plants producing components have closed in the last twelve months and some have been relocated to China. It is estimated that almost 2,200 component jobs have been lost in twelve months (Roberts 2005b).

The components sector has played the game in accommodating to the ‘just in time’ demands of previous conventions of ‘best practice’. However, the sector is subordinated within an assembler grouping that specialises in an increasingly marginalised market segment, where scale has typically been sub-optimal, and for which some parent bodies are in varying degrees of financial distress. Moreover, the assemblers put perennial pressure on component suppliers to deliver yearly cost reductions, which are claimed to be in the 2.5–5 per cent range and so are ultimately unsustainable.

Some commentators see some cause for optimism. New investments are mooted, promising over 900 jobs (Roberts 2005b). All the assemblers have sizeable research establishments, and local managements have the support of respective head offices.

The profound challenge facing the local car and components industry presents a profound challenge to the government. The government has yet to display awareness of the urgency or the demands of this situation. The Industry Minister, Ian Macfarlane, is well-intentioned but of only moderate capacity. He has made rousing speeches on the need to do better, and has made trips to Tokyo and Detroit to urge head offices to maintain Australian-made componentry in Australian-made cars. Macfarlane has also reminded headquarters that the industry receives substantial subsidisies from the government (estimated at $8.3 billion for the 2000–15 car plans).

Any concern for potential de-industrialisation has been offset by a longstanding ‘cargo cultism’, a naïve optimism in a rosy future for the Australian economy. The massive trade deficit in value-added manufactures is seen as temporary, or as a step on the path to more efficient future production. Resources exports will be our perennial salvation; even greater scale is achievable by better infrastructure. Tourism revenue will bring up the rear. The science and technology sector, should anything of substance eventuate, will be icing on the cake.

CONCLUSION

There are contrary signals in a decade of industry policy under Howard. Some sensible programs receive continued funding. The NHMRC and ARC have been generously funded. The automobile and TCF plans have been maintained, at least in funding. There is the formal promise of attempted coherence in Backing Australia’s Ability. But there is also much additional packaging and noise. The Australian Financial Review’s Peter Roberts (upon the issue of the Department Industry’s annual report) is unforgiving:

There are also worrying indicators. Some of these indicators are in the supposedly significant education and training sectors—the depleted funding of tertiary education, the diversion of significant funding into fragmented faith-based secondary schools, and a scandalous neglect of trades skills training. Other agendas are dressed up as far-sighted, but carry the smell of ideological fetishism or the undue catering to vested interests—notably, the attempted establishment of a water trading market, the steps in energy environmentalism (a coal industry driven agenda?), and the forceful moves to restrict fishing licenses and establish marine parks (supporting the large fishing companies and the oil and gas industry). Most fundamentally is the legislation of a radical workplace regulation regime that is essentially punitive and negative, and entirely contrary to the workplace demands of a clever country.

The current account deficit continues to grow, both nominally and as a percentage of GDP (currently over 6 per cent). A persistent net deficit of around $20 billion (now over $30 billion) in the ‘income payable’ component of the current account has recently been joined by a net deficit in merchandise trade of over $22 billion. The 2004–05 net deficit in manufactures trade was $87.7 billion (Department of Foreign Affairs and Trade 2006). These figures give the lie to the honeyed words that the economy’s performance has been superlative.

After a decade of the Coalition in office, industry policy programs could be worse, but they could certainly be better. The Coalition under John Howard has exhibited a deep cynicism in governmental processes—it has won elections and there is no sign of movement to greater governmental integrity in the near future.

Acknowledgments: Alan Jones, Paul Malone, Peter Roberts and Phil Toner provided valuable assistance to the author.

REFERENCES

Borgas, M. & Gallagher, P. 2006, ‘Research science short-changed again by Canberra’, The [Melbourne] Age, 31 January.

Capling, A. & Galligan, B. 1992, Beyond the Protective State: The Political Economy of Australia’s Manufacturing Industry Policy, Cambridge University Press, Melbourne.

Department of Foreign Affairs & Trade 2006, Composition of Trade Australia 2004–05, Canberra.

Department of Treasury 1999, ‘Economic policy reform and Australia’s recent economic performance’, Economic Roundup, Autumn.

House of Representatives Standing Committee on Industry, Science & Technology 1997, Finding a Balance: Towards Fair Trading in Australia, AGPS, Canberra, May.

Commonwealth of Australia 1997, Investing for Growth: The Howard Government’s Plan for Australian Industry, Canberra, 8 December.

Commonwealth of Australia 2001, Backing Australia’s Ability: An Innovation Action Plan for the Future, Canberra.

Commonwealth of Australia 2005, The Australian Government’s Innovation Report 2004-05, Canberra.

Jones, E. 2000, ‘The Howard Government’s industry policy’, Economic Papers, vol. 19, no. 3, pp. 60–75.

Jones, E. 2005a, ‘Industry policy in the 1990s: Working Nation, its context and beyond’, Journal of Economic and Social Policy, vol. 9, no. 2, pp. 35–53.

Jones, E. 2005b, Small business—corporate business relations: Dimensions of structural subordination in Australia, Working Paper No. ECOP2005–1, School of Economics & Political Science, The University of Sydney, September.

Liberal Party of Australia 1996, ‘Industry and Commerce Policy’, mimeo, February.

National Commission of Audit 1996, Report to the Commonwealth Government, AGPS, Canberra, June.

Roberts, P. 2005a, ‘Industry department struggles to remain relevant’, Australian Financial Review, 18 October.

Roberts, P. 2005b, ‘Parts makers gear up for more job losses’, Australian Financial Review, 11 November.

Evan Jones is an Honorary Research Associate in Political Economy in the School of Economics and Political Science at The University of Sydney. His research on industry policy has been published in such journals as the Australian Economic History Review, the Australian Journal of Public Administration, and the Journal of Australian Political Economy.

View other articles in this symposium:

Howard’s ‘Choice’: The Ideology and Politics of Work and Family Policy 1996–2006 Elizabeth Hill
From Player to Pawn: Howard’s Trade Legacy Elizabeth Thurbon and Linda Weiss
The Howard Government, Australian Aid and the Consequences Tim Anderson
The Uses of Fiscal Policy and the Role of Monetary Policy Tony Aspromourgos
After Howard’s Decade, is Australia More Conservative? Gabrielle Meagher and Shaun Wilson
The Geoffrey Boycott of Australian Politics Rodney Tiffen

The evolution of industry policy under Howard

AN UNSYMPATHETIC UNDERLYING POLICY CULTURE IN AUSTRALIA