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Changing course a must for Australia

9 Jul 2008 THE AGE
BY MARTIN FEIL - MARTIN FEIL IS A TAX AND INDUSTRY POLICY CONSULTANT AND A FORMER DIRECTOR OF THE INDUSTRIES ASSISTANCE COMMISSION


After 30 years following the wrong path, it's time to alter our economic direction, writes Martin Feil.

WE ARE at a watershed in our lives. From the early 1970s until now, we have participated in an economic experiment that was intended to create an international economy without barriers.

Reform of the economy has been a passion for Labor governments. We have moved full circle from Whitlam's statement that he was a Rattigan man (when the government reduced tariffs by 25%), to Hawke's acceptance of Professor Ross Garnaut's view of the North-West Asian ascendancy, to Keating's jibe about the rusty sheds of manufacturers, to Prime Minister Kevin Rudd's vision that we have to be "a country that makes things".

It is instructive to read the dialectic of the past 30 years. We were to create internationally competitive, outward-looking industries. The winners Garnaut picked in 1988 were sustained export expansion of non-primary commodities, education and tourism.

This was the sort of language used by the economic rationalists who morphed into free market economists. The rusty sheds are long gone. But so has most of our manufacturing capacity. We have watched our manufacturers sell their brand names and move their businesses to Asia. The services industries have not filled the exports shortfall.

Our foreign debt has been increasing by $50 billion a year for the past three years, despite the mining boom. We owe $600billion to the rest of the world. We owed $180 billion 12 years ago. We owed nothing in the '70s.

The grand experiment hasn't worked. We were supposed to create outward-looking industries that could compete on even terms with the rest of the world. This didn't happen.

The strategic solution to reduce our foreign debt is inescapable. We have to reduce our consumption of imports and increase our exports quantity or their unit value. The quantity of agricultural produce and minerals is finite.

Inflation has arrived, fuel prices are escalating, interest rates are climbing and, even by the Government's definition, unemployment is increasing. Many people are learning that you can't depend on a perpetually rising stock exchange. Some of the financial heroes of yesterday have lost a lot of the public's money.

Average Australians forced into superannuation funds are wondering why they have lost tens of thousands of dollars of their retirement nest egg in the past two years. We are at the beginning of a credit crunch.

This series began with the proposition that innovation, research and development and a constantly re-educated and perpetually mobile workforce will not quickly reverse the malaise of the economy.

Individual articles have attempted to touch on some of the major points where our Government philosophy, its practice and attitudes differ widely from what is happening in the rest of the industrialised world. Productivity improvement is a laudable ambition but it will not turn the economic tide for Australia. There is too big a gap between the cost to make goods and their retail price.

We need to change our approach. Change is only achieved if there is a change in attitude. Before we start to reform the Australian economy, we have to believe that it needs reforming.

A lot of people have a vested interest in fighting to ensure that our economic policy continues on its present path. They are the winners who have created careers, power and wealth from the evolution of Australia into a barrier-free economy that focuses on selling services within Australia, selling agricultural produce and raw materials to the rest of the world, and buying their manufactured goods.

Change will only occur if we acknowledge that what we have done in the economy has not been the most successful economic strategy we could have devised.

Our leaders need to stop ignoring the trade barriers that the rest of the world uses. There is no such thing as free trade. Every country uses non-tariff barriers and gives preference through procurement to its own industries. Tariffs are passe. Non-tariff barriers are used by every industrial nation. Subsidies are a fact of life in the European Union and the US. There are no Fiats in Paris or Toyotas in Seoul. Why is that? The tariffs are low. (Zero for Fiats in the EU). Education and labour mobility are all very well but they are long-term, indirect solutions. We need to do something now.

Those manufacturers who are left have had enough. The remnants are ready to go offshore now.

The services sector, the media and the bureaucracy need to stop criticising manufacturing. They are the recipients of a lot of protection themselves, which they do not acknowledge. It is hard to lose your job in the public service.

In the past 10 years, many Australians have believed that it is stupid to work hard. Easy money from ever-rising stock markets was the way to go.

Making things takes education, time and a never ending commitment to the people who work with you.

The refrain about turning back the clock by bringing back high tariffs is true. They are past their use by date. In contrast, non-tariff barriers such as subsidies, government preference and local design rules have never stopped being introduced and have increased in the rest of the world.

Free trade is an even more antiquated fantasy. We can't turn back the clock to the simple 18th century times of David Ricardo when Pax Brittanica was the prevailing force. Even then the world economy was a much more complex place than Ricardo ever dreamt.

We need to change our minds, our attitudes and our approach if Australia is to remain a small, rich, economy whose ownership is basically in the hands of its inhabitants.

We are truly at the point where what is left of Australian manufacturing (and these are the really good stayers who have survived the free market pogroms) think that they should move offshore and simply live off their intellectual property and market conduits. More of the same 1970s policy will convince them to leave.

They must be convinced to change their minds.

Martin Feil is a tax and industry policy consultant and a former director of the Industries Assistance Commission.

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