Manufacturing matters: why it is important for an economy to have a manufacturing base

The recent loss of 440 manufacturing jobs at Ford Australia has generated a lot of debate about the long-term viability of the Australian car industry, and manufacturing in general. This debate has included arguments that manufacturing is important and needs more government support. It has also seen some commentators argue that Australian’s have no right to expect jobs in manufacturing.

While most of this debate has focused on the automotive manufacturing sector, there is a wider question that needs to be answered. This relates to the issue of whether it is feasible for an advanced economy to grow and prosper without a manufacturing sector?

Kaldor’s Laws

Economist Nicholas Kaldor (1908-1986) proposed that economic growth and enhanced standards of living were positively correlated with national industrial activity. He suggested that growth in GDP was positively related to growth in the nation’s manufacturing sector. Productivity in the manufacturing industries was also positively related to growth in this sector. He also suggested that the productivity of the non-manufacturing sector was associated with growth in manufacturing.

Kaldor was a controversial figure in economics. He criticised mainstream economists for what he saw as an excessive focus on “equilibrium” approaches, condemning them as “barren and irrelevant”. He preferred to focus on the creative function of markets rather than their ability to simply allocate existing resources. His analysis of the decline of the United Kingdom’s manufacturing sector argued in favour of greater economies of scale and expansionary fiscal stimulus by national governments combined where necessary with import controls.

Not surprisingly this “supply-side Keynesian” approach was roundly condemned by monetarists and neoliberal economists. The problems facing manufacturing in industrialised nations such as the UK were attributed to poor industrial relations, inadequate investment in R&D, insufficient investment in technical education and training and poor management.

Kaldor’s theories on economic growth and the role played by manufacturing are therefore not without their critics. However, they raise some interesting questions as to the overall importance of manufacturing to the long-term economic growth and general productivity of a national economy. They also highlight the protracted, and often bitter, disputes that occur within the circles of economists as to how a national economy should be managed.

From the nature of the recent debate over whether or not Australia should have a car manufacturing sector, these theoretical debates remain as hot today as they did for Kaldor back in the 1960s. For the workers who lose their jobs such theoretical arguments are irrelevant.

Why manufacturing matters

The issue of what has been termed the “deindustrialisation” of the developed world has been exercising academics and policy makers since at least the 1980s. Low productivity growth and the emergence of new challenger nations such as Japan and Taiwan led to a shift in the majority of industrial economies.

As manufacturing jobs were moved offshore there was a significant amount of structural unemployment. By the end of the 1980s the majority of employment was to be found in the services sector and there was talk of a “post-industrial society”. Over the past two decades the emergence of China as a global manufacturing powerhouse has further challenged the existing manufacturing base within other countries. This raises further concerns over whether or not it matters that an economy retains a manufacturing sector.

According to some analysts manufacturing does matter and the loss of manufacturing jobs is not good for an economy. Such a view over the importance of manufacturing was articulated recently by Professors Gary Pisano and Willy Shih of Harvard University’s Business School. In an interview undertaken in March 2011, they argued that manufacturing is essential to the longer term health of the United States economy.

According to Pisano and Shih, without a manufacturing sector it will become very difficult for the US economy to sustain innovation. The “exporting” of manufacturing work overseas in the form of off-shoring, they claim, risks the erosion of America’s industrial commons.

They point to the offshoring of semiconductor manufacturing by American companies in the past. This led to the competencies within the workforce and production systems for the production of such technology to be largely lost to American industry. Over time this provided an opportunity for the Taiwanese, South Koreans and increasingly the Chinese to build their manufacturing base. From semiconductors there was a transition to the production of flat screens. This trend is now moving to LED technology and they suggest that soon high-efficiency lighting will be largely sourced to Asian manufacturers.

America seeks to rejuvenate its manufacturing sector

This view echoes a similar call from the US Council on Competitiveness, which launched an initiative in late 2011 entitled “Make: An American Manufacturing Movement”. The underlying philosophy driving this program is the view that manufacturing matters. Rather than a “dumb, dirty, dangerous and disappearing” industry, manufacturing must be seen as a mechanism for driving innovation. It is a sector that should be viewed as “smart, safe, sustainable and surging”.

According to the US Council on Competitiveness manufacturing in the United States directly employs over 11 million and contributed around US$1.7 trillion to the national economy in 2010. It also has one of the highest multiplier effects of all industry sectors and is a provider of skilled and well-paid jobs.

The report highlights the Global Manufacturing Competitiveness Index, a joint initiative with Deloitte. As shown in the following diagram, the key to a competitive manufacturing sector is the ability to draw together a range of macro and micro level elements. Government policy plays an important role. However, so does the cost of labour, energy and the quality of infrastructure, legal and regulatory systems.

Key Drivers of Manufacturing Competitiveness Deloitte & US Council on Competitiveness (2010)
Click to enlarge


The list of recommendations emerging from this substantial report is lengthy, but in essence they call for action by both industry and government. There is a call for fiscal reform to transform the taxation system and reduce regulatory and structural costs that impede innovation and new venture creation. The report also calls for changes to the protection of Intellectual Property (IP) laws, international standards for interoperability and export control regimes to enhance exports. A key feature of this is to work more closely with trading partners to enact anti-counterfeiting programs.

The report also calls for a substantial investment in education and training targeted at encouraging more students to enter the fields of engineering and relevant technology and production areas. In the development of human capital it seeks to use the mechanism of international education to attract more skilled and talented students to the United States, with a view to retaining them within the workforce.

Support for small to medium enterprises (SMEs) is also highlighted. This includes enhanced management development support and apprenticeship schemes to help boost the capacity of these firms. It also seeks to build up the level of innovation through the creation of advanced manufacturing clusters, networks and partnerships. This involves the modernisation of factories to include more technology-enabled smart manufacturing processes. Finally, the report seeks an investment in transport, production and telecommunications infrastructure that is smart, sustainable and resilient.

Is Australia any different?

Australia’s manufacturing sector is significantly smaller than America’s. However, it employs around 945,600 people or 8.5% of the workforce. This is about five times more than the mining sector. Despite a declining investment in capital equipment and R&D over recent years, the manufacturing sector also contributes significantly more to innovation than other industry sectors.

Although the economic growth created by Australia’s mining and energy sector cannot be ignored what is inevitable about such resources booms is that they inevitably reach a peak. The current outlook for resource sector investment is for this peak to occur around 2014-2015. This has been forecast for some time although it has only recently made headlines due to its reporting by Deloitte Access Economics.

It is important that Australia prepare itself for the inevitable slowing down in our mining and energy sector’s growth. A more diversified economy is essential for the longer term, and manufacturing has an important role to play.

As the United States has shown, the key to enhancing our manufacturing industries is to address a series of macro and micro level issues simultaneously. Fiscal policy, including taxation rules need to be overhauled to encourage industries to transition into a more competitive future through investment in capital equipment and R&D.

There must be greater assistance, particularly to SMEs, to help local manufacturers connect with global supply chains. Education and training of the Australian workforce is also a critical area that requires future investment. Our universities and technical training colleges must be funded to provide best practice programs that can supply the future needs of industry. It must also become easier for manufacturers to connect with such institutions for research, education and training.

Finally, there must be ongoing investment in our national infrastructure, in particular initiatives such as the National Broadband Network, and the application of environmentally sustainable technologies.

[Author, right: Tim Mazzarol, Winthrop Professor, Entrepreneurship, Innovation, Marketing and Strategy at University of Western Australia.]

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