The downside of protectionism

Phil Ruthven says the future is ever-changing and too exciting to let nostalgia or vested interests spoil the party.

There are good and bad sides to protectionism. People and businesses need help and protection from time to time (in some cases, all the time). Some $25 billion is spent on defence, $10 billion on police and over $250 million on emergency services. So just under $36 billion or 2.6 per cent of our GDP is spent to protect lives and property from external threats, crime and natural disasters – mostly money well spent.

Then there is another sort of protectionism – welfare for the disadvantaged, which we provide via our taxes. In the 2014 financial year (F2014), we will provide almost $140 billion in support to the aged, unemployed, disabled and disadvantaged. And because we are an advanced and civilised society, we will also make available over $105 billion in health support and over $45 billion in education support. So, safety, welfare, health and literacy come with a bill of $337 billion or about one-quarter of Australia’s annual wealth creation (GDP). This is 87 per cent of the government’s income from taxes and running businesses (such as utilities or transport).

Australia’s taxes at 28 per cent of GDP make it the second-lowest taxing nation of all advanced economies in the OECD. Some are closer to 50 per cent – such as Denmark and France – with another five countries over 40 per cent. The average is around 37 per cent, so we are a long way away from being a nanny state and are not over-protected at this juncture.

Once upon a time, the business protection element (3 per cent of all protection, see Figure 1) was there to help industries – and thus, the economy and employment – to grow, particularly in the early 20th century, especially for manufacturing and via tariff protection and embargoes. These days, much (if not most) is for lost causes. The amount of money is not all that much compared with the total spending on protection: just under $11 billion in F2014 and 0.8 per cent of GDP. But that would be better used to help the growth of tomorrow’s industries, not yesterday’s. And, we are lagging our normal economic growth of 3.5 per cent by that 0.8 per cent of GDP.

Protecting yesterday’s industries has two negatives. First, it provides fiscal morphine to uncompetitive, if not dying, industries and their businesses rather than a stimulus to growing industries. It can encourage many businesses to hold out their hands. Australia either wants to go forward, embracing the new, and being prepared to abandon the old, or let nostalgia, rent-seeking and jingoism take us backwards to the so-called “good old days”, which were not, except when comparing them with even older times. This sort of justification, taken to absurdity, could lead us back to the Neanderthal age.

We hear that a nation cannot survive without a manufacturing sector. A glance at Figure 2 puts the lie to this populist claim: Australia has seen an exponential climb in its standard of living with the declining importance of both agriculture and manufacturing. Agriculture was once 50 per cent of our GDP, even 25 per cent in 1950 and now 2 per cent. Manufacturing was once 29 per cent of GDP (in 1960); now just over 7 per cent.

Interestingly, both these old-and-bold industries will experience a renaissance of sorts in the 21st century, not back to their once-dominant positions in the economy, but a revival nevertheless in a new form. Agriculture will emerge more like mining, by going corporate, capital intensive, Asian export-oriented and largely foreign-owned, as did mining 50 years ago.  

Agriculture cannot survive and become even a small food bowl in its present small and medium-sized enterprise ownership form, as heartless as that might sound. It has to follow the lessons of mining. The blocking of the Graincorp sale to Archer Daniels Midland was regressive in this regard, showing ignorance of where our future lies. But Banjo Patterson, Dorothea McKellar, Henry Lawson and other icons will survive this coming revolution, at least in continuing folklore and legend.

Manufacturing will also become a very different sector, but in many cases made up of more medium- sized enterprises with hi-tech/3D technology and more IT-based than the old craft and engineering skills that many think must be retained at all costs.

Franchising and international strategic alliances will be critical elements in the renaissance of both these industries.

A country must be prepared to shed the old in favour of the new. We see that challenge in retailing. That industry has gone through three revolutions over several centuries: the move to specialty stores in the 1820s; the move to chain stores in the 1890s; and the move to self-service in the 1960s. Today, we can hear the bleating of the winners of that last revolution (self-service) as the fourth revolution is descending like a tsunami in the form of online retailing. It is vital that the marketplace and progressive technology win, not the regressive players demanding protection.

Ironically, some of Australia’s most profitable medium-to-large companies are in our declining and toughest industries. Of our 100 most profitable companies in terms of ROSF (returns on shareholder funds, after tax), averaged over the past five years to F2013, a surprising 21 were in manufacturing (weighted average ROSF of 53.1 per cent), seven in retailing (42.1 per cent) and one in agriculture (34.7 per cent). 

These returns compare with 14 per cent for all the medium-to-large enterprises. As is said, there is no such thing as bad industries, only bad companies.

So why protect the bad ones?

The second negative with protecting declining industries is the fortunes of the workers. By protecting industries beyond their use-by date, there is a huge risk that the same thing happens to workers, who may have 10 to 15 years of working life ahead of them. There is a double jeopardy if such workers are in country or coastal areas, far from major centres and other sorts of work. The textile, clothing and footwear industry was a case of excessive protectionism for too long. It was staffed by a lot of migrant women who found it near-impossible to reskill for another season in their working life.

History tells us that it is prudent for people to take charge of their own destiny more than they tend to do these days. To believe blindly in a government of the day, an employer or a union is dangerous, even when they are sincere in their promises of a safe future. Forward planning, reskilling and moving house are all necessities in today’s world where there are likely to be five or six careers or seasons in a working life of 50-55 years.

Figure 3 shows where the new and lost jobs have been over the past five years and is a reminder of the huge changes taking place in the industries in which we work. Indeed, 191,440 jobs were lost, most (65 per cent) from manufacturing, followed by agriculture and media and telecommunications. On the other hand, almost a million new jobs were created, but only one-sixth were in goods industries (mostly mining, which could be static or shedding over the next five years).

Service industries are in the ascendancy. Health created a huge 29 per cent of all new jobs and is now the nation’s largest employer, having overtaken retailing and manufacturing. Professional and technical jobs followed in second place, followed in turn by government administration, education and hospitality.

Clearly there will always be enough new jobs over time to replace those lost. So to suggest wages should be lowered to save an industry is voodoo economics: no country got rich by keeping jobs that should go to poorer yet emerging economies. Competing with them is to go backwards and lose anyway. At the same time, productivity growth can maintain wages for a shrinking number of workers for some years in some industries. Protectionism with taxpayer money for yesterday’s industries is a lost cause and ultimately does more harm than good. The future is ever-changing and too exciting to let nostalgia or vested interests spoil the party.