Tuesday, June 26, 2012

Don't blame the dollar, you were sinking anyway - tough love from Gary Banks

This graph suggests he has has a point:

The high exchange rate, the mining boom and the global financial crisis are not to blame for the decline of manufacturing. It was suffering anyway.

So says Gary Banks, head of the Productivity Commission, who is even prepared to put a number on what the recent upheavals have done to Australian manufacturing. He says they’ve advanced its long-term trend decline one-and-a-half to two years.

“The boom has just compounded the longer-term trends that we see in every OECD country,” he told a Deakin University seminar at parliament house in Canberra yesterday.

“Manufacturing has been shrinking relative to the rest of the economy for decades. In absolute terms it hasn’t shrunk much, but as other parts of the grow it has to shrink as a proportion. We can’t add up everything to more than 100 per cent I am afraid - that’s just the way the arithmetic pans out.”

Mr Banks said the main way in which the mining boom has hurt manufacturing been by making Australians more wealthy. Australians have more to spend, especially on services, meaning other goods have to “make way”.

“The rising exchange rate has simply been a facilitator of that,” he said.

“It has made Australia’s traded goods relatively more expensive. In the old days that would have happened through inflation... which would have led to greater unemployment and it would have been very disruptive.”

“So the exchange rate - which is getting a bad name for appreciating - is actually delivering adjustment more painlessly than was ever the case in Australia in the past in response to the kind of structural pressures that we are seeing.”

“In relation to manufacturing the boom and the GFC have merely accelerated the longer term trend decline in the share of manufacturing by one-and-a-half to two years.”

“That impact has not been uniform. The biggest job losses have been where the activities have been the least competitive. These also happen to be the most highly assisted parts of manufacturing.”

Further assistance could actually compound the problems for manufacturing, the Productivity Commission chairman said. To the extent that it helped manufacturers export or cut imports it would push up the dollar further.

Assistance for innovation was “okay,” but “everything gets tries to be called innovation for that reason”.

Assistance to help displaced workers was “a good idea,” but it should be directed at the workers not their employers.

In today's Sydney Morning Herald and Age

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