Abstract

The hypothesis of this report will be to validate that Australia’s manufacturing has been in decline over the past two decades.

Introduction

Australia’s economy has seen the largest uninterrupted annual economic growth over the past 27 years and has entered its 28th year, which makes it the only country in the developed world to hold that record. (AUSTRADE, 2019) Australia’s continuous economic growth could be associated to the rise of Asian economies, leading to greater demand for Australian goods and services.

However, from the onset of reforms enacted for greater trade liberalization throughout 1970s, 1980s, 1990s and the current decade, Australia’s manufacturing sector has greatly diminished. (Blakemore, D. 2014) As Blakemore, D. 2014 expresses that Australian manufacturing has faced a rapid decline from contributing 60% of GDP in 60s to 12% of GDP in 2007. This could be associated largely to the increased competition from foreign firms due to relaxation of trade barriers, reduced industry protection, reduced terms of trade and a structural shift towards a diversified service sector.

The prominence of statistical institutions and wide availability of data in Australia has contributed to variety of studies conducted concerning Australia’s competitiveness amid global competition. However, as pointed out in _________ that very few empirical researches were conducted after the Hawke-Keating Government’s (1983-1996) to study the effects of Australia’s major industry policy changes.

Therefore, the major purpose of this study is to investigate if the Australia’s manufacturing has suffered in international market due to loss of competitiveness. This would be investigated through analyzing change in factors such as employment, R&D (GERD), Value added, investment trends through Gross Fixed Capital Formations (GFCF) and using Revealed Comparative Advantage index (RCA).

During the recent years, the sustainability and future attainment of manufacturing in Australia has been widely studied, particularly in the framework of different trade indicators. Contrary to the popular belief that root cause of decline in Australian manufacturing has been the high wages and manufacturing moving to low labor cost economies. Blakemore, D. 2014 argued that countries such as Germany, France and Japan carry a high living standard and have high labor costs, yet their economy is largely driven by the manufacturing sectors. Therefore, ruling out that decline in manufacturing could not purely be associated to the cheap cost of labor.

The empirical research conducted by the OECD 2015 argues that Australian manufacturing grieves from “tyranny of distance” leading to a high cost environment. The remoteness of Australia has created disadvantage across the sector leading to lower integration of Australian manufacturers into global value chains and ability to compete with major international players. The study further argued Australia manufacturing slump could be attributed to the low R&D intensity, which has led to slump in productivity and innovation. In addition, further downward pressure from a rising primary sector due to the mining boom has led to appreciation of the Australian dollar, reducing the terms of trade for the domestic manufacturers. The study follows a variety of different models to study the different aspects of Australia’s manufacturing sector. However, this research has focused on primarily on the competitiveness of Australian manufacturing between 1990-2010.

In addition, Cully, M. 2016 reasons Australia’s competitiveness has been falling due to fall in productivity growth, falling business investment and low collaboration between business and research institutions. The research assists us in observing the structural weaknesses between the exporting and no exporting businesses and also point towards the fall in business investment, similar to the previously reviewed literature. The study uses a combination of models to understand the complex nature of the topic and stresses on the importance of greater engagement of private sector with the research institutions to drive innovation and identifying over burdensome regulations. The following literature neglects to show the effect of loss of competitiveness of Australian manufacturing over the years.

On the other hand, while the literature cited above conveys a mixed approach of private and public integration for proliferation of the Australian manufacturing in global context. Stanford, J. 2016 argues purely on the basis of loss of employment, opinion survey on attitudes towards manufacturing and government policy. The literature follows more subjective approach rather than objective and fails to convey an objective argument. However, the literature does link its findings such as need to increase productivity in the sector to both studies cited above and facilitation of export orientated industries to Cully, M 2016. In this study the following will be studied in a more objective manner using multifactor model to deliver a more tangible argument.

Methodology

The objective of methodology is to formulate the relevant models to capture if Australia’s manufacturing has seen decline amid global competition. The research hypothesised that Australia has seen a decline in the manufacturing sector amid global competition.

The methodology of this research comprises of two main components: (a) An analytical account comprised of Australia’s manufacturing trade data, gross domestic expenditure on R&D (GERD), employment data and gross fixed capital formulation (GFCF) relative to other G7 nations between the year 1990-2010 and (b) An analysis of competitiveness for Australia’s manufacturing sector using the Revealed Comparative Advantage Index (RCA) between the year 1996-2010.

The quantitative data used in this study to resolve the first two components has been collated using the OECD Structural Analysis Database (STAN), OECD Main Indicators on Science and Technology (MSTI), OECD Bilateral Trade Database (BTD) and Australian Bureau of Statistics (ABS). The qualitative data used to analyse supporting variables include a number of previous studies conducted including the OECD 2015, Cully, M. 2016 and Stanford, J. 2016.

The OECD’s STAN structural analysis database allows to analyse industrial performance at a detailed level of activity across the respective countries, this includes annual measures of output, labour input, investment, capital stocks, value added and its components. (OECD,2019)

The OECD’s MSTI database allows to analyse the expenditure on Research and Development (R&D) by the OECD and other major economies. (OECD,2019)

The OECD’s BTD database allows to analyse the total trade in goods for the respective industry between two different nations or one nation to the worlds over time. This database is limited to a number of countries. (OECD,2019) The International Trade Centre’s (ITC) database provides the similar information with more economies, however this study used OECD’s BTD to have a uniform dataset relative to other variables. This decreases the human errors presented by the researcher in this study and systematic error by the relevant institution that may be using different sets of variables in their dataset affecting the study’s overall validity and reliability.

The data for Australia’s manufacturing industry was collated using the Australian Bureau of Statistics (ABS), which is the Australia’s official statistical organisation.

The revealed comparative Advantage index, also known as the Balassa Index proposed by Bella Balassa and Mark Noland (1965) allows to measure a country’s export potential. The RCA specifically measures a country’s relative export performance in individual categories of a given product compared to that category’s overall performance in World Trade. (WITS, 2010)

RCA = (Xij/Xwj)/(Xit/Xwt)

where, Xij denotes country i’s exports of commodity j, Xwj is world exports of commodity j, Xit is country i’s total exports, and Xwt is total world exports. The RCA index measures the relative performance by industry and country, illustrated as a country’s share of world exports of a good divided by the sum of that country’s share in world exports. When the value of RCA exceeds (is below) unity, country i is said to have a revealed comparative advantage or comparative disadvantage in commodity j. (WITS, 2010)

However, the measure has limitations as it fails to incorporate domestic policy measures such as foreign trade barriers, trade preferences and production subsidies. For future studies, this section could also incorporate gravity model of trade to test bilateral trade relationship between two economies.

The studies used a variety of different datasets to analyse trends over time to analyse the impact of different variables affecting the decline in manufacturing such as GERD, value added, employment trends and GFCF. In comparison, to study such as Stanford, J. 2016, which was limited to analysing trade patterns using “value added” data and followed a more subjective approach to deliver their rational. Instead, the approach undertaken in this study correlates with the OECD 2015 that used the same datasets to provide an objective rationale.

Limiting the study to “value added” provides a distorted picture of the factors influencing the study being conducted as it may lead to different interpretations. Thus, outlining the variables that are closely correlated to the variable being tested is crucial and has been incorporated in the study.

Results

Multifactor model of Australia relative to G7 Nations

Figure 1: – Contribution of manufacturing to total R&D (GERD), exports of goods, value added, employment and gross fixed capital formulation (GFCF), 1990-2010 (Australia)

Source – OECD Structural Analysis Database (STAN), OECD Main Indicators on Science and Technology (MSTI), OECD Bilateral Trade Database (BTD); Australian Bureau of Statistics (ABS) for data on Australia

Figure 2: – Contribution of manufacturing to total R&D (GERD), exports of goods, value added, employment and gross fixed capital formulation (GFCF), 1990-2010 (G7 Countries)

Source – OECD Structural Analysis Database (STAN), OECD Main Indicators on Science and Technology (MSTI), OECD Bilateral Trade Database (BTD); Australian Bureau of Statistics (ABS) for data on Australia

Revealed Comparative advantage index (RCA)

Figure 3: RCA for Australian Industries

Source: OECD Bilateral Trade Database 2012, International Trade Centre (ITC) 2001-2018, WITS – The World Bank 2010

Industry

RCA (1996)

RCA (2010)

Net Change (%)

Agriculture, Hunting, Forestry and Fishing

2.3

2.1

-0.086956522

Mining of coal and lignite; extraction of peat

25.1

26.1

0.039840637

Extraction of crude petroleum and natural gas

0.7

1.7

1.428571429

Mining of metal ores

15.3

23.3

0.522875817

Manufacturing industries

0.6

0.4

-0.333333333

Food products, Beverages and Tobacco

2.9

3.3

0.137931034

Wood and Products of Wood and Cork

1.2

2

0.666666667

Coke, Refined Petroleum Products and Nuclear Fuel

2.1

0.9

-0.571428571

Pharmaceuticals

1.1

1.2

0.090909091

Iron and Steel

1.3

0.5

-0.615384615

Non-Ferrous Metals

8.5

10.1

0.188235294

Machinery and Equipment, not elsewhere

0.6

0.5

-0.166666667

Medical, Precision and Optical Instruments

0.6

0.8

0.333333333

Table 1: RCA for Australian Industries

Source: OECD Bilateral Trade Database 2012, International Trade Centre (ITC) 2001-2018, WITS – The World Bank 2010

Note: – The RCA was only studied until 2010 due to limitations to gather data within different industrial classification from the archived Bilateral Trade Database 2012. Furthermore, the International Standard Industrial Classification (ISIC) followed in this study was using the Revision 3.1 – United Nations (2002) rather than the 2008 version. This was due to the problems encountered on converting the trade data from HS code classifications to ISIC code divisions.

Discussion

Multifactor model of Australia relative to G7 Nations

The multi-factor model presented in Figure 1 & 2 illustrates comparison analysis of Australia relative to G7 nations, which follows a common trend of de-industrialisation in Australia and the G7 nations. However, in comparison to G7 nations that have seen a gradual decline in importance of manufacturing, Australia’s decline in manufacturing has occurred at a faster pace.

The graph exemplifies the value added and employment in Australian manufacturing are below the average shares in G7 nations. Similar trends could be observed when analysing investments using Gross Fixed Capital Formations (GFCF). The contribution of manufacturing to total R&D (GERD) has also seen a substantial decrease in Australia. This could mostly be attributed to the rapidly expanding mining sector that has overshadowed the rest of manufacturing sector. Additionally, the bulk of manufacturing in Australia as opposed to G7 nations is considerably different in terms of exports. Manufacturing in Australia accounts for a significantly smaller share of total exports (32% in 2010) of goods compared to G7 nations (70% in 2010).

Australia’s composition of manufacturing activities is closely associated to its ample natural endowments resulting in concentration of manufacturing within industries such as food, beverages and tobacco products; the mining output and wood and paper products. Henceforth, as observed in OECD 2015 the sectoral structure would appear rather similar to other nations that are rich in natural endowments, primarily Norway and Canada. It is to be noted Canada is part of the G7 nations assessed in the graph above.

However, for the remainder of the G7 nations that do not have abundant natural resources, their industrial composition of manufacturing is much more diverse and consist of specialised sectors such as Machinery and Equipment, Chemical and Rubbers, Transport Equipment etc. The greater diversification of the industrial composition of manufacturing in G7 nations could be attributing to the larger share of business R&D in gross domestic expenditure on R&D (GERD) with an average of 54% in 2007.

Revealed Comparative advantage index (RCA)

The data collated in Figure 3 & Table 1 demonstrates that overall the manufacturing sector has seen a decrease in competitiveness between 1996 and 2010 with a net loss of 0.2 comparative advantage. However, the distribution of this decline has not been across all sub sectors of manufacturing sector. As shown in table 1, sub sectors such as Food products; beverages and Tobacco; Wood Products of wood and cork; Pharmaceuticals; Non-ferrous Metals; and Medical, Precision and Optical Instruments has seen an increase in their comparative advantage over the same period.

An increase in comparative advantage in the sub sectors such as Food products, beverages and Tobacco, Wood Products of wood and cork, Non-ferrous Metals could naturally be associated with Australia’s ample natural endowments. However, improvement in comparative advantage in sub sectors such as Pharmaceuticals and Medical, Precision and Optical Instruments could indicate the structural shift in Australian manufacturing exports moving from Low-Medium tech to Medium-High Tech. This could indicate that Australian manufacturers would be better off competing in Medium-High Tech industries in the future given they operate from high cost environment.

The RCA of manufacturing sector was also compared to other sectors presented in Table 1 and Figure 3 to review the increases in Mining of coal and lignite; extraction of peat, Extraction of crude petroleum and natural gas and Mining of metal ores, which reflect strong comparative advantage between the time period of 1996 and 2010. The prominence of primary sectors may impact negatively on the manufacturing sector as identified in this study and the literature reviewed.

Conclusion & Recommendation

The hypothesis of this report was to validate that Australia’s manufacturing has been in decline over the past two decades. Although, the hypothesis was supported by the RCA and Multi-factor model. However, the RCA has also outlined that some sub sectors have experienced an increase in their comparative advantage, while others have experienced negative impacts.

The comparison analysis of Australia relative to G7 nations presents that Australia’s manufacturing has been declining over the years due to crowding out of specialised sectors by the resource sector boom. This has further created a downward pressure on the competitiveness of Australian manufacturing goods, resulting in sharp decline across R&D (GERD), employment in the sector, declining exports and declining gross fixed capital formulation.

The RCA identified some sectors that show promising sign for future growth in manufacturing. Therefore, in future research more industries within manufacturing sector could be studied in depth to evaluate their competitiveness. Although, RCA has limitations as it fails to incorporate domestic policy measures such as foreign trade barriers, trade preferences and production subsidies. However, it could be further improved to study various other sectors in the future by using gravity model of trade or using value added trade flow figures instead of gross for RCA. (Steven Brakman & Charles van Marrewijk, 2015) The reason value added trade flow method was not incorporated in this study was due to no data available by industry using the STAN Database for the respective time period.

References

Cully, M. (2016). Australian Industry Report 2016. [online] Department of Industry, Innovation and Science. Available at: https://www.industry.gov.au/australian-industry-report–2016 [Accessed 10 Mar. 2019].

OECD (2015). Australian Manufacturing in the Global Economy. Study for the Australian Government, Department of Industry, Innovation, Science, Research and Tertiary Education. Organisation for Economic Co-operation and Development.

OECD (2019). Main Science and Technology Indicators – OECD. [online] Oecd.org. Available at: http://www.oecd.org/sti/msti.htm [Accessed 10 Mar. 2019].

OECD (2019). STAN Bilateral Trade Database by Industry and End-use category. [online] Stats.oecd.org. Available at: https://stats.oecd.org/Index.aspx?DataSetCode=BTDIXE [Accessed 10 Mar. 2019].

OECD (2019). STAN Structural Analysis Database – OECD. [online] Oecd.org. Available at: http://www.oecd.org/sti/ind/stanstructuralanalysisdatabase.htm [Accessed 10 Mar. 2019].

Stanford, J. (2016). Manufacturing (Still) Matters: Why the Decline of Australian Manufacturing is NOT Inevitable, and What Government Can Do About It. [online] Tai.org.au. Available at: http://www.tai.org.au/sites/defualt/files/Manufacturing%20Briefing%20Paper%20FINAL.pdf [Accessed 10 Mar. 2019].

WITS (2010). Trade Indicators: World Bank. [online] Wits.worldbank.org. Available at: https://wits.worldbank.org/wits/wits/witshelp/Content/Utilities/e1.trade_indicators.htm [Accessed 11 Mar. 2019].

Steven Brakman & Charles van Marrewijk, (2015). “A Closer Look at Revealed Comparative Advantage: Gross-versus Value Added Trade Flows,” CESifo Working Paper Series 5321, CESifo Group Munich. Available at: https://ideas.repec.org/p/ces/ceswps/_5321.html [Accessed 01 May. 2019].

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