Saturday, August 16, 2008

What is happening to Whitlam's legacy of fair play in industry assistance?

The Australian government has just released a report into the car industry commissioned from a committee led by Steve Bracks, the former premier of Victoria. The committee has recommended an extra $2 billion in budgetary assistance to the industry on top of an amount of similar magnitude to be paid under existing programs.

Few people would be surprised that Steve Bracks has recommended additional assistance to the car industry. After all, this industry is concentrated in Victoria, while the taxpayers who will bear the cost of the recommended assistance are spread around the whole of Australia.

It is reasonable to presume that the government set up this ad hoc review precisely in order to obtain a recommendation of additional assistance. If it had approached the issue with an open mind it would have sent a reference to the Productivity Commission – the organisation that normally conducts such industry assistance reviews.

In reading the Bracks report I was particularly interested to find out how it would reconcile claims that the Australian car industry needs further assistance in order to become internationally competitive with often heard assertions that the Button car plan, introduced in the 1980s, had been a big success in helping the industry to become internationally competitive.

The Bracks report argues that the competitiveness of the industry has declined because the Australian dollar has appreciated against the currencies of the major automotive producing countries. That explanation doesn’t hold water. Other industries are having to cope with exchange rate appreciation without additional assistance. If the car industry needs a special round of additional assistance this suggests that it is still fundamentally uncompetitive in the Australian environment.

One of the good things about the Bracks report is its recognition that assistance to the car industry “comes at a cost to other industries and consumers” (92). So, what is so special about the car industry to warrant this additional assistance at the expense of other industries?

I could not find a satisfactory answer to this question in the report. There is some discussion of spillovers but nothing definitive to suggest that they are more important than in other industries that have been adversely affected by exchange rate movements. The report does not consider why this industry should be given preferential treatment. The people undertaking the review lacked the economy-wide perspective required to balance the claims of this industry against those of other industries.

If the government accepts the recommendations of this dodgy review it will be seen to have trampled on what has possibly been Gough Whitlam’s most positive legacy – a system of fair play in industry assistance. The government needs to be reminded of what Whitlam said in setting up the IAC (predecessor of the Productivity Commission) in 1973. I quote from his second reading speech:
“It will be apparent that the reference to the Commission of questions relating to assistance for individual industries cannot be optional. If some industries, particularly those which stand to lose most from public exposure of their claims, can avoid the process of public inquiry the fundamental purpose of the Commission will be frustrated”.

Those words seem to me to be just as relevant today as in 1973 – and this picture sums up the direction in which the Rudd government's industry policy is heading.


Anonymous said...

As usual, Winton is measured and honest in his assessment of the government's policy on motor vehicles. He demonstrated the same qualities in offering unwelcome, but fully justified, advice to me during the time we worked together.
Bill Carmichael

Winton Bates said...

Thanks Bill.
You make me wonder whether I offer gratuitous advice just for the satisfaction of offering the advice, or because I have reason to hope that I might have some influence. When I offered you unwelcome advice I'm sure the latter situation applied. I knew that you would listen.