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Economy

Feb 11, 2014

Ask the economists: will the loss of car-making drive us to recession?

With Toyota announcing it will cease Australian operations, the age of car manufacturing in Australia is over. Crikey media writer Myriam Robin and SmartCompany journalist Yolanda Redrup ask the experts what the impacts will be.

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Labor (and labour) figures accuse the Abbott government of callous disregard for workers and the economy after Toyota became the last car manufacturer in Australia to declare it would shut up shop, amid warnings of a looming economic recession.

So what do the economists think? Crikey quizzed them about the broader economic impact — and found nobody was particularly concerned about recession …

Philip Toner, department of political economy at the University of Sydney:

The net effect of the closure of the Australian auto industry will be the dumbing-down of the Australian economy. It’s an industry that’s really central to Australia’s technology and scientific base. It’s R&D and innovation intensive. Apart from all the direct inputs, it’s also been a testing ground for new ways of working.

And you can’t ignore the jobs. There’s something like 45,000 of them in the car and components industry. These are mostly good jobs. The Productivity Commission assumes they’ll be transferred to other industries. But what we know, from vast academic and government studies following previous redundancies in this industry, is pattern is typically something like this: a third will permanently leave the labour force by retiring or going on the dole; another third will get jobs with lower wages and conditions in things like hospitality or aged care; and another third will get jobs with equivalent wages and conditions.

Ironically, the effect of that is a reduction in Australia’s productivity. A rather startling statistic that emerged from some analysis I did was that something like 90% of jobs created over the past four decades were in industries with below-average productivity — low-wage jobs in things like aged care, retail, cleaning and security services.

We spend $1.5 billion on the car industry and get out $21 billion in yearly production. Meanwhile, we spend something like $33 billion in tax concessions on superannuation, $4.5 billion on fuel rebates to the mining industry, and $1.5 billion in assistance to the private healthcare industry.

What all this goes to is the fact that the world is a complex place. We simply have to get away from the infantile dichotomy between free trade and protection that seems to be the way the federal bureaucrats and politicians think. It’s just idiotic, and simple-minded thinking has got us to this situation where we’ve completely lost this entirely valuable industry.

Shane Oliver, chief economist and head of investment strategy at AMP:

The inclination is to say this is a disaster. But I don’t see it that way.

Certainly there are short-term costs involved. There’s the blow to confidence (though the general trend of consumer confidence has kept rising despite the bad news from the other car manufactures last year). And then there are the job losses — some say 25,000, some say 50,000, and some would go higher. But ultimately, total employment in the Australian economy is 11.6 million people, so all those numbers are within the range of normal volatility.

The bigger impact will be on the regions affected. I’d rather keep this industry. I grew up in Newcastle and saw the closure of steel industry. I remember going back in 1990s when it looked fairly dismal. Today, however, the place is buzzing. They moved on. The regions here will also move on.

When I started work, there was a lot of talk about how manufacturing was disappearing. This is a continuation of what’s been happening for 50 years. I think there’s a real danger in overstating the economy impact. We’ll get by — there won’t be a recession.

The longer-term impact is probably a positive one. All the money that taxpayers have been pumping into the car industry will probably come to an end. It can be reallocated to more useful areas, like infrastructure spending.

Roy Green, dean of the UTS business school and member of the former government’s manufacturing taskforce:

We shouldn’t have put all our eggs into the assembly basket. We should have tried to transform the industry to have a better focus on the components sector and their ability to be part of the global production sector. Is it better to produce a car from concept to show room or to encourage suppliers who can produce a component to best the world for huge manufacturers like VW, Toyota or BMW, which are sold in every market?

In the end the car assembly plants did not have sufficient scale in their market in Australia, irrespective of the level of subsidy, and they were engaged in product lines customers were increasingly finding unpopular.

With the combined impact of the three assembly makers exiting the market, between 30,000 and 50,000 people will be affected in the immediate companies and the car component suppliers. [But that’s] contingent on what the government does next in terms of policy in respect to manufacturing. It may not be as many jobs lost if there is a strategy developed around the diversification of the components manufacturing sector to let it participate more in global chains or to diversify into other industries. They’re the two possibilities for the companies with the ability to undertake those tasks. It isn’t a question of throwing money at the remaining SMEs in the car components sector, but building their capability, providing them with an understanding of other opportunities and providing the skill base and management expertise to make the transition. Some will make it, many will not.

John Quiggin, school of economics, University of Queensland:

This marks the end of manufacturing in Australia.

Sure, there are some things left that are technically manufacturing — like food processing and the like — but it’s not stuff we’d traditionally think of as manufacturing. In the long-run, that’s regrettable. It makes us a more service-reliant economy. We’ve always had this line that if we had a severe crash in the resources sector, the dollar will fall and manufacturing will pick up. That’s not the case anymore. We’ll have to rely on things like tourism to pick up the slack. It makes us more vulnerable.

You’d expect this would knock out most of the component manufacturing industry. If that’s coupled with a slowdown in China and other emerging economies, and a fiscal tightening as the government has flagged, that wouldn’t be very good. It’s really a bad time for a tough budget. Some of the government’s decisions — like raising the debt ceiling — suggest they’re aware of this, but others do not. There doesn’t seem to be any apparent economic strategy with a lot of the rhetoric and decision-making. It’s all very politically selective.

The motor vehicle industry in Australia was always going to close down. We said that in the 1980s. But we managed to slim down operations and keep the industry going another 25 years. With the right policies, we could have gotten another decade out of the industry. That would have made a significant difference to a lot of workers. But the industry, and manufacturing in general, was always going to decline.

Stephen Walters, JP Morgan economist:

A recession is a ridiculous suggestion. In three or four years we’re losing several thousand jobs in a workforce of something like 12 million. There will be a big gain in employment multiple times what the losses from this will be. To suggest losing 2500 jobs causes a recession is just ridiculous.

We shouldn’t direct scarce government resources into areas of economy that can’t stand on their own. We’ve done that for the past 30 to 40 years but it’s clearly not viable. We should be spending the money on more efficient provisions of infrastructure, lower taxation, increased services for the sick and elderly. There’s just no future in automotive manufacturing. Propping up an unviable industry is a ridiculous economic equation, and it just doesn’t work.

There has been restructuring in the past where industries have closed and those jobs end up appear in a different sector. With retraining and some assistance, those jobs end up elsewhere. Component manufacturers are also able to reposition and maybe even export their components. Just because car manufacturing is ending, it doesn’t necessarily mean they’ll shut down, but it does mean there are some challenges ahead.

Burchell Wilson, acting chief economist, Australian Chamber of Commerce and Industry:

The comments from the Opposition Leader are clearly overstating the issue. It’s a relatively small industry compared to the broader labour market, and it’s unclear to what extent the losses will go further up the supply chain. There’s a lot of quite dangerous and alarmist commentary going around, which will only undermine confidence. It’s doing the states a disservice.

What this closure tells us is the $30 billion in industry support they’ve received over the past 15 years has been wasted. It’s been costly to the community. There is no justification for propping up private sector businesses in relation to the automotive industry, as the Productivity Commission told us just two weeks ago. The idea of co-investment is masking what is actually a subsidy.

We’re seeing quite a strong pick up in the construction sector with the reduction of the cash rate. The retail sector is gaining some strength. There’s plenty of capacity to absorb a couple of thousand job losses in the car industry.

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