The Holden Fiasco

The Holden Fiasco The closure of Holden in Australia is the culmination of a long history of economic mismanagement by successive governments. GMH established its car making facility in the mid 20 century with the assistance of tariffs, subsidies and local content plans which were far too generous and were retained far too long. This encouraged other car manufacturers to enter, with far too many inefficient plants which were too small to reap the scale economies necessary in such a high tech industry as the motor industry. An Industry Assistance Commission report in the 1970s estimated that, for maximum efficiency, assembly plants should produce a minimum of 110,000 vehicles per annum, compared with the actual Australian average of 40,000 (spread over 12 plants). The reforming Hawke/ Keating/Button government eventually took the initiative to reduce protection levels (but not completely), and sensible rationalisation measures resulted in the closure of many of these inefficient plants. ‘Effective rates of protection’ for the motor industry were reduced from 119% in the 1970s to 36% or less by the mid 1990s. Were there any logical arguments for protecting the industry? Two arguments stand out: firstly the self-sufficiency argument; namely that for industries of strategic importance we should not be too dependent on overseas sources in case supplies are cut off, especially in time of war. Secondly the infant economy argument, also called the external economies argument. This is a tricky one, but the argument goes something like this. As a country develops it will inevitably need to pass through a transition stage from an infant rural economy to a mature industrialized economy with a diversified manufacturing base. But because of the importance of external economies in the development of industries which are highly interdependent (e.g. motor assembly manufacturers depend on a regular supply of component parts, and component parts manufacturers depend on a regular market with assembly manufacturers), some form of government intervention or assistance is needed, but only for a limited period – perhaps a few decades. With the benefit of hindsight, the industry may have been established too early in the transition stage, but by the end of the century it should have been well and truly bedded down. But guess what? We then had a mining boom, which was allowed to merrily roll along with disastrous effects on the manufacturing sector, especially the internationally competitive motor industry. The market mechanism responsible for this was a rapid rise in the $A due to a significant increase in overseas investment induced by very high export prices. In effect, the mining boom represented a transition from the manufacturing sector to the mining sector, which undid much of the beneficial effects of previous government attempts to protect and develop the manufacturing sector, at enormous cost. It was painfully obvious a few years ago that the federal government should have introduced stronger measures to curb the mining boom, e.g. by preserving and increasing the resource rent tax and by discouraging the import of foreign labour which mining moguls claimed to be so necessary. Slowing the mining boom would also have reduced or delayed the adverse environmental impacts of mining. The above analysis may be an over-simplification, but it is frustrating when so much of public debate on economic policy waffles around peripheral issues instead of analysing central core fundamentals, or is distracted by shallow arguments of dubious logic, such as “other countries protect their motor industry so we should also”. If other countries subsidise the production of cars so that their prices are reduced, do we not benefit from the lower prices? And if other countries prop up inefficient industries, is that an argument for us to also prop up inefficient industries? Maybe yes if self-sufficiency is the purpose, but the arguments need to be fully explained. Another popular misconception is that Holden should be retained to maintain jobs. All structural change involves employment change, but structural change is an inevitable feature of technological change and productivity improvement, which is a long-term process requiring long-term policies. Unemployment is a short-term phenomenon requiring short-term solutions, and I expect the government will address this. What next? “Oh what a tangled web we weave”. The damage is done and our manufacturing base is weakened, but the government needs to draw up a long-term plan of where we are heading as a nation, free from short-term political expediency. This involves more than just industry policy. Foremost is environmental protection and its fundamental requirement of population restraint. Don’t hold your breath.