INDUSTRY PROTECTION AND ADJUSTMENT: THE AUSTRALIAN EXPERIENCE

NOTES AND REFERENCES

1. For 1983–84 the largest items of government expenditure on industry assistance were Textile Industry Bounties ($75 million) and Industrial Research and Development grants ($66 million). Three or four years ago export incentives were important ($260 million in 1980–81), but they have recently been scaled down. The estimated net subsidy equivalent of the tariffs and quotas in 1981–82 was $4,060 million (1977–78 prices).

2. The motivation for this decision was to be found in macroeconomic policy rather than in industrial policy. See F. H. Gruen, ‘The 25% tariff cut; was it a mistake?’, Australian Quarterly, 47, 1975, pp. 7–20. See also R. G. Gregory and L. D. Martin, ‘An analysis of the relationships between import flows to Australia and tariff changes’, Economic Record, 52, 1976, pp. 1–25.

3. The effective rate of protection, ER, measures the protection afforded the value added of an industry. It takes into account both tariffs on outputs and inputs. It is calculated as <equation> Where ti is the nominal tariff on the output of the industry and tj the tariff levied on the jth input. The co-efficient aij is an estimated material output ratio adjusted for the tariff rates currently applied to inputs and outputs.

4. The domestic price of imports PD can be written as <equation> Where Pm is the foreign price of imports, (1 +t) the adjustment to the foreign price as a result of the nominal tariff rate, and ψ the exchange rate which translates foreign prices into domestic currency. See R. G. Gregory and J. J. Pincus, ‘Industry assistance’ in L. R. Webb and R. H. Allan, Industrial Economics: Australian Studies, George Allen and Unwin, Sydney, 1982, pp. 113–64.

5. This theory generated considerable controversy and a large economics literature. The basic idea in the Australian context was developed in R. G. Gregory, ‘Some implications of the growth of the mineral sector’, Australian Journal of Agricultural Economics, 20, August 1976, pp. 71–91. For a survey of the large literature that followed see P. J. Lloyd, ‘Protection policy’ in F. H. Gruen (ed.), Surveys of Australian Economics, George Allen and Unwin, Sydney, 1978, pp. 241–96.

6. The argument has been associated to a significant degree with Professor Martin Feldstein, until recently the Chairman of the US Council of Economic Advisors, e.g., “Large projected US trade deficits are a result of macroeconomic forces, particularly large budget deficits” (p. 67); “The most effective strategy the United States can pursue for its exporting and import competing sectors is to get its overall economic house in order — above all, by bringing budget deficits and real interest rates under control” (p. 70). Economic Report of the President, February 1983, US Government Printing Office, Washington DC, 1983.

7. These calculations are inevitably rough and are subject to severe limitations: — they impute all the protection to labour and not to other factors, they attribute protection to all labour and not that part which is dependent on import quotas, i.e. some employment would remain even if protection were removed, and they ignore any general equilibrium effects that would flow from the removal of import restrictions. Nevertheless, they do illustrate fairly well the general order of magnitude of the ineffectiveness involved in this system of industry protection and the rate at which this ineffectiveness is increasing.

8. See Table Al.1.2 Assistance and the performance of manufacturing industries: 1968–69 to 1981–82 in Industries Assistance Commission, Annual Report, 1982–83, Australian Government Publishing Service, Canberra, 1982, pp. 44–5.

9. These data are more recent than trade and production data. The latest available data on market shares show dutiable imports as a proportion of domestic sales for 1981–82. For Textiles this ratio is lower than for any other year since 1968–69. For Footwear and Clothing the ratio is marginally below the 1974–75 level.

10. This new plan embodies many of the characteristics of the old plan — fewer producers, more market oriented allocation of quotas — but it envisages less protection and more imports. The 1981 plan also made allocation for above quota imports, but the tariff rates were to be 150(100) at 1985 and 124 per cent (57.5) at 1992. The new plan tariff rates are those listed in brackets.

11. General Motors Holden, for example, has yet to use the credits it has earned, but recently they have announced a plan for significant reduction of local sourcing.

12. The Industries Assistance Commission has been a very worthwhile institution that has dominated the discussion of structural change. It is interesting to note that the Brookings Intitution has suggested that such an institution should be created in the US (A. M. Rivlin, Economic Choices, The Brookings Institution, Washington, DC, 1984).

13. The production of iron and steel in Australia is undertaken largely by one company, Broken Hill Proprietary Ltd.

14. In their 983–84 Annual Report the Industries Assistance Commission comments on the Steel Plan as follows: “One feature common to all these schemes is that they focus on reducing the impact of adverse developments on the industry. In each case, a degree of assurance (or risk reduction) is provided so that higher assistance is potentially available if the market should deteriorate. Conversely, if the market for local production improves there is provision for the package of assistance to be reviewed” (p. 27).

15. Perhaps the whitegoods industry may be an exception. The whitegoods industry also received quota protection in 1974–75, but the government was able to replace this with higher tariffs in 1978–79 which subsequently have been scaled down. The long run tariff rate of 30 per cent is still, however, quite high. The industry has been subject to considerable rationalisation (Bureau of Industry Economics, Structural Adjustment in the Australian Whitegoods Industry, Research Report No. 12, Australian Government Publishing Service, Canberra, 1983). The number of local producers has fallen from 20 in 1971 to 15 in 1978, and the market share of the two largest firms has increased from 31 per cent in 1971 to 69 per cent in 1980–81. The scale of some product lines has been increased by the introduction of cross subsidy arrangements between the major firms. Obviously the government is hoping for a similar outcome for motor vehicles.