Forget manufacturing, mining is papering over economic cracks

FOR anyone interested in Australian public policy, it's been thin pickings at the Australian Conference of Economists, held this week in Melbourne.

But one of the highlights was the speech given by the chairman of the Productivity Commission, Gary Banks.

He made an important contribution to the debate about competition policy by querying the exemption of the labour market from any scrutiny of the costs and benefits of anti-competitive arrangements.

While acknowledging the importance of fairness in the employment relationship, he made the point that there was always a trade-off with efficiency and firms' incentive to innovate. In his view, labour market regulations should be subject to a public-interest test.

The commission's study of the retail industry, for instance, exposed the fact that a number of the impediments currently faced by retailers are a result of labour market laws, including the better-off-overall test governing agreements, the unworkable individual flexibility arrangements and the mandated high penalty rates.

And the commission's recently released draft report on default superannuation funds has concluded that it is not in the public interest for workers' access to superannuation to be restricted to a small number of funds set out in awards.

Earlier in the week, we had senior Treasury official David Gruen attempt to provide an intellectual veil for the government in relation to the economy's poor productivity performance. Nothing to do with industrial relations regulation, he claimed; everything to do with management quality and the small size of firms and the ownership structure in manufacturing.

This conclusion of course begs the question why our productivity performance was so good in the 1990s. Are we to assume that managers were of better quality then? Actually, the trend is in the opposite direction: managers are now better educated and there is a global market for management talent. And the average size of manufacturing establishments has actually increased. In any case, do we really care about manufacturing - it is less than 10 per cent of the economy?

The more interesting question is the extent to which onerous, pro-union regulations are restricting the ability of Australian managers to manage and innovate.

Former Treasury secretary Ken Henry gave us a lunchtime lecture about the inevitable economic consequences of the rise in the terms of trade that began in 2003. While endorsing another round of productivity-enhancing reforms, he made the obvious point that there is simply no possibility of returning to the status quo ante in terms of the structure of the economy.

The international competitiveness of businesses in the non-mining trade exposed sector is inevitably undermined and the rational response by those businesses is to shed workers in Australia and to set up operations overseas, along Japanese lines.

When it came to what he had in mind in terms of productivity measures, however, he was very coy.

There was also a very strange discussion held yesterday on the so-called Dutch disease afflicting Australia. Along with Vince Fitzgerald of Allen Consulting, I am loath to call the lift to national income (of about 15 per cent) caused by the rise in the terms of trade a disease. But there are clearly some structural pressures that arise from the need to deal with the appreciation in the real exchange rate.

But listening to some of the speakers, it was easy to gain the impression that some economists think Australia would be better off without mining. After all, it is largely foreign owned, it doesn't employ many workers and mining companies hardly pay any tax. And by pushing up the value of the Australian dollar, life is made more difficult for firms in other sectors, most notably those in non-mining trade exposed industries.

This is notwithstanding the fact that there are some 250,000 direct jobs in mining, up from 147,000 four years ago. And according to calculations made by economist Ed Shann, mining and mining services will account for over 20 per cent of GDP this financial year. Mining makes the car industry look tiny and the Port Henry aluminium smelter imperceptible.

Were it not for the mining sector and the spin-off activity it generates, there is little doubt that economic growth in Australia would have been much lower and unemployment higher. In effect, mining has been papering over the weakness in the rest of the economy.

But rather than use the tail wind of the high terms of trade as an opportunity to press on with adjusting to the new state of play, this government has tried to suppress this adjustment by subsidising adversely affected businesses. Not only is trying to turn back the clock always unsuccessful, it also comes at a high cost.

So what would most of the conference attendees make of the jobs figures released yesterday? Most would take no notice at all, driven as they are by the imperative to publish in international journals that have no interest in Australian public policy.

What the numbers suggest is that unemployment is probably stuck around the 5 to 5.5 per cent mark.

The labour market looks stronger this year than last, although there are some question marks over the reliability of the figures. But it is not powering ahead, with the risks probably on the downside. And saying that we are better than most of the developed world is not saying much at all.