The Good Oil by Rod Brown *
What is the state of industrial development around the world? Interest has been stirred in Europe because of stark findings in the Industrial Development Report 2002/2003, prepared by the Vienna based United Nations Industrial Development Organisation (UNIDO). Given the widening gap between the rich and poor nations, the report is timely and it offers perspectives of relevance to all nations. The report commences by noting that a few developing economies have done very well in recent years, but most have done badly.
UNIDO says ‘reliance on primary resources and cheap, unskilled labour may be a good way to start, but it is a bad way to continue. Most of the effort has to come from within economies, providing the right environment for capacity building and investing in the necessary factors and institutions. ‘But such local efforts should be helped from the outside. Opening markets completely in developed economies will help greatly, but much more is needed to narrow the widening gap.’
The report shows starkly how wide the gap is, and how it reflects structural factors that are difficult to alter in the short to medium term. UNIDO says ‘if these growing structural gaps are not addressed by the international community, there is a real risk of further long term marginalisation of many countries. ‘The clear solution is to follow the high road to competitiveness – to develop capabilities and increase productivity growth through concerted innovation and learning.’
In order to help nations understand where they sit, UNIDO has developed a Scoreboard on crucial aspects of industrial development and competitiveness. It has two parts – an index of a country’s ability to produce and export manufactures, and benchmarks of the structural drivers of industrial performance. The Index is constructed from four indicators – manufacturing value added per capita, manufactures exports per capita, and the shares of medium and high tech products in manufacturing value added and in manufacturing exports.
From a list of 87 economies, selected on the basis of data availability, the top ten countries are Singapore, Switzerland, Ireland, Japan, Germany, the USA, Sweden, Finland, Belgium and the UK. Australia and New Zealand rank lowly at 29th and 31st respectively – trailing Slovenia, Hungary, Portugal, the Philippines, the Czech Republic, Mexico, and Malaysia.
UNIDO notes that these rankings are fairly stable over time, confirming that industrial performance is path dependent and difficult to change. However, it notes that major improvements have been achieved by some middle income countries such as China (now ranking 37), Costa Rica (36), Malaysia (22), the Philippines (25) and Thailand (32).
The report argues that there are three key success factors in terms of industrial development, in developed and developing countries alike. These are indigenous technological effort; foreign direct investment; and skills and infrastructure. It also asserts that in today’s interdependent world, connectivity to external sources of technology, together with market access, remain vital for industrial success.
Tapping into global value chains, especially in knowledge driven sectors, can be a good means to enter global markets. It then explains that enterprises, regions and countries need to concentrate on the following three things.
- Linking – connecting with outsiders to acquire technologies and skills
- Leveraging – going beyond arm’s length transactions to squeeze as much as possible from the new relationships with those outsiders.
- Learning – making the many efforts to master process and product technologies, consciously building the foundation for improving current technologies and creating new ones.
The report also notes the role that global value chains play, and the value that firms in all types of economies can derive from absorbing advice from lead enterprises. It concludes by stating that the basis of any coherently framed industrial strategy is a national vision of industrial development – a vision to get on the high road to competitiveness by increasing productivity growth through concerted innovation and learning.
What are the implications for Australia? We are not a member of UNIDO since the Australian Government chose to withdraw as a cost saving measure about six years ago – hence it would not be politically correct for UNIDO to offer a view on Australia. But the report’s findings would strike chords with Local Governments in regions where manufacturing and processing activities are important.
For example, where is our coherently framed industrial strategy? The Australian Industry Group tried to kick start an agenda about three years ago, but won little political support at the Federal level or with the ACTU. However some States picked up the baton.
The doubters will say that we will never again be strong in manufacturing, because of our supposed high wage rates. They argue that the service industry is where the growth lies, and in any case we have high productivity and GDP growth. This fails to recognise the hollowing out of large parts of our manufacturing industry over the last 20 years, and that manufacturing has strong backward and forward linkages to other sectors. People also forget that the manufacturing sector includes the processing of our wheat, wool and minerals.
With farmers facing subsidised foreign competition and consequently low and uncertain returns, surely they would be better off forming a loose alliance with the manufacturers to promote value adding policies. It could also provide a fillip to the manufacturing lobbying, which is almost invisible compared with the building industry, where the HIA and MBA are seasoned campaigners. The First Home Buyers Scheme is an unfortunate example of their success, with national savings flowing into new dwelling construction to the disadvantage of investment in more productive capacity.
Looking on the bright side, perhaps the situation was meant to be. After all, our political system and priorities probably do reflect community wants – and this is why we are No. 1 in the world in the level of home ownership and in many sports. The Canadians have different priorities, notwithstanding very similar resource endowments to Australia – this is why they rank well above us (No. 16) on the UNIDO Scoreboard.
* Rod Brown’s Canberra based consultancy group, Australian Project Developments Pty Ltd, specialises in industry/regional development and government liaison.
For further information telephone (02) 6231 7261 or email apd@orac.net.au
