|
|||
|
|||
|
 |
|
|
Proposed |
Change |
|
|---|---|---|
|
Investment |
1.11 |
0.99 |
|
Innovation |
3.64 |
-0.22 |
|
Export |
1.77 |
0.00 |
|
Business Competitiveness |
13.26 |
0.09 |
|
Sustainable Resource Management |
0.97 |
0.00 |
|
TOTAL |
20.75 |
0.84 |
The Economist Intelligence Unit for the Metal Trades Industries Association
The EIU made seven recommendations for 'government policy to win investment'. These include:
Of the above list, 3, 6 and 7 are the major recommendations which specifically address industry policy rather than addressing what might be described as an economic climate business would like. These recommendations are described in more detail in the following box.
Goldsworthy's Global Information Economy
Goldsworthy puts forward seven challenges with proposed action agendas built around them. These challenges with the major action agendas are summarised as follows:
Many of these specific recommendations involve close personal collaboration between industry and industry's global leadership, and the Australian Government at the highest levels. There is an important sense in Goldsworthy and other such proposals that personal relationships and negotiation between business and government can play an important part in industry policy. (One is reminded of the personal efforts Senator John Button used to put into the relationship between key businesses and government.)
In addition to the above list of specific industry policy measures, there are a certain number of general economic policy recommendations, such as ensuring taxes are simpler and internationally competitive. Those other recommendations are not the subject of this paper.
These reports have a good deal in common. The main common features are:
On the investment attraction subsidies, Goldsworthy and the EIU would include tax holidays for major concessions similar to those which operate in some Asian countries. These tend to be concessional taxes on income (Goldsworthy suggests 10 per cent) for say a five year period. Goldsworthy, perhaps anticipating possible objections, says a 'tax holiday for an investment that would not otherwise have been made is not tax revenue foregone.'(9) That is no doubt true if they can genuinely be confined to investments which would not have otherwise occurred. In addition to the tax concessions, all three reports have in mind some sort of fund for use in making grants to sway investment decisions on the part of wavering multinationals.
The second common factor is the suggestion of enhancing the R&D tax concessions. This is combined with some criticism of the decision to reduce the concession from 150 per cent to 125 per cent in the 1996 Budget. Goldsworthy and the EIU seek a 200 per cent deduction in line with the 'double deduction' allowed in some Asian countries, although Goldsworthy would limit the 200 per cent to R&D related salaries. Of course the double deduction is a greater benefit the higher is the company tax rate in the first place. Under the current Australian company tax rate a double deduction would mean the private:public contribution to a business' R&D would be 28 to 72. That compares with Mortimer's suggested 50:50 split and the present 55:45.(10)
An important feature of the Mortimer Report is its recommendation which calls for 'action agendas.' Mortimer recommends that action agendas be developed jointly by industry and government using the Supermarket for Asia as a model 'action agenda.' The aim would be to examine current performance with respect to exports, R&D and other characteristics so as to identify impediments to growth, the availability of trained labour, regulatory and other issues. Following that, industry and government would commit to an action agenda designed to improve industry performance and with responsibilities for specific actions shared between the parties.
Instead of Mortimer's action agendas, the EIU bases its industry-level discussion on the existing programs-cars, TCF industries, pharmaceuticals and the IT industries. It believes the industry sector programs have been 'both inward and backward looking' and would seek to redirect the focus to make them 'outward and forward looking.' The EIU would have the existing programs opened up 'to any industry where both companies and government were confident that sustainable competitive advantage in a global market could be achieved.'(11) All of that would be managed by the proposed investment agency. However, the EIU does not go any further and provide any guidelines as to how the existing sectoral programs might be transformed into outward and forward looking programs. On the other hand, the Goldsworthy report, since it focuses on just one industry, virtually provides a complete action agenda already, albeit with assistance features which may be controversial.
The three reports being discussed here can be seen as part of a common approach-perhaps a business perspective on industry policy. Purists, including some of the newspaper editorial writers, see the Mortimer recommendations as self-serving arguments for handouts to business. In the rest of this paper we attempt to concentrate on the calls for industry intervention put by Mortimer.
Mortimer recommends that 'the Government adopt a whole of government industry policy'.(12) The problem though is that Mortimer offers no real guidance as to what that 'whole of government industry policy' might look like or how one would go about putting that together. In a similar way Mortimer observes that '[b]usiness is calling for a vision, but is not doing well at articulating for Government what it means by this.'.(13) While endorsing those sentiments Mortimer does not specifically identify what the vision should be or how it might be created.
Mortimer specifies that an industry policy should go 'beyond the narrow view that Australia should accept simply what the market determines'.(14) This reflects the general recognition in the community that there are problems with the market which, ideally, government intervention is designed to address. The Industry Commission in a submission to the Mortimer review set out suggested criteria which it recommends should be used to see if intervention is warranted. The main criteria are:
In the event that all of that is satisfied, the Industry Commission sets out a number of design and delivery criteria which it recommends.(15) Mortimer outlined a similar set of criteria in chapter four of the report but then departs dramatically from those criteria when discussing the need to 'stimulate domestic investment in new industries' and asserting that a 'strong national capability in investment attraction and facilitation is required.'(16)
Mortimer tends to use arguments of the type: 'if it is alright in ASEAN countries we should do it too.' In Mortimer and the other reports there is the sense of an international competition for footloose investments, investments which could be situated in a number of locations, and the choice is likely to depend on the incentive different competing countries are prepared to offer. However, there is one important case where Mortimer relies heavily on generally accepted externality arguments. That case is the Research and Development (R&D) area. In that case Mortimer refers to the earlier studies which show a strong social return to R&D spending far in excess of the private return to R&D spending. If the social return exceeds the private return it means society is getting a benefit beyond that which the people involved are paying for. That implies that society would have been willing to pay more for the additional benefit. Furthermore, if the payment is not commensurate with the benefit, it is likely to mean that there will be insufficient effort into providing the beneficial 'good' in the first place. There is a wide variation in existing estimates of the social and private returns so Mortimer opts for a 50 cents in the dollar contribution-meaning the private and social contributions are equal.
In a recent speech to the Committee for Economic Development of Australia, Bill Scales, the Chair of the Industry Commission, severely criticised proponents of interventionist industry policy, including the Mortimer report itself. Scales accepted the Mortimer recommendations to the effect that new policy should satisfy cost benefit criteria and should incorporate performance measures. Indeed, those recommendations reflected the submission the Industry Commission made to Mortimer. However, Scales complains that Mortimer 'does not apply its own established principles of rigorous analysis to this [the $1 billion investment attraction mechanism], and other such recommendations.'(17)
Scales says that there is no theoretically justifiable argument in Mortimer which puts an intellectually respectable case for industry intervention in many of the ways recommended in the Report. The exception is the references to R&D as discussed above. The Industry Commission itself in its monumental work on R&D argued that there are strong 'market failures' which result in under expenditures on R&D and which require government intervention to correct.(18) Scales says '[a]nyone who has even a passing familiarity with the Industry Commission's work would know that we are advocates of government support in this area.' Here Scales is critical of the Mortimer report which wants to scale down the Commonwealth Scientific and Industrial Research Organisation, universities and the Cooperative Research Centres and suggests Mortimer is going in the wrong direction. Mortimer may be motivated, at least in part, by the desire to keep down total outlays within his package of recommendations.
At the time of writing, the Government has not responded to these reports, although Senator Richard Alston, Minister for Communications and the Arts, has also been appointed Minister for the Information Economy. In addition, a new National Office for the Information Economy has been created. While these changes follow the Goldsworthy Report, the Prime Minister, Mr Howard, was reported as saying that rather than Goldsworthy, the changes reflected earlier discussions on the beneficial impact of the information economy with US Federal Reserve Chair, Alan Greenspan.(19)
When Scales complains that there is no justification for aspects of the Mortimer Report he is definitely rejecting the proposition that investment should be subsidised, unless a case can be made on market failure or similar grounds as described above. Scales, the Industry Commission and many other economic commentators rely heavily on neo-classical economic theory in their arguments. Imperfections and market failures can occur and provide a justification for intervention in the neo-classical theory. However, these are the exceptions and do not provide a general case for intervention.
One important implication of the neo-classical theory is the view that '[a]ctivity encouraged by government business programs typically comes at the expense of activity elsewhere in the economy.'(20) Moreover, neo-classical theory suggests the activities into which you have to 'push' the economy are likely to be less productive than those activities which happen naturally through the ordinary workings of the market. Hence there is a net 'loss' to the economy through such interventions. Of course Mortimer puts himself directly at odds to this way of thinking when he says in the passage referred to above that we should go 'beyond the narrow view that Australia should accept simply what the market determines.'
Mortimer is more inclined to use language such as 'wealth creation' and 'boosting investment' rather than 'increasing efficiency' and 'overcoming market imperfections' which are the catch cry of neo-classical economics. There is certainly nothing in the Mortimer report to suggest the view that induced activity detracts from the overall performance of the economy. Instead there is a perhaps simple view that additional incentives for promoting and facilitating investment will increase our growth rate and so address problems associated with unemployment.
There is also a view in Mortimer and the other reports that investment begets investment. Or perhaps 'business begets business' is a better description. It seems to be a reasonable view in business circles that new business activities create new opportunities for others, spread confidence and in other ways induce even more activity. Indeed, Mortimer's proposed investment incentives should be designed to attract projects 'that will provide the largest spillover benefits to the Australian community.'(21) Nevertheless, emphasis on investment and wealth generation challenges the basis of neo-classical economics.
It is easy to criticise the business perspective, as represented by the Mortimer Report, as just special pleading or 'rent-seeking' on the part of business. On the other hand, business people may find it hard to understand that the interests of business may not be congruent with the interests of society at large. When there is blank misunderstanding like this it is often a result of people seeing the world in completely different ways. It is that which makes for difficult communications between business and institutions such as the Industry Commission and other economic policy making areas of government.
To appreciate this 'communication gap' it is worth pausing to outline how the neoclassical economist sees the world. Important features of the neoclassical vision include the dominance of competition in free markets and the importance of competition in producing the most efficient allocation of resources. Competition and the search for the competitive advantage in the market solves the problem of how and where to produce goods and services in this vision. However, the what to produce is decided entirely by those who want to make a purchase. The consumer is 'king' in this world. Profit can only be made by meeting the needs of consumers, so self interest is harnessed in the cause of meeting the needs of consumers and, therefore, the needs of society. Consumers in turn are assumed to be interested only in maximising the satisfaction they obtain through their purchases in the market.
Maximising welfare means most efficiently deploying society's resources to best meet the needs of consumers. That means setting up the processes in which producers compete for the consumer's dollar, with only those producers who can best meet consumer needs surviving in the long run. Savings and investment are only minor complications in the vision. People are seen to save in order to spread their consumption forward over time. By doing so they make resources available to those producers who wish to expand their capacity to meet the needs of consumers in the future. Saving is deferred consumption which frees present resources so that producers can invest to meet the needs of future cohorts of consumers.
There are many points in the argument where we might want to object or make qualifications. However, that is beside the point for present purposes. Without specifying our objective for the economic system there is no way we can argue that this or that organisation of economic activity is better than some other alternative. The important point is that in the neo-classical vision the objective of economic activity is the maximisation of aggregate consumer satisfaction. That is what is meant by the objective of maximising economic welfare.
However, this vision, or at least this objective, does not really seem to be shared by some of the other perspectives on economic policy such as the perspectives contained in the three reports. The Mortimer report certainly does not talk about how to best address the needs of Australian consumers, although there is no reason to doubt that Mortimer himself would also regard that as a very desirable objective. Instead Mortimer talks about wealth creation and the need to increase wealth, which he sees as the imperative of economic policy. Mortimer of course has titled his report, 'Going for Growth.' In addition there are references to enhancing 'the community's capacity to create wealth,' 'increasing the wealth of all Australians, 'boosting investment,' 'more proactive in promoting and facilitating investment.' Key words are 'wealth', 'growth' and 'investment.' Government policies are assessed in terms of their effects on wealth creation. In this Mortimer is not alone. Other business people talk about the objective of policy in terms of creating wealth or increasing investment.
Presumably Mortimer and others have in mind some notion of total wealth in Australia, though whether it should be Australian-owned as well is not made clear. Leaving that aside, a moment's reflection should make it clear that an approach to economic policy which has the aim of increasing wealth may lead to outcomes not necessarily compatible with maximising welfare as described above.
To begin with, wealth is assets owned by people or companies, but the value of the assets which constitute wealth is determined on the market, the property market, the stock exchange or other similar markets. Now for most assets which constitute wealth, their value is determined in the market on the basis of many factors, among which the expected income yield or future profit is the overwhelming factor. Wealth in dollar terms then becomes the discounted present value of the expected income to be generated from particular assets held as wealth.
Given the public policy objective of increasing wealth, as put by the business community, there are measures which might be advocated even though they would not necessarily increase economic welfare according to the neo-classical vision described above. Tax incentives for business, financed by increasing taxes on consumers, would not necessarily meet the economist's criteria of maximising welfare. However, that policy switch would do the job of increasing wealth. Profit would be expected to increase as a result and so the present value of the future profit stream would be increased. Increasing incentives for business investment could well be criticised as 'business welfare'. It would be seen to distort the market so as to encourage an above optimal level of savings/investment. That would be reducing economic welfare below that attainable in the free market. However, such a policy would appear quite acceptable to the bulk of the business sector since it would be consistent with increasing wealth and maybe investment.(22)
To the business person thinking in terms such as those described above, there may be nothing intrinsically wrong with tilting the incentive structure in their direction so as to increase the wealth and investment being generated. The business game plan is to accumulate wealth, maximising value for shareholders. Similar objectives are often put as being the desirable objectives for a nation to pursue. That certainly appears to be the case with Mortimer who finds nothing wrong in adding a bit of incentive from the government.
Mortimer's views therefore can be seen to represent a rejection of neo-classical thinking, if not the theory. There is also a strong sense in Mortimer and the other reports that we can build a self sustaining growth momentum if we can encourage higher investment. Indeed, Mortimer suggests Australia should direct incentives to projects where there are 'demonstrable spillover benefits' which would be associated with new dynamic processes.(23) In this sense Mortimer and the others could be regarded as making a contribution in the spirit of those who emphasise 'cumulative causation.'
This section briefly looks at some of the cumulative causation mechanisms that might be advanced to give more theoretical justification for the government intervention recommended in Mortimer and the other reports. The expression 'cumulative causation' was designed to convey the notion that by bringing in activity X, further processes can be induced which have beneficial snowball effects on the rest of the economy. To illustrate the mechanism it is useful to consider the example of an innovative technology and how the initial training of the workforce spills over for the benefit of other employers.
When an employer trains employees we might at first suggest that it is entirely a matter between them. Both will benefit from a higher skilled workforce-the former receives more output per worker and the latter receive better pay and conditions. However, there is a significant turnover among workers which means that subsequent employers will also enjoy the benefit of the training provided by the first employer. It also means that if the first employer is also the first user of a new technology, the first employer will have to train not only the workers who can be expected to use the new technology in the first instance, but also later workers who are taken on to replace those who leave. The higher is the turnover, the greater is the training that will have to be given in order to ensure a sufficiently trained workforce at any point in the future. In this way the first firm generates benefits for subsequent employers for which it receives no consideration. That is certainly an example of an externality.
Installing a new technology for the new user, or supplying some of the components for it will mean that new skills are learned by the suppliers to the user of the new technology. 'Learning by doing' therefore extends beyond the main user of the new technology. That experience then becomes a valuable resource which can benefit other customers of the supplier firms. The important point is that in the normal course of events there are likely to be benefits which spin off for the benefit of unrelated parties.
The Industry Commission examined such linkages in its report on the motor vehicle industry. It admitted that externalities were generated by car manufacturers but could not identify a specific 'market failure' and so, under its own self imposed discipline, failed to see a reason for government intervention and was not convinced the externalities would have been big enough to warrant intervention.(24)
Externalities and spill-overs are no doubt important in Australian manufacturing. However, equally important is the likelihood that economies of scale will be pervasive. Recall the view above that if we push the economy towards greater production of a particular good we are likely to reduce overall productivity. That in turn reflects the view that we run into diseconomies of scale, which means that beyond some point the unit cost of production increases as production increases. If instead increasing returns to scale are pervasive, then there is a strong argument for intervention to get industry as big as possible.(25) In that case the more industry is pushed in a certain direction, the lower are its costs of production. That in turn increases its competitiveness and increases overall productivity.
An influential observer of the East Asian economies has observed:
Where external economies, economies of scale, and learning-curve economies are important, the market structure is unlikely to generate socially desirable outcomes- rapid growth and shifts in economic structure towards higher value added products. In Taiwan, Republic of Korea and Japan, government policy has probably played an important role in stimulating their realization, and hence in improving domestic ability to compete against other countries' suppliers...If one accepts that external economies, economies of scale, and learning-curve economies are major sources of technological advance and productivity growth, the efforts of the state to make sure that market conditions do not obstruct their realization within the national unit take on great significance in explaining the superior economic performance of the East Asian three.(26)
The above discussion of cumulative causation is not a justification for industry intervention, however, it illustrates how such a justification might proceed and how a theoretical underpinning for Mortimer and the other reports might be developed. To do all that would be beyond the scope of the present paper. The considerations raised by the discussion of cumulative causation also indicate the type of characteristics which an industry might display in order to be a good candidate for government assistance and incentives. The likely candidates should display strong economies of scale (or similar attributes) which would imply that, once set in motion, they should quickly generate a life of their own and generate benefits for other domestic industries.
There have been vigorous debates about industry policy in Australia associated with the Mortimer Report, the Goldsworthy Report and the Economist Intelligence Unit Report for the Metal Trades Industry Association. The three reports seek to provide incentives for globally foot-loose industry to locate in Australia. Specifically, each of them advocates investment attraction subsidies, greater incentives for research and development and a greater emphasis on outward looking sectoral planning mechanisms. Economic commentators, including Mr Bill Scales from the Industry Commission, have criticised those aspects of the Mortimer Report in particular, as have some of the economic commentators in the Australian press.
Critics of the Mortimer and other reports believe intervention in industry is not generally warranted unless specific externalities can be found which necessitate government intervention and there is no other means of addressing the externality. It is not the purpose of the present paper to come down on one side or the other. However, it is important to appreciate that the opposite sides in this debate have rather distinct and different conceptions of how the world works. This paper has tried to outline exactly how, in the author's opinion, the respective views of the world differ. It was argued that while the neo-classical economist's argument is based on efficiency in terms of meeting consumer needs, Mortimer and the business perspective is based on increasing wealth and using the investment process as a mechanism to generate greater wealth. Those different starting points can lead to different outcomes. Also implicit in the business perspective is the view that economic performance involves a process of cumulative causation. Inducing greater activity generates its own momentum in this thinking, and if the necessary conditions are present, cumulative causation mechanisms can overturn the conclusions of the neo-classical theory.
