BETWEEN FOUR WORLDS: CHINA, RUSSIA, JAPAN AND AUSTRALIA.
BETWEEN FOUR CAREERS and FOUR LANGUAGES.

Battling the Irrationalists

1. Australia’s Troubled Economy
2. Rely on the Foreigners
3. The Terumo Story – Killing the Golden Goose
4. The Exchange Rate to the Rescue
5. The Great Australian Car Industry Confusion
6. Australia’s Past Manufacturing Prowess
7. The Tariff Auction Scheme

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My efforts to get re-involved with Australia on trips back there during the eighties and early nineties meant greater involvement in Australia’s economic debate.

The debate was being dominated by something called economic rationalism – the brainchild of the now discredited US/UK market fundamentalist, supply-side economic theories married to the arid scholasticism of Australian academia and the light-headedness of most Australian media, the rightwing-conservative media especially.  

Getting involved was to waste a lot of my time, though I did get to meet some interesting people who shared my ideas.

Australia was not completely bereft of commonsense, I came to realise, even if my earlier Vietnam experience had left me doubtful. 

For the most part however I simply managed to convince a lot of other people that I was out of the mainstream, not only in foreign policy but in economic policy as well.

But first some background.

1. Australia’s Troubled Economy 

The Australian economy had been in trouble for some years – inflation, stagflation, trade deficits, fiscal deficits.

What to do?

The economic rationalists knew the answer – heavy tariff cuts to force efficiency into Australian manufacturing.

Rationalists were strong in the universities and the Treasury. Their ideas had also infiltrated the media, the business media especially.

As they saw it, expose Australia’s inefficient low tech and mid tech industries – textiles, metal working, white goods. TVs, steel, cars  – to the harsh winds of international competition, and not only would these industries be forced to shape up or ship out.

As well, Australia would emerge as a producer of computers and other high-tech goods – a Sweden of the southern hemisphere.

That after all was what their textbooks said: Resources freed from the demise of high labor cost, non-competitive low tech industries will move naturally into higher technology industries.

So the worker and managers from a bankrupted textile plant can be retooled to work in a computer factory?

Unlikely.

A Japan Comparison

To me, coming from Japan, the textbook absurdity of it all was obvious. Japan had always been careful about preserving weaker industries, even textiles, even if they seemed non-competitive

True, a large reason had been the familial concern for peoples’ livelihoods, and the difficultly dis-employing people . But Japan also saw protecting these weaker industries as providing the basis for future industries.

Higher-tech industries do not emerge from nowhere.  They require a strong network of skills and ancillary industries – what I and some others call the industrial base.

They usually also require support from existing large companies, from those keen to upgrade to higher tech. They can at least provide the resources – factory space, ancillary staff, basic technologies, maketing networks –  needed for the transition to higher tech.

And existing large companies do not survive long or well if you are busy bankrupting their lower tech activities.

…

At times I wanted to drag some of our economic rationalists to Japan to see how large textile companies like Toray and Teijin had gradually and organically moved from textiles to making a range of mid-tech goods and eventually even airplane bodies (via carbon fibre technology).

Meanwhile they had upgraded their textile divisions into fashion goods and high quality materials. 

So they were expanding both directions, and becoming much larger and more powerful companies in the process.

Crucial to making these changes had been protection of their textile divisions when they first came under threat from cheap imports as Tokyo was phasing other protectionist policies.

This allowed them gradually to upgrade to higher tech.　

In effect the higher amounts consumers were paying (under protectionist policies) for their textile goods, whether imported or Australian-manufactured, amounted to a subsidy helping the shift to higher tech. 

If any of these companies had been in Australia, our economic rationalists would happily have sent them bankrupt years ago for the sin of demanding temporary protection for their textile imports or manufactures. 

True, these transitions occur more easily in a vibrant economy. Canberra had long been doing its best to have us move to a dead hand economy.

…

Textiles were one example. Another was the importance of mid-tech.

The lesson of Japan, where venture capitalists were rare.  was that something like a computer industry was much more likely to emerge from large firms like Sony, NEC or Hitachi already making a range of mid-tech items – TVs, copiers, fax machines etc. 

This successful mid-tech production would provide the skills and capital – the base – needed to move gradually into making higher tech goods.

Waiting for new high-tech companies to emerge from garages would take time, and talent. And given the lack of individualistic entrepreneurs (Steve Jobs for example) that talent would have to come from existing mid-tech companies. 

Meanwhile Australia was busily using tariff cuts to close down not just textiles but also the very few reasonably large mid-tech firms it had, and which might just possibly have been able to evolve and survive as in Japan. 

Thinking Small 

The rationalist idea that high tech firms could emerge from green fields owed something to the Scandinavian-Silicon Valley experience.

But even there background experience and skilled entrepreneurs had been needed. Market scale was also needed.

Australia simply did not have the conditions for this to happen.

One of our economic rationalists, quite influential in industry policy, had produced a paper claiming that the high-tech goods needed to rescue the Australian economy could emerge from small firms of around 50 workers using CAD/CAM techniques.

They would develop specialised products that could be exported around the world and so rescue the Australian balance of payments

And they already had a model to point at – a small-time Sydney-based maker of quality yacht winches with international sales. 

Indeed, Canberra was so enthusiastic about the man who had created this firm that in the late seventies he was appointed to head Austrade – Australia’s export promotion vehicle.

But as a model export entrepreneur he did not last long. He soon sold out his entire operation to a foreign company and moved to USA.

(True, there have been a few other specialist product successes.  One of them was the medical appliance company, ResMed, founded by Peter Farrell, a good friend from his Tokyo days, when we both wondered where Australian industry was headed.

(At the time he was working mainly in Japan for a US company, Baxter. He had decided to move back to Australia and try to kick some reality into the idea of university-related venture businesses – in his case working out of the University of New South Wales. 

(Industry-academic links were then very much the flavour of the month in Canberra. NSW University made propaganda hay out of his move.

(But Peter soon discovered how dead and bureaucratic the Australian university scene could be.

(He went independent, and moved company headquarters to the US, where he now dominates the US sleep market.

(Ironically his main product, a device to counter sleep apnea, is distributed in Japan by none other than Teijin.)   

A Problem of Psychology 

Coming from Japan if there was one thing I would say about Australian industry planning: an infinite capacity to emerge unrepentant from disasters. 

Reflect on the lessons to be learned, or worse, criticise, and you were a ‘knocker’. ‘Gotta move on.’  Don’t waste time reflecting on spilt milk and past mistakes.

The wretched Australian Financial Review with its incessant go-go optimism was the chief purveyor of this never-ending optimism. 

An On-the-spot Investigation 

While the rationalists were carrying on with their theories, many Australian mid-tech industries – TVs,  white goods etc. – were collapsing in the face of competition from cheap priced imports from Asia. 

On a visit to Australia in 1974 I spent some time visiting stores to collect evidence of how these Asian goods were replacing Australian-made products.

Most of the Japanese products were cheaper than equivalent Australian products. Many also had brand-name advantage.

Some were selling below the sales price in Japan. In other words they were priced at marginal cost – a favourite tactic exporters use to penetrate foreign markets.

How could any Australian firm possibly compete with marginal cost pricing from large-scale, established overseas producers?  

Impossible.

I got my results published in The Australian. But it made little impression on Canberra, or the AFR rationalists.

My brother Nicholas, who also knew much about industry, sympathised with my efforts and offered to organise a Canberra seminar with concerned bureaucrats he knew.

I forced me to revise somewhat my views of bureaucrats. I began to realise their problem: no criticism of P.M.Hawke’s rationalism would pass cabinet, they said, almost in unison.

When I look back on the harm that lazy, knock-about, semi-alcoholic, philandering  apology for a politician brought to Australia,…. 

2. Rely on the Foreigners

As Australian firms collapsed before the flood of cheap Asian goods, Canberra then fell back on its longtime favourite technique – assembling a bunch of Australian businessmen into an officially government-sponsored group to go out tell the world what a great place Australia was for investment.

In other words, persuade the foreigners to do the investments that the Australians would not or could not do for themselves.

Japan was their first target, with lavish receptions laid on at expensive hotels.

One hates to think of the money needed to launch this bunch of bureaucrats, amateurs and carpetbaggers into the bemused attention of sane and serious Japanese business.

Needless to say, the results were zero .

—

 I recall one of those ineffective affairs in the grand hall of Tokyo’s plush Hotel Okura, with the usual collection of non-Japanese speaking Australian officials trying to make conversation with the usual collection of non-English speaking Japanese businessmen.

(I was not invited, as usual.  But by chance I could see what was going on from the room next door where I had been invited by the all-Japan Chamber of Commerce to talk to members about Japanese versus Western management systems.)

True, things improved later when the Embassy went out and hired a Japanese staff person with the specific job of finding quality investors.

But what happened when they did manage to find someone willing to make a serious technological investment in Australia?

3. The Terumo Story – Killing the Golden Goose 

Terumo was and remains a major maker of medical equipment in Japan. Persuaded by the hype to invest in Australia, and with the promise of some protection from cheap imports, it opened a factory in Victoria.

But as soon as the factory was up and running, the rationalists moved in to demand tariff reductions.

But without some protection it was obvious that the new, small-scale plant in Australia could not compete with cut-price imported devices. 

Even when it was up-and-running it would probably still need some protection since it still did not have scale economies.

…

But none of this worried the Canberra rationalists.

Removing tariff protection would force the factory along with other similar industries to be more competitive, they claimed.

Australia did not need non-competitive foreign investments, they insisted.

And this was at a time when the Australian dollar was already badly over-valued, making it even more difficult for firms – newly established firms especially – to compete with cheap imports.

Terumo had to just grit its teeth and try to become more competitive, the rationalists demanded.

…

Terumo decided otherwise.

It just folded its tents and left, leaving its would-be 250 employees stranded, and a large stain on Canberra’s happy talk about wanting more foreign investment.

The incident was widely reported in Japan.

I wrote something about it for the Melbourne Age, then one of the few media outlets worried about Canberra’s lack of a sensible industry policy.

Here, I said, was a firm with international status, offering precisely the kind of investment Canberra said it wanted, and willing to back up its investment with skills and resources not available to any Australian firm.

If a firm of this quality was forced to leave as a result of Canberra’s rationalist attitudes, was it not time to take a closer look at the rationality of those attitudes?

But I got no reaction, other than a rationalist writing in to The Age saying Australia did not need non-competitive investments.

This was followed by a gloating AFR editorial about the Terumo exit  saying in effect, good riddance.  

Australia did not need inefficient foreign companies taking up space and resources.

Analysis

Australian are not stupid people. They are world leaders in some industries, agriculture for example.

But how come when it comes to manufacturing they not only get it wrong, they get it just plain stupid?

The mistake of allowing this important sector of the economy to come under the control of Canberra’s paper-addicted bureaucracy is one reason. But it goes further than this,I think.

I seriously doubt whether any of these people beating the anti-protectionist drum have ever  been inside a factory.

If they had they would realise not just the complexity but also the inter-related links of  most manufacturing processes. Organising, and training, people for all this takes time, and

resources.

All this can only come from what some call infant industry protection, but which in reality can sometimes be mature industry protection also.

The anti-protections somehow had the idea that manufacturers seeking protection were just lazy, inefficient people who needed to be incentivised by putting flame burners under their backsides.

That may have been true for a few of the low-tech protectionist people.  But certainly not for the mid-tech brigade.  I met some of these people and saw directly how they suffered, forced into bankruptcy for the sin of trying to create new industries for Australia.

I also knew well some of anti-protectionist people writing for our financial media. They were as naive as their Canberra equivalents.

Only in Melbourne, among writers for The Age, did one find glimmers of commonsense, with  calls for an industry policy. 

Industry policy was to become a forbidden word among the Canberra bureaucrats. Which surprised me because if they were not planning any policy, other than slashing protection, how did they justify their fat Canberra salaries?

…

But the stupidity goes further than that.

Having destroyed most of our mid-tech industry, the bureaucrats decided our industrial future lay with building submarines. 

If you cannot build and sell a car how do you set about building a submarine? And now they plan to build a nuclear submarine.

Ironically, as you drive to the heath-robinson future submarine plant in Adelaide you pass through the suburb of Elizabeth.

It was built and named to attract British car technicians from Britain’s collapsed car industry to come and work in Adelaide’s hoped for Mitsubishi and other car making plants.  The Mitsubishi plant went under. The others never arrived. 

I note that on the site of a former Mitsubishi plant in south Adelaide, Tonsley,  they have built a heavily subsidised ‘innovation district’ which seems to have linked up with Flinders University which has produced not much more than a nice hotel and cafe (presumably mainly for the benefit of the university staff), an expensive PR operation (which boasts how now thanks to the ‘innovation district’ no one has to get hands dirty anymore in messy car manufacture) and three showroom products invented so far, one a beer glass and beer tank washing machine in Bundaberg of all places. 

A great return on the 100s of millions already spent.    

4.  The Exchange Rate to the Rescue 

Meanwhile, the Australian dollar remained over-valued (we were still in the post-oil shock resources boom), making it even more unlikely that new high-tech or even mid-tech industries could emerge without some tariff protection.

In this situation simple economic rationality demanded that to the extent the currency was over-valued due to booming resource exports, then manufacturing industries, high-tech or not, had every right to receive the level of protection needed to match the degree to which the currency was overvalued.

So if the dollar was fifty percent over-valued, then a substantial tariff was both needed and justified, simply to level the playing field.

(The ‘level playing field’ was a concept much used by rationalists in the Australian economic debate.)

But those rationalists found it very hard to accept there was a problem with over-valued exchange rates.

They shared the disease of other free traders in those days – namely, that currency movements were the result of free market forces and therefore different from those undesirable tariffs.

In fact exchange rate protection in principle is not just  the same as tariff protection. Its effects it can be far worse since it is not even selective.

It is across the board protection, protecting even those who do not deserve it.

Selective tariff protection of consumer goods in the context of a planned industry policy is no more than a tax on consumers to develop an industry seen as crucial to the nation’s industrial future.

Many taxes are imposed on consumers for far less worthy purposes.

What is more, it is paid directly to producers, without the intervention of clumsy and corrupt bureaucracies.

(Rationalists loved to carry on about how tariffs raised costs throughout the economy and therefore lowered national competitiveness.

(But this was only true for producer goods, and even here the East Asians had found easy ways to compensate, by using subsidies for exports hit by those higher costs.)

The Over-Valued Exchange Rate Problem 

The burden of having to suffer the lack of scale economies imposed by Australia’s relatively small market already flooded with imports was one thing.

 An over-valued currency was even worse for any manufacturer facing import competition, especially competition from the Asian countries.

In those days Asian manufacturers already had strong footholds in the US and other markets.

They enjoyed not just the advantage given them by their own under-valued currencies, but also the scale economies that allowed them to indulge in the cut-throat, marginal-cost pricing to break into new markets like Australia.

Rationalist policies did not even begin to take account of these realities.

If foreigners wanted to indulge in cut-throat pricing then this was yet another benefit to be conferred on to Australian consumers by their rationalist policies, they said.

So Australia was to use those happy consumers to start building hi-tech industries? 

How textbook dogmatic can you get?

Gradually I began to realize that the rationalists had little idea of the realities in the world outside.

I suspect many of them had never talk to an Australian factory manager struggling to survive.

Fortunately one of the anti-rationalists had gone out of his way to give me a guided tour of factories suffering import competition. They were making good products but suffered from small scale and high costs relative to East Asian competitors.

The rationalists who were trying to destroy the tariffs crucial to keeping them alive had no idea of those problems. They had no idea of the concept of the industrial base, and how much it was needed to foster new industries.

They seemed to have even less idea of how harmful over-valued exchange rates could be for any Australian move to create new industries, and how beneficial under-valued exchange rates had been for the East Asian economies.

Australian Dollar Collapse 

But help was on the way, though not in the way the rationalists had predicted. 

For as myself and a few others had predicted, the loss of import competing industries due mainly to the irrationality of rationalist policies led to a surge in imports, which in turn saw Australia’s balance of payments heading south precipitously.

 (Unbelievably, an article in the Australian Financial Review, then the fount of much rationalist wisdom, welcomed the flood of manufactured imports into Australia as proof that rationalist policy was working and inefficient manufacturers were being forced out of business! )

 This balance of payments collapse in turn led to the collapse of the over-valued dollar, which in turn eventually came to the rescue of some of the industries the rationalists would have been happy to bankrupt. 

The car industry was one of them.

5. The Great Australian Car Industry Debacle 

Canberra, in a fit of laissez faire, rationalist market fundamentalism, had in the Whitlam years of the early seventies gone out of its way to encourage car makers from around the world to set up operations in Australia. 

Part of the deal was very high tariffs on imported cars, with lower tariffs on imported car parts. The idea was to encourage new car assembly entrants who would then compete against each other to create an efficient car industry worthy of Australia. 

And sure enough, every car maker worth his name from around the world rushed to get a foothold in the potentially lucrative Australian market.

But how could anyone set about establishing a serious car industry when a dozen of so makers were all competing for a share of Australia’s still small car market?  Clearly none of the would have the scale or resources to produce cars of quality and price attractiveness,

So despite the high tariff barriers, cars made abroad were still attractive to the Australian consumer, which meant that the share available to each domestic maker would be even less.

Needless to say, the firms that had set up in Australia realised this and did little more than set up small-scale, inefficient assembly operations but enjoying the tariff free entry.

Even so, many were soon struggling to survive.

Worse, their problems in turn were to be seized upon by the rationalists determined to prove the inefficiency of existing Australian manufacture, and the need to cut tariffs in order to force efficiency.

Most seemed unaware that it was their very own fundamentalist laissez faire doctrines that had created the mess they were decrying. 

Competition Shakedown 

Faced with small market share and the possibility of lower tariff protection, most of the assembly operations fell by the wayside, leaving in their wake wasted capital, unemployed workers and a thorough distaste for Australia’s irrational car policies. 

(I got to hear something of it all from the people trying to preserve the Toyota and Nissan operations in Australia.)

The number of makers fell to four – still too many for the small Australian market.

But those makers had been able to survive by sourcing many of their parts and materials cheaply from large, powerful parent companies abroad.  

But our ever-diligent rationalists were still not happy.  The survivors still enjoyed the originally high 40 percent tariff barriers against fully-assembled cars.

They demanded those barriers be at least halved, down to around 20 percent. 

Even so, the big four were still able to continue to survive, for as tariff protection was reduced the Australian dollar continued further to collapse.

Across-the-board exchange rate protection was replacing tariff protection.

Rationalism Gone Mad 

But then came the ultimate in rationalist irrationality.

Discovering that the big four car makers had not only survived but had even improved their production processes, the rationalists and their spokes-vehicle, the Financial Review, began a campaign to tell us how this proved that the lowering of the original tariffs for 40 percent down to 20 percent had forced the makers to improve their performance.

Their rationalist policies had been vindicated.

Those worthies had not even noticed that while tariff protection had halved, exchange rate protection had increased by almost 50 percent as the Australian dollar dropped in value from around 110 yen to around 60.

The net increase in protection was 30 percent.

It was this increased protection, plus heavy parent company support, that had allowed not only the four car makers to survive.  It gave them the leeway to invest and improve production processes.

I tried to get something into the Financial Review pointing this out. They simply refused publication.

But Manne’s Quadrant gave me some space, thankfully

We even managed to get a small debate going on its pages.

6. Australia’s Past  Manufacturing Prowess 

Some time later that same flagship of economic irrationality – the Financial Review – ran an opinion column pouring scorn on Santamaria, the highly conservative/rightwing leader of the Catholic-biased Democratic Labor Party.

Australia at the time was going through severe unemployment and crime problems, not to mention the collapse of its currency. 

Santamaria had written how Australia had been a much happier, fairer, less-crime ridden and more industry-progressive nation back in the fifties, before the advent of tariff-slashing economic rationalism.

An FR columnist had sarcastically accused Santamaria of troglodyte-ism, of wanting to take Australia back to the age of the dinosaurs. 

——

I had no brief to defend Santamaria.  He had done much to create the Yellow Peril fantasies that had underlain Australia’s Vietnam commitment. 

But I long been curious about the Australia of the fifties that I remembered.  

It had indeed seemed to be more stable, more egalitarian and even more prosperous in some ways. 

It had a fairly full range of surprisingly efficient mid-tech and even heavy industries. 

It was even able to make its own ships and railway cars, and had factories set up by GM to produce an all-Australian car – the Holden.    

Nor was tariff protection the only reason for all this activity. Distance, and then the war years, had isolated Australia from rival producers in the US and Europe.  

Behind these barriers, both natural and imposed, Australians had created a surprisingly broad and efficient industrial base – surprising because in those days Australia’s domestic market was sustained by a population of no more than around seven million.  

Over-Protectionism 

True, the postwar years had seen tariffs steadily raised in a bid to protect that industrial base and the employment it provided, and to  protect against emerging Asian producers.

But even so Australia did not seem to be suffering too much in comparison with other Western nations. 

Eventually however tariff policy became politicised. Some of the undeserving began to receive excessive protection.

A small group of conscientious economists (centered mainly in the very ANU department where I was doing my PhD work) began to complain, especially about excessive protection for the textile industry.  

At first they were both isolated and heavily criticised.

Today it might sound incredible, but the conventional wisdom in those days said that protectionism, even excessive protectionism,  was good for an economy

Today, of course, every form of anti-protectionism is the conventional wisdom. 

(Once again we see the amazing flip-flop phenomenon found so often in Australian thinking.)

But the small band of anti-protectionists stuck to their guns.  And like the early Christian martyrs, they gradually gained a hearing through their willingness to suffer ostracism and fight on for their ideals. 

Eventually those ideals were to become the new conventional wisdom.  

No one seemed able to take the middle road – that while excessive tariff protectionism could be harmful, so too was excessive anti-protectionism, especially when currencies were over-valued.

Australia As It Had Been 

I decided to follow up on the Santamaria story. I did not like the idea that he could be pilloried so easily and cruelly simply for trying to put forward some new thinking.

I was able in Tokyo to dig up an early 1950’s copy of the Financial Review.

And sure enough, it read very much like the Nikkei of the seventies that I knew – a catalogue of economic progress and new initiatives in a range of industries.

I then compared it with the very issue of the Financial Review in which the cynical anti-Santamaria criticism had been written. This time it was a catalogue of firms going out of business and rising unemployment.

I wrote to the Financial Review suggesting they compare the two editions of their own paper and admit that maybe Santamaria had a point.

Once again, no response.

(I mentioned earlier how Australians when criticized simply prefer to go off and sulk, or pretend they heard nothing. 

(It is yet another Japanese similarity.

(In Japan, letters to the editor pages of the national newspapers are usually just a mishmash of material supporting what the paper advocates.

(Australia is not quite that bad.  But when the criticisms are close to the bone they clam up.)

(One cries out for a paper like the London Financial Times, which for all its faults encourages debates and a range of opinions on its letter pages.) 

Industry Policies? 

At the time I was not trying simply to be destructive in my criticisms.

In those days China had yet to emerge. But it seemed clear to me that resource exports alone, mainly to Japan, would not be enough to sustain the Australian economy.

Even if the balance of payments could be held up, what other than service industries, would provide employment? 

Some manufacturing was needed. Ideally it should be competitive manufacturing, though the theoretical arguments for a competitive resource sector alongside a protected manufacturing sector are not stupid.

A very similar situation in reverse had long existed in Japan – a weak and protected farming sector alongside a strong manufacturing sector – without doing any obvious harm.

The problem was how to create reasonably competitive Australian manufacturing, especially when Asian manufacturing was getting even more competitive by the day.

In short, we needed an industry policy. And rapidly. And Canberra had to be the organiser

(One rationalist argument said bureaucrats could not be trusted to create intelligent industry policies.  In that case why employ them in the first place?) 

I had an idea.

My Industry Policy 

Australia needed to take a hard look at where it was going.

The East Asian industrial miracle was bound to continue.  Australia could not hope forever to protect all and every manufacturer, its high labor cost textile industries especially.

Ironically, these were the industries that ended up having to be protected during the Whitlam years, precisely because of their high employment levels.

As many more desirable mid-tech industries went to the wall, unable to cope both with the over-valued exchange rate and the incredibly stupid 25 percent across-the-board cut in tariffs ( sold to Whitlam in 1974 by my rationalist, textbook-economist colleague in Prime Ministers department, Fred Gruen, at the height of the exchange rate problem ) unemployment problems surged.  

Canberra realized that if the textile industries too went to the wall, the unemployment problem would be out of control.

So those industries ended up having to be protected, while the much less-labor intensive, mid-tech industries which Australia really did need were allowed to collapse.

Yet another proud by-product of rationalist insanity!

But a selective tariff policy that encouraged reasonably viable mid-tech industries to survive and prosper made sense, especially if there was some chance they could become competitive.

Certainly a selective tariff policy was better than the across-the-board protection of exchange rate depreciation.

Apart from anything else, the funds gained from the former would end up in Canberra hands rather than foreigner hands.

I even had a name for my idea  – tariff auctioning.

7. The Tariff Auction Scheme

The scheme was very simple.

Canberra would announce it was seeking foreign investors to create say a TV industry (Australia’s last maker had already gone to the wall, unable to compete with cheap imports).

Canberra would go to each of Japan’s TV makers in turn and tell them they could have fairly exclusive access to the large Australian market if they built us a large-scale, state of the art TV factory.

Ideally it would make maximum use of parts and materials available in Australia and seek cooperation with Australian capital.

On this basis what would be the minimum level of tariff protection they would need relative to the exchange rate in order to set up a factory, and for how long.

—–

Already, and knowing the Japanese mentality, I could see the furious bidding rush that would follow, with each large firm keen to deny competitors a chance to gain a foothold in the Australian market. 

(My studies of Japanese investment abroad had already taught me the importance Japanese firms place on what they call foothold investment.)

Having got the bids from Japan, the Australian negotiators would then go to Korea and Taiwan to get even more, and hopefully even better, bids.

The final result could well be the promise of a factory needing very little protection (with pricing of parts and materials needed from the parent firm at rock-bottom marginal cost), and with significant flow-on effects to the Australian economy.

Repeated across the spectrum of mid-tech industries Australia could well end up with a revived industrial base and some chance to start making those precious computers the rationalists wanted so much.

And Canberra’s negotiators would get a free inside look into East Asian mid-tech manufacturing processes – assuming they had the intelligence to realise the chances they were being offered.

Getting Published 

The neatness and simplicity of the idea grabbed me strongly.

In Tokyo I had managed to catch the ear of the ALP’s John Button, then visiting and then minister in charge of industry policy.

I had always respected his intelligence, and he seemed interested in my idea. 

But he warned me about the prevailing anti-tariff orthodoxy in Canberra under the Bob Hawke administration and the likelihood my idea would get nowhere.

Even so,  I felt I had at least to try, if only for the sake of Australia’s future.

I was back to the dilemma of my enclave solution for Vietnam during the war there.

I knew I might have little chance to push it through. 

But morally, and for the sake of Australia, I could not forgive myself if I had not done all I possibly could to push it through. 

Pushing the Idea in Australia 

I had been invited to Australia by the metal manufacturers association to give a speech at a Canberra conference they were organizing where they would try to temper the rationalist orthodoxy.

(They were suffering even more than most from East Asian competition.)

(For a while I even had a consultancy with them, until they decided it was too dangerous to criticize the Hawke orthodoxy.)

I even got to make a presentation to an industry policy think-tank in Button’s ministry. 

The members listened, carefully and intelligently.   But they too decided they had to stay with the Hawke orthodoxy.

Exposing Hawke 

Soon after I found myself at a leftwing conference in Melbourne. The Victorian Left notoriously had little sympathy for the rightwing Hawke and his simplistic economic orthodoxy.

But in those days the predominantly rightwing media found it easy to dismiss automatically whatever the leftwing was saying, the Victorian Left especially.

In frustration I decided to give conference the remark my father had made to me back in 1956 about Hawke’s failure as an economist while in Oxford. 

So why was anyone taking his economic views seriously today, I added .

My father”s comment was picked up by the Melbourne Age and some other papers.

But that too had little effect.  The rationalist orthodoxy was too firmly embedded.

And coming after my earlier published criticisms of Whitlam,  I had put yet another nail in my chances of gaining ALP friends.

A Book? 

Meanwhile I was talking to Manne and his Latrobe University colleague, John Carroll. Both were upset by damage being caused by rationalist policies.

As they saw it, the industries that had been carefully nurtured over the years and were now being put out of business, were part of Australia’s traditional culture.

And while their complaints were more moral and conservative rather than economic (Carroll was highly conservative, Manne later became highly progressive) I agreed to cooperate with them to put out a book.

The book eventually emerged, with a chapter by myself.  (Shutdown. The Text Publication Company, Melbourne, 1992.’The Failure of Economic Rationalism; And How to Rescue Australia’.)

But we were clearly fighting against the conventional wisdom tide.

The Australian dollar continued to collapse, to below 50 cents to the US dollar (earlier at the height of the resources boom it had been close to 400 cents).

Eventually the dollar was to recover, thanks mainly to the resource purchases by China – the nation Canberra had earlier tried to ignore and ostracise. 

The tourism/immigration boom created by rising 21st century incomes also helped.

But all that was a far cry from the original rationalist dream of Australia as the high-tech manufacturing Sweden of the southern hemisphere.

In fact, if the rationalists had had their way Australia would have been reduced to the level of Argentina.

Argentina Versus Australia 

The rationalists used to make much of the way Argentina had collapsed due to excessive protection.

Protection had led to industrial inefficiency, which had led to inflation and the collapse of the currency, with repeated depreciations, capital flight and more inflation.

There was even a book put out in Australia comparing the economy there with Australia’s, and warning that was where Australia would go if it lapsed into protectionism.

Ironically, no one seemed to realize that the excessive non-protectionism of the rationalists would from the opposite direction have pushed Australia into the same economic morass as Argentina. 

Lack of protection would have killed Australia’s industrial base, which would have led to chronic import surpluses, which would have collapsed the currency, forcing repeated depreciations.

Unlike Argentina, Australia could be saved by its continuing resources boom. So the depreciations were more gradual, allowing some remaining manufacturers to survive. 

This in turn worked to prevent complete loss of confidence in the currency and excessive capital flight in the interregnum before China began to ramp up resources purchases. 

But explaining all that to our economic rationalists would have taken too much time and effort, and for no effect anyway.

I was happy to head back to the practical economic rationality of non-dogmatic Japan, as it was then.

Later it too was to succumb to the disease of dogmatic market fundamentalism.  

But that is another story.