How to Get Manufacturing and the Rest of the Tradeable Sector to Grow
Listener 27 February, 1999

Keywords: Growth & Innovation;

“Deindustrialization” describes the process whereby the manufacturing sector grows more slowly than the rest of the economy. Almost all rich OECD countries have experienced deindustrialization in the last three decades. Including New Zealand, whose manufacturing sector’s contribution to production decreased from 24 percent of GDP in 1974 to 18 percent in 1993. (The employment share fell from 27 percent of the labour force in the 1960s to 17 percent in 1993. The sharper employment fall, here and in rest of the OECD, reflects the faster rise in manufacturing productivity.)

Perhaps surprisingly for a country that thinks itself rural, the relative size of New Zealand’s manufacturing has been similar to the OECD average. It is true that we lack some of the most prestigious industries – jet aircraft, computers and specialised steels – while our factories are often smaller than their international equivalents. However we have had a large food processing sector – dairy factories and freezing works – which, competing against protected overseas equivalents, is usually larger and more efficient.

Deindustrialization is relatively new to New Zealand. Manufacturing’s has provided a fairly constant quarter of GDP since the 1920s (our earliest data), through to the early 1980s. although its composition changed. But since 1984 New Zealand has been deindustrializing faster than the rest of the OECD (despite the “Think Big” expansion of the petrochemical industry based upon processing Maui gas). This is partly a result of the major reduction in tariffs, and import licensing, export subsidies, and other interventions which supported the sector. But probably more important, the high real exchange rate made exporting more difficult and importing easier, so the sector has found it difficult to invest and expand.

Does this relative decline matter? In most OECD countries other industries have expanding to create the production and jobs to offset the diminution of the manufacturing sector. The big expansion is in the lower productivity service industry, which ranges from fast foods to medical care to leisure activities. Another big expansion has been the finance business sector, although I find this a little puzzling since once upon a time each worker in that industry serviced fourteen workers in other industries. Now they only service six. Other evidence suggests financial sector productivity is decreasing.

But unlike most of the service sector (the big exception is tourism) the manufacturing sector earns foreign exchange (or saves it by displacing imports). It is not, for primary industries are also a part of the tradeable sector. But as the foot note shows, the agriculture sector has also been diminishing in relative size. The other primary foreign exchange earners (including fishing and forestry) are not filling the gap. Not surprisingly then, New Zealand is finding it increasingly difficult to earn the foreign exchange it desires to pay for its imports, evident in the large current account deficit the economy faces (of about 7 percent of GDP).

The macroeconomics is more complicated than just requiring manufacturing and the other tradeable industries to grow to in order to fill that gap. However, unless these industries grow faster than the economy as a whole, any other measures will fail, or do so only by a major contraction of the domestic economy, which would mean lower living standards and rising unemployment. Conversely a larger manufacturing sector means more jobs. If manufacturing was as relatively large today as it was in the mid 1980s, it would employ about another 100,000 workers, reducing the unemployment queue. In addition their purchasers would generate jobs elsewhere in the economy.

So how to get manufacturing (and the rest of the tradeable sector) to grow faster. The Irish experience shows that a shrewd industry policy can assist. On a recent visit here, the feisty Mary Harney, Irish Deputy Prime Minister and Minister of Trade, Enterprise, and Employment, described the extraordinary success of the Irish economy. In part there is the advantage of being close to the European Union. But they have also pursued policies quite different from ours: a sound open-economy macroeconomic policy, a wages accord, a venture capital fund, strong regulation of competition, an emphasis on technical education, research, and responding positively to industry problems. It was a hands-together rather than hands-off approach to industry policy. In contrast we abandoned our car tariffs, without anything to replace the production, other than financiers to borrow to cover the increased external deficit.

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LOOSE CHANGE … The Farming Sector Too.

Just after the First World War, the farm sector contributed 30 percent of GDP. Today it contributes about 5 percent. While its share steadily declined between 1920 and 1985, like the manufacturing sector, the decline has been sharper thereafter.

It is harder to trace trends in farming production, because its production gets so affected by the weather, but the impression is that farming has suffered proportionally more than manufacturing. (Like the “Think Big” boost that manufacturing got from the pre-1984 policies, farm output is higher because of the horticultural sector subsidies.) This suggests the manufacturing sector decline is mainly the result of macroeconomic policy, rather than the loss of its interventions.

Whatever, the farm based New Zealand economy has disappeared, into one which is more diversified, but at the cost, apparently, of wastelands and unemployment.