Building Innovative Capabilities
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BUILDING INNOVATIVE CAPABILITIES REVIEW OF THE AUSTRALIAN TEXTILE, CLOTHING AND FOOTWEAR INDUSTRIES VOLUME 2 © Commonwealth of Australia 2008 This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and enquiries concerning reproduction and rights should be addressed to the Commonwealth Copyright Administration, Attorney General’s Department, Robert Garran Offices, National Circuit, Canberra ACT 2600 or posted at http://www.ag.gov.au/cca. ISBN 978 0 642 72361 5 Note: The dollar amounts in this report are in Australian dollars, unless otherwise indicated. Disclaimer The material contained within this document has been developed by the Review of the Australian Textile, Clothing and Footwear Industries. The views and opinions expressed in the materials do not necessarily reflect those of the Australian Government or the Minister for Innovation, Industry, Science and Research. The Australian Government and the Review of the Australian Textile, Clothing and Footwear Industries accept no responsibility for the accuracy or completeness of the contents, and shall not be liable (in negligence or otherwise) for any loss or damage (financial or otherwise) that may be occasioned directly or indirectly through the use of, or reliance, on the materials. Furthermore, the Australian Government and the Review of the Australian Textile, Clothing and Footwear Industries, their members, employees, agents and officers accept no responsibility for any loss or liability (including reasonable legal costs and expenses) or liability incurred or suffered where such loss or liability was caused by the infringement of intellectual property rights, including moral rights, of any third person. ii CONTENTS Evaluation OF THE PRODUCTIVITY COMMISSION MODELLING OF TCF assistance 1 international POLITICAL ECONOMY OF THE TEXTILE AND CLOTHING INDUSTRIES OF DEVELOPED COUNTRIES: EXAMPLES FROM THE US, UK AND GERMANY 17 INDUSTRY POLICY FRAMEWORKS FOR A KNOWLEDGE ECONOMY 43 SUPPLY CHAIN Considerations FOR THE AUSTRALIAN TCF INDUSTRIES 95 SurveY OF STRATEGIC INVESTMENT PROGRAM GRANTEES 113 DESIGN AND FASHION IN THE AUSTRALIAN TCF INDUSTRIES 137 LABOUR ADJUSTMENT: CHANGES IN EMPLOYMENT IN THE AUSTRALIAN TCF manufacturing SECTOR 177 iii iv Evaluation OF THE PRODUCTIVITY COMMISSION MODELLING OF TCF assistance Associate PROFESSOR RICHARD DENNISS Crawford SCHOOL OF ECONOMICS AND GOVERNMENT AUSTRALIAN National UNIVERSITY INTRODUCTION As part of the terms of reference for the Review of the Textile, Clothing and Footwear Industries, the Productivity Commission (PC) was commissioned to conduct economic modelling of the impact of changes to TCF tariffs and budgetary assistance. The Productivity Commission was asked to model a wide range of policy scenarios in order to shed light on the likely macroeconomic and sectoral impacts of policy change (see Productivity Commission 2008). The approach adopted by the PC was to use a comparative static computable general equilibrium (CGE) model, the MMRF. In the words of the PC, ‘modelling requires a range of assumptions to be made about behaviour and other parameters, the validity and significance of which always needs to be tested’ (PC 2008: XIII). This paper begins with an overview of the PC’s modelling results and then discusses the limitations and flaws in applying the PC model. 2 REVIEW OF THE AUSTRALIAN TEXTILE, CLOTHING AND FOOTWEAR INDUSTRIES VOLUME 2 OVERVIEW OF THE PRODUCTIVITY COMMISSION MODELLING RESULTS The results of the PC’s modelling exercise, and additional commentary, were published on 8 July 2008 in a report entitled Modelling Economy-wide Effects of Future TCF Assistance. The key results, as defined by the Productivity Commission, are presented in the table below. Table 1: Assistance reductions deliver economy-wide gains, even with restrictive assumptions Column/(scenario) 1 (R) 2 (O1) 3 (S2a) 4 (S3a) 5 (S1a) 6 (S4) Tariff To 5 To 5 per To 5 per cent To 5 per cent To 5 per cent To 5 per cent per cent cent Budgetary assistance To 0 No change To 0 To 0 No change To 0 Sensitivity scenario 10 per cent 30 per cent remain Productivity Minerals pass through unemployed increase boom National aggregates ($m) Real adjusted GNE 63 63 50 18 114 12331 Real GDP 71 71 58 23 121 13458 Export volumes 385 324 362 378 309 -6935 Import volumes 344 336 238 334 332 4650 Sectoral output ( per cent change) Agriculture 0.02 0.01 0.02 0.02 0.01 -1.56 Mining 0.08 0.05 0.08 0.07 0.04 14.03 Food processing 0.05 0.04 0.05 0.05 0.03 -3.21 Manufacturing -0.07 -0.06 -0.04 -0.08 -0.04 -4.12 Services 0.00 0.01 0.00 0.00 0.01 0.80 Textiles ( per cent change) Output -2.76 -2.27 -2.43 -2.77 -1.72 -5.30 Employment -3.09 -2.53 -2.72 -3.10 -3.54 -6.19 Clothing ( per cent change) Output -5.12 -4.55 -3.05 -5.12 -3.91 -11.81 Employment -5.73 -5.10 -3.42 -5.73 -5.98 -13.46 Footwear ( per cent change) Output -2.06 -0.60 -1.75 -2.07 1.41 -13.79 Employment -2.48 -0.85 -2.08 -2.49 -0.24 -16.25 Note: A description of each of the scenarios is provided below. Source: PC (2008: XVII, Table 2). The most important finding shown in the table is that the potential economic benefits flowing from a modest (1.5 per cent) increase in productivity, combined with tariff reductions ($121 million per annum), dwarf the potential benefits from reducing tariffs alone ($71 million). While the PC focuses on the potential benefits of tariff reductions alone, the analysis below suggests that the estimate of $71 million in potential benefits from tariff reductions is best interpreted as an upper bound. Including real-world assumptions such as labour market immobility, imperfect competition in the retail sector and low elasticity of export demand significantly reduces the potential benefits from tariff reductions. The benefits of increased productivity, on the other hand, are less sensitive to the choice of modelling assumptions. This discussion of the results of the modelling begins with the scenario presented in column 1 of Table 1 (the reference scenario, which assumes that tariffs fall to 5 per cent and all TCF-specific budgetary assistance is abolished). The other scenarios will then be discussed in turn. The section ends with a critical analysis of both the conclusions and method contained in the PC report. Evaluation OF THE PRODUCTIVITY COMMISSION MODELLING OF TCF assistance 3 SCENARIO 1—tariffs fall TO 5 PER CENT AND budgetarY assistance IS ABOLISHED As noted above, the results of the modelling suggest that reducing tariffs to 5 per cent and abolishing budgetary assistance will lead to an increase in GDP of $71 million per year. At the sectoral level, the model suggests that the pursuit of such policies would result in a 0.07 per cent decline in the size of the manufacturing sector, with the largest increases in the size of mining (0.08 per cent) and food processing (0.05 per cent). The mechanisms by which a reduction in TCF output will lead to an increase in mining are discussed in detail below. At a finer level of disaggregation the results suggest that the textile, clothing and footwear industries will decline by 2.76 per cent, 5.12 per cent and 2.06 per cent respectively, with reductions in employment across those industries estimated to be 3.09 per cent, 5.73 per cent and 2.48 per cent respectively. To summarise the findings for scenario 1, reducing tariffs to 5 per cent and abolishing all TCF-specific budgetary assistance will lead to a very small increase in GDP, and the loss of thousands of jobs across the TCF sector, with the biggest reductions occurring in the clothing industry. SCENARIO 2—tariffs fall TO 5 PER CENT AND budgetarY assistance IS maintained The most significant feature of the modelling results for this scenario is how similar they are to those of scenario 1, which suggests that there is no macroeconomic case for ending budgetary assistance to the TCF sector. This does not mean that other arguments for the abolition of assistance might not be advanced, but the modelling suggests that such a change in policy would have no impact on GDP. At the sectoral level there are, however, some important differences between scenarios 1 and 2. The most important difference is the way that the budgetary assistance helps soften the impact of tariff reductions in the TCF industries. The results of scenario 2 suggest that budgetary assistance is sufficient to prevent almost all of the decline in output associated with tariff reduction in the footwear industry. SCENARIO 3—tariffs fall TO 5 PER CENT AND budgetarY assistance IS ABOLISHED, BUT ONLY 10 PER CENT OF THE COST REDUCTION FROM tariffs IS passed ON TO CONSUMERS This scenario focuses attention on the potential adverse impacts of market power in the TCF distribution chain being used to capture the benefits of tariff reductions for retailers and wholesalers rather than being passed on to consumers. One of the assumed major benefits of tariff reductions is lower prices for consumers, but if markets are not highly competitive then such price reductions may instead be converted into higher profits by distributors. The modelling shows the potential significance of imperfect competition in the TCF wholesale and retail supply chain. For example, column 3 shows that if only 10 per cent of the value of tariff reductions is passed on to consumers, then GDP is likely to rise by only $58 million rather than $71 million. That is, up to 18 per cent of the potential increase in GDP is contingent on the assumption of a high degree of competition in the TCF wholesale and retail chain.