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Patterns of dependency : an analysis of Australia’s path to economic development Crowley, Michael Daniel 1984

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PATTERNS OF DEPENDENCY: AN ANALYSIS OF AUSTRALIA'S PATH TO ECONOMIC DEVELOPMENT By MICHAEL DANIEL CROWLEY .A. Hons., The University of New South Wales, 1978 A THESIS SUBMITTED IN PARTIAL FULFILLLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS i n THE FACULTY OF GRADUATE STUDIES (School of Community and Regional Planning) We accept this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA May 1984 ® Michael Daniel Crowley I n p r e s e n t i n g t h i s t h e s i s i n p a r t i a l f u l f i l m e n t o f t h e r e q u i r e m e n t s f o r an advanced degree a t t h e U n i v e r s i t y o f B r i t i s h C o l u m b i a , I a g r e e t h a t t h e L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r r e f e r e n c e and s t u d y . I f u r t h e r a g r e e t h a t p e r m i s s i o n f o r e x t e n s i v e c o p y i n g o f t h i s t h e s i s f o r s c h o l a r l y p u r p o s e s may be g r a n t e d by t h e head o f my department o r by h i s o r h e r r e p r e s e n t a t i v e s . I t i s u n d e r s t o o d t h a t c o p y i n g o r p u b l i c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l n o t be a l l o w e d w i t h o u t my w r i t t e n p e r m i s s i o n . Department o f Community and Regional planning The U n i v e r s i t y o f B r i t i s h C o l u m b i a 1956 Main M a l l V a n c o u v e r , Canada V6T 1Y3 Date May 30,1984. ABSTRACT The central argument of t h i s thesis i s that Australia's economic development can be characterized as a changing pattern of dependency, whereby the nature of Australia's development has been largely determined by forces external to A u s t r a l i a . Consequently this thesis argues that the problems r e s u l t i n g from the current restructuring of the Australian economy can be linked to changes i n the organization of the international economic system during the post war period. I t i s further argued that the f a i l u r e of the government to recognize t h i s pattern has led to Its actions exacerbating the impact of t h i s readjustment. I t i s therefore posited that i f the s o c i a l d i s l o c a t i o n r e s u l t i n g from t h i s restructuring i s to be moderated, an understanding of Australia's process of development must be achieved so that appropriate p o l i c i e s can be derived and implemented. Thus the main focus of t h i s study i s a h i s t o r i c a l analysis of the process of A u s t r a l i a ' s economic development, taking into account the evolution of the i n t e r n a t i o n a l context i n which i t unfolded. This general analysis i s followed by a case study of the Australian coal industry to examine more cl o s e l y the impact of this pattern of development. The analysis of t h i s thesis was undertaken from a theoretical framework b u i l t on Evans' (1979) conception of dependent development. The process of dependent development i s described as involving several phases. Beginning with the t r a n s i t i o n from " c l a s s i c a l dependence" to i n d u s t r i a l i z a -t i o n based on import su b s t i t u t i o n , t h i s phase i s quickly followed by the i n t e r n a t i o n a l i z a t i o n of the domestic market as transnational corporations penetrate the growth sectors of the economy. The most recent phase has involved the i n t e r n a t i o n a l i z a t i o n of the production process under a new i n t e r n a t i o n a l d i v i s i o n of labour. This f i n a l phase i s also linked to - i i i -increased d i s a r t i c u l a t i o n of the dependent economy leading to the marginalization of an increasingly redundant workforce. The outcome of the analysis was to conclude that the economic development of A u s t r a l i a could be reasonably described as a process of dependent development, whereby the dire c t i o n and pace of economic development are determined by the interaction between foreign c a p i t a l , l o c a l c a p i t a l and the l o c a l state. However, foreign c a p i t a l was found to play a dominant role i n shaping the d i r e c t i o n of economic development. This i s seen as a consequence of Australia's h i s t o r i c pattern of development and the p o l i c i e s of the Australian government i n the post war period which gave greater p r i o r i t y to strategic concerns than to issues of economic sovereignty. Po l i c y responses to some of the more obvious problems In the minerals and manufacturing sectors were i d e n t i f i e d . These included the need for greater co-ordination i n the minerals sector and the development of an i n d u s t r i a l p o l i c y for the manufacturing sector. However, i t was concluded that the underlying problem confronting the Australian economy was the f a i l u r e of the federal government to adapt to the changing international context created by the emergence of the modern transnational corporation i n the post war period. A brief outline of a national economic planning policy was given and suggested as a potential strategy for dealing with this changing context. This policy involves the co-opting of the corporate plan into the national economic development strategy. While the d i f f i c u l t y of implementing this strategy i s acknowledged, i t i s argued that without some affirmative action there i s u n l i k e l y to be any long term r e l i e f from the current problems confronting the Australian economy. - iv -TABLE OF CONTENTS Page ABSTRACT i i TABLE OF CONTENTS i v LIST OF TABLES v i ACKNOWLEDGEMENT S v i i CHAPTER 1 INTRODUCTION 1 1.1 Introduction and Problem Statement 1 1.2 Context 3 1.3 Method ... 7 1.4 Theory 9 1.4.1 Dependent Development 11 1.5 Austr a l i a : A Case Study of Dependent Development?.. 17 CHAPTER 2 DEPENDENT DEVELOPMENT UNDER BRITAIN: 1788-1939. 20 2.1 1840-1890: Pastoral Expansion 22 2.2 1890-1939: Roots of In d u s t r i a l i z a t i o n 25 2.3 Summary 29 CHAPTER 3 INTEGRATION INTO THE PACIFIC RIM ECONOMY UNDER UNITED STATES HEGEMONY 31 3.1 ANZUS Pact 34 3.2 Post War Expansion and Internalization of the Manufacturing Industry.. 36 3.3 Minerals Boom - Expansion and Internalization of the Mining Industry 40 3.4 Integration into the P a c i f i c Rim Economy 44 - v -Page CHAPTER 4 THE EVOLUTION OF THE AUSTRALIAN-JAPANESE TRADING RELATIONSHIP 57 4.1 H i s t o r i a l Roots 57 4.2 Post War: Rehabilitation of Trade Links 63 4.3 Australia's Incorporation into the Japanese Resource Hinterland 66 4.4 Japanese Business A c t i v i t y i n Aust r a l i a 73 4.5 Current Trends Within the Trading Relationship 76 4.6 Summary 77 CHAPTER 5 THE AUSTRALIAN-COAL INDUSTRY - DEVELOPMENT OR DEPENDENCY 80 5.1 History of the Australian Coal Industry 80 5.2 Post War Restructuring of the Coal Industry 83 5.3 The Re-emergence of the Australian Coal Export Trade.... 85 5.4 Expansion of Steaming Coal Export 98 5.5 Summary 103 CHAPTER 6 CONCLUSION 106 6.1 Overview.. • 106 6.2 Policy Responses 110 6.3 An Alternative Strategy 113 BIBLIOGRAPHY 116 - v i -LIST OF TABLES Table Page 1 New B r i t i s h P o r t f o l i o Investment Abroad, 1868-1891 24 2 Share of G.D.P. and Workforce for Rural Mining and Manufacturing Sectors, 1910-11 to 1959-60 38 3 Mining Industry Value Added Apportioned to Australian and Foreign Ownership, 1963 to 1974-75 43 4 Australia's Imports and Exports from Selected Countries, 1894-1913 58 5 Australia's Imports and Exports from Selected Countries, 1914-15 to 1938-39 60 6 Rate of Growth of Australian-Japanese Trade, 1957-58 to 1976-77 67 7 Australia's Imports and Exports from Selected Countries, 1949-50 to 1978-78 72 8 Australia's Exports of Coal to Selected Regions, 1861 to 1914-15 82 9 New South Wales and Queensland Coal Production, Exports and Proportion of Exports to Japanese Destinations, 1950-51 to 1981-82 87 10 New South Wales and Queensland Raw Coal Production by Method of Mining, 1960-61 to 1980-81 91 11 Japanese Imports of Bituminous Coal by Source, 1974-75 to 1980-81.... 94 12 Japanese Imports of Bituminous Coal by Type and Value from Selected Sources, 1980-81 97 13 Steaming Coal Exports from Aus t r a l i a by Destination, 1969-70 to 1980-81 99 - v i i -ACKNOWLEDGEMENTS I would l i k e to thank my supervisor, Dr. Clyde Weaver for his support, comments and encouragement which have greatly assisted the completion of this project. I would also l i k e to thank Dr. Terry McGee for his help and assistance. There i s also a long l i s t of family and friends who have provided continuous support and encouragement throughout this long process that I would l i k e to thank. I would l i k e to s p e c i f i c a l l y express my thanks and appreciation to Jean Dejong and Joe Watkins who generously provided me with a warm, supportive environment in which to f i n i s h this project. - 1 -CHAPTER 1 INTRODUCTION 1.1 I n t r o d u c t i o n and Problem Statement A u s t r a l i a began the 1980's with the expectation of entering into a period of economic growth and prosperity fuelled by an energy minerals boom. Though s t i l l only a r e l a t i v e l y small sector within the Australian economy (5% of G.D.P. in 1980-81) the mining industry had assumed a c r u c i a l importance as an earner of foreign exchange (accounting for 38% of export earnings i n 1980-81) (Hunter and Wood, 1981). The rapidness of this r i s e and the dramatic sectoral s h i f t within the economy i t represented i s reflected by the fact that the Vernon Committee, which conducted a major inquiry into the Australian economy in 1965, suggested that the mining industry would not represent a major force in economic growth. Yet by 1980 Au s t r a l i a had become the world's largest exporter of iron ore, the second largest exporter of coal and the dominant world producer of bauxite, alumina, r u t i l e and zircon, as well as a s i g n i f i c a n t producer of n i c k e l , lead, zinc and manganese (Govett and Govett, 1980). The main factor leading to the resurgence 1 of the mining industry i n Australia was the general expansion of demand on the international minerals market which stimulated a massive inflow of Investment capital by transnational corporations (TNCs) seeking to develop Australia's mineral reserves. Of particular importance to this resurgence was the rapid expansion of Japan's i n d u s t r i a l capacity and i t s consequent demand for mineral and energy raw materials. By 1966-67 Japan had become Australia's largest export market with iron ore and coal making up an increasing - 2 -proportion of t o t a l exports. There was another important feature of this period. Concurrent with the expansion of the mining industry, the manufacturing industry was undergoing structural change. As in the case of the mining industry the impetus for this transformation was largely external to Au s t r a l i a . Either through the direct actions of TNCs or in response to import competition, labour intensive operations were moved off-shore to take advantage of cheap, subjugated labour in South-East Asia while other production processes were reorganized by u t i l i z i n g labour replacing technologies (Linge and McKay, 1981). The Fraser government's (Liberal-National Country Party Coalition -1975-83) policy of "fight i n f l a t i o n f i r s t " and i t s promotion of a "minerals-investment led recovery" as the path to economic prosperity supported the forces acting to restructure the Australian economy. Promises of better times around the corner and a concerted public relations 3 campaign against the unemployed drew public attention away from examining the possible long term implications of the dismantling of the manufacturing sector. However, when the second resources boom stumbled i n 1982 Australia found i t s e l f in the midst of i t s worse economic recession since the depression. The severe impact of the recession focused attention on the wisdom of Australia's economic development strategy, a strategy that has been coming under increasing c r i t i c i s m in recent years (e.g. A.M.W.S.U., 1977, 1979; Corrighan, 1980, 1982; Crough and Wheelwright, 1982b, 1983; and Fagan et a l . , 1981). Thus, the problem that this thesis w i l l address i s whether the current restructuring of the Australian economy with a greater focus on - 3 -the mineral extractive and processing industries i s i n the best interests of most Australians. The argument of this thesis i s twofold. F i r s t l y , that the current focus of development i n Australia can be seen as the most recent phase in a pattern of dependent development that has served to severely r e s t r i c t economic progress. Secondly, that recent changes i n the structure of the / international economy w i l l result in even greater r e s t r i c t i o n s on Australia's development with severe consequences for a large sector of the Australian workforce. 1.2 Context The development of Australia as a s i g n i f i c a n t mineral exporter during the 1960's and 70's re f l e c t s the dramatic change in the structure of the international economy that took place during the post war period. The rapid and sustained increase in consumption in the advanced i n d u s t r i a l economies following the war led to an increased demand for i n d u s t r i a l raw materials. Transnational mining corporations headed out in the late 1950's and early 1960's combing the globe for new mineral producing regions in order to exploit this new demand and to maintain or gain control over mineral supplies. Australia was quickly indentified as a favoured target for TNCs due to i t s r i c h mineral deposits and favourable p o l i t i c a l climate. Thus Australia witnessed a massive infusion of investment by TNCs during the 1960's climaxing in the l a t t e r part of the decade with the so-called "minerals boom." While the bottom f e l l out of the boom by 1970-71, the TNCs had already successfully penetrated the mining industry (See Table 3, p. 43) securing safe and lucrative investments as well as r e l i a b l e sources of supply for the international minerals market - 4 -(Corrighan, 1982; Crough, 1978). Of c r u c i a l importance to the development of the Australian mining industry was the extraordinary resurgence of Japanese industry in the post war period. This resurgence was primarily the result of the American policy to reconstruct Japan as a c a p i t a l i s t stronghold on the edge of Asia. Japan's chronic shortage of natural resources meant that i t required access to s i g n i f i c a n t and r e l i a b l e sources of i n d u s t r i a l raw materials (C a r a i l l e r i , 1980). However, previous important sources of raw materials ( p a r t i c u l a r l y iron ore) were closed off due to the new regimes in China and North Korea. By the late 1950's the Japanese steel industry was searching for new sources of iron ore as i t s current suppliers, Philippines, Malaysia and India were unable to keep pace with Japan's rapidly expanding production. This fact led to a generation of interest in Australia as a supplier of mineral raw materials. As Australia was a major supplier of wool to Japan, a number of Japanese trading corporations were already established i n A u s t r a l i a . Therefore, i t was a r e l a t i v e l y easy matter for these corporations to expand their a c t i v i t i e s into the minerals sector, thereby further incorporating Australia into i t s resource hinterland. Thus, the 1960's and 70's saw a rapid expansion of the trading relationship between Australia and Japan as Australia became Japan's major supplier of a whole range of minerals including, iron ore, coal, n i c k e l , bauxite, and alumina (Corrighan, 1982). The growing trade relationship with Japan was widely considered at the time to be very desirable as i t linked Australia with Japan's growing prosperity. Given that the manufacturing sector had already begun to stagnate by the late 1960's the rapid development of mineral resources was seen as a much needed stimulus for the economy. However, with the collapse - 5 -of the long post war boom in 1974 came the decline of productive a c t i v i t y in Japan. This pattern, which was also seen in other i n d u s t r i a l i z e d countries, led to a tapering off of demand for mineral commodities and the decline of prices on the world market. This exposed Australia's v u l n e r a b i l i t y in depending on Japanese markets and consequently led to some attempts to d i v e r s i f y to export markets. However, the sharp r i s e in o i l prices in the same period focused attention on the potential value of Australia's considerable energy resources (coal, uranium and natural gas) rather than the potential p i t f a l l s of an economic strategy based on resource development. Meanwhile the manufacturing sector began to experience a dramatic decline in the l e v e l of employment. Between December 1973 and December 1978, there was a net loss of 197,200 jobs i n manufacturing industries. Over the same period the unemployment rate rose from 2.3% to 6.2% (Ward, 1979). The cause of this decline i s d i f f i c u l t to establish. The l i t e r a t u r e , however, does point to a number of trends. Marsden and Anderssen (1979) argue that the most si g n i f i c a n t factor has been the f a i l u r e of demand to keep up with the rate of productivity. Fagan et a l . (1981) suggest that the apparent f a i l u r e of demand could be better described as the f a i l u r e of the manufacturing industry to invest in new product lines in response to changing consumer preferences. 4* I t would seem that new Investment within the industry has either focused on i n s t a l l i n g labour-replacing equipment or on c a p i t a l intensive industries (e.g. aluminium smelting) (Alford, 1979; Fagan, 1981; and Donaldson and Donaldson, 1983). The s o c i a l upheaval that this restructuring of the manufacturing industry caused was presented by the government as a necessary process to - 6 -r e v i t a l i z e the industry in the longer term. This view argued that jobs lost in the shake-out of i n e f f i c i e n t manufacturing industries would be absorbed by the expanding minerals and t e r t i a r y sectors. The f l u r r y of interest i n Australia's energy resources following the second o i l c r i s i s i n 1979 lent some timely support to this position. By 1980 Australia's second "minerals boom" was in f u l l swing. I t was estimated at the time that mining projects involving investments of over $23 B i l l i o n were either committed or at the stage of f i n a l f e a s i b i l i t y studies; the majority of these being energy related (Corrighan, 1982). In addition various state governments, encouraged by r i s i n g o i l prices and by studies (e.g. Internatonal Energy Agency, 1978; Wilson, 1980) predicting a rapid increase in the demand for coal, were already implementing massive infrastructure development programs (e.g. coal export f a c i l i t i e s and coal-fired power stations) to attract mining corporations and energy-intensive industries (Corrighan, 1980). However, this boom was to be short-lived fading under the weight of the international recession. Thus many of these projects never made i t off the drawing board while others were postponed to wait for a recovery of commodity prices. With the collapse of the boom the impact of the recent restructuring of the economy on employment became f u l l y apparent. Unemployment which had hovered around 6% up u n t i l 1982 rose sharply during the following eighteen months to reach 10.3% i n June 1983. The implications of this restructuring are much more severe than these figures suggest, for they conceal the growth of hidden unemployment and underemployment (Ward, 1979; Windschuttle, 1979). Further, there has been considerable discrepancy in the spatial impact of this recession with the i n d u s t r i a l regions such as Newcastle, Wollongong and Geelong bearing - 7 -the brunt of the economic hardship ( S t i l l w e l l , 1980). If these trends continue then there i s the d i s t i n c t p o s s i b i l i t y that large sectors of the community w i l l become marginalized within declining i n d u s t r i a l centres (Crough and Wheelwright, 1982b). 1.3 Method As already indicated this thesis proposes to provide a broader international and h i s t o r i c a l context in which to evaluate the current restructuring of the Australian economy. As many of the features of the present situation are paralleled in Australian economic history, reference to previous experiences should provide some insights into the present predicament which would assist the formation of alternative economic strategies. However, as some of the factors contributing to the restructuring of the economy are r e l a t i v e l y new (e.g. the rise of importance of TNCs) i t i s considered necessary to also provide a brief overview of recent developments i n the structure of the international economic system. Together these w i l l provide a comprehensive background from which policy recommendations can be drawn. The core of this thesis w i l l be an h i s t o r i c a l analysis of the economic development of A u s t r a l i a . Beginning with Australia's settlement as a penal colony/strategic outpost for the B r i t i s h Empire, i t w i l l trace the major s h i f t s i n Australia's economic development, i d e n t i f y the major forces generating these and examine some of the consequences. Es s e n t i a l l y , • <p this analysis should demonstrate that Australia's economic development is best described as a changing pattern of dependence where the direction of development i s influenced not by national p r i o r i t i e s or actions but by the - 8 -interests of the dominant imperial power, i . e . the United Kingdom t i l l 1939 and the United States in the post war era. (It i s important to note throughout this study that while Japan also plays a s i g n i f i c a n t controlling role i n Australia's development, especially since the beginning of the 1970's, i t s influence i s as a junior imperial partner to the United States. Thus, while this study gives considerable attention to the Japan-Australia trade relationship, i t i s always within the context of the United States' domination of the P a c i f i c region). This general overview w i l l be followed by a case study of the Australian coal industry with s p e c i f i c reference to coal exports. The purpose of doing a case study i s to examine the impact of the pattern of dependent development in greater d e t a i l . The coal industry, being one of Australia's oldest industries i s a p a r t i c u l a r l y appropriate example. The fortunes of the industry have been closely tied to i t ' s performance i n export markets which in turn has been largely determined by external forces. For example, during the f i r s t coal export boom (1860-1914) the export of coal was primarily a by-product of the organization of the B r i t i s h merchant flee t ' s operation (Burley, 1960). Between the wars the export markets for coal a l l but disappeared and the Australian coal industry s l i d into economic recession. The re-emergence of the coal export trade i n the 1960's was largely due to the response of American transnational mining corporations to the growing demand for coal from Japan. Thus once again the prosperity of the coal industry was s i g n i f i c a n t l y determined by outside forces. A fact reinforced in recent times by cuts in coal prices and shipping quantities. - 9 -1.4 Theory Recent orthodox economic interpretations of the development of Australian capilatism (e.g. B u t l i n , 1964, 1970; S i n c l a i r , 1976; Butlin et a l . , 1982) though providing impressive empirical research, have tended to discount the influence of outside forces on Australia's economic growth and development. For example, while Bu t l i n (1964:5) notes that "[m]ore than any other growing new country of the time [1861-1900], Australia depended on the transfer of B r i t i s h resources...," he goes on the refute the notion that Australia was in any way dependent on B r i t a i n , c i t i n g Australia's greater economic prosperity as evidence and consequently concluding that "...the composition of output and the rate of growth appear to have been determined by l o c a l Australian considerations." Thus these works have defined the economic problem as uncovering the mechanism of economic growth by which an undeveloped rura l settlement of the 1850's was transformed into a highly urbanized and i n d u s t r i a l i z e d economy by the 1960's. The focus of this approach has been on l o c a l c a p i t a l formation where foreign investment is seen as a neutral element providing an essential factor of production that could not be secured from domestic savings (Snooks, 1975). Thereby, Australia's process of economic development i s described as a linear progression through a series of steps or stages (somewhat analogous to Rostow's (1960) stages of economic growth) as a natural consequence of a growing domestic market and favourable access to abundant resources. Following this framework, the current restructuring of the Australian economy i s seen as a natural evolution of a market economy whereby jobs lost due to r a t i o n a l i z a t i o n of the manufacturing industry are absorbed by the expansion of the t e r t i a r y and quaternary sectors. This - 10 -scenario, which in often promoted by corporate interests (e.g. Kahn and Pepper, 1980) also sees an increasing role for the mining and a g r i c u l t u r a l sectors as export earners to maintain the balance of payments in a stable s i t u a t i o n . However, such an analysis provides only a s u p e r f i c i a l understanding of Australia's economic development due to i t s f a i l u r e to appreciate the significance of the international economic system i n determining the shape of Australia's growth and development. Consequently, this framework is not capable of providing policy options to deal with Australia's current situation as i s demonstrated by the worsening of the c r i s i s i n 1983 and the predictions that the levels of unemployment are unlikely to f a l l s i g n i f i c a n t l y i n the forseeable fu t u r e . 5 A closer examination of the process of economic growth and development in Australia reveals that foreign investment, far from being neutral, has been one of the most instrumental factors i n determining the shape and structure of the Australian economy. I n i t i a l l y this was achieved through the lending p o l i c i e s of the B r i t i s h controlled banks which r e s t r i c t e d the a v a i l a b i l i t y of finance to l o c a l manufactureres while acti v e l y promoting pastoral development to expand wool exports. The banks also provided the colonial governments with loans to enable the construction of railways and ports to f a c i l i t a t e the wool trade. What i n d u s t r i a l i z a t i o n that did develop prior to 1930 was kept tied to B r i t i s h technology and equipment. Further, B r i t i s h financiers required that government p o l i c i e s ensured that the growth of the manufacturing industry did not impinge on Australia's a b i l i t y to meet i t s overseas debt commitments. Thus the manufacturing sector was forced to bear the brunt of c y c l i c a l downturns in the economy (Cochrane, 1980a). - 11 -The influence (though not the implications) of foreign investment became even more evident following World War I I . The growing use of direct investment strategies and the massive expansion of TNCs had a dramatic effect on Australia's post war i n d u s t r i a l i z a t i o n . Leaping t a r i f f barriers American (and to a lesser extent, B r i t i s h ) TNCs established branch plants operating i n numerous industries (e.g. automobiles, petrochemicals and non-ferrous metals). While probably accelerating the rate of post war i n d u s t r i a l i z a t i o n this was at the cost of creating a concentrated, truncated branch plant industry ( C a m i l l e r i , 1980; Armstrong and Bradbury, 1983). During the 1960's Australia experienced another redirection of foreign investment as a massive infusion of funds poured into the mining industry, converting a small domestic oriented industry into a leading producer for the world market (Corrighan, 1982). The dramatic impact of these externally generated forces on the direction of Australia's economic development has already been documented. However, as these inflows of foreign c a p i t a l were generally associated with growth and prosperity, there was l i t t l e appraisal of their true costs and benefits (Clark, 1975). Yet the benefits were cle a r l y gained at a considerable cost: the continued external control of Australia's economic development. 1.4.1 Dependent Development Therefore the search for a theoretical model to enlighten the h i s t o r i c a l analysis of this thesis must take into account the international context of Australia's economic development. Amin (1977a) suggests that the starting point for such a model i s imperialism. This i s because of the increasing domination of the international economy by the c a p i t a l i s t relations of exchange and more recently, the growing in t e r n a t i o n a l i z a t i o n - 12 -of production ( P a l l o i x , 1977) and the consequent concentration of control of capita l by a small group of in d u s t r i a l i z e d countries. Further, despite the changing mechanisms for the appropriation of surplus and the accumulation of capital within this system, the underlying use of p o l i t i c a l and m i l i t a r y resources by the dominant countries to preserve and maintain their c a p i t a l investments contain a l l the essential features of imperialism as described by Lenin (1939). Cochrane (1980a) and Corrighan (1982) also point to the significance of imperialism in understanding the shape of Australia's development. Corrighan argues that Australia's development since i t s i n i t i a l settlement as a B r i t i s h penal colony has been subject to external controls due to i t s incorporation into the international economic system under the hegemony of the prevailing imperial power. Thus Australia's development has portrayed a changing sequence of roles which were dictated by the predominant interests of these countries ( i . e . i n i t i a l l y B r i t a i n , subsequently America, and most recently Japan as a sub-imperial power under American hegemony). Cochrane argues in a similar vein that Australia's apparent independent i n d u s t r i a l i z a t i o n i s more accurately described as part of a changing pattern of dependence. However, Corrighan and Cochrane while outlining the relationship between dependency and development do not provide the d e t a i l required to analyze the consequences of imperialism for the internal evolution of Australia's economy or i t s implications for Australia's future growth and development. However, Evans (1979) does provide such a framework. Grounding dependency theory within a general theory of imperialism, Evans proceeds to build a model of dependent development. This model attempts to explain how - 13 -a country can extensively i n d u s t r i a l i z e yet maintain the central features of dependency characteristic of peripheral countries ( i . e . that the rate and direction of accumulation are externally controlled). Dependent development of a peripheral country has i t s foundations i n the i n i t i a t i o n of export-fed growth which i s begun when a country can successfully appropriate part of the surplus value generated from i t s exports to centre countries. The l o c a l accumulation of ca p i t a l can then be used to establish basic industry, providing the necessary pre-conditions for the tr a n s i t i o n to dependent development. This t r a n s i t i o n occurs with the.consolidation of the internal market through i n d u s t r i a l i z a t i o n based on import substitution. T r a d i t i o n a l l y , imperial powers have blocked this i n d u s t r i a l i z a t i o n , using force i f necessary (Frank, 1969). However, at times of c r i s i s i n the centre (e.g. 1890*s, 1914-18, 1930's, and 1939-1945), some peripheral countries have been able to begin t h i s t r a n s i t i o n . Nevertheless, most peripheral countries do not achieve more than s u p e r f i c i a l import substitution which cannot be referred to as dependent development (Evans, 1979). As such, this concept has many s i m i l a r i t i e s with Wallerstein 1s (1979) concept of "semi-peripheral countries" in that Evans also argues that the countries of the periphery, far from being homogeneous, represent a very wide range of disparate situati o n s . Furthermore, the position of an individual country within the international economic system i s not s t a t i c but merely represents the outcome of h i s t o r i c events. For those countries that do achieve a si g n i f i c a n t l e v e l of import substitution a p a r a l l e l phase of internationalization of the domestic market quickly follows. This i s a process whereby TNCs increasingly - 14 -penetrate l o c a l industries as import substitution expands from consumer non-durables to consumer durables, intermediary goods, and some cap i t a l goods. However, as import substitution has occurred as a result of the loca l e l i t e s and state gaining some measure of control over the l o c a l surplus, this penetration requires the formation of an alliance between international c a p i t a l (usually i n the form of TNCs), l o c a l c a p i t a l , and the l o c a l state. Evans (1979:32) argues that the formation of this t r i p l e alliance i s "a fundamental factor in the emergence of dependent development." However, this alliance also reinforces dependence, -for as Amin (1976:287) argues, the inherent structure of this relationship implies that as economic growth occurs the features of the economy that.cause dependence are accentuated rather than lessened. For while international c a p i t a l has to negotiate i t s entrance into l o c a l markets, i t obviously does so from a position of strength. The peripheral country i s dependent on access to centre markets for export income and therefore, i s not normally in a position to exclude international c a p i t a l . Furthermore, the factions of l o c a l c a p i t a l that a l l y with foreign c a p i t a l usually benefit considerably from the alliance and consequently w i l l support foreign investment i n industry i f they can ensure access to the development. International capital's position i s further strengthened by i t s greater access to finance and technology which tend to allow i t to monopolize the most dynamic sectors within the dependent economy (Cardoso, 1977). Recent developments in the structure and organization of the production process have dramatically altered the face of dependent development, though not i t s fundamental effect (Evans, 1979:27). The evolution of the manufacturing process cycle (Suarez-Villa, 1984; - 15 -Fagan,1981) has seen a movement of dependent development away from import substitution and towards export-oriented production as part of the "world-wide sourcing" strategies of the TNCs (Adam, 1975). Under this strategy the main emphasis for location decisions for subsidiaries by TNCs has moved from penetration of protected markets to finding the most favourable sites for minimizing production and d i s t r i b u t i o n costs. I n i t i a l l y this involved the relocation of labour-intensive manufacturing to the periphery to take advantage of low wages and unorganized labour. However, the p r o f i t a b i l i t y of these arrangements encouraged other sectors to reorganize their production process - taking advantage of new technologies and improved communication and transportation networks - so that individual components could be manufactured at the most favourable location, e.g. semi-conductors for the electronics industries (Siegel, 1980). Al t e r n a t i v e l y , the production process for a particular product i s automated and standardized, enabling the d e - s k i l l i n g of the work force and subsequently, the relocation of production in the periphery. The outcome of these changes has been to greatly enhance the position of the TNC within the a l l i a n c e . However, the role of peripheral countries in this process has also been central to this whole process. F i r s t , by offering major incentives and concessions, such as the establishment of "export processing zones" which offer tax benefits and freedom of import and export of goods and c a p i t a l amongst others. Second, the guarantee of low-cost compliant labour often through the banning of trade unions in export industries and the use of repressive controls (Fagan et a l . , 1981:15-16). - 16 -While these strategies offer some short-term benefits to the lo c a l economy (e.g. source of foreign exchange), in the long term they only lead to a deepening of the periphery's dependence. For a country that i s host to i n d u s t r i a l i z a t i o n that i s part of a TNCs world-wide sourcing strategy, has no access to independent markets for i t s product and l i t t l e , i f any, demand domestically. Therefore, i t has l i t t l e bargaining power and consequently i s forced to keep wages low i n order to maintain i t s attractiveness as a location for investment. Thus low l i v i n g standards become the basis of dependent development (Evans, 1979:28). This consequently undermines the development of the host country as resources available for i n d u s t r i a l i z a t i o n are funnelled into the export sector, starving domestic industry of ca p i t a l (Amin, 1977b:9). Further, the i s o l a t i o n of the export sector (especially i n export processing zones) and the nature of i t s production (component manufacturing) also diminishes the t r a d i t i o n a l m u l t i p l i e r effects of i n d u s t r i a l development. This leads to the structural deformation or d i s a r t i c u l a t i o n of the host economy as the dynamic sectors of the economy are linked more to the international economy than to the domestic economy (Amin, 1974:288-9). Evans (1979:29) argues that this has consequences for both the e l i t e and the greater population. For the e l i t e , the d i s a r t i c u l a t i o n of the economy i s an obstacle to self-sustained growth as their control of the economy i s reduced by this increased dependency. However, for the mass of the population this process means effective marginalization as consumers and producers and therefore, p o l i t i c a l l y , s o c i a l l y , and c u l t u r a l l y . This i s because production i s geared for high-valued goods for the export market and therefore, beyond the means of the masses to consume. Meanwhile the increasing use of - 17 -capital-intensive technologies reduces the need for workers. Thus large sections of the population are e f f e c t i v e l y barred from economic pa r t i c i p a t i o n in the society. Evans argues that p o l i t i c a l exclusion (and consequently^ s o c i a l and cu l t u r a l exclusion) must follow to avoid the disruption that would otherwise occur. 1.5 A u s t r a l i a ; A Case Study of Dependent Development? That.Australia i s headed for a similar fate has been suggested by a number of commentators (e.g. Ehrensaft and Armstrong, 1981; and Crough and Wheelwright, 1982b). Certainly Australia's economic development f i t s into the general pattern of dependency outlined above, as i s shown by the analysis presented in the following chapters. Beginning with a survey of the 150 years of B r i t i s h domination of Australia's economic development, Chapter 2 describes how Australia was able to make the i n i t i a l t r a n s i t i o n from i t s position of " c l a s s i c a l dependence" as a sheep run for B r i t i s h c a p i t a l to "dependent i n d u s t r i a l i z a t i o n " during the reorganization of the B r i t i s h Empire in the late nineteenth, early twentieth centuries. Chapter 3 traces the evolution of Australia's development from 1939 to the present under American domination. Laying down the framework of the strategic/diplomatic relations that underlie Australia's dependent relationship with the United States, the chapter documents the penetration of American c a p i t a l into Australian industry consistent with phase of inte r n a t i o n a l i z a t i o n of domestic industry discussed above. In the f i n a l sections of the chapter the analysis focuses on the restructuring of the Australian economy since 1960. The ri s e of an export-oriented minerals sector, the gradual demise of i n d u s t r i a l i z a t i o n based on import - 18 -substitution, and the increasing integration of Australia into the P a c i f i c Rim economy can be a l l seen as part of the new phase of dependent development oriented towards the new international d i v i s i o n of labour. As Japan has played a s i g n i f i c a n t role In the process of Australia's integration into this latest phase dependent development, Chapter 4 examines the growth of the Australia-Japan trading relationship. Beginning at the h i s t o r i c a l roots of this relationship the chapter shows the changing balance of power as Japan moves from being a peripheral country to a sub-imperial power under American tutelage. Chapter 5 provides a case study of the Australian coal industry to demonstrate the changing pattern of Australia's development through the history of a single industry. Chapter 6 summarizes the analysis of the thesis and ties i t into the theoretical framework given and concludes with a consideration of the implications of these findings for policy responses to the current c r i s i s . - 19 -CHAPTER 1 NOTES 1. In the late nineteenth, early twentieth centuries, Australia had a flourishing mining industry centred on the production of minerals such as copper for the i n d u s t r i a l markets of B r i t a i n and Europe and coal as an intermediate cargo for Britain's merchant f l e e t . However, as the twentieth century progressed the industry slowly declined, diminishing in economic importance during Australia's period of sustained economic development. For an excellent h i s t o r i c a l survey of the industry see Blainey (1978). 2. In 1956-57, 14.0% of Australia's exports went to Japan. Of these greasy wool accounted for 67% of export earnings while coal was only just beginning to find a regular market in Japan. Iron ore exports were prohibited u n t i l 1960 and consequently s i g n i f i c a n t exports did not begin u n t i l 1965. In 1966-67 Japan's share of Australia's exports had grown to 19.4%, of which coal made up 11.7% and iron ore 7.3%. Coal and iron ore were to continue to grow i n significance over the next decade, although often by f i t s and s t a r t s . In 1976-77 Japan took 34.0% of Australia's exports with coal accounting for 26.5% and iron ore for 17.6% of these (figures from Walker and Jacobs, 1979). 3. See Windschuttle (1979) Chapters 8 and 9 for a thorough account of the persecution of the unemployed by the media and federal government i n Australia from 1975-78. 4. Apart from the t e x t i l e s , clothing, and footwear industries, the major increase in manufacturing imports during the late 1970's were in areas that did not compete with Australian manufacturers (Marsden and Anderssen, 1979). 5. The Institute of Applied Economic and Social Research in i t s regular forecasting of trends in the Australian economy predicted that the rate of unemployment w i l l r i s e s l i g h t l y to average 10:5% for the year 1984-85 (Reported in the Institute's journal, "The Australian Economic Review," No. 64, December 1983:83). - 20 -CHAPTER 2 DEPENDENT DEVELOPMENT UNDER BRITAIN: 1788-1939 The t o t a l domination that B r i t a i n held over Australia's c u l t u r a l , economic and i n s t i t u t i o n a l development prior to 1939 has faded with the decline of Brit a i n ' s position within international a f f a i r s . Nevertheless the influence of B r i t i s h domination i s reflected throughout Australian society, ranging from the structure of i t s legal and p o l i t i c a l i n s t i t u t i o n s right through to residual emotional ties (e.g. the continued reference to B r i t a i n as "the Mother Country" even by many Australians with no B r i t i s h ancestoral t i e s ) . S i m i l a r l y , the present structure of the Australian economy i s importantly tied to i t s h i s t o r i c a l formation under B r i t i s h colonization. Therefore this chapter w i l l present a brief analysis of Australia's economic development under B r i t i s h hegemony u n t i l 1939. Following from Cochrane (1980a) and Catley and McFarlane (1980), this analysis i d e n t i f i e s two broad periods of development from 1840 to 1939. The f i r s t taking Australia up to 1890, was the organization of economic development around the production of raw materials (mainly wool) for export to meet the needs of the B r i t i s h market. During this period finance was readily available only for the expansion of pastoral a c t i v i t y . Thus, the development of other industries, such as manufacturing, was in h i b i t e d . This period was also marked by the p o l i t i c a l dominance of the landed gentry whose interest were aligned with this form of development. The second period (1890-1939) saw two factors combining to produce rapid, urban growth and i n d u s t r i a l i z a t i o n . The f i r s t was the increased - 21 -investment within Australia resulting from a r e d i s t r i b u t i o n of wealth within the B r i t i s h Empire to shore up Britain's position against the r i v a l i m p e r i a l i s t powers of the United States and Germany. The second was the emergence of an organized labour force who formed an all i a n c e with i n d u s t r i a l c a p i t a l that enables the l a t t e r to rise as the new hegemonic fraction of c a p i t a l , thus deposing the r u r a l e l i t e . The domination of Australia's development by B r i t a i n had i t s roots in the circumstances surrounding i t s i n i t i a l settlement. F i t z p a t r i c k (1939:13) argues that the primary reason for the settlement of New South Wales by the B r i t i s h government was that i t was regarded "...as a convenient, because remote, t e r r i t o r y to which 'redundant poor,' whether convicted or not, might be dispatched -there, on a r r i v a l , or expiry of sentence, or pardon, to be settled on peasant plots - so they would remain, not again to overburden the newer, capitalist-farmer economy of Great B r i t a i n and Ireland." However, the choice of Australia for a penal colony most l i k e l y had several components: "Indeed, the precise balance between the delicate motives of evacuating human refuse from the goals and hulks of B r i t a i n , bolstering p r o f i t s in the whale and tea trades, and providing a naval base for imperialism i n South Asia, continues to fascinate historians" (Connell and Irving, 1980:31). Nevertheless, the precise reason for settlement i s not what i s important but that for the f i r s t f i f t y years of settlement the colony f u l f i l l e d a p o l i t i c a l function for the B r i t i s h economy and was thus t o t a l l y supported by the B r i t i s h state apparatus. I n i t i a l l y the state organized a g r i c u l t u r a l production to ensure the supply of s u f f i c i e n t - 22 -provisions. However, i t gradually withdrew from this task as the number of free s e t t l e r s and convicts taking up land grants for farming increased. These i n i t i a l landowners became the backbone of an i n f l u e n t i a l r u r a l e l i t e . The benefits they enjoyed through land grants, use of convict labour and other forms of state assistance enabled them to establish their hegemony i n the face of the i n f l u x of many smaller landowners who flooded into rural production i n the l a t t e r half of the 19th Century (Gibson, 1981). 2.1 1840-1890; Pastoral Expansion By the end of the f i r s t f i f t y years of B r i t i s h settlement in Australia most of the features that were to shape i t s next phase of economic development were already emerging i f not i n place. Agriculture had established i t s e l f as the dominant form of production and the major source of exports. The growth of the a g r i c u l t u r a l industry was financed by B r i t i s h commercial ca p i t a l in order to meet the requirements of the manufacturing sector in B r i t a i n . With l o c a l agents providing the access to finance and markets the pastoralists were able to rapidly expand their wool production. However this l i n k created a dependence on exports leaving the industry very vulnerable to the effects of periodic gluts of a g r i c u l t u r a l commodities on the world markets. The resulting enormous price fluctuations caused widespread depression and bankruptcy within the Australian a g r i c u l t u r a l industry. With the continued growth of the colony as a result of state-assisted immigration and l a t e r , the massive inflow of fortune seekers during the 1850's gold rushes, urban centres became more firmly established - 23 -and the beginnings of a manufacturing industry was noted, even i f somewhat primitive and fragmented. This growth, however, was contingent on the rapid expansion of the ag r i c u l t u r a l sector. For the manufacturing sector, unable to compete with B r i t i s h manufactured imports, was re s t r i c t e d to production in naturally protected areas such as construction and food processing. They were, however, also able to make some inroads into the production and processing needs of the ag r i c u l t u r a l sector (Linge, 1979; Connell and Irving, 1980; Gibson, 1981). The 1870's and 80's saw the emergence of direct involvement of B r i t i s h f i n a n c i a l c a p i t a l i n Au s t r a l i a . At the time B r i t i s h f i n a n c i a l interests were experiencing a surplus of capital due to the successful expropriation of pr o f i t s from other regions in the empire (notably India and South A f r i c a ) . However, t r a d i t i o n a l outlets for B r i t i s h investments -Europe, the United States and South America - were either in an economic depression or facing p o l i t i c a l i n s t a b i l i t y . B r i t a i n likewise was suffering from a downturn in economic a c t i v i t y reducing the opportunities for investment at home. Thus investors turned to the Empire for alternative outlets for their c a p i t a l with the dominions being the main recipients ( A u s t r a l i a being the largest; see Table 1). Most of this money was funnelled through borrowing by the Colonial governments for the provision of infrastructure to support the trade of primary products. Indeed, finance was only made available for a c t i v i t i e s related to trade and ag r i c u l t u r a l production. This was part of a broader imperial strategy based on free trade and B r i t i s h i n d u s t r i a l supremacy and backed by B r i t i s h naval dominance. Under this strategy the role of the dominions was to supply the B r i t i s h i n d u s t r i a l sector with raw materials and to purchase - 24 -manufactured goods from B r i t a i n . Thus the most profitable investment i n the dominions was providing short term financing for importers and exporters and longer term loans for rural development to enable the expansion of production for export. The capital inflow enabled the rapid expansion of the Australian a g r i c u l t u r a l industry (mainly pastoral) with the concomitant spin-offs for urban development and l o c a l manufacturing. However, i t also financed a wide range of imports thus r e s r i c t i n g the areas of development of manufacturing and leaving the industry narrow and unsophisticated (Linge, 1979; Cochrane, 1980a; Logan et a l . , 1981). Table 1: New B r i t i s h P o r t f o l i o Investment Abroad, 1868-1891. Non- Empire Total Australia Australia's Australia Empire Share of Share of Empire Inv. Total Em Em Em Em % % 1868-72 209.3 46.9 256.2 11.9 25.0 4.6 1873-79 180.1 119.4 299.9 39.5 33.0 13.2 1880-82 114.3 66.3 180.8 24.2 36.5 13.4 1883-87 166.8 159.1 325 .9 83.8 52.6 25.7 1888-91 279.4 127.1 406.9 67.2 52.8 16.5 Source: Adapted from t Cochrane, 1980a. The influence of this investment strategy was c r u c i a l i n determining the path of Australia's economic development. This i s most c l e a r l y reflected i n the stunting of the manufacturing sector. For the B r i t i s h investment upon which Australia's economic growth and prosperity had become dependent, was to a large extent contingent upon the sale of i t s manufactured goods i n Aus t r a l i a : - 25 -"An advanced capita l goods base in Australia implied net import replacement on a scale that would have short-circuited B r i t i s h investment and reduced Australia's export marketing opportunities in B r i t a i n . Therefore reliance on overseas c a p i t a l led to definite r e s t r i c t i o n s on economic development" (Cochrane, 1980a:5). Cochrane goes on to argue that influence was brought to bear upon Colonial and l a t e r , Australian governments to ensure the p r i o r i t y of payments of overseas debts. The most v i s i b l e mechanism of this pressure being the frequent "economic missions" that v i s i t e d Australia to push the logic of Australia's dependence on B r i t i s h trade and capita l markets. 2.2 1890-1939: Roots of I n d u s t r i a l i z a t i o n The depression of the 1890's marked the beginning of a new period i n Australia's economic development. While the wool crop continued to dominate trade, this period witnessed a d i v e r s i f i c a t i o n within primary industry, and a s i g n i f i c a n t expansion of the manufacturing industry. The depression had resulted i n reduced c a p i t a l inflows and export earnings causing a breakdown of the established trading and f i n a n c i a l relations between Australia and B r i t a i n . This required a reorganization of productive capacity that resulted i n the emergence of more land intensive primary industries such as wheat, sugar, beef and dairy. There was also a resurgence of the mining industry, which had largely dissipated after the gold rushes. These industries were more inclined to generate forward and backward linkages (e.g. flour and sugar m i l l s , and a g r i c u l t u r a l machinery). As importantly, these - 26 -industries, being more broadly owned, had a much higher m u l t i p l i e r effect within the l o c a l economy than did the pastoral industry (Cochrane, 1980a; Blainey, 1978). A secondary effect of the depression was an increased used of the l o c a l banking system for raising government loans. Previously the Colonial governments had obtained most of their loan finance from B r i t a i n . This, together with the exhaustion of investment opportunities within the pastoral sector, led to an increasing flow of finance into the l o c a l i n d u s t r i a l sector. Most of this flow, however, went into raw material processing, in part to reduce shipping costs (Gibson, 1981). At this time monopoly i n d u s t r i a l c a p i t a l had established i t s e l f in B r i t a i n and Europe and had begun to l i n k d i r e c t l y with Australian consumers by setting up i t s own agents and thus bypassing the commercial c a p i t a l i s t . Thus the previously dominant commercial fraction of capita l had become overshadowed in the reorganization of c a p i t a l i s t a c t i v i t y . However, this restructuring increased the threat of increased penetration by the r i v a l imperial powers, the United States and Germany, into the Australian market. Canada had already been lost to United States influence and there was concern within B r i t a i n that Australia should not go the same way. Thus B r i t a i n was forced to allow further development of secondary industry i n A u s t r a l i a . However this development was f a i r l y limited and being dependent on B r i t i s h methods and technology, s t i l l tied Australia firmly into i t s colonial relationship (Cochrane, 1980a; Gibson, 1981). Meanwhile, during the depression a r e l a t i v e l y m i l i t a n t labour force began to organize, as s i g n i f i e d at the p o l i t i c a l l e v e l by the formation of the Australian Labor Party i n 1891. This group went on to build an - 27 -alli a n c e with the small emerging i n d u s t r i a l sector to force the allowance of growth of an independent secondary industry under a protectionist policy. With Federation in 1901 came a unified national market which provided the basis for the growth of the manufacturing sector. By the beginning of World War I manufacturing employed 20% of the workforce and accounted for 14% of the GNP. However, this expansion was s t i l l narrowly based in industries naturally protected from import competition or associated with processing of primary production. Factory production spread mainly as a function of population growth and urbanization, although they were generally small and labour-intensive and consequently i n e f f i c i e n t . What import replacement that did occur was mainly within the metal-based industries whose output was geared to railway workshops and rural production (e.g. agricUtlrual machinery). Apart from these only a small range of simple goods such as candles, s p i r i t s , blankets and clothing were being produced in any quantity (Schedvin, 1970). The i s o l a t i o n created by World War I provided a vacuum that enabled new industries to emerge and thus manufacturers were able to make si g n i f i c a n t gains into import competing sectors. This trend continued i n the post war period with increased demand due to commodity shortages and immigration. The Massey-Greene t a r i f f of 1921 and heavy public works programs a l l contributed to an unusually high demand for i n d u s t r i a l equipment. However, the f i n a n c i a l i n s t i t u t i o n s , s t i l l largely controlled by the B r i t i s h f i n a n c i a l sector, continued with their policy of lending predominately to government and the primary i n d u s t r i a l sector. For i t was only these sectors that had the export earnings to pay the interest on these loans. Therefore, l o c a l i n d u s t r i a l i z a t i o n was mainly financed - 28 -through l o c a l c a p i t a l raising and internal financing by foreign companies (mostly B r i t i s h and American branch plants) (Gibson, 1981). Thus this period marked the beginning of direct investment i n Australia by B r i t i s h and American monopoly c a p i t a l . This changing involvement of B r i t i s h capital r e f l e c t s several factors. The f i r s t was that the B r i t i s h economy was f a i l i n g and Australia was seen as the most appropriate s i t e for the relocation of c a p i t a l and labour within the Empire. This was because of i t s p o l i t i c a l s t a b i l i t y and scope for development and expansion. Furthermore, the state governments were generally development oriented and thus eager for and co-operative with foreign investment. Secondly, this change i n orientation represents the changing fortunes of different factions of capita l with monopoly i n d u s t r i a l c a p i t a l asserting i t s e l f i n the early 1920's. Thirdly, while Australian manufacturing was making inroads with import substitution they were s t i l l dependent on B r i t a i n and to a growing extent, the United States, for c a p i t a l goods and technology. Australia's economic policy was intended to establish an independent, balanced development. This policy presumed both the a v a i l a b i l i t y of overseas c a p i t a l to finance the development of secondary industries and a continued export surplus to service this debt. However, as the 1920s progressed the burden of this debt grew substantially placing enormous strains on Australia's export income. The subsequent decline of markets for Australian exports and the slow down of capital inflow as the world slipped into economic depression was met by rapid capital drain as B r i t a i n maintained pressure on Australia to service i t s overseas debt (Cochrane, 1980b; Catley and McFarlane, 1980). - 29 -The economic contraction that followed was the most severe i n Australia's history. In response to this c r i s i s the Australian government devalued the currency and broke away from the B r i t i s h Gold Standard in 1931. This action was p a r t i c u l a r l y s i g n i f i c a n t because i t marked a breakdown i n the hegemony of B r i t i s h banks i n Australia (Cochrane, 1980a). The depression also brought the need for an import replacement strategy which engendered a s i g n i f i c a n t change in the investment patterns of B r i t i s h c a p i t a l from export related industries to direct investment i n Australian domestic production. The devaluation, together with protectionism, had made investment i n trade less lucrative while remittance of company p r o f i t s was not as easily affected by monetary policy. Therefore, the incentive for foreign c a p i t a l to establish branch plants within Australia increased enormously as compared to the provision of finance or involvement i n trade (Gibson, 1981). 2.3 Summary Australia's economic development under B r i t i s h hegemony clea r l y follows a pattern of dependent development. Beginning as a penal settlement t o t a l l y dependent on B r i t a i n , i t quickly established a pattern of dependent development with the early foundation of a export-oriented pastoral industry. As this phase developed, a secondary phase of i n d u s t r i a l i z a t i o n began, which was fostered and controlled by B r i t i s h finance c a p i t a l as changes i n the exigences of the international economy ( i . e . the r i s e of competing imperial powers) forced B r i t a i n to change i t s i m p e r i a l i s t i c strategies. However, even as Australia moved into the next phase of dependent development - import substitution within a consolidated - 30 -domestic market - the internationalization of i t s manufacturing industry had begun, maintaining the external control of the Australian economy. The next chapter describes how this process continued under American control following the P a c i f i c War. In pa r t i c u l a r , i t w i l l examine the incorporation of Australia into the American sphere of influence, re-affirming the lin k s between m i l i t a r y and p o l i t i c a l resources and economic control. The chapter w i l l also describe Australia's t r a n s i t i o n through the various stages of dependent development that have brought i t to the verge of becoming a disarticulated economy with a s i g n i f i c a n t proportion of i t s population economically and s o c i a l l y marginalized. - 31 -CHAPTER 3 INTEGRATION OF AUSTRALIA INTO THE PACIFIC RIM ECONOMY UNDER UNITED STATES HEGEOMONY Even as late as the 1930's Australia's foreign relations were l i t t l e more than appendages of B r i t i s h foreign policy. As such Australia's diplomatic l i n k s with the United States were f a i r l y limited and often less than c o r d i a l . During the interwar period the United States was Australia's second largest trading partner (though i t was of considerably less importance than the United Kingdom). However the trade balance between the two countries was s i g n i f i c a n t l y i n favour of the United States (see Table 5, p. 60). The main reason for this inbalance was that Australia's imports from the United States were generally made up of specialized goods (e.g. machinery, motor vehicles and parts, petrol and o i l ) while Australia's major exports were i n direct competition with powerful vested-interest groups in the United States (e.g. wool, meat and butter). From 1929 the Australian government made regular representations to the United States government regarding trade barriers affecting Australian products. These approaches, however, were unsuccessful despite Australia's threat to enact a trade diversion policy. This policy would impose import r e s t r i c t i o n s on American goods thereby giving preferential treatment to nations with whom Australia enjoyed better trade r e l a t i o n s . However, Australia's bargaining position was somewhat undermined by the Ottawa Agreements of 1932 which gave B r i t a i n and i t s Dominions favoured access to Australian markets. In the face of this trade discrimination by Aust r a l i a , the United States was unmoved by Australian complaints about i t s - 32 -discriminatory trade p o l i c i e s (Nicholson, 1955). Partly as a result of the continued f a i l u r e of these negotiations, the Australian government did not include the United States on the l i s t of nations that would receive "most favoured" status with respect to t a r i f f s from January 1, 1937. The government also implemented a trade diversion policy on May 23, 1936 through a system of import licensing and increases i n duty. This policy was p r i n c i p a l l y aimed at diverting imports away from the United States and Japan, although for quite disparate reasons (the case of Japan i s dealt with below). The stated purpose of this policy was to increase exports of primary products, expand secondary industry and bring about an increase in rural and i n d u s t r i a l employment. The policy, however, was not p a r t i c u l a r l y successful in obtaining these objectives which were mainly intended to be achieved through the development of l o c a l motor engine production (Nicholson, 1955:8). The policy however did adversely affect a wide range of imports from the United States. The United States government ret a l i a t e d by withdrawing Australia's "most favoured nation" status on August 1, 1936, though this action had very l i t t l e effect on Australia's exports ( O f f i c i a l Year Book of the Commonwealth of A u s t r a l i a , 1944-5) . As a result of Australian government action to replace the licensing system with a system of duties in December, 1937, the United States restored Australia's "most favoured nation" status on February 1, 1938. These actions stem mainly from the trade negotiations between the United States and B r i t a i n , which were in progress at that time, leading to the signing of a trade agreement on November 17, 1938. Part of these negotiations required the Dominions to forgo certain trade privileges with - 33 -B r i t a i n . The United States' actions were almost certainly an acknowledgement of Australia's s a c r i f i c e i n this regard (Nicholson, 1955). That Aus t r a l i a would apparently negotiate i t s e l f out of potentially valuable trade preferences i s a f a i r measure of i t s lack of p o l i t i c a l automony at that time. These agreements led to a reduction of antagonism between Au s t r a l i a and the United States and opened the way for improved diplomatic as well as economic r e l a t i o n s . Early in 1940, Australia established a delegation i n Washington, r e f l e c t i n g the rapidly growing association between Australia and the United States, both p o l i t i c a l l y and c u l t u r a l l y , as well as economically and s t r a t e g i c a l l y . With the passing of the Lend-Lease Act i n the United States, Australia began to turn to the United States rather than B r i t a i n for the supply of essential goods and general strategic concerns. The extent of this re-orientation i s reflected in the December 27, 1941 statement of Prime Minister John Curtain which openly portrayed the United States as the "keystone" of Australia's defense (given Australia's prior attachment to B r i t i s h m i l i t a r y power this statement represented a s i g n i f i c a n t watershed i n Australian - United States r e l a t i o n s ) . Further, i n recognition of the assistance received from the United States, the Australian government, unsolicited, granted the United States "most favoured nation" status in a proclamation of February 17, 1943. For i t s part, the United States government in a strategic assessment i n mid December, 1941, concluded that Australia was an important base providing the necessary l i n e of a i r communications with the Philippines ( C a m i l l e r i , 1980; O f f i c a l Year Book of the Commonwealth of Au s t r a l i a , 1944-5). However, Australia's integration into the United States' sphere of - 34 -influence was not simply a matter of Australia replacing one dominant partner with another. I t also represented the f i n a l decline of B r i t i s h imperialism and the ascendancy of the United States as i t expanded to encompass every area of strategic importance across the P a c i f i c and along the rimlands of Asia. The i m p e r i a l i s t i c nature of this expansion i s c l e a r l y demonstrated by the nature of i t s relationship with Au s t r a l i a during and following the war. A u s t r a l i a , along with other minor a l l i e s , was continually l e f t out of major decisions regarding war-time strategic planning and preliminary negotiations for a peace settlement. Australia was c l e a r l y d i s s a t i s f i e d with the A l l i e d decision making apparatus. However, i t s attempts to increase i t s influence were never l i k e l y to succeed. Given the enormous disparity i n power between the two countries i t was obvious that the United States did not feel obliged to give any concessions and had no intention of adopting p o l i c i e s that did not f i t into i t s own p r i o r i t i e s and goals for the region ( B e l l , 1973; 1976). This i s a basic tenant that has underlined Au s t r a l i a - United States relations ever since. 3.1 ANZUS Pact The P a c i f i c War had heightened Australia's awareness of i t s i s o l a t i o n and v u l n e r a b i l i t y as a small nation on the edge of a p o t e n t i a l l y h o s t i l e Asia. Indeed the fear of invasion from the north was reflected in a widely proclaimed slogan of the time "populate or perish." This fear was a predominant influence in Australia's post war policy. A 1945 White Paper expounding objectives for the development of Australia set the goal of high population growth along side ones of f u l l employment, r i s i n g standards of l i v i n g and s t a b i l i t y i n costs and prices (Jackson, 1975). - 35 -S i m i l a r l y , Australia's foreign policy, preoccupied with the "threat of invasion" ( p a r t i c u l a r l y as the cold war gained momentum), l e f t the Australian government predisposed to accept whatever conditions the United States was w i l l i n g to o f f e r . From the United States point of view Aust r a l i a offered a sympathetic and p o l i t i c a l l y stable government and thus an ideal base for m i l i t a r y installations,near mainland Asia. The extent that Australia's incorporation into the United States strategic orbit was an established principle of United States policy, even by the end of 1950, i s reflected in American proposals for the Japanese Peace Treaty put to Australia by the American negotiators i n October, 1950. Part of this proposal envisaged "a chain of P a c i f i c defense" stretching from the Aleutians through Japan, the Ryukyus, the Philippines, to Australia and New Zealand. American forces i n Japan and the Northern P a c i f i c , the United States presence in the Philippines and some acceptable security arrangements with Australia and New Zealand were described as "three spokes of a wheel" the centre of which would be the United States (Spender, 1969; C a m i l l e r i , 1980). The acceptable security arrangment with Australia and New Zealand was p r i n c i p a l l y that embodied i n the ANZUS treaty signed at San Francisco on September, 1951. This treaty was often advanced as safeguarding Australian interests by l i n k i n g i t to a major power, the United States. However, the r e a l i t y was somewhat different as the real costs of Australia's commitment to this pact were quickly established. The United States used the alliance to obtain commitments of troops i n Korea (and l a t e r again in Vietnam) and to obtain f a c i l i t i e s in Australia for a number of m i l i t a r y communications bases as well as testing f a c i l i t i e s for weapons - 36 -systems. A u s t r a l i a , however, was unable to extract any commitment from the United States that i t would a s s i s t , i f necessary, Australia and New Zealand forces sent to Malaysia to help r e s i s t the Indonesian "confrontation" ( C a m i l l e r i , 1980). 3.2 Post War Expansion And Internationalization  of the Manufacturing Industry I t was not only the lure of a m i l i t a r y a l l i a n c e that brought Australia into the United States' sphere of influence. Australia's post war objective of high population growth, which was met in part by a government sponsored mass immigration program, resulted in a high demand for housing and urban development. This demand absorbed a large proportion of Australia's available c a p i t a l . Thus i f Australia was also to meet i t s goals of i n d u s t r i a l development and expansion i t required a considerable inflow of overseas capital (Jackson, 1975). As the United States emerged from World War I I as the main source of international investment i t became an important source of overseas c a p i t a l for the development of Australia's i n d u s t r i a l sector. Thus there were sig n i f i c a n t f i n a n c i a l incentives for Australia to encourage i t s growing li n k s with the United States (Connell and Irving, 1980). I n d u s t r i a l i z a t i o n of the Australian economy had proceeded slowly between the wars with the continued growth and consolidation of heavy industry and the introduction of new consumer products under increased t a r i f f s . Probably the most important of these was the automobile which, with the introduction of production l i n e techniques, had become, affordable to a larger segment of the population. During this time there was a clear s h i f t of a c t i v i t y within the economy to the manufacturing sector. For - 37 -example, manufacturing's share of GNP grew from an average of 14.4% i n the 1910's to an average of 17.6% during the 1930's. S i m i l a r l y , manufacturing's share of the labour force grew from 17.8% to 21.1% for the same periods (see Table 2). However, the conditions that stimulated i n d u s t r i a l development during and following World War I were even more pronounced following World War I I . This was i n part due to the existence of a more developed i n d u s t r i a l base that was able to expand to take advantage of the drop i n import competition and the development of new technology during the war. In the post war period a number of factors intertwined to cause a considerable growth i n demand, providing the impetus for the i n d u s t r i a l expansion that would continue in Australia u n t i l the late 1960's. Among these factors were the release of pent up consumer demand following the rationing of the war and immediate post war years; the mass immigration program together with the post war baby boom; and a general worldwide commodity shortage. This last factor had a more complex effect of both reducing import competition but at the same time r e s t r i c t i n g the a v a i l a b i l i t y of new plant to allow the expansion of factories. However, probably the most sig n i f i c a n t factor i n determining the post-war development of the Australian manufacturing industry was the very high levels of protection_afforded to i t by import duties and quotas. These p o l i c i e s had the dual aim of encouraging the development of a d i v e r s i f i e d manufacturing industry and of attracting overseas investment to accelerate the growth of industry. As an additional incentive, State governments, who were anxious to attract investment to their own regions, offered foreign corporations very favourable loans and the promise of government contracts ( S t i l w e l l , 1980). Table 2 Share of G.D.P. and Workforce for Rural Mining and Manufacturing Sectors, 1910-11 to 1959-60. G.D.P. Workforce Period Rural Mining Manufacturing Rural Mining Manufacturing /o /o /o /o to fo 1910/11-1919/20 27.2 5.4 14.4 23.8 4.2 17.8 1920/21-1929/30 24.6 2.4 16.0 23.8 2.5 19.9 1930/31-1939/40 25.2 2.9 17.6 24.3 2.7 21.1 1940/41-1949/50 N/A N/A N/A 16.4 1.8 26.3 1950/51-1959/60 18.4 2.2 28.4 . 13.9 1.7 28.1 Source: Derived from Bu t l i n , 1970: Tables 6.9, 6.10. - 39 -In broad terms these p o l i c i e s were very successful. The manufacturing sector expanded rapidly following the War to account for an average 28.4% of G.D.P. and 28.1% of the labour force during the 1950's (up from 17.6% and 21.1% respectively during the 1930's; see Table 2). S i m i l a r l y , there was a massive inflow of c a p i t a l investment following the war as TNCs (mainly American though a s i g n i f i c a n t number of B r i t i s h corporations) moved to establish subsidiaries so as to circumvent the high trade b a r r i e r s . However the costs i n terms of loss of l o c a l control of the manufacturing industry were considerable. As the 1960's progressed American TNCs helped by the hegemony of the United States dollar i n international currency markets, rapidly expanded their overseas investments (Crough and Wheelwright, 1982a). Consequently, by 1971, fi v e hundred American subsidiaries were operating in Australia while American private investment in Australia was worth $3,000 m i l l i o n (60% of this a r r i v i n g after 1965). While this investment was directed to a l l sectors of the economy, the most profitable sectors were p a r t i c u l a r l y targeted with o i l r e f i n i n g , motor vehicles and non-ferrous metals being the most heavily penetrated. United States ownership was also s i g n i f i c a n t i n chemicals, excavating and a g r i c u l t u r a l equipment, e l e c t r i c a l appliances, and pharmaceuticals ( C a m i l l e r i , 1980). At the same time the United States was emerging as Australia's major supplier of imports and by 1966-67 had pushed the United Kingdom out of i t s position as Australia's major trading partner. 1 This reflected the United States' role as the major supplier of ca p i t a l goods to the Australian market. However the expansion of the manufacturing sector had already begun to slow by the mid 1960's. The domestic market had become saturated - 40 -as population growth slowed and the overbuilding of manufacturing capacity began to make i t s impact f e l t . For example, by the early 1960's, fiv e car manufacturers were operating i n Australia which at that time had a t o t a l population of only 10 m i l l i o n people (McQueen, 1982). The f a l t e r i n g of the manufacturing sector however went unnoticed as the nation became gripped in the excitement and commotion of the mining boom of the late 1960's. 3.3 M i n e r a l s Boom - Expansion and I n t e r n a t i o n a l i z a t i o n o f the Mining  Industry The minerals boom of the late 1960s was the culmination of a number of disparate events that began up to twenty years e a r l i e r . Following World War II the Australian government, concerned that Australia was d e f f i c i e n t i n proven resources of many major minerals and fuels, introduced taxation incentives to encourage mineral exploration and established the Bureau of Mineral Resources, Geology and Geophysics. There was a general notion at the time that A u s t r a l i a , unlike the other continental masses, lacked major economic deposits beyond those already located i . e . coal, lead, copper and zinc. However, in 1949 uranium was discovered at Rum Jungle, while large bauxite deposits were discovered at Weipa i n 1955. By 1974 Australia had the largest known reserves of bauxite, enormous reserves of iron ore, i t produced 90% of the worlds r u t i l e and zircon, and had proven reserves of petroleum, natural gas, nickel and phosphorus as well as greatly expanded reserves of copper, coal, lead and uranium (McKern, 1975).This suggests that A u s t r a l i a , rather than being resource poor, had simply never had the incentive to investigate i t s mineral potentials f u l l y (as reflected in the case of iron ore ). The required incentive was provided by the upsurge i n world - 41 -base-metal demand during the 1960's. This, together with the increasing i n s t a b i l i t y of the Third World sources of minerals and energy fuels, focused attention on resoures i n Australia and Canada (Wheelwright, 1982). Thus mining became the major growth sector within the Australian economy. The mining industry with i t s enormous rates of return was quickly outstripping the manufacturing industry i n attracting new investment. Indeed, the climate for investment i n the Australian minerals industry was widely considered to be the best i n the world (Connell and Irving, 1980). The following quote provides some insights as to why this was so: "I am t r u l y amazed. In terms of ownership, r o y a l t i e s , tax and marketing of your energy and minerals, I know of only one country in the world which gets a worse deal: that's Gabon in West A f r i c a . " 4 The extent of this give-away was documented by Fitzgerald (1974) i n a report to the then Minister for Minerals and Energy, Rex Connor. The report was e n t i t l e d "The Contribution of the Mineral Industry to Australian Welfare" and i t surveyed the taxation revenue generated by the mineral industry between 1967-68 and 1972-73; the period of rapid expansion for the industry. The report revealed a substantial subsidy element in federal tax policy. Further, i t showed from i t s comprehensive sample that foreign TNCs were the major beneficiers of this subsidy. While the amount of this subsidy has been disputed, McKern (1975) in an evaluation that was quite sympathetic to the minerals industry, concluded that no matter whose figures were used, the result s t i l l indicated that the mining industry received a hefty subsidy i n that period. McKern argues, however, that the subsidy needs to be seen i n the l i g h t of the balance of payments problems that had been a continual concern - 42 -during the 1950's and 60's. The attraction of foreign c a p i t a l was thus a major component of Australia's economic policy. This policy, however, had been long c r i t i c i z e d from many varied quarters. For example, amongst others, Brash (1966:3) quotes the then leader of the Opposition, A.A. Caldwell (Labor) as declaring that Australia's "reliance on the flow of c a p i t a l from abroad to meet a substantial part of our imports b i l l Is tantamount to mortgaging the house to pay the grocery b i l l . " The cost of this c a p i t a l inflow was poignantly conveyed by S i r Roderick Carnegie, Chairman of Conzinc Riotinto of Australia Ltd. in an interview for the ABC t e l e v i s i o n program, "Faces of the Eighties." "People don't realise the cost. If you get $2 i n 1979 from overseas invested i n equities, those owners want a dollar a year from 1990 onwards forever. What I'm saying i s t h i s : that's a very high price because they see the $2 coming i n today, but in ten, eleven years' time, a dollar going out i s an enormous price to pay. ..." (quoted i n Crough and Wheelwright, 1982b:1). Part of the cost of this capital inflow has been a dramatic increase i n foreign ownership and control of Australian industry. Consequently, Australia i s one of the most heavily penetrated of a l l advanced in d u s t r i a l i z e d countries. Between 1963 and 1974-75 foreign ownership within the mining industry i s estimated to have risen from 27.3% to 51.8%. This dramatic increase in foreign ownership was largely fuelled by the operations of American corporations which increased their control of the industry from 9.2% i n 1963 to 28.7% i n 1974-75. These levels would have 5 almost certainly risen quite substantially since 1978 as there has been a s i g n i f i c a n t increase in c a p i t a l inflow financing the takeover of a large number of Australian corporations by foreign based firms. This i s p a r t i c u l a r l y so in the energy coal industry where a number of mines have Table 3 Mining Industry Value Added Apportioned to Australian and Foreign Ownership, 1963 to 1974-75. Year Apportioned to Foreign Ownership Australian % U.K. % U.S.A. % Total Foreign % 1963 16.3 9.2 27.3. 72.7 1964 19.5 8.9 30.0 70.0 1965 20.8 9.3 34.0 66.0 1966 18.7 15.2 37.6 62.4 1967 19.2 18.5 40.9 59.1 1968 17.2 23.9 44.0 56.0 1971-72 16.2 25.5 48.7 51.3 1972-73 15.7 26.4 49.6 50.4 1973-74 13.2 27.7 49.8 50.2 1974-75 11.6 28.7 51.8 48.2 Note 1: Source: The figures for 1963 to 1968 are based on value of production, not value added. Adapted from Crough, 1978: Table 6. - 44 -been taken over by o i l corporations (Crough and Wheelwright, 1982b). It i s interesting to note that much of the foreign investment in the Australian mining industry i s connected to mines supplying minerals to Japan and other export markets. (The important role that Japan has played i n shaping Australia's post-war economy w i l l be dealt with i n Chapter 4.) It i s also important to note that while the prevalence of direct investment by overseas corporations i n Australia marked a s i g n i f i c a n t change in the organization of production from the pre-war period, i t should be seen as simply a different mechanism for exploiting Australia's production. The B r i t i s h i n i t i a l l y extracted wealth from Australia through trade and providing finance to the export sector. However, with the increased use of t a r i f f s and the collapse of currency values in the 1930's, these were no longer the most secure mechanisms for extracting surplus from the periphery (Cochrane, 1980a). The l e v e l of B r i t i s h investment had dramatically increased in the inter-war period and i s s t i l l a s i g n i f i c a n t source of overseas capital for A u s t r a l i a . However, i t was the f i n a n c i a l strength of the United States i n the post-war period that brought i t into the ascendent r o l e . The significance of American investment in Australia i s heightened by i t s concentration within the leading sectors of the economy (C a m i l l e r i , 1980; Gibson, 1981). 3.4 I n t e g r a t i o n i n t o the P a c i f i c Rim Economy The economic underpinning of the Australian-American relationship, however, extended well beyond simple b i l a t e r a l t i e s . These economic connections were an integral part of the broad strategic-diplomatic relationship of these two countries. I t could be argued that Australia - 45 -used these ties to gain m i l i t a r y security by providing the United States with s u f f i c i e n t vested interests (due to commercial investments) to include A u s t r a l i a within i t s defense perimeter. For i t s part, America was consequently able to l i n k Australia into i t s P a c i f i c basin strategy. Indeed there i s some evidence that as early as 1950 Australia had been assigned a role i n providing a g r i c u l t r u a l and mineral products to Japan to aid i t s integration into the "Free World" (C a m i l l e r i , 1980:7). Certainly due to declining markets in B r i t a i n , Australia was looking for new markets for i t s exports and by 1970 was already strongly oriented towards the P a c i f i c . Indeed, Japan and the United States had already become Australia's major trading partners and S.E. Asia and Oceania were quickly growing in economic and p o l i t i c a l significance (see Table 7, p. 72). The Whitlam Labor government (1972-75) took this orientation and turned i t into a firm policy commitment. With aspirations of a junior metropolitan role for Au s t r a l i a , the government favoured increasing part i c i p a t i o n in Asia. Australian corporations were encouraged to seek a foothold in Asia, p a r t i c u l a r l y sectors that involved lower technology ( i . e . labour intensive). Foreign TNCs were also encouraged to use Austr a l i a as a springboard for entry into the Asian market by locating regional headquarters in Au s t r a l i a . Further, the government was expecting that as Asia developed and ind u s t r i a l i z e d that i t s demand for raw materials and foodstuff could be met by Au s t r a l i a . This would help d i v e r s i f y Australia's export markets which had become very dependent on Japan (C a m i l l e r i , 1980). This represented a substantial s h i f t i n Australia's policy towards Asia which had previously emphasized m i l i t a r y alliances rather than economic t i e s . - 46 -The Labor government also attempted to introduce a number of other policy s h i f t s in support of i t s economic nationalist platform. The main focus was on generating the economic development of natural resources under Australian ownership ( i f need be, via state ownership). As part of this program Labor retained l e g i s l a t i o n passed by the previous government i n 1972 enabling the Treasurer to prohibit any takeover that was not " i n the national interest." The Labor government also froze a l l foreign investment in real estate and required that a proportion of overseas loan funds be deposited with the central bank, interest free. In 1975 the Foreign Investment Advisory Committee was established to oversee the l e g i s l a t i o n and to determine the "national interest" with respect to takeover bids. The government also nominated four areas of special scrutiny: non-bank f i n a n c i a l i n s t i t u t i o n s , l i f e and general insurance companies, minerals, and 7 real estate. In the case of foreign investment within the minerals sector the government introduced the requirement that a l l new projects must have a minimum of 50% Australian equity except for uranium projects which had to be 100% Australian equity (Crough and Wheelwright, 1982b). A second component of Labor's platform was the encouragement of j o i n t action with other producers to secure a more equitable return for i t s raw material exports. While these actions only further integrated A u s t r a l i a into the P a c i f i c Rim economy they were also cl e a r l y aimed at improving Australia's own position. However, TNCs within the mining industry saw these moves as potentially threatening their position, and therefore, acted quickly to mobilize opposition to these moves. The power and influence of this opposition forced the government to dilu t e their program substantially. The success of this opposition r e f l e c t s the extent - 47 -of foreign control within Australian industry by this time (Corrighan, 1980). Indeed, the United States put extreme pressure on the Whitlam government to act as a moderating influence rather than organizing j o i n t action with other resource producers. For example, in October 1974, following discussions between the United States Secretary of State Kissinger and Prime Minister Whitlam, i t was clear that Australia was expected not to support the International Bauxite Association's attempts to seek higher royalties ( C a m i l l e r i , 1980). The Liberal-National Country Party regained power i n December 1975 under Malcolm Fraser. The new government, confronted with a deteriorating economic climate, employed a policy aimed at producing an investment-led recovery based on attracting transnational c a p i t a l , p a r t i c u l a r l y into the minerals and mineral processing sectors (the manufacturing industry offering l i t t l e l i k e l i h o o d of long term p r o f i t a b i l i t y ) ( C a m i l l e r i , 1980). This strategy involved the implementation of various measures aimed at increasing the p r o f i t a b i l i t y of the mining sector. For example, the 1976 Federal Budget included substantial concessions and incentives to the mining sector, such as the removal or reduction of levies on o i l and coal production as well as numerous tax concessions (Corrighan, 1980). Fraser retained Labor's modest foreign investment policy, though the 50% Australian equity requirement was maintained for new mineral projects, i t was now subject to waiver i f Australian equity was unavailable. The 100% equity requirement for uranium ventures was dropped to 75% (and later to 50%). This change increased the government's a b i l i t y to attract new - 48 -foreign investment while s t i l l giving Australian capita l investment opportunities in partnership with foreign c a p i t a l i f they so desired (Corrighan, 1980). At the same time the government established the Foreign Investment Review Board to replace Labor's Advisory Committee. Crough (1980) argues that with i t s change in structure came a reversal of role from that of scr u t i n i z i n g foreign investment to one of actively f a c i l i t a t i n g i t . Nevertheless, the government also extended the 50% Australian equity requirement for four new areas: agriculture, forestry, f i s h i n g , and the pastoral industry (Crough and Wheelwright, 1982b). In June 1978 the government brought in new foreign ownership guidelines with i t s policy of naturalization for foreign corporations. Under these guidelines a corporation would be considered Australian for the purposes of the Foreign Investment Review Board i f i t met the following c r i t e r i a : 25% Australian equity in the corporation; a majority of Australian citizens on i t s boards of directors; and i s committed to a 51% Australian equity over an unspecified time (Crough and Wheelwright, 1982b). While this move was mainly a benefit to B r i t i s h corporations (American corporations being much more reticent to relinquish equity i n their subsidiaries), i t did mark a major capitulation by the government to transnational mining in t e r e s t s . In the early 1980's foreign investment guidelines were applied more stringently, indicating that l o c a l c a p i t a l was reasserting i t s influence over the government. Indeed, foreign investment policy throughout this period acted as a f a i r l y r e l i a b l e barometer of the re l a t i v e strengths of foreign and domestic c a p i t a l . For the main effect of the 50% Australian equity requirement i n various sectors was to enable - 49 -domestic c a p i t a l p a r t i c i p a t i o n i n development projects to which they would probably have never otherwise had access (Corrighan, 1982:41). The Fraser government's strategy and the r e l a t i v e l y good prospects of the mining industry for long term p r o f i t a b i l i t y led to the minerals industry becoming the most dynamic sector within the Australian economy. Consequently, the minerals sector was the focus of investment plans for both major Australian i n d u s t r i a l corporations such as Broken H i l l Proprietary Ltd. (BHP) and Colonial Sugar Refineries Ltd. (CSR) and major mining TNCs.9 This was a marked contrast to the manufacturing sector which had suffered a serious decline in both employment and p r o f i t a b i l i t y during the 1970's. The causes of this decline are not simple to id e n t i f y but can probably be attributed to a combination of different factors over various periods. Marsden and Anderssen (1979:70) note the tendency to focus on particular "causes" at different times, e.g. 1975 - import competition; 1976 - size of the public sector; 1977 - size of the budget d e f i c i t ; 1978 -real wage overhang; and 1979 - technological change. While some of these can be dismissed as p o l i t i c a l constructs, some of these causes have obviously played a role i n creating these problems. For example, import penetration increased dramatically i n the t e x t i l e s , clothing, and footwear industries during the mid-1970's despite their high levels of protection (Peetz, 1982). However, as the 1970's progressed, technological change and changing consumption patterns tended to play a much greater r o l e . For whereas productivity has increased throughout this period, consumer demand has stagnated in the mainstays of manufacturing - food, clothes, drink, and cars - as demand has shifted to new products and non-manufactured items - 50 -(e.g. tourism and recreation). Therefore, productivity increases have outstripped production leading to job retrenchments i n many sectors of the industry (Hopkins and Curtain, 1982:75-6; Marsden and Anderssen, 1979). This f i n a l factor also r e f l e c t s the lack of new investment i n the growth sectors of manufacturing as shown by the rapid increase during the late 1970's i n manufactured imports that do not compete with Australian products (Fagan et a l . , 1981) . Indeed, government action on this issue seems to represent a f i n a l abandonment10 of the policy of broad-base i n d u s t r i a l i z a t i o n b u i l t on import substitution. Instead, the focus appears to have shifted to spe c i a l i z a t i o n i n capital-intensive manufacturing where Australia's s k i l l e d labour force and natural resource endowments supposedly give i t a comparative advantage. The two clearest examples of this trend are the unholy rush of the state governments to attract aluminium refi n e r i e s to their declining i n d u s t r i a l regions (Fagan, 1981) and the Australian government's acceptance of General Motors-Holden's (GM-H) incorporation into General Motors Corporation's world car strategy where GM-H would export engines and in return would be able to import a s p e c i f i c value of car component parts at a reduced duty (McQueen, 1982:27-29). However, the adoption of this policy was based i n part on the expectation that the expansion of the minerals industry would support, the restructuring of the manufacturing sector and the increased import of consumer goods. Further, i t was also anticipated that the jobs lost due to ra t i o n a l i z a t i o n and technological change could be taken up by the t e r t i a r y and quaternary sectors. With the f a i l u r e of the resources boom i n 1982, - 51 -Australia slipped into i t s worse recession since the 1930s. The goverment's general lack of an alternative economic policy once the "investment-led mining boom" f a i l e d and declining economic prosperity, led to the eventual defeat of the Fraser government in March 1983. The new Labor government under Bob Hawke took over power on a policy of "national reconstruction and pragmatic economic management." However, while Labor introduced a new style of government and leadership, i t s p o l i c i e s did not represent a r a d i c a l departure from those of the previous government. The Labor government's major policy issues to date have centred around "sunrise industries" and "cottage industries" at two ends of the spectrum for manufacturing, and development of f i n a n c i a l sector services. The "sunrise industries" p o l i c i e s i s probably more important as a symbolic program than i n i t s potential for job creation, which i s not large. Offering assistance to "high-technology" industries the government appears to be wanting to broaden Australia's i n d u s t r i a l base and though accepting that direct employment creation w i l l be minimal argues that the wealth generated from these industries w i l l " . . . compensate for the long term decline in our t r a d i t i o n a l i n d u s t r i e s . " 1 1 Carter (1983:41) questions that given the increasingly captial-intensive nature of Australian manufacturing, whether the so-called "sunrise industries" offer anything new or substantive, given the l i k e l y small scope of these industries. The government i s , however, also examining "alternative" employment programs such as the establishment of "cottage industry communes" in high unemployment areas (Bulbeck, 1983). The government has also introduced changes in banking l e g i s l a t i o n to allow the establishment of international - 52 -f i n a n c i a l markets in Sydney and Melbourne (Bowring, 1983) as yet another strategy i n broadening Australia's economic base. However, while the government i s attempting some innovative p o l i c i e s , there has been l i t t l e sign of any serious re-evaluation of the economic course which the previous Liberal government and e a r l i e r Whitlam Labor government encouraged, i . e . the greater integration of Australia into the P a c i f i c Rim economy with the Australian economy consequently being increasingly incorporated into a new international d i v i s i o n of labour. Indeed, Bob Hawke's murmurings about society recognizing the alternative l i f e s t y l e s as one way of tackling the unemployment problem (Aarons, 1983:20) seems to suggest that the government, though showing a welcomed change of attitude towards the unemployed, i s unwilling to address the major structural problems of the economy. 3.5 Summary Through the tracing out of some of the major trends i n Australia's economic development since 1939 this chapter has revealed the d i s t i n c t i v e pattern of dependent development described in the f i r s t chapter. Though Australia's dependent relationship has shifted focus from B r i t a i n to America ( i t i s not suggested, however, that this was either an instantaneous or complete process), the process of dependent i n d u s t r i a l i z a t i o n based on import substitution continued unabated through to the early 1960's. S i m i l a r l y , the internationalization of the domestic industry through the penetration of foreign c a p i t a l p a r a l l e l s this i n d u s t r i a l i z a t i o n . Indeed, by the 1970's the level of penetration of - 53 -foreign c a p i t a l into the Australian economy was second only to Canada amongst OECD countries (wheelwright, 1982:45). From the 1960's a new phase of development appears as TNCs establish operations i n Australia to serve international markets. This i n i t a l l y occurs within the minerals industry due to Australia's r i c h resource endowments and the rapidly increasing international commodities market. However, as the organization of production was increasingly internationalized, investment patterns i n the manufacturing sector also changed. F i r s t , through either r a t i o n a l i z a t i o n of production or the wholesale movement of labour-intensive industries off-shore to cheap labour countries, p a r t i c u l a r l y i n S.E. Asia. Later, there was a gradual incorporation of some sectors of manufacturing into the new international d i v i s i o n of labour, increasingly within the strategy of world-wide sourcing where l o c a l industry becomes a component manufacturer for an international production operation. For Aus t r a l i a , this production usually involved high-value capital-intensive manufacturing (e.g. automobile engines) which leads to a decline i n the workforce required for a given value of production. Thus the growing numbers of unemployed can be seen as the beginnings of the process of marginalization referred to i n Chapter 1. Indeed, there i s some indication that the new Labor government accepts t h i s as an inevitable consequence, and though exclusion i s not prevalent at this point, i t i s questionable how long the state w i l l be able to support the marginalized i f their numbers continue to grow. The a l l i a n c e between foreign and l o c a l c a p i t a l and the state i s also c l e a r l y revealed throughout this process. On one hand the state has been continually offering incentives to attract foreign investment to A u s t r a l i a , - 54 -but at the same time l o c a l c a p i t a l has been able to ensure i t s e l f a role within this development. This chapter also points to the importance of America's i m p e r i a l i s t i c position within the relationship and demonstrates how i t acts to draw Australia further into the segment of the international economic system focused on the P a c i f i c . I t did this e s s e n t i a l l y by i n s i s t i n g on Australia's co-operation i n providing Japan with access to s u f f i c i e n t raw materials to allow i t to develop as a stronghold of capitalism on the edge of Asia. Consequently, the relationship between Austr a l i a and Japan evolved rapidly, partly due to the involvement of American TNCs in mining operations, leading to the eventual r i s e of Japan as Australia's largest trading partner. Given the significance of the Australia-Japan relationship, symbolically as well as economically (due to the widespread i d e n t i f i c a t i o n of Australia's economic prosperity with that of Japan), the next chapter examines the h i s t o r i c roots and development of the Australia-Japan trading relationship. For while this relationship i s cle a r l y subsumed within the broader trends discussed in this present chapter, i t nevertheless has played a s i g n i f i c a n t role i n drawing Australia into the P a c i f i c Rim economy. The shape of Australia's future relations with Japan w i l l have important implications for the structure and direction of Australia's future development. 1 - 55 -CHAPTER 3 NOTES 1. In 1966-67 the United States became Australia's largest trading partner and largest supplier of imports. In the same year Japan replaced B r i t a i n as Australia's largest export market. By 1970-71 Japan had also displaced the United States as Australia's largest trading partner, p r i n c i p a l l y due to i t s importance as an export market. Although the United States has remained Australia's largest supplier of imports, Japan may eventually replace the United States here as we l l , due to i t s increasing role as a supplier of c a p i t a l goods to A u s t r a l i a . 2. General Motors-Holden, Ford, Chrysler, B r i t i s h Motor Corporation, and Volkswagen were operating production f a c i l i t i e s i n Australia during the 1960's. However, of these only General Motors-Holden and Ford are s t i l l operating. Volkswagen closed i t s Australian operations in 1968, B r i t i s h Motor Corporation i n .1974, while Mitsubishi Motors took over Chrysler's Australian operation i n 1980. However, Toyota and Nissan both established production f a c i l i t i e s in Australia i n 1976 to maintain the number of producers at five (McQueen, 1982). 3. The existence of the "iron ore embargo" from 1938 to 1960 i s a major source of confusion over the knowledge of Australia's iron ore reserves. The aim of the 1938 embargo was to prevent the exporting of iron ore to Japan. To this end a report was prepared i n 1938 by the Commonwealth Geological Advisor, Dr. W.G. Woolnough, on the "Technical Aspects of the Iron Ore Reserves i n Australia." This report duly indicated that the known reserves of iron ore were limited and that i t might be prudent to ban exports to ensure the supply to the domestic industry (Blainey, 1968). This report has often been taken on face value and interpreted as the geological wisdom at the time (e.g. McKern, 1975:4; Barnett, 1979). However, McQueen (1982:78) argues that "the presence of iron ore in the Pilbara had been recognized by a procession of commentators beginning with William Dampier in 1699." He also refers to a government report of 1888-89 that noted that the Pilbara contained enough iron ore ". . . t o supply the whole world should the present sources be worked out." The reason that; the embargo was s t i l l i n place i n 1960 was p r i n c i p a l l y that there was no s i g n i f i c a n t export market before then to make the proving of the Pilb a r a reserve worthwhile. 4. Peta Nora, a v i s i t i n g expert from Norway on energy and resources, i n a speech to a gathering of Australian p o l i t i c i a n s (AMWSU, 1979:32). 5. The latest o f f i c i a l figures of foreign ownership i n A u s t r a l i a are from 1976-77; however, the figures for some industry sectors are somewhat older. This i s because the Fraser government closed down the section of the Australian Bureau of S t a t i s t i c s which measured foreign ownership and control i n 1978 under the guise of r e s t r a i n t . Following considerable pressure, the government promised in January 1982 to reopen - 56 -the section. However, i t w i l l most l i k e l y be several years before new figures emerge. Crough and wheelwright (1982b:2) note that "between 1976 and 1981, there were almost 3500 takeovers of Australian businesses involving over $6.5 b i l l i o n . " 6. For example, Crough and Wheelwright (1982b:2) note that B r i t i s h Petroleum bought into the Clarence c o l l i e r y at Lithgow, and Shell took over the Bellambi Coal Company. A t l a n t i c R i c h f i e l d has bought into R.W. M i l l e r and established a major steam coal mine at B l a i r Athol, Queensland, with Conzinc Riotinto of Australia (a subsidiary of Rio Tinto-Zinc) (Corrighan, 1982). 7. Previously the only r e s t r i c t i o n s over foreign investment in Australia were i n banking, c i v i l aviation, broadcasting and t e l e v i s i o n , plus guidelines l i n k i n g loan-raisings by foreign companies i n Australia with their l o c a l equity content, and the prevention of. takeover of uranium mines (Crough and wheelwright, 1982b:5). 8. BHP i s Australia's largest corporation, being known best for i t s iron and steel production. However, in recent years i t s resource a c t i v i t i e s , which previously were mainly linked to i t s iron and steel production, have come to dominate i t s corporate strategy while i t s i n d u s t r i a l a c t i v i t i e s have been cut back. CSR i s Australia's monopoly sugar refiner with interests in the chemical industry. It too has branched out into the lucrative mining industry i n recent years. 9. These include American Smelting and Refining Co. Inc., Amax, Kaiser Aluminium and Chemical Corporation, Rio Tinto-Zinc, and Consolidated Gold Fields among others (Corrighan, 1982; Crough, 1978). 10. This process can be seen to have begun i n force during the early 1970's when the Whitlam government encouraged Australian companies to move labour-intensive industries off-shore. 11. From a Labor manufacturing industry policy document quoted in Carter (1983:38). - 57 -CHAPTER 4 THE EVOLUTION OF THE AUSTRALIAN-JAPANESE TRADING RELATIONSHIP 4.1 H i s t o r i c a l Roots of the R e l a t i o n s h i p Trade lin k s between Australia and Japan can be traced back to 1875 with Japanese representation at the Intercolonial Exhibition i n Melbourne and at the Sydney International Exhibition i n 1879. However, i t was not u n t i l the turn of the century that direct trade developed i n a meaningful way. Table 4 shows the proportion of Australia's imports and exports from selected countries from 1894-1913. The United Kingdom, not surprisingly, dominated Australia's trade although the United States and several European countries were also prominent. Trade with Japan developed slowly over this period accounting for approximately 1% of Australia's imports and exports. Cotton t e x t i l e s were the major component of imports while wool was the predominant export; a trading pattern that was to continue u n t i l the 1960's. Following World War I Australia's trade with Japan grew steadily. By the early 1920's Japan had become a s i g n i f i c a n t export market taking an average 6.1% of Australia's exports. In 1926 the Japanese Government approached A u s t r a l i a , i n v i t i n g i t to participate i n the Treaty of Commerce and Navigation that had been recently signed between the United Kingdom and Japan (30th July, 1925). This treaty had provision for i t s accession by dominions of the Empire. However, Australia held no similar treaty with any other non-British country at that time and saw no particular advantage i n extending the rights granted by this treaty to Japan. I t therefore declined Japan's i n v i t a t i o n to participate i n the treaty (Walker and Jacobs, 1979). o Table 4 Australia's Imports and Exports from Selected Countries, 1894-1913 Yearly Averages for Quinquennial Periods (Percentages) Country 1894--98 1899-•1903 1904--08 1909- •1.3 Import Export Import Export Import Export Import Export Japan 0.4 0.3 0.7 0.4 1.0 1.4 1.2 1.6 U.S.A. 8.6 7.1 13.6 6.9 11.6 3.9 11.4 2.7 U.K. 68.6 66.8 58.8 49.6 60.4 46.9 59.8 45.1 Germany 5.1 4.8 6.4 5.4 7.0 8.0 6.4 9.2 France 1.2 6.5 1.3 5.8 1.0 8.9 0.8 10.9 N.Z. 3.7 2.7 5.3 3.0 5.5 3.2, 3.9 3.2 Canada 0.5 0.1 0.7 0.1 0.7 0.3 1.3 0.2 Source: O f f i c i a l Year Book of the Commonwealth of Australia, No. 9 (1916). - 59 -Nevertheless, trade between the two countries grew steadily and by 1934-35 Japan accounted for 6.6% of Australia's imports and took 11.7% of i t s exports. Much of this increase i n imports, which were predominantly made up of cotton and " a r t i f i c i a l s i l k " t e x t i l e s , was at the expense of B r i t i s h imports. During the 1930's Japan had been successively reducing i t s prices i n an attempt to capture the Australian market. The Australian government, however, continued to protect B r i t i s h imports (despite the fact that the United Kingdom was already receiving preferential duties) and u n o f f i c i a l l y sought a voluntary restraint on these goods from Japan. Although Japan was s t i l l guaranteed a share of the market i t rejected this compromise. This was despite the sensitive discussions between the two governments over a trade treaty that was then i n progress. In response the Australian government i n s t i t u t e d the "trade diversion policy" from May 23, 1936. With respect to Japan this policy imposed discriminatory duties on the imports of t e x t i l e s (Nicholson, 1955). In a radio program e n t i t l e d "The Truth about the Japanese Trade Position" in June 1936, the Prime Minister J . A. Lyons said: "We wish to trade with Japan, we are prepared to allow her a substantial share i n the t e x t i l e market, but i f Japan i n s i s t s i n using the weapon of lower and s t i l l lower prices i n an " endeavour to set up monopolies i n this market, then Australia must regulate her imports. We were one of the last countries i n the world to move i n this matter. Nation after nation has been forced into r e s t r i c t i v e action by this otherwise i r r e s i s t i b l e deluge of goods against which no Western standard of wages, of hours, and of l i v i n g could possible survive." (quoted i n Walker and Jacobs, 1979:7-8) Japan was not slow to react. Invoking an Imperial Ordinance under the Law Concerning the Adjustment of Trade and Safeguarding of Commerce, i t announced r e t a l i a t o r y measures including a 50% ad_ valorem surcharge on Table 5 Australia's Imports and Exports from Selected Countries, 1914-15 to 1938-39. Yearly Averages for Quinquennial Periods (Percentages) 1914-15 to 1918-19 1919-20 to 1923-24 1924-25 to 1928-29 1929-30 to 1933-34 1934-35 to 1938-39 Country Import Export Import Export Import Export Import Export Import Export Japan 5.6 3.8 3.2 6.1 3.0 7.7 4.7 10.7 5.2 7.8 U.S.A. 21.8 11.4 21.6 7.1 24.5 7.5 18.8 2.6 15.7 4.1 U.K. 47.1 53.5 47.1 46.9 42.2 38.8 41.7 46.8 42.5 52.2 Germany 0.4 0.1 0.3 2.2 2.4 6.2 3.3 6.0 3.8 2.4 France 0.3 2.5 2.5 7.6 2.7 11.6 2.3 6.9 1.0 6.0 N.Z. 3.0 4.1 1.6 4.6 1.8 3.1 1.4 3.0 1.7 4.3 Canada 2.3 2.1 3.2 0.2 2.6 0.6 3.3 1.0 7.0 1.5 Source: O f f i c i a l Year Book of the Commonwealth of Australia, various issues. - 61 -certain products. Also, comment at the time by the Japanese on Australia's actions was equally strong, as shown by the following statement from Mr. Tsutsumi, President of the Japan Chamber of Commerce: "Japan has offered to negotiate, and i f there i s any hope of progress, I trust that a time l i m i t w i l l be set, and that trade w i l l not languish i n uncertainty while endless talk goes on. Great reliance i s placed on the statement that Japan w i l l y i e l d because she must have wool, but Japan can do a great deal with substitutes." (quoted i n Walker and Jacobs, 1979:8) The dispute was informally settled on December 26, 1936, when an agreement was reached setting out the steps for a resumption of trade (Nicholson, 1955). Nevertheless, despite the short duration of the dispute i t had a s i g n i f i c a n t impact on trade between the two countries. Between 1935-36 and 1936-37 Australia's imports from Japan f e l l from 6.1% to 4.5% of t o t a l imports. However, Australia's exports to Japan over the same period f e l l from 14.2% to 6.5% of t o t a l exports ( O f f i c i a l Year Book of the Commonwealth of A u s t r a l i a , No. 34, 1941). Thus i t i s apparent that the trade diversion policy had a larger impact on Australia's exports to Japan than vice versa. This would seem to indicate that Australia had misjudged the strength of i t s bargaining position by overestimating Japan's dependence on Australian wool. From 1938 the Australian and Japanese governments made yearly arrangements regarding the volume and type of goods to be traded. However, there was growing concern within Australia regarding Japan's growing m i l i t a r y aggression. Japan's war with China raised questions of i t s t e r r i t o r i a l ambitions leaving many Australians wondering as to the wisdom of Australia's continued export of munitions material to Japan. At the - 62 -time, A u s t r a l i a exported a small amount of iron ore and pig i r o n , of which a s i g n i f i c a n t proportion went to Japan. More s i g n i f i c a n t , however, was the development of an iron ore deposit by Nippon Mining Company on Koolan Island i n Yampi Sound, Western A u s t r a l i a . There were a small number of Japanese technicians at the development and the government was concerned that their presence at an Isolated Australian harbour would prove very awkward in the event of war (Blainey, 1978). The government, however, wanted to avoid a diplomatic incident so i t constructed an iron ore embargo as a way to remove the Japanese from the unguarded coastline. In A p r i l 1938, Dr. W. G. Woolnough, the Commonwealth Geological Advisor i n a report to Parliament on the extent of Australia's iron ore reserves, recommended that steps be taken to conserve the iron ore reserves. In July 1938, the government placed an embargo on the export of iron ore from Australia on the o f f i c i a l pretext that Australia had to conserve i t s iron ore to protect the supply to the l o c a l steel industry. The Japanese Consul-General, however, protested that the policy was aimed at Japan while the action was strongly supported by public opinion for that very reason (Blainey, 1968). The embargo, however, did l i t t l e to stem the growing public demand for an end to a l l trade in munitions with Japan. Lack of government action led to the Port Kerabla pig-iron s t r i k e . On November 18, 1938, the Port Kembla waterside workers refused to load pig-iron onto the steamer Dalfrara which was bound for Japan. While the s t r i k e was unsuccessful i n that the Dalfram was eventually loaded, i t did mark an important turning point i n labour's campaign to stop trade with Japan (Richardson, 1973). - 63 -4.2 Post War; R e h a b i l i t a t i o n of Trade L i n k s I t was some years after the ending of h o s t i l i t i e s between Japan and the A l l i e d Forces i n September 1945 before trade between Australia and Japan was to return to the levels of the mid-1930's. This delay i n normalization of trade was not simply due to the disruption and disl o c a t i o n caused by the war. I n i t i a l post-war trade between Australia and Japan consisted of the export of foodstuffs from Australia and the import of raw s i l k from Japan. This was not the t y p i c a l trading pattern for these two countries. However, the Supreme Commander A l l i e d Powers (SCAP) had reserved a l l t e x t i l e production for the United States market and had placed Japan in the "dollar" area. This created technical currency d i f f i c u l t i e s for countries from the s t e r l i n g area ( l i k e Australia) wishing to trade with Japan (Nicholson, 1955). By 1949-50 trade between Australia and Japan had begun to take on i t s former shape with Australia's exports being dominated by wool and imports from Japan by t e x t i l e s . Australia's exports to Japan expanded rapidly throughout this period; however, there was l i t t l e corresponding expansion in imports from Japan. This was essent i a l l y due to the discriminatory import practices exercised against Japan by A u s t r a l i a . Japan was not accorded "most favoured nation" status by Australia and thus faced higher t a r i f f levels on some of i t s largest import items (Crawford, 1968). This was despite the requirement of the 1951 Peace Treaty for a l l signatory countries to accord such status to Japan so as to assist i t s redevelopment. Australia also resisted pressure to grant Japan "most favoured nation" status when i t became a f u l l member of the General Agreement on T a r i f f s and Trade in 1955 by c i t i n g exemption under A r t i c l e XXXV of the Agreement (Walker and Jacobs, 1979). - 64 -Australia's reluctance to normalize trade relations with Japan reflected i t s ambivalence towards Japan i n this period. Australia, concerned to l i m i t the potential of a renewed Japanese threat, had sought a harsher Peace Treaty that included disarmament and long-term economic controls. The pre-war experience with the "trade diversion policy" had also l e f t A ustralia concerned about the aggressive trading t a c t i c s used by Japan and their possible impacts on Australian industry. Nevertheless, Australia was eventually convinced by American arguments of the need to rebuild Japan as a stronghold against communist forces in Asia and the promise of an acceptable security agreement. (The movement of A u s t r a l i a away from i t s hard l i n e on the Peace Treaty in part r e f l e c t s the emergence of the "cold war syndrome" i n Australia's foreign policy in the late 1940 !s.) The rebuilding of Japan required that i t be given generous access to raw materials. Australia accepted this recognizing the importance of a rehabilitated and growing Japan as an expanding market for Australian products. This was an important consideration given that the volume of exports to the United Kingdom was declining and that Australia's defense p o l i c i e s , immigration program, and other economic and s o c i a l objectives called for rapid economic development (Spender, 1969; Ca m i l l e r i , 1980; Crawford, 1968). There was also the pragmatic fact that Australia could not expect to continue to reap the benefits of an expanding Japanese market while denying Japan access to the Australian market. There were other markets in which Japan could obtain the wheat and minerals i t purchased from Australia (as there s t i l l i s ) and given s u f f i c i e n t balance of payments pressures, wool, which was imported predominantly for the domestic market, could be replaced by cheaper synthetics. - 65 -These factors came together i n 1957 to force Australia to reappraise i t s trade stance, which was by any standard unreasonable. This reappraisal resulted in the 1957 "Agreement on Commerce between Australia and Japan." Before discussing the terms of the Agreement, i t i s interesting to note the background against which the decision to negotiate a trade agreement was made. Crawford (1968:351) described the government's trepidation when announcing i t s policy: "The rather quiet announcement of the decision by the then Acting Minister for Trade, W. McMahon, was deceptively laconic. The decision followed what would now be c a l l e d 'agonising appraisal' in anticipation of a h o s t i l e public opinion. In the event, the treaty aroused an even more b i t t e r protest from manufacturers than had been expected. Nevertheless, the general public demur was far less than expected. . . ." while the Vernon Committee (1966:325-6) made the following observation: "[The trade treaty with Japan] . . . was signed in July 1957, against a background of pre-war trade h o s t i l i t i e s , the war i t s e l f , and Australia's post-war discrimination against Japan in t a r i f f s and import l i c e n s i n g . Some rapproachment was c l e a r l y v i t a l for p o l i t c a l as well as for trade reasons. The basis of the treaty was the exchange of MFN rights i n trade matters and reciprocal assurances of non-discriminatory treatment i n import-control and exchange control matters." The 1957 Agreement, however, did not grant f u l l "most favoured nation" status to Japan. In p a r t i c u l a r , A r t i c l e V of the Agreement gave Australia the right to act against any product that might threaten to seriously injure Australian industry. While this a r t i c l e i s inconsistent with the requirments of GATT, the significance of this needs to be gauged in context. Crawford (1968:354), for example, notes that Australia's r e s t r i c t i o n s on Japan were somewhat less than many other GATT signatories. - 66 -In addition, this a r t i c l e provided the Australian government with a sanction to use against Japan and thus enabled i t to calm the fears of the Australian manufacturing industry. The 1957 Agreement represented an important landmark i n the development of Australia and Japan's trade relationship. Japanese interest i n Australian minerals was beginning to unfold in the late 1950's and the potential for the continued expansion of the l e v e l of trade between the two countries was enormous. Indeed, Crawford (1968:356) argues that without the trade agreement of 1957 the course of mutual trade expansion would have certainly been slower and probably would have led to a much lower rate of economic development for A u s t r a l i a . 4.3 A u s t r a l i a ' s I n c o r p o r a t i o n i n t o the Japanese Resource H i n t e r l a n d In the twenty years following the 1957 trade agreement there was a dramatic expansion and restructuring of trade between Australia and Japan. The i n i t i a l rapid expansion of imports from Japan during this period (see Table 6) was primarily the result of the l i f t i n g of trade r e s t r i c t i o n s and a r e f l e c t i o n of the previously low levels of Japanese imports. With the rapid expansion of Australia's domestic economy at the time, this i n f l u x of imports was easily absorbed without impacting the manufacturing sector. Indeed, the early 1960's saw a dramatic reversal of the manufacturing industry's almost hysterical fear of Japanese imports (which was prevalent during the 1950's) to a recognition of the potential mutual benefits that could be derived from a co-operative trade relationship. The formation of a j o i n t Committee for Australian-Japanese Business Co-operation r e f l e c t s the extent of this change i n attitude (Crawford, 1968:354). I t was under Table 6 Rate of Growth of Australian-Japanese Trade, 1957-58 to 1976-77. Yearly Averages for Quinquennial Periods (Percentages) 1957-58 to 1961-62 1962-63 to 1966-67 1967-68 to 1971-72 1972-73 to 1976-77 Australia's Exports to - 6.1 9.4 18.3 23.8 Japan Australia's Imports from 30.9 24.5 16.3 27.9 Japan Source: Overseas Trade, various issues. - 68 -these new circumstances that the Australian government bowed to Japanese pressure to drop A r t i c l e V from the 1957 Agreement. Thus, in 1963 the Agreement was amended and Japan was accorded f u l l rights as a "most favoured nation" under GATT. In r e a l i t y , this amendment was merely a rubber-stamping of the new pattern of trade that was already emerging between Australia and Japan. While wool and t e x t i l e s continued to be the dominant items of trade during the 1960's, the future shape of trade between the two countries was already taking form in the 1950's. Between 1957 and 1963, mineral exports doubled from 5.4% to 11.5% of Australia's exports to Japan (source: Overseas Trade). This was largely accounted for by increased coal exports though lead, zinc, copper, and mineral sands were a l l s i g n i f i c a n t . The 1938 iron ore embargo was not l i f t e d u n t i l December 2, 1960, partly due to i t s own momentum and partly because there had been few markets and therefore l i t t l e interest i n iron ore before the 1960's. Most of the iron ore markets i n North America and Europe were supplied by captive mines leaving no access for new mines i n Aust r a l i a . The Japanese demand during the 1950's had been adequately met from a number of Asian sources (primarily the Philippines, Malaysia, and Indonesia). However, as the Japanese steel industry began to expand rapidly during the 1960's, these sources could neither provide the quantity nor the r e l i a b i l i t y then required. As knowledge of Australia's abundant supplies of iron ore became more widespread, Japanese trading companies became interested i n Australia as a supplier for the steel industry. These companies had already been operating i n Australia to secure supplies of wheat and wool. Consequently, they were in an ideal situation to l i n k the Japanese steel m i l l s with the - 69 -mine operators which included American, B r i t i s h , and Australian mining corporations. The trading companies played a s i g n i f i c a n t role in securing long-term contracts from the steel m i l l s which were essential for the mining projects to proceed. These contracts provided the security required for the mining corporations to obtain the f i n a n c i a l c a p i t a l for the massive infrastructure programs involved in bringing these projects into operation (Blainey, 1978; Barnett, 1979; Edgington, 1983). A number of explanations have been offered for the Japanese policy of using long-term contracts rather than direct equity holdings to secure supplies of raw materials. However, i t would seem that the main reasons were Japan's lack of foreign exchange and the high opportunity costs of exporting c a p i t a l from Japan, when the rapid growth of the domestic industry demanded heavy c a p i t a l investments. Throughout the 1960's the Japanese government, through the Ministry of International Trade and Industry (MITI), vetoed overseas investments above prescribed amounts, e.g., i n 1968 the l i m i t was $200,000 (Galway, 1975:34). However, Japan did provide finance i f i t was necessary for a development to proceed 1 but because of the involvement of transnational raining corporations i n Australian resource develoments this was not required i n Australian projects. Therefore, Japanese equity investment was generally restricted to small share-holdings by trading companies for marketing purposes (McKern, 1975:19-20). However, as the 1970's progressed, Japan's foreign exchange reserve quickly expanded as a result of balance of payments surpluses and foreign investment speculation on the Yen (McKern, 1975; Galway, 1975). This led to a change i n Japanese policy as MITI began to encourage overseas - 70 -investment: f i r s t through the provision of debt financing to enable the purchase of equipment (these loans were tied to Japanese suppliers) and subsequently to equity investment i n exploration and development of new projects. Thus the Japanese role i n the 1960's minerals boom was p r i n c i p a l l y as a market for export oriented production which was the major growth area for the minerals industry. Iron ore and coal exports expanded rapidly throughout the late 1960's, and by 1970-71 iron ore was Australia's largest single export item to Japan bringing in 27.7% of Australia's revenue from exports to Japan. Coal was to take over as Australia's most valuable export to Japan i n 1974-75 bringing i n 22.9% of export revenue from Japan (source:0verseas Trade). The export of many non-ferrous ores such as copper, zinc, n i c k e l , manganese, and r u t i l e also grew rapidly, primarily i n response to Japanese demand as did the production of bauxite and alumina. The effect of these developments on the structure of Australia's exports and the wider economy were equally dramatic. Australia's trade with Japan grew rapidly during this period and by 1970-71 Japan had become Australia's 2 largest trading partner. The areas of growth within Australia's exports to Japan reflected the changing structure of Japanese industry during the 1960's. Not surpr i s i n g l y , these changes were also mirrored i n the composition of imports from Japan. Textiles made up a decreasing proportion of imports as the 1960's and 70's progressed, though they s t i l l represented a si g n i f i c a n t import item. Motor vehicles and e l e c t r i c a l machinery, from the early 1960's, rapidly emerged as the most si g n i f i c a n t import groups. By the mid-1970's they were together accounting for over 40% of Australia's - 71 -imports from Japan. The penetration of Japanese motor vehicles was p a r t i c u l a r l y impressive given the extent of protection afforded to the l o c a l industry. Nevertheless, the t a r i f f barriers were high enough to encourage the Japanese to set up assembly plants to attract an intermediate t a r i f f rate. In 1976 Nissan and Toyota established plants i n Australia to become part of the 85% lo c a l content program, thus receiving low t a r i f f s on imported components (McQueen, 1982). Other Japanese imports are characterized by their enormous d i v e r s i t y . However, i n contrast to Australian exports to Japan, they are usually finished manufactured goods, often of a highly technical nature, e.g., cameras, watches, audio-visual equipment, computers, and other electronic equipment. This pattern of trade between the two countries continued to grow steadily throughout the 1970's. The energy c r i s i s of 1974 did not have any direct impact on this growth, although i t did contribute to a number of policy s h i f t s that have almost certainly affected Australia's mineral resource trade. F i r s t l y , the o i l shock led to a policy of source d i v e r s i f i c a t i o n to reduce the risks of dependence upon a single supplier. Certainly this has resulted in a drop in the proportion of Japanese imports of various minerals supplied by Au s t r a l i a . During the 1970's the main effect was merely to slow the growth of mineral exports to Japan. However, during the early 1980's the downturn in the Japanese steel industry had a s i g n i f i c a n t effect on the iron ore industry and to a lesser extent on the coking coal industry, p a r t i c u l a r l y as existing long-term contracts reach completion. A second effect has been an increase i n investments i n alternative energy sources in Australia (most notably LNG and steaming coal) i n order to reduce Japan's dependence on o i l (Edgington, 1983). Table 7: Australia's Imports and Exports Erom Selected Countries, 1949-50 to 1978-79. Yearly Averages for Quinquennial Periods: $ mi l l i o n s (Percentages) 1949-50/1953-54 1954-55/1958-59 1959-60/1963-64 1964-65/1968-69 1969-70/1973-74 1974-75/1978-79 Country :  Import Export Import Export Import Export Import Export Import Export Import Export Japan 31 (2.2) 109 (6.9) 43 (2.7) 196 (11.7) 121 (5.9) 360 (16.5) 319 (10.2) 592 (20.0) 702 (15.8) 1,532 (28.9) 1,949 (18.8) 3,523 (31.2) U.S.A. . 152 (10.8) 156 (9.8) 204 (12.3) 113 (6.8) 417 (20.2) 212 (9.7) 780 (25.0) 369 (12.4) 1,018 (22.9) 640 (12.1) 2,206 (21.4) 1,176 (10.4) U.K.1 657 (46.5) 571 (35.9) 665 (41.9) 520 (31.1) 638 (30.9) 457 (21.0) 743 (23.8) 449 (15.1) 837 (18.8) 498 (9.4) 1,246 (12.1) 495 (4.4) Other EEC 131 (9.3) 347 (21.8) 161 (10.1) 359 (21.5) 231 (11.2) 351 (16.1) 382 (12.2) 390 (13.1) 597 2 (13.4) 0 527 (9.9) 1,462 (14.1) 1,187 (10.5) South and •S.E. A s i a 3 185 (13.1) 135 (8.5) 190 (12.0) 162 (9.7) 198 (9.6) 196 (9.0) 224 (7.2) 352 (11.9) 316 (7.1) 607 U'1.4) 995 (9.6) 1,398 (12.4) Other 225 (18.1) 271 (17.1) 326 (20.5) 323 (19.3) 460 (22.3) 605 (27.8) 677 (21.7) 812 (27.4) 980 (22.0) 1,502 (28.3) 2,477 (24.0) 3,527 (31.2) United Kingdom joined the EEC on January 1, 1973. Denmark and Ireland joined the EEC on January 1, 1973. From 1973-74 Denmark and Ireland were incuded in other EEC. 3 Defined as Brunei, Burma, Hong Kong, India, Indonesia, Khmer, Loas, Macao, Malaysia, Maldive Islands, Pakistan, Philippines, Republic of Singapore, Sri Lanka, Taiwan Province, Thailand and S o c i a l i s t Republic of Vietnam. Source: Derived from Norton and Brodie, 1980: Tables 1.3a, 1.4, 1.5a and 1.6. - 73 -Although the growth of Australian-Japanese trade had been comparatively smooth, i t was not without i t s wrinkles. The Whitlam Labor government (1972-75) introduced comprehensive export controls. This was mainly in response to the belief that mining corporations were not obtaining a high enough price for their minerals (especially with respect to Japanese prices for Australian coal). The Japanese responded to this action by expressing concern at the dangers in the p o l i t i c i z a t i o n of the resource trade. These and other minor issues led to the negotiation of a new trade treaty between Australia and Japan aimed at ironing out some of these wrinkles. Thus, i n June 1976 the Prime Ministers of Australia and Japan signed the "Basic Treaty of Friendship and Co-operation." This treaty was of particular significance for Australia as i t was the f i r s t of i t s kind that i t had concluded with any country. I t also demonstrates the dramatic advances that the Australia-Japan relationship had made i n the 50 years since 1926 when Australia had declined to enter a treaty of Commerce and Navigation with Japan (Walker and Jacobs, 1979). 4.4 Japanese Business A c t i v i t y i n A u s t r a l i a The treaty also set the stage for increased Japanese investment within A u s t r a l i a . For as the pattern of trade had evolved considerably during the post-war period, so had the pattern of Japanese business involvement i n A u s t r a l i a . This, can be most cl e a r l y seen i n reviewing the various sectors of Japanese a c t i v i t y in Australia i n the post-war period. The Japanese trading companies have been the vanguard of Japanese business involvement i n Aus t r a l i a . From 1947 and through the 1950's they established representative offices for import/export trade, primarily to - 74 -secure supplies of wool and wheat for the Japanese market. They also acted on behalf of Japanese manufacturing companies to secure markets within A u s t r a l i a for Japanese products. Their presense enabled them to play an important role in the development of export markets for minerals as Japanese demand for raw materials grew and knowledge of Australia's vast mineral reserves spread. The mineral projects that were developed as a consequence of this action were characterized by low levels of Japanese equity and the use of long-term contracts to secure demand and supply for both parties. Some of the reasons for this strategy were examined e a r l i e r i n this chapter. A subsequent development was the setting up of specialized j o i n t ventures between Japanese trading and manufacturing companies to f a c i l i t a t e the d i s t r i b u t i o n of Japanese goods i n Aus t r a l i a . This trend late r evolved into the development of jo i n t ventures with l o c a l manufacturers to circumvent t a r i f f barriers. While the Japanese partners held only a small equity, they were usually the exclusive agent for supplying the new firm with parts and raw materials often via the trading companies (Edgington, 1982). During the 1970's the Japanese trading and manufacturing companies began to operate more independently within A u s t r a l i a . The trading companies began to specialize i n resource developments i n conjunction with Japanese customers, and l a t e r , on purchasing raw materials for r e s e l l i n g to a third country. The lev e l of Japanese equity i n resource projects also rose as MITI l i f t e d foreign investment r e s t r i c t i o n s and the trading companies wanted to increase their control over the management of operations. As the 1970's progressed, resource investment was increasingly - 75 -focused on alternative energy developments and the increased l o c a l processing of raw materials, p a r t i c u l a r l y bauxite. This reflected a change i n both Japanese and Australian policy. For Japan i t represented part of i t s policy to reduce i t s dependence on o i l . This involves both locating alternative energy sources and gradually exporting energy intensive processes, such as alumina smelting to either the point of extraction or to locations with cheap energy supplies. For A u s t r a l i a , i t represented a concerted policy by a number of State governments to attract raw material processing industries through energy subsidies in the vain hope that they would also attract the more labour-intensive stages of the production cycle (Fagan, 1981). The a c t i v i t i e s of the Japanese manufacturing companies also increased dramatically during the 1970's as reflected by the fact that the number of representative offices more than quadrupled over the decade from 1971 to 1981, to 42. A s i g n i f i c a n t number of these firms were overseeing manufacturing operations in Australia as some firms opted to set up f u l l y controlled subsidiaries to produce goods for the l o c a l market (e.g., cars). The reason for opting for 100 percent ownership rather than a j o i n t venture arrangement was i n order to control management and quality. As the Australian government has accepted the "world car" concept and consequently integrated i t into i t s policy, more of the Japanese operations have been oriented towards component production for the export market to take advantage of the export-accreditation scheme. The major beneficiaries of the scheme w i l l be General Motors-Holden and Nissan A u s t r a l i a , both of whom plan to export engines. Under this scheme the producers gain credits for exports which then enables them to import components of a certain value duty free (Crough and Wheelwright, 1982b:105). - 76 -4.5 Current Trends Within the Trading Relationship As the 1980's have progressed, the wrinkles within the Australia-Japan trading relationship have become increasingly apparent. With the strengthening of the world economic recession, Japanese steel industry production i s well below the optimistic predictions of the l a t e 1970's. Stevenson's (1976) comment that supplying raw materials to the Japanese steel industry was Australia's most si g n i f i c a n t contribution to the international economy r e f l e c t s Australia's dependence on Japan for i t s own economic growth. However, this dependence i s not mutual. During 1982, Japan cut back the contracts of major Australian iron ore mines by 25% although steel production actually f e l l by only 10%. This discrepancy was made up, i n part, by Japan's increased use of steel scrap at the expense of iron ore. This action added considerable weight to the claim that the iron ore producers were bearing the brunt of the f i n a n c i a l burden of the downturn i n the steel industry. This strategy represents a fundamental change from Japan's previously co-operative trading arrangements, where i t was prepared to grant special price or tonnage deals to assist suppliers to overcome temporary slumps. Furthermore, i t seems unlikely that the Japanese st e e l companies w i l l renew expiring long-term contracts over the next fi v e years. Many of these contracts were drawn up i n the 1960's and early 1970's. A similar decline i s facing metallurgical coal; however, the rapid expansion of steaming coal exports has more than offset this slowdown i n demand (Australian Financial Review, September 6, 1982). Nevertheless, i t i s expected that the output of the mining and a g r i c u l t u r a l industries w i l l continue to grow throughout the 1980's. Furthermore, they should maintain their dominant position amongst - 77 -Australia's exports to Japan. For while manufactured exports are expected to increase, this i s largely due to an Increase i n resource processing (primarily within the aluminium industry) rather than any s i g n i f i c a n t expansion i n the export of finished manufactured products (Hunter and Wood, 1981). Indeed, future i n d u s t r i a l i z a t i o n w i l l most l i k e l y be more heavily integrated into the international economy along the lines of the "world car" concept discussed e a r l i e r (Edgington, 1982). 4.6 Summary The development of the Australia-Japan relationship can therefore be seen as part of Australia's integration into the P a c i f i c rim economy. For while i t i s argued (e.g., Smith, 1977) that the development of the post-war trading relationship between Australia and Japan was a natural outcome of their h i s t o r i c a l trading pattern, i t i s also clear that the shape of the current trading relationship i s importantly the result of American intervention: f i r s t through i t s diplomatic pressure on Australia to normalize trading relations with Japan following the war, and secondly through the dominant role played by American TNCs in the development of Australia's minerals export industry from the 1960's. Thus, while Australia's relationship with Japan has been compared to i t s previous dependent-colonial relationship with B r i t a i n , they are e s s e n t i a l l y very d i f f e r e n t , both i n substance and significance. The Australian-Japan relationship i s primarily economic and exists within the framework of American hegemony of the P a c i f i c region. The m i l i t a r y , diplomatic and c u l t u r a l ties of B r i t i s h domination have been primarily taken over by the United States. - 78 -it Nevertheless, the Australia-Japan relationship has considerable independent significance. It was the emergence of Japanese demand for raw materials that i n i t i a t e d Australia's minerals boom i n the late 1960's. Corrighan (1982:36) argues that the minerals boom represented " . . . the incorporation of Australia as a resource hinterland for Japanese industry." As such, Australia's economic development can be seen to have come almost a f u l l c i r c l e . Once again the focus of Australia's development i s centered on the supply of raw materials to the center. This pattern i s traced out very clearly i n the following chapter through an examination of the development of the Australian coal industry. The next chapter also points to the numerous p i t f a l l s of this pattern of development suggesting that reliance on resource development i s not a p a r t i c u l a r l y sound strategy for securing Australia's future economic development. - 79 -CHAPTER 4 NOTES 1. This approach was f i r s t employed i n B r i t i s h Columbia to f a c i l i t a t e the development of independent copper mines to supply Japanese industry. In 1959 Ataka-Sumitoma provided $7.5 m i l l i o n i n loan and equity investment to the Granby Mining Company Ltd. for the i n i t i a l c a p i t a l costs of their Phoenix mine i n B.C. In 1961, Bethlehem Copper Corporation received a $5 m i l l i o n loan from the Sumitoma group for i n t i a l plant construction (McKern, 1975:15; Galway, 1975:42). 2. It i s interesting to note that Australia's share of Japanese trade has, i n comparison, remained f a i r l y stable. This r e f l e c t s Japan's emergence as a major trading country during the 1960's and 70's which has greatly increased i t s importance as a trading partner for many countries (Smith, 1977:1). 3. M i t s u i , Mitsubishi, and C. Itoh were a l l involved in marketing early mineral developments i n Au s t r a l i a . Mitsui and C. Itoh took a j o i n t holding of 10% i n the Mount Newman iron ore mine i n the Pilbara region of Western A u s t r a l i a , while Mitsubishi took a 15% holding i n Central Queensland Coal Associates (1968) following e a r l i e r dealings (1965) with the Utah Development Corporation when Mitsubishi negotiated contracts for Japanese steel and chemical companies for coal from Utah's Blackwater mine (McKern, 1976). - 80 -CHAPTER 5 THE AUSTRALIAN COAL INDUSTRY - DEVELOPMENT OR DEPENDENCY The coal industry in Australia has a r i c h i f turbulent history. From very modest beginnings i n 1779 i t has expanded in recent years to become one of Australia's most s i g n i f i c a n t industries. In 1975-76 coal became Australia's largest single export item, earning over $1 b i l l i o n in foreign exchange (Norton and Brodie, 1980: Table 1.3b). In the following f i v e years, the quantity of coal exports increased by 50% while export earnings nearly doubled reaching $1.97 b i l l i o n i n 1980-81 (Joint Coal Board, 1982). However, the rapid expansion and apparent buoyancy of the coal industry i s a r e l a t i v e l y recent phenomenon, beginning around 1960. Indeed, the expansion within the industry i s remarkable, both i n i t s size and f r a g i l i t y . To f u l l y appreciate both of these aspects i t i s necessary to provide a context within which to examine the current development of the industry. 5.1 History of the Australian Coal Industry Coal was discovered early on in the l i f e of the penal colony when an escaped convict came across a deposit near the s i t e of present day Newcastle, i n 1791. Although i n i t i a l production was primarily for l o c a l consumption, 150 tons 1 of coal was shipped to India i n 1801, marking the beginning of Australia's export trade in coal. The development of the industry proceeded only slowly during the f i r s t half of the 19th century. However the growth of the domestic market and an upturn in the export market i n the second half of the century led to a steady expansion of coal - 81 -production (Year Book Austra l i a , 1982:395). The bulk of Australia's coal, at that time, was produced i n N.S.W. and shipped along the coast to meet l o c a l demand. The main uses of coal during this period being railway transportation, domestic heating, metallurgical processes and e l e c t r i c i t y generation (Gibson, 1981). From 1860 to the beginning of World War 1 the coal industry had maintained a viable and profitable export industry. However the main motor of this trade was not the competitiveness of N.S.W. coal but the low freight charges available on B r i t i s h cargo ships which used coal as a bulk intermediate cargo. These ships, which unloaded manufactured products from B r i t a i n , would carry coal to ports from where grains, r i c e , tea, sugar or f e r t i l i z e r s were shipped to Europe. The main focus of this trade being Asia, the P a c i f i c Islands and the west coast of the Americas (see Table 8). One of the major reasons for choosing coal was that a number of the largest N.S.W. coal mines were registered in and consequently directed from B r i t a i n . This f a c i l i t a t e d the organizing of contracts for the supply of coal as an intermediate cargo. The fact that a number of directors of the coal mines were also shipowners certainly enhanced this connection (Burley,1960) . However, with the coming of World War I the international market for coal collapsed. The use of coal for transport was rapidly declining, yet because of a r t i f i c a l l y i n flated prices, coal production was being maintained at levels that quickly led to a considerable over-supply i n the market. During the late 1920's and Into the 1930's p r o f i t a b i l i t y f e l l dramatically. However, most operations preferred to maintain production despite losses, in the hope of a turn around i n the market. This was Table 8 Australia's Exports of Coal to Selected Regions, 1861 to 1914-15. Yearly Averages for Quinquennial Periods Period Total Exported ('000 tons) New Zealand % P a c i f i c Islands % Asia % North America Central and South America % 1861 - 1865 138 39.3 5.8 35.7 10.6 1.2 1866 - 1870 304 29.4 6.7 42.7 17.4 1.9 1871 - 1875 441 26.4 10.0 36.8 24.1 0.8 1876 - 1880 487 32.6 10.3 33.0 21.7 1.2 1881 - 1885 764 21.7 10.9 33.6 25.4 6.6 1886 - 1890 970 16.1 9.9 24.5 35.0 13.5 1891 - 1895 1,027 15.5 13.0 17.2 27.3 25.1 1896 - 1900 1,374 12.4 17.1 19.5 17.1 32.7 1901 - 1905 1,721 15.2 23.5 13.6 11.6 32.9 1906 - 1910 2,108 11.3 19.6 19.9 10.8 38.0 1911 - 1914/15 1,827 19.6 13.2 21.8 7.1 38.0 Source: Adapted from Burley, 1960: Appendix I. - 83 -because most of the investment i n the mine consisted of specialized c a p i t a l equipment that could not be easily liquidated. Furthermore, there was the need to keep the mines maintained i f they were to be used in future. These conditons were not, however, uniform throughout the industry. For example BHP, consolidating i t s position as the monopoly producer of iron and steel within A u s t r a l i a , acquired a number of mines during the 1930's to secure coking coal for i t s blast furnaces. Once acquired, these mines were modernized with the latest mechanical techniques and became models of effic i e n c y and p r o f i t a b i l i t y within the industry. However, such examples were the exception and the industry was characterized as being backward and i n e f f i c i e n t . Part of the reason for this malaise was the subsidies offered by the state and commonwealth governments. While these subsidies were aimed at regaining the prosperity of the pre-World War I coal industry, they only served to prop-up otherwise unprofitable mines (Gibson, 1981). 3 5.2 Post War R e s t r u c t u r i n g of the Coal I n d u s t r y By the end of World War I I the coal industry had suffered from t h i r t y years of marginal p r o f i t a b i l i t y and was in a serious c r i s i s . However, the post war development programs depended on coal generated e l e c t r i c i t y to supply the energy required for rapid i n d u s t r i a l growth. Thus the Commonwealth goverment established a Commission of Inquiry into the Australian coal industry i n order to make recommendations on the reorganization and r a t i o n a l i z a t i o n of the industry. In response to the Commission's report the Commonwealth enacted the Coal Industry Act of 1946. Among other things this Act brought into being a j o i n t - 84 -Commonwealth-New South Wales government body - the Joint Coal Board of New South Wales (JCB). The JCB embarked on a massive program of reorganization of the coal industry i n N.S.W. involving: 1. the closure or takeover of operation of the least e f f i c i e n t mines, 2. s h i f t i n g of f i n a n c i a l assistance to producers from price subsidies to bounties to f a c i l i t a t e r a t i o n a l i z a t i o n and mechanization, 3. setting up machine pools of the latest overseas bought equipment available to be rented out to coal proprietors, 4. introduction of a scheme of apprenticeship to the industry and a s t r i c t e r system of q u a l i f i c a t i o n s , 5. mechanization of a l l mines to the f u l l e s t extent, 6. s h i f t from piece-rate to hourly-rate, and 7. improvement of working and l i v i n g amenities of miners. The l e g i s l a t i o n also established the Coal Industry Tribunal to deal with i n d u s t r i a l relations within the industry. As part of this process, considerable incentives were offered to the workers to attempt to circumvent opposition to the massive restructuring (Gibson,1981). In t h i s process a number of new mines were established replacing o l d , unprofitable mines which were taken over by the JCB and closed. This together with increased mechanization led to a steady growth of output. P r o f i t levels were maintained, i n part, by price f i x i n g rather than government subsidies i n order to encourage continued investment i n c a p i t a l equipment to further mechanize coal production. As the 1950's progressed - 85 -o i l made si g n i f i c a n t inroads into the energy market, leading to a chronic oversupply of coal as sections of industry switched from coal to o i l . For example, between 1950-51 and 1960-61 consumption of coal by railways and gasworks i n Australia f e l l by 31.1%. By 1970-71 they were consuming less than 10% of their 1950-51 l e v e l of consumption. The significance of this decline i s even more apparent when i t i s realized that together the railways and town gas production were the largest consumer group of coal i n Australia i n 1950-51. Thus, despite the steady growth of coal - f i r e d e l e c t r i c i t y and steel production, coal production stagnated during the late 1950's and grew only slowly during the early 1960's. This, combined with the effects of mechanization, led to a decline i n the size of the work force within the coal industry from 1954 to 1965 ( i t would be 1981 before the coal industry work force reached i t s 1954 lev e l again). Part of the cause of this decline was the proportion of coal production being won at open cut coal mines. In 1960-61 open cut mines accounted for only 10.2% of raw coal production. However, during the 60's and 70's open cut mines became a si g n i f i c a n t source of the expanding production of the industry and by 1975, accounted for over 50% of raw coal production in A u s t r a l i a . In 1980-81 open cut mines accounted for 53.7% of Australia's raw coal production while they accounted for only 27.4% of mines and employed only 28% of the workers i n the coal industry. 5.3 The Re—emergence of the A u s t r a l i a n Coal Export Trade In response to the stagnation of domestic demand i n the 1950's the JCB began to look for potential export markets. At the same time the Japanese steel industry was looking for new sources of raw materials to - 86 -meet i t s growing demands. Thus the needs of Japanese steel industry and the N.S.W. coal industry dovetailed neatly to lead to a resurgence of the export of Australian coal after 40 years of depressed export markets. The importance of the Japanese market (and the steel industry i n par t i c u l a r ) for the growth of the coal export trade of Australia was overwhelming (see Table 9). Prior to 1956-57 less than 2% of raw coal production was exported. However, by 1960-61 exports accounted for 8.1% of raw coal production, of which 90% went to Japan. The rapid expansion of coal exports was to continue under Japanese domination throughout the 1960's as exports rose from 1,926,000 tonnes i n 1960-61 to 18,964,000 tonnes in 1970-71. The i n i t i a l expansion of the coal trade came primarily from N.S.W. mines. Being the major coal producing state and having s i g n i f i c a n t unused capacity, i t could readily expand production to meet the demands of a new market. Thus N.S.W. was easily able to dominate the export trade during the 1960's. However, the 1960's also saw the rapid development of the Queensland coal industry, which would consequently have a dramatic effect on the structure of the Australian coal industry. During the 1950's, Queensland's coal industry was s t i l l very modest, producing an average, 13.9% of Australia's raw coal. The export component of i t s production was small and i r r e g u l a r . However, as the 1960's progressed, knowledge of Queensland's abundant high-quality coking coal deposits increased, as did interest from foreign mining corporations and Japanese trading companies. The involvement of foreign corporations i n the development of Queensland's coal export trade i s just one of a number of characteristics that distinguishes the development of Queensland's coal export trade from that of N.S.W.'s. A second c h a r a c t r i s t i c was that coal Table 9: New South Wales and Queensland Coal Production, Exports and Proportion of Exports to Japanese Destinations, 1950-51 to 1981-82. New South Wales Queensland Year Raw Coal Exports Proportion of Raw Coal Exports Proportiot Production Exports to Production Exports ('000 tonnes) ('000 tonnes) Japan (%) ('000 tonnes) ('000 tonnes) Japan (' 1950 - 1951 12,887 68 - 2,289 — — 1951 - 1952 14,970 129 - 2,708 12 -1952 - 1953 14,492 236 24.9 2,719 37 -1953 - 1954 15,165 396 2,639 8 -1954 - 1955 14,832 285 - 2,822 - -1955 - 1956 14,787 207 4.3 2,701 - -1956 - 1957 15,474 564 41.3 2,793 - -1957 - 1958 15,905 799 54.1 2,673 13 -1958 - 1959 16,014 714 53.5 2,830 - -1959 - 1960 17,349 1,167 76.5 3,072 39 -1960 - 1961 18,454 1,878 89.4 3,066 48 100.0 1961 - 1962 19,389 3,213 93.7 3,467 297 100.0 1962 - 1963 19,025 2,470 92.3 3,480 244 95.9 1963 - 1964 20,562 3,043 91.0 4,504 817 98.0 1964 - 1965 22,163 4,751 92.1 4,855 1,186 100.0 1965 - 1966 25,410 6,300 92.8 5,560 1,741 99.4 1966 - 1967 26,626 7,128 94.6 6,062 1,741 99.7 1967 - 1968 28,566 8,111 95.3 7,191 2,369 99.9 1968 - 1969 32,243 10,303 95.8 9,204 4,103 100.0 1969 - 1970 35,322 12,221 89.4 11,649 5,742 99.4 1970 - 1971 35,719 11,985 76.5 14,323 6,975 99.5 1971 - 1972 36,963 12,649 79.4 19,009 9,200 89.9 1972 - 1973 38,060 11,168 95.7 25,269 14,658 84.3 1973 - 1974 36,632 12,731 84.7 27,146 15,645 83.6 1974 - 1975 42,306 14,812 67.2 32,097 17,610 80.6 1975 - 1976 40,590 14,054 74.2 32,402 16,371 81.9 1976 - 1977 46,785 16,447 75.8 34,657 18,925 82.4 1977 - 1978 49,254 17,736 67.3 34,138 20,175 71.1 1978 - 1979 50,517 19,442 63.1 37,253 18,836 68.5 1979 - 1980 48,710 21,866 63.3 36,528 21,295 71.2 1980 - 1981 58,292 23,712 66.4 42,755 23,727 71.9 1981 - 1982 59,818 22,290 67.2 45,138 24,862 69.3 Source: Joint Coal Board, 1981, 1982. - 88 -for export came primarily from new mines s p e c i f i c a l l y developed to provide coking coal for the Japanese market. The f i r s t major venture of this kind was the Thiess Peabody Mitsui project in the Moura-Kinga region of central Queensland. This venture was i n i t i a t e d by Thiess Holdings Ltd. i n conjunction with the Peabody Coal Co. in 1962. Thiess Holdings Ltd., an Australian c i v i l engineering firm, had previously attempted unsuccessfully, to market steaming coal from i t s Callide mine in Japan. However, having noted that there was a considerable market for coking coal i n Japan, the corporation set about locating a suitable deposit. Following i n i t i a l development of the project by Thiess and Peabody (an American TNC), Mitsui was brought in to help finance the venture and to secure markets via long term contracts (McKern, 1976). The Theiss Peabody Mitsui project was quickly followed by the entry of the Utah Development Corporation (Utah) into the Queensland coal industry. Eventually Utah would play a very si g n i f i c a n t role in the shaping of Australia's coal export industry. Utah i s 90% owned by Utah International Inc., an American based mining conglomerate that was taken over by General E l e c t r i c i n 1975, in one of the United States largest ever corporate merger (McQueen, 1982). Utah had come to Queensland in the early •1960's to search for coking coal expressly for the Japanese market. In 1964 Utah negotiated a coal leasing arrangement with the Queensland government for the Blackwater mine. From the following year, contracts t o t a l l i n g 22.4 m i l l i o n tonnes over a ten year period were signed with Mitsubishi, who was acting on behalf of Japanese steel and chemical corporations. Following the success of the f i r s t project Utah formed Central Queensland Coal Associates (CQCA) in a co-venture with Mitsubishi - 89 -(Utah held 85% and Mitsubishi 15%). In 1968, CQCA negotiated an agreement with the Queensland government to establish four lease areas of up to a maximum area of 440 square kilometres from the 3370 square kilometres of i t s o r i g i n a l prospecting lease (McKern, 1976). CQCA i n i t s lease areas had secured access to massive high quality coking coal deposits, much of which was obtainable through open cut operations. The f i r s t two lease areas to be developed were in the Goonyella and Peak Downs area of Central Queensland. Given the massive ca p i t a l expenditure required to establish the open cut operations, CQCA needed to secure contracts for large volumes of coal and therefore, embarked on a price-cutting war. Because of their low operating costs the Queensland mines were able to successfully undercut the prices of coal from N.S.W. mines which were underground operations with higher cost structures. Consequently, the Queensland mines were able to capture the lion's share of the growth i n Australia's export trade i n coal between 1969 and 1973 (see Table 9). CQCA were very succesful i n carving themselves out a substantial proportion of the new contracts. In 1969 and 70 they negotiated contracts with fourteen Japanese steel and chemical corporations for a to t a l of 85 m i l l i o n tons of coal. In 1972 they secured further contracts for 34-52 m i l l i o n tons with Japanese and European buyers. To f u l f i l l these new contracts CQCA opened a third mine at Saroji near Peak downs. The aggressive t a c t i c s of the Queensland mines and of the Utah operations i n pa r t i c u l a r , were the cause of considerable acrimony i n the N.S.W. coal industry. It was generally conceded that Utah was s e l l i n g i t s coal well below market value, despite i t s handsome p r o f i t s , and that this was acting to suppress the price of coal in negotiations with the Japanese by other mines. The JCB (N.S.W.) in i t s 1971-72 annual report referred to - 90 -the need for greater co-operation between Australian coal exporters i n the face of the united negotiations of the Japanese steel m i l l s . During 1972 the N.S.W. coal producers approached the Federal government to intervene into the export trade, claiming that Utah was pricing them out of the export market. Furthermore, there was concern that the price cutting ta c t i c s of the Queensland mines were undermining the long term v i a b i l i t y of the coal industry. This was because i t was based on the exploitation of the most easily accessible ( i . e . potential open cut extraction) quality deposits which make up only about 30% of Australia's recoverable reserves (as of 1980). The Queensland government had no policy with regards to what part of a deposit a lease holder could exploit. Thus, as Queensland mining leases often gave a corporation the rights to a fixed proportion of a deposit, there was often no incentive to mine anything other than the most accessible quality deposits. On the other hand the JCB worked under a prin c i p l e of balanced development where the development of open cut reserves was severely r e s t r i c t e d and their operation was usually tied to an underground operation. Thus the cheaper open cut operation would act to cross-subsidize the more expensive underground mine. The impact of the different p o l i c i e s of Queensland and N.S.W. can be cle a r l y seen in the proportion of each state's raw coal production recovered by open cut methods (see Table 10). Because the problem of Utah's underpricing was linked to the di s p a r i t y in the mining policy of the two states the c a l l for federal government intervention by the N.S.W. government was seen by the Queensland government as an attempt by N.S.W. to hinder Queensland development for i t s own advantage. Table 10 New South Wales and Queensland Raw Coal Production by Method of Mining 1960-61 to 1980-81. New South Wales Queensland Year Raw Coal Production ('000 tonnes) Underground (%) Open Cut (%) Raw Coal Production ('000 tonnes) Underground (%) Open Cut (%) 1960 - 1961 18,454 95.6 4.4 3,066 86.2 13.8 1965 - 1966 28,410 96.1 3.9 5,560 69.6 30.4 1970 - 1971 35,719 92.8 7.2 14,323 31.2 68.8 1975 - 1976 40,590 79.4 20.6 32,402 12.1 87.9 1980 - 1981 58,292 74.2 25.8 42,755 11.5 88.5 Source: Joint Coal Board, 1982. - 92 -While the Liberal-Country Party government agreed that coal prices were too low they were not prepared to act before the approaching general e l e c t i o n , due before the end of 1972. The election was subsequently won by the Labor Party whose Minister for Minerals and Energy, Rex Connor quickly addressed the issue of producing a resource export policy. Acting from the be l i e f that mining corporations were not gaining a s u f f i c i e n t price for the minerals i n contract negotiations the Labor government amended the Customs and Excise Act to introduce comprehensive export controls. These export controls required that exporters of minerals obtain approval from the Department of Minerals and Energy before applications to the Department of Customs and Excise for export permits could be approved. Concern over the prices being received for Australian coal i n contracts with the Japanese was one of the major factors behind the enactment of the l e g i s l a t i o n . The Queensland government angrily protested the l e g i s l a t i o n charging that i t was aimed at undermining the development of i t s natural resources. However the Australian government had very carefully stayed within i t s constitutional powers so the l e g i s l a t i o n could not be challanged in the courts. Furthermore, while the Queensland and Western Australian governments were hosti l e to this l e g i s l a t i o n , the mining corporations were less concerned as they would cle a r l y benefit from any price increases resulting from the controls (Stevenson, 1976). The export controls were generally conceded as being successful, at least in the short run, i n achieving their aims of raising the price of coal and improving the sharing of export markets between producing regions (Barnett, 1979). However, with the economic slump following the f i r s t o i l c r i s i s came a downturn in Japanese steel production. This led to - 93 -a stagnation of Australian coking coal exports to Japan from 1975. Between 1974-75 and 1977-78 Japanese imports of coking coal decline by 18.0 percent. Though American mines bore the brunt of this decline (see Table 11) Japan used the state of oversupply within the coking coal industry to also squeeze concessions from the Australian mines. Its position as the single largest purchaser of Australia's coking coal exports, consuming 73.2% in 1978-79, gave i t tremendous leaverage against the uncoordinated Australian mines. In 1978 the Japanese steel mines forced the Hunter Valley mines to renegotiate their coal contracts by threatening to withdraw their ships from the Newcastle to Japan run. This was despite a 25% drop i n the cost of the Hunter Valley coal to the Japanese steel m i l l s , due to exchange rate movements i n the previous two years (McQueen,1982). In response to Japan's squeezing of the coal industry the L i b e r a l -National Country Party government took the unexpected step of reintroducing mineral export controls i n October, 1978. These controls enabled the government to veto any export contract whose conditions were seen as unfavourable e.g. the price being too low or there being i n s u f f i c i e n t provision for the renegotiation of prices over the l i f e of the contract. Theoretically, this power acts to enhance the bargaining position of individual mines by enabling a mine to argue that the Australian government w i l l not issue an export permit i f i t considers the agreement to be unsatisfactory. The r e a l i t y was, however, somewhat . di f f e r e n t , as shown by the action of CQCA i n cutting the price of i t s Norwich Park coal in order to secure contracts with the Japanese. CQCA brought i t s Norwich Park mine into operation i n 1979, despite the fact i t had no contracts for i t s coal, for the purpose of keeping i t s Table 11: Japanese Imports of Bituminous Coal by Source, 1974-75 to 1980-81. Source 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 Coking Coal (*000 tonnes) United States 26,651 19,489 16,115 11,169 12,644 14,637 20,723 Australia 24,143 23,299 26,744 25,719 24,410 27,136 27,680 Canada 9,617 11,827 9,741 10,532 10,867 10,256 10,173 U.S.S.R. 3,140 3,102 3,005 2,716 2,155 1,871 1,794 Poland 1,306 945 1,026 748 388 549 132 Germany (FR) 259 307 388 311 394 127 -China 4 11 9 3 575 947 992 South A f r i c a 149 152 1,768 2,301 2,335 2,707 2,795 Other 204 200 169 63 24 14 202 TOTAL 65,473 59,332 58,965 53,562 53,792 58,244 64,491 Coking Coal (Percentage) United States 40.7 32.8 27.3 20.9 23.5 25.1 32.1 Australia 36.9 39.3 45.4 48.0 45.4 46.6 42.9 Canada 14.7 19.9 16.5 19.7 20.2 17.6 15.8 Other 7.7 8.0 10.8 11.5 10.9 10.7 9.2 Non-Coking Coal ('000 tonnes) -United States 12 0 — 0 0 0 1,270 Australia 187 177 373 440 827 1,729 5,478 Canada - - 0 0 13 26 884 U.S.S.R. 97 73 205 211 103 186 249 China 100 129 130 156 213 260 965 South Af r i c a 0 - 22 6 20 29 848 Other - 0 4 - 0 0 -TOTAL 396 379 734 813 1,176 2,230 9,694 Source: Joint Coal Board, 1982. - 95 -competitors out of the market. The market for coking coal was sluggish at the time despite steel industry forecast of rapid growth into the 1980's. Therefore, as a means to securing contracts of the size required to make the mine viable i t sold i t s coal at $47 a ton, considerably below the going market rate for the quality of the coal being sold. McDonnell (1983) suggests the price was about $7 a tonne less than might have been expected. However the implications of this agreement were far greater than the loss of export earnings or the increased expropriation of p r o f i t s by Utah from Australia due to i t s increased share of the coking coal export market. Given the size and timing of the agreement i t s major inpact was on the negotiations of other coal producers with the Japanese steel corporations. CQCA's price cutting acted to suppress coal export prices for Australian producers. This i n turn threatened the v i a b i l i t y of marginal mines, p a r t i c u l a r l y underground mines i n N.S.W. (McQueen 1982). Clearly Australian governments at both the national and state l e v e l have f a i l e d to deal e f f e c t i v e l y with the consequences of the Japanese domination of coking coal exports. The ta c t i c s used by the Japanese buyers are well known and widely acknowledged as being successful in suppressing the prices of raw materials. Yet the effectiveness of many of these t a c t i c s , such as taxi-cab bargaining 5, i s due largely to the poor level of-communication amongst producers. This s i t u a t i o n could be easily r e c t i f i e d by increased information sharing, either within the industry or vi a a government agency. This i s not to say that such schemes to regulate the s e l l i n g of coal would be trouble free but that the current mechanism of individual negotiations by each mine creates even greater problems for the overall industry. - 96 -It would be naive, however, to over-estimate Australia's a b i l i t y to improve i t s return from i t s coal exports. Australia's dominant share of the Japanese coking coal market was achieved through undercutting i t s major competitor, the United States. Since the late 1970's the United States has brought considerble p o l i t i c a l and economic pressure to bear on Japan to provide United State's mines with a guaranteed share of the coking coal market (Coddington 1982). Thus, despite being considerably more expensive than either Australian or Canadian coal (see Table 12), the United States has been successful i n s i g n i f i c a n t l y increasing i t s share of the Japanese coking coal market i n the early 1980's (see Table 11). More recently the United States has renewed pressure on Japan to increase i t s energy purchases ( p a r t i c u l a r l y coal) from the United States i n order to improve the trade balance between the two countries (The Vancouver Sun, November 12, 1983: e l l ) . The strength of the Australian coking coal industry's bargaining power with the Japanese steel m i l l s has been further undermined by the current surplus in international coking coal production. This over capacity was a result of the combined effects of a slump i n steel production and the coming on stream of a large number of new coking coal mines flooding a stagnate market. Most of these new projects were i n i t i a t e d i n response to optimistic predictions of future raw material requirements by the Japanese steel industry i n the late 1970's. These predictions were supported by a massive over-contracting of coal by the Japanese. The f a i l u r e of steel production to reach i t s predicted levels further excaberated the problem of over-contracting. The steel corporations, therefore, began to cut back on coal purchases by either cutting contracts or reducing shipping arangements. Most suppliers were Table 12 Japanese Imports of Bituminous Coal by Type and Value from Selected Sources, 1980-81. Heavy Coking Other Coking Source — Total Coking Non-Coking Ash < 8% Ash > 8% Ash < 8% Ash > 8% •000 Tonnes Aust r a l i a 4,627 15,402 1,318 6,333 27,680 5,478 Canada 1,357 8,816 - - 10,173 884 Poland 60 72 - - 132 -U.S.A. 11,026 5,040 2,951 1,706 20,723 1,270 U.S.S.R. 916 506 75 297 1,794 249 South A f r i c a 164 - 2,608 23 2,795 848 China 38 735 25 194 992 965 Others 69 - 133 — 202 -TOTAL 18,257 30,571 7,110 8,553 64,491 9,694 Average C.I.F. Value Per tonne ($A) Australia 55.88 54.87 52.13 49.95 53.78 52.19 Canada 58.25 53.51 - - 54.14 50.24 Poland 55.29 55.16 - - 55.22 -U.S.A. 71.45 71.81 66.27 60.76 69.92 61.03 U.S.S.R. 54.12 53.23 46.01 44.99 52.02 44.11 South Af r i c a 48.55 - 49.36 49.85 49.32 43.11 China 54.50 49.83 49.48 50.19 50.07 48.25 A l l countries 65.33 57.12 57.09 51.94 58.76 51.78 Source: Joint Coal Board, 1982. - 98 -cut back, although not a l l were uniform, and some Australian mines were cut back by as much as ,25-30% (Australian Financial Review, September 2, 1982: 21). With the coming onstream of more new mines at the beginning of 1983 the Japanese steel industry, i n the face of already high stocks of coal, adopted a strategy of accommodating the new mines and therefore cutting back existing producers even further (Australian Financial Review, January 21, 1983). The position of the coking coal industry has worsened considerably during 1983. The Japanese steel industry, facing declining demand and prices has increased i t s use of cheap scrap iron in i t s steel production, thereby decreasing i t s use of coal and iron ore. Suffering losses i n sales revenue, the steel industry has renegotiated lower prices for i t s raw material contracts (The Globe and Mail, November 19, 1983: B21). However, the d i f f i c u l t i e s confronting the coking coal industry and the r e f l e c t i o n this offers on the problems of Australia's dependence on resource exploitation has been obscured by the dramatic r i s e of the export trade i n steaming coal since the second o i l c r i s i s of 1979. 5.4 Expansion of Steaming Coal Exports In the post war period the ready a v a i l a b i l i t y of cheap petroleum products led to a dramatic reduction i n the use of steaming coal as an energy source. The cost of sea transport for steaming coal was high, r e l a t i v e to i t s value and therefore discouraged the development of a large export market. Thus the small though si g n i f i c a n t steaming coal export market that had developed during the 1970's, arose predominantly from mines with spare capacity, that consequently, did not have to provide new infrastructure. For the same reason, N.S.W. mines were the main source of Table 13: Steaming Coal Exports from Australia by Destination, 1969-70 to 1980-81. ('000 Tonnes) Destination 1969-70 1972-73 1975-76 1978-79 1979-80 1980-81 Japan U.K.. Other Europe Taiwan Elsewhere Total Japan Other Europe Taiwan Elsewhere Total Japan U.K. Other Europe Taiwan Elsewhere 793 31 41 865 10 10 173 173 793 31 51 8 173 1 New South Wales 152 2,359 418 41 17 2,987 Queensland 2 7 A u s t r a l i a 157. 2,359 418 41 19 782 985 2,582 156 314 4,819 38 58 80 26 202 820 985 2,640 236 340 1,646 1,125 3,135 740 30 6,676 100 49 159 33 341 1,746 1,125 3,184 899 63 4,503 1,265 2,673 934 69 9,444 988 128 15 1,141 5,501 1,265 2,673 1,062 84 Total 877 181 2,994 5,021 7,017 10,585 Note 1: Includes small quantities from Western Australia. Source: Joint Coal Board, 1981, 1982. - 100 -steaming coal exports during the 1970's. This pattern was reinforced by the sporadic nature of the export market, which also discouraged the development of steaming coal mines s p e c i f i c a l l y for export. More r e l i a b l e markets in Japan and S . E i Asia began to appear around the mid 1970's. However, the price of steaming coal was s t i l l too low to attract the capita l required for new mine and infrastructure development i f the industry was to expand. The second o i l c r i s i s of 1979 led to a dramatic surge in international demand for steaming coal as a number of large energy users changed over from o i l to coal, the Japanese cement industry being one of the major examples. Consequently, there was a rapid r i s e in the price of steaming coal which attracted new investment to the industry. The publication on a number of reports giving coal a prominent role i n future energy requirements (e.g. International Energy Agency,1978; Wilson, 1980) also fuelled considerable interest in the industry. While the expansion of demand into the 1980's has not been as great as expected, due to the continuing economic recession, there has, nevertheless, been a considerable growth in steaming coal exports from Aust r a l i a since 1978. However, the recent stagnation and decline of coking coal exports has eroded much of the benefit of this new growth. The lower value of steaming coal and the recent roll-back of contract prices by the Japanese led the Australian Deputy-Prime Minister, Lionel Bowen to decry the Japanese control of the Australian coal industry as not being i n the long term interests of A u s t r a l i a . This denunciation stemmed from a prediction that the value of export income from coal would decline despite the maintenance of export volumes at the previous year's l e v e l (Coal Age, July 1983). - 101 -The changing pattern of the coal export industry towards greater dependence on steaming coal exports, has both positive and negative implications for the Australian economy. For example, as many mines produce both coking and steaming coal, the expansion of steaming coal markets allows for a more balanced development of these mines. However, specialized coking coal mines producing for the export market have not fared as w e l l . The continued expansion of coal production and exports has obscured dislocations resulting from the changing demands of the market. This i s reflected in,the rapid development of mines i n the Upper Hunter Valley to serve the steaming coal market while mines in other regions are reducing production or shutting down altogether. More insidious and far-reaching are the macro-economic impacts of the rapid development of steaming coal deposits for export. The WOCOL Study (Greene and Gallagher, 1980: 41) estimated that for Australian production to reach the levels envisaged i n the "High Coal Case" scenario there would have to be an annual commitment of approximately 6% of Australia's private gross fixed investment to coal production f a c i l i t i e s . While the "High Coal Case" i s an improbable scenario, this estimate nevertheless gives an indication of the massive investment of funds required i f the planned expansion of coal exports i s to be achieved (e.g. see Coal Resources Development Committee, 1981). Because the a v a i l a b i l i t y of investment c a p i t a l i n Australia i s quite limited (even with the enormous inflows of overseas c a p i t a l i n recent years) the development of coal resources and related export infrastructure i s only possible i f there i s a diversion of c a p i t a l away from other sectors of the economy such as manufacturing, agriculture, and construction. - 102 -Such a pattern has become increasingly apparent over recent years with major i n d u s t r i a l , a g r i c u l t u r a l and f i n a n c i a l corporations d i v e r s i f y i n g into the minerals industry. This focusing of new investment into the minerals sector has had si g n i f i c a n t consequences for the structure of the Australian.economy. For example, BHP's closure of i t s Whyalla shipyards in 1978 can be linked to i t s general move away from manufacturing and back into the mineral industry from which i t sprang in the 1880's (McQueen, 1982). While BHP has been upgrading i t s iron and steel production f a c i l i t i e s , i t has been widely c r i t i c i z e d for i t s concentration on automating i t s plants rather than attempting to expand i t s profitable steel making operations. There i s some evidence that BHP i s transferring p r o f i t s from i t s iron and steel d i v i s i o n to i t s o i l and gas operations because of the enormous tax concessions available to the l a t t e r . Further, by understating the p r o f i t a b i l i t y of i t s iron and steel operation, i t can squeeze federal and state governments for production subsidies, continued t a r i f f protection, and tax concessions, to finance the introduction of labour-saving technologies (Donaldson and Donaldson, 1983; S t i l w e l l , 1980). Notwithstanding BHP's recent takeover of Utah International Inc., the wisdom of the massive diversion of investment funds into the coal industry i s somewhat questionable. Walker (1982:59), writing at the height of the optimism surrounding the coal industry, concluded that the medium to long-term p r o f i t a b i l i t y looked bleak ". . . as technological change makes coal redundant and the high exit barriers from the industry result in an inevitable squeezing of margins i n the world market." These conditions are ba s i c a l l y the same that led to the collapse of the coal export industry following World War I. - 103- -5.5 Summary This review of the development of the Australian coal industry provides potent examples of the influence of foreign c a p i t a l i n the economic development of A u s t r a l i a . It also points to some of the implications of this influence. To begin with, the major periods of expansion of the coal industry have been paralleled by si g n i f i c a n c t involvement of foreign c a p i t a l . For instance, the f i r s t major coal export boom (1860-1914) was primarily a by-product of the operation of the B r i t i s h merchant f l e e t . The coking coal export boom of the 1960's and early 70's was b u i l t almost t o t a l l y on the expansion of the Japanese steel industry, with United States mining TNCs and Japanese trading companies playing a major role i n the development of coal resources for export. F i n a l l y , the expansion of the market for steaming coal exports between 1978-82 was also s i g n i f i c a n t l y tied to the Japanese market. However, this dependence on external markets has l e f t the industry very vulnerable to changes i n international demand, as shown by the decline in the coal industry following World War I. More recently, some of the problems of the coking coal export industry can be linked to Japan's encouraging an oversupply of coal through over-contracting. The subsequent competition between coal exporters has enabled Japan to squeeze the p r o f i t a b i l i t y of the industry. A second feature of Australia's development that can be drawn out from this chapter i s the re-orientation of the Australian economy in the post war period, towards a role of supplier of raw materials to the advanced i n d u s t r i a l countries. This can be viewed as part of the most recent phase of dependent development as described i n Chapter 1. For - 104 -instance, foreign investment within the coal industry has focused mainly on the export industry. This i s consistent both with the general movement of foreign investment away from import substitution and towards export oriented production, and with Australia's p a r a l l e l incorporation into the new international d i v i s i o n of labour. Under the l a t t e r , i t i s argued that Australia's natural resource endowment and i t s s k i l l e d labour force give i t a comparative advantage i n the capital-intensive mining and minerals processing industries. The f i n a l chapter summarizes the findings of this thesis and ties them into the theoretical framework developed at the beginning of this study. Having confirmed the implications suggested by the model of dependent development, i t offers some recommendations for policy responses to the current crises. - 105 -CHAPTER 5 NOTES 1. As Australia only recently converted to the metric system of weights and measures, most h i s t o r i c a l data i s recorded i n imperial units. Conversion of these data was not considered necessary. Therefore, to distinguish between weights recorded i n the two systems this thesis follows the standard practice whereby "tons" indicates imperial units, while "tonnes" indicates metric units. 2. While coal mining commenced i n Queensland i n 1846 i t was not u n t i l the 1960s that i t s production became a s i g n i f i c a n t factor within the Australian coal industry. 3. The source of coal related s t a t i s t i c s for the rest of this chapter i s the JCB, unless otherwise indicated. 4. The recent sale of Utah Internatonal Inc. by General E l e c t r i c to BHP does not s i g n i f i c a n t l y affect this analysis. Indeed, i t adds further support to the argument that BHP's corporate strategy i s becoming increasingly oriented towards the minerals sector. 5. "Taxi-cab bargaining" refers to a s p e c i f i c bargaining technique employed by the Japanese i n contract negotiations. Under this technique, Japanese negotiators w i l l meet representatives from a negotiating coal company at the airport. Subsequently, during the taxi t r i p to the hotel, the Japanese negotiators inform their guests that a competing firm has j u s t lowered their price for their coal. The Japanese then attempt to secure a contract at a favourable price under the threat of buying elsewhere. The coal s e l l e r , quite obviously, has no a b i l i t y to v e r i f y the story and i s consequently placed i n an unenviable position. - 106 -CHAPTER 6 CONCLUSION 6.1 Overview The central argument of this thesis has been that Australia's economic development can be characterized as a changing pattern of dependency, whereby the nature of Australia's development has been largely determined by forces external to A u s t r a l i a . Consequently, t h i s thesis argued that the problems resulting from the current restructuring of the Australian economy can be linked to changes in the organization of the international economic system during the post war period. It was further argued that the f a i l u r e of the government to recognize this pattern has led to i t s actions exacerbating the impact of this readjustment. I t was therefore posited that i f the so c i a l dislocation resulting from t h i s restructuring i s to be moderated, an understanding of Australia's process of development must be achieved so that appropriate p o l i c i e s can be derived and implemented. Thus, the main focus of this study was a review of the process of Australia's economic development, taking into account the evolution of the international context i n which i t unfolded. The conclusion of this analysis was that the economic development of Austr a l i a could be reasonably described i n terms of dependent development, whereby the direction and pace of economic development are determined by the interaction of foreign c a p i t a l , l o c a l c a p i t a l and the l o c a l state. It was argued that the influence of these sector varied over time. However, i n the case of Aus t r a l i a , foreign c a p i t a l has played a dominant role within this a l l i a n c e in shaping the direc t i o n of the economy. This has been - 107 -largely due to the pol i c i e s and p r i o r i t i e s of the Australian government which have allowed, indeed encouraged, foreign ownership and control of many of the key sectors of the economy. Thus many of the most important decisions affecting Australia's economic growth are made outside A u s t r a l i a , i n boardrooms i n Los Angeles, Tokyo, New York and London. The Australian government's h i s t o r i c capitulation to foreign capital has stemmed from two factors. The f i r s t being the economic, p o l i t i c a l and strategic r e a l i t i e s of i t s international relationships. For example, Australia's dependence on B r i t i s h shipping and markets for i t s export-generated growth during the nineteenth and early twentieth centuries l e f t i t vulnerable to pressure from B r i t i s h c a p i t a l . This pressure was used to direct and shape Australia's development so as to ensure that A u s t r a l i a remained dependent on and complementary to B r i t i s h industry (e.g. emphasis on the production of ag r i c u l t u r a l products and the introduction of the imperial system of weights and measures) (Cochrane, 1980a). Following the war the government's pre-occupation with the "threat of invasion" and a policy of rapid economic expansion led i t to pursue overseas c a p i t a l ( p a r t i c u l a r l y American), offering almost whatever terms were required to encourage foreign corporations to establish operations in Au s t r a l i a . The second contributing factor was that Australia had experienced enormous prosperity under this pattern of dependent development. Therefore, there was a general b e l i e f that foreign investment was beneficial for the Australian economy. A belief reinforced by the correspondence between periods of economic growth and heavy capital inflow. That this ca p i t a l involved onerous costs to the Australian economy - 108 -was not, however, as well recognized. This was despite the s i g n i f i c a n t pressure placed on the Australian economy by i t s overseas debt repayments. These obligations were responsible for the heavy ca p i t a l drain from the economy prior to the depressions of the 1890's and 1930's and almost cer t a i n l y heightened the severity of these depressions. Thus Australia's present dependent economic position i s partly predetermined by i t s position within the international economic system and partly a consequence of government policy. This policy perceived that the maintenance of the h i s t o r i c pattern of development would continue to prove beneficial to the Australian economy. However changes in the organization of production within the international economic system in the post war period had s i g n i f i c a n t l y changed the context of Australia's economic development. From the 1960's new foreign investment within Australia began to focus on the minerals sector, i n order to service the growing international commodities market. This marked the beginning of a s h i f t from development based on import substitution to development centred on export-oriented production. This restructuring of the domestic economy, however, was not unique to Australia but part of a broader trend of the internationalization of production through what has been commonly referred to as the new international d i v i s i o n of labour. While this phenomenon has been encountered by most in d u s t r i a l i z e d countries, resulting in a common experience of restructuring and de i n d u s t r i a l i z a t i o n , the extent and impact of these changes have varied s i g n i f i c a n t l y from country to country. The main reason for this being the varied natural endowment, h i s t o r i c a l process of development and government - 109 -response to these changes over time. As already discussed, the h i s t o r i a l context of Australia's economic development and the p o l i c i e s and p r i o r i t i e s of previous Australian governments have led to the Australian economy being p a r t i c u l a r l y vulnerable to the stresses caused by the current reorganization of the international economic system. This i s most c l e a r l y seen in the experience of the manufacturing sector during the 1970's and early 1980's. The decline of employment in the manufacturing industry during this period can be linked to the dependent structure of the industry and the f a i l u r e of the Australian government to develop a coherent i n d u s t r i a l p olicy. The dependent structure of the industry refers to the domination of key sectors of manufacturing by TNCs who established subsidiaries during the 1950's and 1960's to service the domestic market. However, with declining p r o f i t a b i l i t y in the 1970's and the emergence of "world-wide sourcing" as an alternative production system, some sectors began to apply considerable pressure on governments to a l t e r protectionist p o l i c i e s and encourage the restructuring of domestic industry. The emergence of the "world car" concept being one of the clearest examples of this trend. As shown in Chapter 3 the Australian government's economic development policy during this period was almost t o t a l l y centred on expansion of the minerals sector. The only i n d u s t r i a l policy offered by the Fraser government was a commitment to the dismantling of the most i n e f f i c i e n t sectors of the manufacturing industry. This policy was based on the assertion that A u s t r a l i a could not afford to prop up a i l i n g industries and that the minerals sector would more than take up the slack from this dismantling. There i s some element of truth in this assertion as - no -shown by the predicament of the t e x t i l e s , clothing and footwear industries where the cost of'protection can be larger than the wage b i l l for the industry (Peetz 1982:66-7). However, Fagan et a l . (1981) argue that the minerals sector i s not capable of replacing the jobs lost i n manufacturing even should i t achieve the rather optimistic goals of growth. They also dismiss the claim that the t e r t i a r y and quaternary sectors w i l l be able to expand to absorb the unemployed. They argue that this view f a i l s to recognize the tight l i n k between t e r t i a r y and quaternary services and manufacturing a c t i v i t y . Further, manufacturing jobs have a much higher m u l t i p l i e r effect on the service industries than do mining jobs. Thus the negative effect of declining manufacturing jobs and increasing trend to automation i n many service sectors (e.g. word processing and automatic t e l l e r s ) creates considerable doubt concerning the a b i l i t y of the service sectors to expand to f i l l the employment gap. 6.2 Poli c y Responses The question therefore becomes, given the r e a l i t i e s of Australia's position what po l i c i e s can be implemented to lessen the stresses of structural change on the Australian economy. The analysis of this thesis points to the following areas: 1. Minerals: Au s t r a l i a i s obviously committed to the continued development of i t s mineral resources for the international market. However, there i s a need for a re-evaluation of the current focus of economic development on the minerals extraction and processing industries. Both h i s t o r i c and recent experiences have demonstrated the v o l a t i l i t y of the minerals market showing i t to be an unreliable source of either wealth - I l l -or employment generation for the economy as a whole. Indeed the main j u s t i f i c a t i o n of Australia's mineral policy i s that the industry earns valuable foreign exchange earnings. However, the domination of the industry by TNCs has led to a considerable leakage of these earnings through mechanisms such as, transfer p r i c i n g , payment of dividends and licence fees to parent corporations and the purchase of major ca p i t a l equipment from overseas a f f i l i a t e s at i n f l a t e d prices. The experience of the coal industry as described i n Chapter 5 pointed to both the major problems of a minerals based development strategy and to p o l i c i e s that could help minimize some of these. The major problem that the coal industry faces i s the medium to long term tendency towards over-supply i n the international coal market. This tendency comes from both Japan's action to stimulate an over-supply of coal through over-contracting, and the high exit costs from the industry which results in marginal mines producing at a loss i n the hope of a turn-around in the market. This problem comes, i n part, from the process of contract negotiation where Japanese buyers acting as a monopsony have been able to exercise considerable control over the coal market. This has been especially so i n the face of the cut throat tactics practised by competing mines. While the Australian government has previously used export controls to raise coal prices with some success, what i s now required i s an industry or governmental co-ordinating agency. This agency, at a minimum, would act as an information sharing service, p a r t i c u l a r l y for smaller mines, so that the mines would be f u l l y conversant with the market conditions prior to negotiations. Other appropriate roles for this agency would include the i d e n t i f i c a t i o n and development of new markets to enable - 112 -some d i v e r s i f i c a t i o n of markets and reduce dependence on Japanese markets. Although not s p e c i f i c a l l y addressed here, the taxation of the mining industry i n general suffers from the problems of overlapping j u r i s d i c -tions. Consequently, taxes and roy a l t i e s are in the main i n e f f i c i e n t at capturing resource rents and tend to encourage i n e f f i c i e n t mining practices. This problem involves a l l the complexities of state-federal government re l a t i o n s . Nevertheless, i f the wealth that i s to be gained from the exploitation of the nation's resources i s to be equitably distributed then an adequate taxation policy for the mining industry has to be developed. 2. Manufacturing: As discussed e a r l i e r i n this chapter the development of a more v i t a l manufacturing sector i s essential i f the necessary jobs are to be created to relieve the present unemployment si t u a t i o n . However i t i s also clear that this i s not the direction i n which the current forces of change are pushing the Australian manufacturing industry. Therefore, i f such a r e v i t a l i z a t i o n i s to occur i t w i l l depend on the active intervention of the government. This would be achieved through the implementation of an appropriate i n d u s t r i a l policy. The development of such a policy i s c l e a r l y beyond the scope of the present study. Therefore,, comment here w i l l be r e s t r i c t e d to a description of some of the potential components of an i n d u s t r i a l policy appropriate for the present needs of the Australian economy. Looking at successful models of applied i n d u s t r i a l p o l i c i e s such as Japan and Sweden, i t i s evident that the development of new products and industries require j o i n t ventures and partnership arrangements between government and industry especially i n the early stages of development. It - 113 -i s also evident that Australian manufacturing cannot continue as a broad-based industry protected by t a r i f f b a r r i e r s . Apart from growing p o l i t i c a l pressure from the i n d u s t r i a l i z i n g countries of the region, this strategy i s simply becoming too expensive. Therefore growth i n manufacturing w i l l depend on the i d e n t i f i c a t i o n of areas of spec i a l i z a t i o n within the world i n d u s t r i a l system i n which Australia i s able to establish i t s e l f . Given that TNC's control much of the world's technology and that very few pioneering high-technology industries have proven to be commercially vi a b l e , the most appropriate path for Australia would be to iden t i f y medium-technology/medium-capital industries. This strategy should be able to i n i t i a t e enough projects to at least maintain the current le v e l of manufacturing jobs. The introduction of an i n d u s t r i a l policy i s , however, a long term program. In the meantime the process of i n d u s t r i a l restructuring w i l l continue. With i t w i l l continue the economic hardship faced by individuals and regions impacted by this change. As i n d u s t r i a l restructuring i s both necessary and inevitable there needs to be some provision for the support, retraining and relocation of impacted individuals, especially within heavily impacted regions. Such a program would need to be set within a policy of regional development with the f l e x i b i l i t y to respond to a variety of regions. 6.3 An A l t e r n a t i v e Strategy However, these p o l i c i e s offer no more than a starting point. They represent achievable goals that do not require a dramatic change of government policy. Furthermore, they could be usefully complemented by a - 114 -number of similar policy i n i t i a t i v e s such as the-cultivation of more co-operative economic links with some of the smaller economies of the P a c i f i c region. Such po l i c i e s could help to reduce Australia's dependence on Japanese markets and the v u l n e r a b i l i t y that this causes. These p o l i c i e s , however, do not address the underlying problems that have emerged for national economies during the post war period. That i s how to deal with the growing power and influence of TNCs and the impact of their internationalization of the production process. P r i n c i p a l l y , the problem i s that the corporate strategies of TNCs have become de facto economic plans exercising considerable influence over the direction of national development. However the c r i t e r i a of these plans are linked to the interests and aspirations of the corporations and not of the countries i n which they operate. This process has been possible largely due to the tendency of governments to administer rather than direct economic and social a c t i v i t y . However, the corporation i s a construct of the state and recent experience has shown that given s u f f i c i e n t w i l l , governments can exercise considerable power over the operations of corporations. This process can involve simply s t r i k i n g harder bargains over conditions and concessions connected with development projects, or i t could possibly be turned into a new planning process involving TNCs and other corporations as contractual agents of a national economic development plan. This approach would require the government to adopt a much more active role in the economy, gathering and organizing s u f f i c i e n t data and information to enable the development of a comprehensive economic strategy. This would provide a s o l i d base for negotiating with TNCs. - 115 -This strategy would need to be underpinned by some form of federal government chartering whereby incorporation as business operation under Australian law i s seen as a p r i v i l e g e e n t a i l i n g certain obligations. These could include the democratization of management, the greater disclosure of information which could be then u t i l i z e d i n the national planning process and the signing of contracts setting out the details of an agreed corporate plan for a specified period. These contracts would deal with certain c r u c i a l issues of economic management which are currently often unregulated, such as reinvestment p o l i c i e s , repatriation of p r o f i t s , foreign currency flows, employment, minimum export quotas and maximum import l e v e l s , the raising of c a p i t a l especially as related to the use of domestic credits and off-shore operations among others. Clearly such a strategy would require a dramatic change in the role of government i n Australia and would undoubtedly generate considerable opposition. Indeed i t i s unlikely that such a policy w i l l be adopted by the current federal Labor government. 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