Local Industry Fails to Boom

If you over-water your garden, the weeds will spring up lush and green. As soon as the water runs out, the garden will die.

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What is it about "boom and bust" that is so hard to understand?

In The West Australian of 14 Oct 10, Simone McGurk completely misses the point, that the "bust" of boom and bust is when business slows down...

McGurk is secretary of Unions WA. Her article -- Overseas firms reap rewards of WA's boom -- makes a perfectly valid point: when major WA projects source most of their contracts outside WA, WA businesses are missing out on a major source of potential profit. If WA businesses miss out then WA workers (including members of Unions WA) will also miss out.

So far so good.

McGurk then suggests "strong legislation" to force major projects to include a lot of local contracting. That is, pass laws to force major WA projects to spend a lot of their investment as contracts with WA businesses. Baldly stated, that's ridiculous. But a workable compromise could be developed.

Then McGurk puts her foot in the hole in her logic:

"We shouldn't be fearful of putting up something which will set our local industry in good stead for the period of the boom and long after."

Let's follow the (faulty) logic:

• Major project business is being contracted overseas rather than to WA firms.
  
• We can guess that this is because WA firms are either too expensive or not able to do the work or lack the capacity to do the work.
  
• If WA firms are not able to do the work then that's it. End of story.
  
• If WA firms lack the capacity to do the work then they are already working to capacity. So that's fine. End of story.
  
• If WA firms are too expensive then local-content legislation would force major projects to pay more than they would if they contracted overseas. But the WA firms would be able to grow and profit and employ more workers. But...
  
• If the boom is followed by a bust -- or even by a period of lower project investment -- those WA firms will have more workers, high prices and no business.... That's where McGurk's logic fails.
  

Yes, we can use legislation to force business to WA firms. Those WA firms will profit and, hopefully, employ more people. Then they will go bust.

What work will these businesses do if the boom is followed by a bust? Their prices will be too high to be internationally competitive -- thanks to the legislative support. WA local-content legislation will not help when there are no local projects.

Yes, we can support WA firms during a boom. Yes, we should support local businesses during a boom. But if that support simply allows local businesses to charge uncompetitive prices -- then those businesses will fail when the boom has finished.

If and when there is a boom in WA then yes, we should take advantage of the boom to support WA businesses. If we pass laws to encourage uncompetitive bids to win tenders -- simply because the bidders are based in WA -- then we are encouraging future business failures.

While the boom is bringing money to WA we can use some of that money for real, long-term business support. For example:

• Improve education. WA education is already quite good. Make it better. We will then have a well educated population for the future development of the state.
  
• Provide apprentice-style training. Yes, it's cheaper to buy in new staff -- from overseas and interstate -- as required. That leaves local people unemployed. And in a few years -- when job requirements change -- the new migrants will also be unemployed. Training and retraining is a far better social option.
  
• If we do legislate to "buy local", add a condition: A WA firm can only get "buy local" support when it has sold similar services overseas. That is, the buy local legislation supports WA firms which are already competitive in overseas markets. That supports local firms now, once they have proven their future post-boom viability.
  
• Save something for tomorrow. Every company wants its profit now. That's one reason for the local skill and supply shortages: demand is way above available supply. Develop only the projects which can be sustained by existing resources. That way, there will still be projects -- and profits -- to pursue into the future.
  

We could build WA with artificial support for local businesses. This would last through the boom. Then we would crash when the boom ended.

Or we could pace ourselves. Take what we have and make it better. Use today's profits to solve existing problems. Make a steady profit through the boom times. And have enough in reserve to make a profit after that.

It's like a garden...

When it rains, you could apply even more water. Plant rice, water lilies, everything that needs a whole lot of water to survive. And your garden will look lush and green, even though most of it is just weeds.

Then, when the rain ends, most of your garden will die.

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