Déjà vu all over again?: Australia’s industrial policy debate
Updated: Nov 16
“Although it is portrayed as a forward-looking approach to industry policy, there is much that is “old‑think” about it … the sense of déjà vu is palpable.”
- Gary Banks, inaugural Chair of the Productivity Commission, August 2023.
“The Study Group … views policy instruments to assist industrial development as the key element of a long-term policy to deal with the adjustment problems of Australia’s manufacturing industries.”
- Report of the Study Group on Structural Adjustment (Crawford Report), March 1979, p. 7.62.
“I am reminded that the life of an industry minister could be tough.”
- Senator John Button, Industry Minister in the Hawke-Keating Governments, 1983 - 1993, (As It Happened, 1998, p. 245)
“Many of the statements the member for Hotham was making a few months ago were perilously close to the very models of intervention that are now roundly condemned by the International Monetary Fund and others. He has been caught red-handed in cranking up the desirability of government intervention in the economy.”
- Former Prime Minister, John Howard, House of Representatives Hansard, 1998.
“Government industry policy can make a positive contribution by helping to coordinate industrial development.”
- Brendan Shaw & Owen Hughes, “Economic Governance and a Coordination Rationale for the State: the Case of Industry Policy”, 2002, p. 200.
“Australia has not yet started the traditional process of structural transformation.”
- Harvard University, The Atlas of Economic Complexity, 2023.
There has been a resurgence in the Australian political debate about industrial policy and what Australia should do to restructure its economy. Industrial policy is essentially government “interventions intended to improve structurally the performance of the domestic business sector”.
While to some this might sound like a ‘new’ emerging policy debate in Australia, the fact is that this discussion has been going on for generations.
The disappointing thing is that, despite talking about industrial policy on and off for decades, Australia has by and large had a piecemeal, ‘on-and-off’ approach to industrial policy. With a few notable exceptions, Australia has rarely managed to consistently maintain a long-term, effective, strategic approach to industrial policy at the national level in the last half century.
The current debate about industrial policy
While many economists, politicians and commentators have argued over the years that industrial policy is a bad idea for Australia, equally many have also argued that Australia’s economic and industrial structure needs to change, and that Australian governments need to have a positive strategy or policy agenda to help make that happen.
The current iteration of the Australian industrial policy debate has taken on a new emphasis in the context of discussions about Australia’s wealth, where and how the country earns its money, the nation's relative ranking in international competitiveness, and its level of innovation. Some of the more recent reasons why industrial policy has come back in fashion as a policy idea after years in the wilderness include:
the climate change crisis and the need to transition our societies away from carbon-based energy sources and the need to develop alternative carbon-neutral technologies
the recent COVID-19 pandemic revealing global supply chain problems and triggering debates about national production capability and sovereign industrial capability
the retreat from globalisation together with growing geopolitical tensions and instability between trading countries like the United States, China, the European Union and Russia, and
a renewed awareness in Australia that while the country has historically enjoyed being a high-income country, this has disproportionately relied on a few low value-added commodities for wealth rather than capitalising on Australia's science, research and innovative capabilities.
The debate in Australia has also taken on renewed importance given the increased vigour with which other major economies are pursuing industrial policies to reinvigorate their domestic industrial bases for similar reasons outlined above. Examples here include China’s ongoing ‘Made in China’ industrial development strategy, the United States’ Inflation Reduction Act, the European Union’s industry policy strategy, and India’s ‘Make in India’ strategy.
Internationally, the industrial policy debate ‘is back’, with organisations like the OECD and others doing significant policy work on the topic due to its resurgence as a policy tool used in many countries.
Problems on the horizon for Australia's industrial performance?
In Australia, part of the focus in the current policy debate on industrial policy has been brought about by the country’s economic performance. Historically, Australia’s economic performance has matched global commodity booms and busts because its economic wealth has largely been based on exploiting natural resources and commodities. While Australia is a relatively wealthy, high-income country on the back of being a commodity exporter, a range of economic indicators point to issues in Australia’s long-term structural economic and industrial performance, including:
Low and falling productivity in the economy
Falling investment in research and development and innovation more generally, and falling further behind other high-income, industrialised countries over time when it comes to business expenditure on R&D
In the World Intellectual Property Organisation’s annual Global Innovation Index, Australia performs well in many areas as a researcher and inventor of new science and technology, but is below average performance in adoption, commercialising, developing and exporting new technology. While there have been improvements in some areas, this general failure to capitalise on the country’s research and technology strengths and commercialise many excellent scientific developments is a problem stretching back decades.
Source: Niccolo Conte, "Ranked: The Most Innovative Countries in 2023". Virtual Capitalist, https://www.visualcapitalist.com/most-innovative-countries-in-2023/, accessed 15/11/2023.
Australia’s production and export complexity ranks a shocking 90th in the world out of 132 countries according to the WIPO GII, ranking between Kenya on 89 and Namibia on 91. Australia also ranks poorly on ICT services trade, labour productivity, foreign direct investment inflows, energy efficiency, creative services and exports, and many indictors on knowledge impact and diffusion.
This trend is reflected in Harvard University’s Atlas of Economic Complexity, which ranks Australia particularly poorly for a high-income country. It warns that in the last decade Australia’s already low economic complexity has declined and the country has limited opportunities to grow. This reflects Australia’s historic over-reliance on a small number of low value-added resource-based commodities and lack of connectedness to the global economy.
Chart: Australia has low economic complexity and is not well connected to global opportunities
Source: Harvard University, "Australia: Recommended strategic approach", The Atlas of Economic Complexity, https://atlas.cid.harvard.edu/countries/14/strategic-approach, accessed 15/11/2023.
Australia ranks last in the OECD for manufacturing self-sufficiency.
The country is experiencing declining international competitiveness and entrepreneurialism in Australia’s business sector.
Australia has an over-reliance on carbon-intensive products for its export revenue. More than 37% of Australia’s total export revenue is generated from carbon-intensive products, particularly coal and natural gas. This will be a growing problem if the world is supposed to be moving away from carbon-based energy to address climate change.
What’s old is new again – the Australian industrial policy debate
The debate about much of these issues – the need to change Australia’s business and industrial structure and what Australian governments can do about it – is not new. It has been around for decades.
While I don’t always agree with Gary Banks, the former head of the Productivity Commission, he is absolutely right when he reflects a sense of ‘déjà vu’ in the current discussions about the role of the Australian government in encouraging industrial restructuring. I felt it too watching the re-emerging debates about industrial policy in Australia.
The problem for Banks is that his commentary implies that it is a given – an accepted wisdom – that governments should not pursue active, strategic industry policy to change a country’s industrial structure. The suggestion is that the idea that governments shouldn't do industrial policy has been universally accepted for decades.
The problem in Australia for the last 40 or 50 years is that – with a few notable exceptions – much of the political debate in the country about industrial policy has often been pretty one dimensional. Someone participating in the debate has traditionally either been cast as a rabid neo‑liberal who says governments should just deregulate the economy and get out of the way, or labelled as a protectionist, anti-competitive supporter of rent-seeking and inefficiency who wants to cosset the economy from the forces of competition and change in the outside world.
At times the debate has been more nuanced and there have been some good examples in the last half century of policy efforts to find alternative ways to implement industrial policy in Australia. However, the problems have often been a lack of sophistication, a lack of agreement on strategy within policy circles, and a lack of long-term political commitment and direction.
Through Australia’s political history, following the Second World War, the post-Korean war boom, and the stagflation period of the 1970s and economic recessions of the early 1980s and 1990s, the debate about if and how Australian governments should act to encourage the diversification of Australia’s economy has waged on. The debate probably fell into the background during the latest commodity boom Australia has experienced exporting coal and iron ore to China since the early 2000s.
Even the birth of modern Australia as a nation was, in large part, influenced by this issue. The drafting of Australia’s Constitution and the coming together of the separate British colonies at Federation into the Commonwealth of Australia on 1 January 1901, was framed in large part by a yelling match between the free traders on one side and the protectionists on the other about free markets versus protectionism.
The truth is that industrial policy is not simply about whether one is a neo-liberal free trader or a anti-competitive protectionist. A more nuanced approach to industrial policy can take constructive policy measures to support and encourage industrial and business change as part of a broader strategy and recognise the benefits of an open trading economy that embraces competition and engages in the global economy. The two are not mutually exclusive.
Examples of where this has successfully been done include many of the East Asian economies through the 1970s, 1980s and 1990s including Japan, Singapore and South Korea although, again, this has been hotly debated in policy circles in Australia and internationally.
Throughout Australia’s history, the Commonwealth government’s approach to industrial policy has ranged through everything from short-term political fixes through the use of taxpayer funds, tariffs, and inquiries to shore up existing industrial structures, through to serious attempts at long-term policy and strategy to drive change and growth in Australia’s economic performance. Amid many low-brow, failed efforts, high points include Senator John Button’s leadership and follow-up parts of the 1994 Working Nation statement of the Hawke-Keating Governments through the 1980s and 1990s, Senator Kim Carr’s efforts to instill a long-term industrial strategy as Industry Minister in the Rudd-Gillard governments, and former Prime Minister Malcolm Turnbull’s at times hamstrung efforts to build a National Innovation and Science Agenda.
One of the reasons, I believe, Australian governments have had difficulty implementing a long-term strategic industrial policy agenda is the lack of long-term political support in government. To do long-term policy work, an Australian government usually needs a Prime Minister and Industry Minister who genuinely believe in the industrial policy agenda and can stay around long enough to see it implemented. Arguably, the last time Australia managed to achieve this was probably when Bob Hawke was Prime Minister in the 1980s and early 1990s.
So, where to from here?
The current Australian government, led by Prime Minister Anthony Albanese, has started its relatively new term with important early initiatives such as the National Reconstruction Fund and the Prime Minister, like predecessors before him, saying he wants Australia to make things and do more manufacturing in Australia.
The new NRF and the government’s accompanying priority on innovation and industrial development is a good start, and both the current Prime Minister and Industry Minister, Ed Husic, have given good speeches on the importance of Australian industry. However, already there are calls for the current government to develop a longer-term strategic agenda for innovation and industrial develop.
The solution is, in part, rediscovering that elusive middle path that carefully tiptoes between both the hands-off free market approach on one hand, and a slide into old-fashioned protectionism on the other. An approach that uses clever policy to drive change in competitive business environments, firms and industries oriented to the outside world.
The question and debate about what governments can and should do in the current economic and political context to drive industrial and economic change in Australia will continue.
It's an ongoing question, as it has been ever since Federation.