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The very idea of “industrial policy” is a contentious one in contemporary policy circles, with fears of “central planning” often rearing their head. But can a novel, flexible, and adaptable approach deliver Australia the economic diversity and revitalisation it needs to thrive in our multipolar world?
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Uniquely among the world’s developed nations, Australia, the “Lucky Country”, has enjoyed a record-setting, unbroken period of three decades’ worth of economic growth, seemingly without hiccup, that is until the COVID-19 pandemic.
Now, on the other side of the pandemic, the various economic policy leavers pulled throughout the darkest days of the pandemic, namely, the waves of quantitative easing, coupled with the incredible vulnerability revealed by the “just in time” supply chains, have combined to reveal the cracks in our national economy.
Adding further fuel to this public policy fire is Russia’s invasion of Ukraine, which has served to reveal a number of startling and uncomfortable truths about the declining industrial capacity of many once formally great industrial and economic powers, Australia included.
Each of these factors are set against the broader backdrop of renewed global multipolarity and great power competition, all of which are combining to reinforce the growing importance of a reliable, sovereign industrial capacity.
Characterised by the emerging powers, namely China and India, flanked by an equally formidable array of emerging powers, including Indonesia, Vietnam, Brazil, South Africa, and a myriad of others across the globe, each with their own competing ambitions and designs for this new world order.
Buoyed by the Western world’s pursuit of ever cheaper consumer goods and corporate profits, the ensuing waves of industrialisation have transformed these nations into some of the world’s pre-eminent industrial powers and rising economic titans.
While Australia certainly isn’t alone in facing this new global, and in our case, regional paradigm, our geographic proximity to the epicentre of global economic, political, and strategic power presents both well-documented challenges, and importantly for Australia’s national security and resilience, opportunities.
But how do we capitalise on these stupendous opportunities while leveraging our geographic proximity and unrivalled economic promise to build a competitive global economy and true national resilience and security in this new, multipolar world?
For many Western nations, the concept of “reshoring” as a form of industry policy has emerged as the central pillar of economic rejuvenation for many nations, namely the United States, the United Kingdom, and Canada (largely because the Europeans have tightly held on to their industrial base), with industry policy now gaining popularity once again.
Highlighting its growing importance is Brian Deese, former National Economic Council director for the Biden administration, who, in remarks to the Economic Club of New York, sets the scene for a new conceptualisation of industrial policy, stating: “Properly conceived and implemented, an industrial strategy is an economic resilience and capacity strategy. Investments in our industrial capacity will leave our economy better positioned to weather future shocks – and to help all Americans thrive.
Deese asks two important questions for Australian consideration, “The turbulent, historic economic events of the last year have underscored the case. The question should move from ‘Why should we pursue an industrial strategy?’ to ‘How do we pursue one successfully?’”
Definitions and concepts are important
Much of the criticism on contemporary industry policy is rightfully aimed at the often central planning nature at which industry policy has been conceptualised and implemented in the past, both at home and abroad.
Indeed, the very name industry policy conjures up images of heavily subsidised, unproductive, uncompetitive industries (think Australia’s car industry) that rightfully go the way of the dodo. However, this new era of great power competition requires some tried and true and novel approaches to deliver economic diversity, competitiveness, and national security.
Highlighting this is Arthur Herman, senior fellow at the Hudson Institute and author of Freedom’s Forge: How American Business Produced Victory in World War II. in a piece for American Affairs Journal, titled, America needs an Industrial Policy, he asks, “What is industrial policy? Usually it’s a term referring to a program of economic reforms that give the government extraordinary authority, as well as fiscal and regulatory powers, to change a country’s industrial structure or – less ambitiously – promote a targeted sector of the economy.
“According to economists Howard Pack and Kamal Saggi, it refers to ‘any type of selective intervention or government policy that attempts to alter the structure of production toward sectors that are expected to offer better prospects for economic growth than would occur in the absence of such intervention’. The goal is to correct what are identified as market failures in sectors where the normal workings of supply and demand, and market competition, aren’t able to achieve certain economic or other national goals,” Herman expands.
This “definition” provides the broad conceptualisation of industry policy as it has historically been implemented. However the unique nature, complexity, and national implications of industry policy requires a thorough understanding of industry policy and its central characteristics if we’re to embrace both the tried and true and the novel to deliver a globally competitive industrial base for Australia.
Herman cites three central pillars of industrial policy that differentiate it from other forms of macroeconomic policy, namely:
- A primary focus on the manufacturing sector and/or infrastructure and “infant industries” that are seen as “crucial” for future economic growth, prosperity, and competitiveness in the global economy.
- Industry policy often implies direct interventions in a nation’s trade policy, leveraging “tariffs, quotas, and other restrictions on imports from foreign competitors”, along with controlling the flow of certain materials and goods to purchasers abroad, and finally, even going to the extreme of providing direct subsidies or price incentives for exports.
- Finally, Herman cites a reliance on industrial policy is usually more typical of “mixed economies”, where the role of government in economic and business affairs is considered “normal and accepted”.
It goes without saying, however, that industry policy as a means of economic development has a bit of a spotty track record of implementation, particularly throughout the ideological hotbed that was the Cold War. However for Herman, in the American context, it does have some merits.
Herman states, “In the United States, however, the use of industrial policy measures has been viewed with suspicion throughout most of the 20th century – conveniently ignoring the fact (which industrial policy advocates never tire of pointing out) that protectionist tariffs helped to spur America’s industrial growth in the 19th and early 20th centuries, until the United States finally became the dominant industrial power in the world.”
Unpacking this further, Herman seeks to balance out the success of industry policy with its failures, stating: “On the other hand, industrial policy’s spotty record elsewhere has made suspicion of its methods and goals seem justified. For every Japan or Taiwan that has made a success of industrial policy, there are Argentinas, Brazils, Ghanas, and Ugandas where industrial policy has proved a failure.”
So where does that leave Australia in the modern context? Well, every time the Australian government has sought to directly intervene in the economy, it has resulted in costly and often ongoing tax burdens for the Australian taxpayer (think Luxury Car Tax that we still pay despite the end of Australia’s car industry in 2015), so that can’t be the path forward.
Creating the environment v picking winners
Ultimately, much of the contemporary debate and conversation as it stands, devolves into accusations and a debate between the camps of “picking winners” versus “creating the environment” for competitive industry to be established and thrive.
Avoiding this reductive dichotomy will prove essential if we’re going to both avoid the mistakes of our past and begin taking advantage of the opportunities presented by the voracious economic demands of the Indo-Pacific.
It is equally important to understand that in peacetime, markets are the best and most effective form of directing capital, maximising innovation and outcomes for both companies and consumers seeking to enjoy the post-Cold War quality of globalised, consumerist life we all know and love.
However, in the era of great power competition, markets don’t create security, something highlighted by Herman, who states, again in the American context, yet equally relevant for Australia, “More recently, however, politicians, academics, and the public are realising that these assumptions aren’t working – especially in the face of the growing threat from China. There’s an increasing awareness that the United States needs to readjust its economic strategy in a fundamental way.”
The importance of this only becomes more apparent when viewed through the lens of intense geopolitical competition that now colours the relationship between China and much of the developed world, particularly as domestic manufacturing bases have been hollowed out in the US, the UK, and Australia and exponentially exploded in China.
Herman highlights this uncomfortable reality of economic dependence, stating, “Americans have finally awakened to what some of us have been arguing for more than a decade: China is not merely an economic competitor, as Japan was in the 1970s and ’80s, but a major threat to US global leadership. China’s longstanding pattern of serial cyber theft, IP theft, and predatory trade practices; its militarising of the South China Sea; its ‘anti-access, area denial’ maritime strategy aimed at the US Navy; and its massive One Belt One Road initiative are all linked together in China’s national strategy, of which its comprehensive industrial policy is a natural – and increasingly effective – part.”
Much like our own fragmented, almost schizophrenic approach to national policy making, America’s own response to Beijing’s rising challenges has been lacking in spite of recent progress in the past few years beginning with former President Trump’s push to “reshore” jobs to America’s decimated middle and working classes.
This is reinforced by Herman and firebrand US Senator Marco Rubio, where they articulate the growing importance of coordinating national priorities and creating a conducive environment to better support industrial development over direct market interventions.
Rubio articulates this stating, “For too long, government and business leaders alike have stood back and endorsed supposedly unstoppable global forces that have made life harder for working Americans. But inaction will not restore the dignity of work or usher in a new American century that values dignified work and wages like the last one. It doesn’t have to work this way. Supply-side theory – that increased investment benefits workers in the long run – only works if investment actually increases.”
Herman, citing the US Senate’s small business and entrepreneurship committee, reinforces this, stating, “Properly aligned with national priorities, markets in trade and finance can drive tremendous economic progress. Left to their own devices, expanding for expansion’s sake, however, they provide market actors the framework to endlessly seek out new efficiencies, regardless of whether such efficiencies are in the national interest, or in some cases even in the interests of the firm’s own product value.”
As previously stated, responding to these challenges necessitates a return to both the tried-and-true methods that served to build our historic industrial competitiveness and embracing the novel to secure the opportunities now arrayed before us.
Luckily for us, Herman has some thoughts, drawing on the success of American industry during the Second World War as articulated in his book Freedom’s Forge, he states, “the message of Freedom’s Forge is not that we need to abandon the market economy. Instead, this successful paradigm maximises the advantages of market discipline and private sector innovation and minimises the disadvantages of government direction and intervention, while also using the potentially disruptive impact of new technologies as strategic leverage. In short, it aims to secure the virtues of industrial policy while minimising its shortcomings”.
Final thoughts
In the second part of this series, we will take a closer look at what it takes to deliver on a successful industrial policy in the modern context and how it can leverage Australia’s natural competitive advantages to build a diverse, competitive, and resilient economy.
It is clear now that Australia needs bold, ambitious, and exciting leaders who can present an engaging, visionary, and optimistic future direction for the nation. We need our leaders to pull at the heartstrings of all Australians and their hopes and dreams, while providing for a clearly communicated path to achieving this vision.
Equally, the Australian public needs to be educated on the challenges we face in our region and more broadly, the post-Second World War order upon which our wealth and stability is built, because without it, many Australians will blindly simply go with the flow and watch as we fade into the pages of history.
Enhancing Australia’s capacity to act as an independent power, incorporating great power-style strategic economic, diplomatic, and military capability serves as a powerful symbol of Australia’s sovereignty and evolving responsibilities in supporting and enhancing the security and prosperity of Indo-Pacific Asia.
Australia is consistently told that as a nation, we are torn between our economic relationship with China and the longstanding strategic partnership with the US, placing the country at the epicentre of a great power rivalry — but what if it didn’t have to be that way?
Get involved with the discussion and let us know your thoughts on Australia’s future role and position in the Indo-Pacific region and what you would like to see from Australia’s political leaders in terms of partisan and bipartisan agenda setting in the comments section below, or get in touch
Stephen Kuper
Steve has an extensive career across government, defence industry and advocacy, having previously worked for cabinet ministers at both Federal and State levels.
