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For Australian policymakers, the attractiveness of simply transplanting tried-and-true methods from overseas in an attempt to re-industrialise fails to account for one key factor: the Australian way of life, meaning in order to truly be successful, we need to “Australianise” industry policy.
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Synonymous with costly budget overruns, delays in delivery, and entry to service and through-life complexities surrounding maintenance, sustainment and operation, many would be forgiven from gasping at the mere mention of the term “Australianising”.
But please bear with me, because in the context of designing and implementing a foundational industrialisation, or in our case, reindustrialisation policy, “Australianising” will be critical to the long-term success.
In the first part of this short series, we took a closer look at the history of industrial policy, its mixed bag of success and the role it has played in transforming the economic security, prosperity and fortunes of nations, not least of all, the United States.
Additionally, we also took a closer look at the growing groundswell of support for conceptualising and implementing industrial policy as a means of levelling the playing field between the seemingly in-decline Western world and the now vibrant, economic powerhouses of the developing world, led by a now almost openly hostile China.
This recognition is best summarised by Brian Deese, National Economic Council director for the Biden administration, who stressed the importance of industrial policy in the aftermath of the COVID-19 pandemic and economic turmoil slowing down the post-pandemic recovery.
Deese asks, “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?’”
In the Australian context, this becomes more important as a result of our geographic proximity to the world’s fastest-growing economies, coupled with our unrivalled natural resources, and finally, the startling findings of the Albanese government’s Intergenerational Report 2023: Australia’s future to 2063, which details some of the major headwinds coming our away, namely: “Major forces will shape the economy in coming years, including population ageing; rising demand for care and support services; climate change and the net zero transformation; technology and digital adaptation; and geopolitical risk and fragmentation. These forces will change the structure of our economy and how Australians live, work and engage with the world.”
This perfect confluence of factors provides the perfect blank canvas upon which to paint the masterpiece that ultimately becomes Australia’s century.
Success leaves clues and borrowing what works
While “Australianising” any potential industrial policy is pivotal, we also have to build from a foundation of proven success, as I am often fond of saying, success leaves clues!
Luckily enough, a lot of the heavy lifting has already been done, particularly when viewed through the context of similar economic circumstances as was the case in the American economy in the late-1970s and early-1980s as explained by the Harvard Business Review’s Robert Reich in 1982.
“Rampant inflation, high unemployment, and negative trade balances have not only plagued the American economy of late; these symptoms of a worsening international competitive position have also proved stubbornly resistant to the familiar medicine of Keynesian demand management. Recent experience has shown that aggregate fiscal and monetary policies can no longer be counted on to generate the type of new investment needed to improve the nation’s industrial competitiveness. But what are the alternatives?” Reich asks.
In response, and despite the heavy criticism of industrial policy being a form of central planning masquerading as benevolent market intervention, Reich argues that a good industrial policy advocates for quite the opposite.
Reich states, “Industrial policy focuses on the most productive pattern of investment, and thus it favours business segments that promise to be strong international competitors while helping to develop the industrial infrastructure (highways, ports, sewers) and skilled work force needed to support those segments ... Proponents of industrial policy argue that an American company cannot achieve international leadership without government support.
“They do not mean, however, that government should second-guess the strategic decisions of business by picking ‘winners’ and ‘losers,’ or that business should depend on government largesse. They mean simply that the strength of the United States economy will increasingly rest on public policies that complement the strategies of individual companies. Industrial policy is emphatically not national planning but rather a process for making the economy more adaptable and dynamic,” Reich expands.
This approach conflicts with the strategies implemented in both Japan, South Korea, and Taiwan, whereby those governments took an active role in directing (at least to some degree) the investment strategies and priorities of the emerging companies that we ultimately now know as true industrial powerhouses.
However, one of the most common misconceptions is the degree to which these countries actually “directed” the investment decisions they made, something reinforced by author Michael Schuman in his book, The Miracle: The Epic Story of Asia’s Quest for Wealth, where he highlights, “The reason companies in ‘targeted’ industries, like shipbuilding in Korea or electronics in Taiwan, have proven so successful is that the private entrepreneurs who launched them used the state support they received wisely and made products that people wanted to buy on international markets.”
Where the respective Asian governments did more directly intervene is in removing regulatory, industrial relations and legislative hurdles, and in some cases, erecting tariffs as a means of shielding emerging industries as competitive advantage and economies of scale were developed in country to compete on the global stage.
Adding further understanding, Reich explains that “As a theory, industrial policy is closer to the strategic planning models used by many companies than to traditional macro-or-microeconomics.”
The importance of getting this right for Australia is best explained by Arthur Herman, using the American context where he explains, “whether we call it industrial policy or something else, we urgently need a new paradigm. Urgently, not just because of the immediate China challenge, but because the development of advanced technologies can rapidly transform economies of scale and determine the course of future innovation, without which the US economy is doomed to stagnate – and with it, American power”.
Building economic mass for the Free World
It goes without saying that in the current series of economic and industrial challenges arrayed against the United States and broader Western alliance network, especially Australia, are truly immense and without precedent.
Accordingly, our response should equally be immense and without precedent in order to deliver the opportunities now presented by the rapidly changing world order. In order to do so, we need to look at the last time we faced peer competitors, albeit through a radically different lens as this time, because this time, we’re really on the back foot.
To deliver on this, Herman identifies six central pillars that proved pivotal to building the original “Arsenal of Democracy” and thus can be replicated to build economic mass and competitiveness across the Western world, including in Australia, namely:
1. Clearly define the challenge – Herman explains the importance of this saying, “The key lesson is that an industrial policy aimed to deal with a specific threat, in this case competition from China, has a much better chance of succeeding and coordinating resources than one aimed at more vague targets such as ‘creating jobs’ or ‘making America more competitive’.”
2. Find the right talent to plan an overall strategy – Much as was done under the Curtin government under Essington Lewis, leveraging ambitious and skilled industrialists, subject matter experts and other companies to devise a strategy and mobilise the necessary resources to deliver it.
3. Spread the effort and load as widely as possible – Leverage both existing, “trusted” suppliers as well as leveraging the innovation, agility, and flexibility of emerging sector leaders not typically associated with the eras fundamental to national security empowers the entire cross section of the economy to be marshalled do deliver on outcomes, while also expanding competition forcing incumbents to up their own game.
Herman explains this saying: “This also means thinking ‘outside the sector’ in ways that avoid one of the chief problems with industrial policy: simply making the biggest bigger, with a government-sanctioned de facto monopoly. The goal isn’t to make the big companies bigger and more powerful; it’s to use their knowledge and expertise to guide the rest of the sector forward. It involves diffusing the secrets of production from the top down, while absorbing the instinct for innovation from the bottom up. None of this will work, however, without the proper role of government.”
4. Keep all noses pointed in the same direction – Ensuring that all parties are working in unison and pulling in the same direction, while also ensuring that the bloated and cumbersome bureaucracies that have come to characterise Western governments in the past three decades aren’t hindering the capacity to deliver.
Herman details this, highlighting the importance of keeping all parties engaged and not allowing the worst instincts of business or government to creep in and undermine the efforts to re-industrialise, saying, “making sure that the diverse activities on an assembly line or in a corporation are all aimed toward the same goal. That also defines the essential role of government, not only in the making of the Arsenal of Democracy but in any effective industrial policy, which is oversight, not oversteering: not picking winners or losers but rewarding success while punishing failure”.
An addendum to this is the importance of accountability, again something Herman highlights, saying, “In general, the private sector’s freedom of action in advancing war mobilisation was balanced by strict accountability to the public sector – and vice versa. One of the principal dangers in implementing an industrial policy, regulatory capture, was studiously avoided. While contractors’ responsibilities were carefully defined and their powers limited, so were those of the government.”
5. Devise an exit strategy – Ultimately, the crisis will abate and the normal cycles of “peacetime” economics and markets will need to take over, preparing for demobilisation of the industrial base and the supporting workforce (even in the era of automation) will prove essential to the long-term success and enduring economic growth, but the economic infrastructure developed through the buildup can provide the basis for long-term economic prosperity.
Herman explains, saying, “An effective industrial policy must have the [same] clear life cycle perspective: one with a starting line and almost a finish line, when either goals are met or when it’s clear they won’t be, and a new strategy, and policy, is needed.”
6. Find the right leadership – Political leadership is essential to the long-term success of such an ambitious policy agenda, with examples including Franklin D Roosevelt, John F Kennedy, and Ronald Reagan who were committed to their own ambitious policy agendas, like the New Deal, the Space Race, and Reagan’s buildup of the US military, coupled with his ambitious tax agenda.
Each of these ingredients combined are designed to ultimately leverage the fundamentals of a strategy, but what are these fundamentals? Well, luckily, Herman highlights these as well, and well, they’re not rocket science.
Well, as Herman states, “The actual strategy itself can consist of a number of different elements associated with industrial policy. They could include directed tax incentives to spur capital investment in key sectors and discourage investment in others; formation of joint industry-government boards to oversee the expansion of production (as happened during World War II); actual government investment in research and development, and in physical plants and facilities (similar to how the Defense Plant Corporation financed the creation and expansion of wartime production sites); targeted tariffs or restrictions against foreign competitors; pooling materials and resources, including intellectual property, essential for fostering sector growth; or organising and investing seed money for fostering incubators and start-ups in critical sectors.”
Important policy leavers and mechanisms
It is clear, based on the government’s intergenerational report, the nation faces the challenges of building holistic national resilience across the national economy and for the Australian people in response to the mounting grey zone warfare and great power competition now radically reshaping the global and regional balance of power.
The report highlights the true costs associated with developing national resilience in the modern context, stating, “Developing national resilience is an additional pressure on government funding separate to funding for defence. Protecting Australian business, information and trade will require industry and governments to adapt and collaborate in responding to existing and emerging vulnerabilities in cyber, supply chains and technology.”
Maximising the opportunities for Australia’s economic prosperity and stability in the face of the Indo-Pacific’s own economic rise is also another key priority identified by the government’s report and requires a radically different policy approach given the enduring struggles, and some would say, failures of traditional policymaking to overcome these challenges, with the report highlighting: “Integrating all available tools of national power – economic, diplomatic, industrial, intelligence, cyber, and military – will encourage greater flexibility and burden sharing across the national security community and strengthen its capacity to respond to new and emerging threats. Demographic change and workforce constraints will limit recruitment and retention across the intelligence community, the Australian Defence Force and defence industry, particularly in shipbuilding.”
This approach echoes statements made by Opposition Defence spokesperson, Andrew Hastie, who recently said, “Governments need to be involved and support industry. The UK, US, Taiwan, Japan, and South Korea have vibrant industries because their governments have supported them through different incentives and direct support. They pick winners and work closely with business and industry. And they aren’t squeamish about it. It’s a reality of the world we live in. We need to wake up to it.
“The message is clear: the great game is afoot. And the way to win is by rebuilding resilience and self-reliance. We need strategic leadership from government, business, and our partners to create these industries and value chains,” Hastie said.
Herman’s thesis provides the structural foundation and framework to deliver the solutions to the challenges facing Australia over the long-term and present the Australian people with an exciting, secure, and prosperous vision of the nation’s future – we just have to get the Australian people on board.
Final thoughts
Importantly, in this era of renewed competition between autarchy and democracy, this is a conversation that needs to be had in the open with the Australian people, as ultimately, they will be called upon to help implement it, to consent to the direction, and to defend it should diplomacy fail.
This requires a greater degree of transparency and a culture of collaboration between the nation’s strategic policymakers and elected officials and the constituents they represent and serve – equally, this approach will need to entice the Australian public to once again invest in and believe in the future direction of the nation.
Expanding and enhancing the opportunities available to Australians while building critical economic resilience, and as a result, deterrence to economic coercion, should be the core focus of the government because only when our economy is strong can we ensure that we can deter aggression towards the nation or our interests.
This also requires a greater degree of transparency and a culture of collaboration between the nation’s strategic policymakers, elected officials and the constituents they represent and serve – equally, this approach will need to entice the Australian public to once again invest in and believe in the future direction of the nation.
Additionally, Australia will need to have an honest conversation about how we view ourselves and what our own ambitions are. Is it reasonable for Australia to position itself as a “middle” or “regional” power in this rapidly evolving geopolitical environment?
Equally, if we are going to brand ourselves as such, shouldn’t we aim for the top tier to ensure we get the best deal for ourselves and our future generations?
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.
