Industry policy in today’s Australia

12 September 2024 | Danielle Wood

The 2020s have seen industry policy come back into fashion across much of the Western world.

The IMF has documented more than 2500 new industrial policy measures introduced across the world in 2023 alone. And looking just at direct subsidies to industry, advanced economies have been coming to the party with a vengeance since 2020.

And like all return fashions, it comes with a spin on the original.

Current industry policy responds to real concerns about climate change and supply chain resilience, while also resurrecting some of the classic aims such as job creation, industry competitiveness and regional economic development.

The role of economists in these debates is not to offer a reflexive “no”, but to ensure there is rigour in the discussion of costs, benefits and trade-offs of any intervention.

Today, I think there are two principled justifications for intervention.

First is the green transition.

Most governments have accepted that to reduce the damage caused by climate change, we will need to reduce net emissions to zero by 2050 (or 2060 for some developing economies).

However, most do not have the full set of policies (including price signals) we will need to get there.

The fact that markets do not yet fully price emissions means, in the absence of other supports, “green products” – those associated with the transition, such as batteries and solar panels, or embodying renewable energy in production such as green metals – will be undersupplied. And while markets are forward-looking, the lack of a credible emissions price pathway means the signals are not there for the investments the world will need to reach net zero goals.

As more countries move to subsidise the manufacture of green products, this is less likely to be true. Australia can decarbonise faster by importing cheaper green products from around the world.

However, there may be some circumstances in which we expect Australia might have a longer-term comparative advantage in the manufacture of certain products and energy sources.

In these instances, the case for government seed support might exist if:

• First, there are early-mover advantages through building local experience and know-how, such that starting now is likely to reap longer-term competitive advantages. This can occur when having a cluster or hub of firms in an industry helps establish the specialised workforce, information spillovers and supply chains.
• Second, temporary government supports are needed to help support these spillover benefits so efficient hubs can form.

But for comparative advantage to be sustainable, the industry will need to be based on Australia’s key resources of high-skill labour, good universities, and mineral and/or renewable energy resources.

The second justification is about managing geopolitical risks.

A concern is that the concentration of key supply chains leaves countries exposed to risks from disruptions across a range of products.

The costs of diversifying these supply chains can be thought of as a form of insurance against these risks.

Of course this isn’t a single country’s problem to solve. And as large economies such as the US take steps to diversify, Australia will benefit.

However, it is unlikely Australia can simply free-ride on the costly efforts of others, and no doubt there will be pressure on us to “do our bit” by seeking to diversify those supply chains where we have an obvious advantage. Critical minerals, where we have large endowments, is a frequently cited as an example.

These are, I think, the most robust arguments for government intervention. But they aren’t blank cheques for support.

Industry supports come with costs. These include direct costs (spending taxpayers’ money) and the diversion of workforce and resources from other activities.

There are also dynamic costs – even the promise of money on the table will see a raft of firms and lobby groups spend time and resources pushing for taxpayer support. And once the taps are on, they can be hard to turn off.

The likely benefits of supports need to be weighed against the costs. But this is what economists do best: identifying and grappling with trade-offs.

We can take the evidence from the national security expert about the risks of concentrated supply chains, or the green manufacturing expert about potential emissions abatement and knowledge spillovers, and weigh them up against the cost of action.

The National Interest Framework developed by the Treasury to assess Future Made in Australia investments is a great example of applying economic frameworks in this way.

And the fact that the framework is written into the Future Made in Australia Bill, and Treasury has been resourced to undertake sector assessments, suggests the government recognises and values the discipline that economic frameworks can bring to these issues.

Industry assistance would almost certainly end up larger and less disciplined without this type of economic framework.

But, as the Productivity Commission pointed out in our submission on the bill, having the government commit to using the framework to inform all of its funding decisions, including those already announced, would be a significant improvement.