- by John McKay

Even before the onset of the current pandemic it was abundantly clear that the Australian economy was facing serious structural problems: too many jobs are casual, uncertain, and poorly paid; the disruption of global supply chains has highlighted the catastrophic decline of manufacturing; the inability of companies to recruit skilled migrants from overseas has exposed the national scandal of our inability to properly equip young people with essential skills. The list goes on, and behind all of this lurks our inability to deal with two issues of existential importance: climate change, and levels of inequality that threaten our already fragile social compact. Added to this, the global economy has entered a new phase of development, driven primarily by rapid advances in technology.

It is now obvious that economic policy in this country must be fundamentally re-thought, but the current crisis provides a real opportunity for the planning of fundamental reform. The responses by the Federal Government have demonstrated a welcome willingness to set aside entrenched positions and accept that direct government intervention is essential in the face of problems of the complexity we now face.

In this essay I want to argue that Australia needs to embrace modern industrial policies – as several other countries in Europe, Asia and North America have already done - and I will explore how we can learn from this international experience, and how such policies can be designed and implemented to meet our local circumstances.

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KEY WEAKNESSES IN THE ECONOMY

Structural Problems

Our failure to limit both greenhouse gas emissions and the enormous levels of inequality that now prevail have had a myriad of flow-on effects. The over-reliance on the export of mineral resources – particularly coal - and the slowness in moving to the use of renewables has resulted in the degradation of natural environments and the extinction of many species of plants and animals.

The enthusiastic acceptance of neoliberalism and its particular concept of globalisation has seen the decline in support for Australian manufacturing. The acceptance of wholesale movements of manufacturing offshore has resulted in the demise of the Australian manufacturing sector, which formerly contributed a significant percentage of national income as well as large numbers of good jobs. As a result, the economy now has an undue predominance of casual, low-skill, low-wage activities.

Slow wage growth has also resulted from successful attacks on the trade unions, which have seen dramatic falls in membership and in the effectiveness of collective bargaining. The demise of local manufacturing has created serious vulnerabilities to disruption in supply chains, demonstrated during the pandemic when adequate amounts of medical supplies have been difficult to obtain. For decades there has also been a serious lack of investment in the education and training system at a time when it is imperative to create more technologically sophisticated activities.

Neoliberal policies have led to staggering levels of inequality, made worse by a taxation system that is increasingly regressive. In the globalised world system in which Australia is now embedded there is a constant threat of instability and potential crisis. The Global Financial Crisis provided a stark reminder of these threats from a financial system that is essentially out of control, but there are also threats from an impending ecological disaster as well as the fallout from a continued trade war, a new Cold War (or even a hot war) between the US and China. It is not surprising then that many people are fearful of the future, and that predictions of social instability are becoming more frequent.

The Technological Challenge

The global economy has now entered a Fourth Industrial Revolution, driven by the application of advances in artificial intelligence, robotics, and biotechnology. Several countries have developed strategic plans to meet the challenges of this new technological environment, but it is painfully obvious that Australia is being left far behind. Germany has introduced its ‘Industry 4.0’ program based around new smart factories harnessing linkages between automation, data exchange, 3D printing, cloud computing and the internet of things. China’s ‘Made in China 2025’ blueprints plans to replace labour-intensive industries with cutting edge technologies. Japan and South Korea have both developed similar visions: Japan has instituted its ‘Centre for Fourth Industrial Revolution’ while Korea has announced a ‘Presidential Committee on the Fourth Industrial Revolution’ to implement a ‘Digital Infrastructure New Deal’. In early 2020 the European Commission set out a strategy on ‘Shaping Europe’s Digital Future’ including programs for ‘Factories for the Future’, necessitating the upgrading of both infrastructure and skills in the labour market.

Each of these initiatives has its own features reflecting local needs and priorities, but they all share some key elements. All emphasise advanced technologies and the need to create continuous waves of innovations to stay ahead of the competition and accept that active government intervention will be essential. Universities are seen as central to the creation of these new ideas and technologies as well as providing new labour market skills. There is also a realisation that individual companies can perform best when they are embedded in productive regional systems consisting of firms that share information and ideas and which together can support an essential range of specialised producer services, as for example in Korea’s ‘Smart City’ program.

The Return of Planning and Industrial Policy

Continual processes of innovation and the application of advanced technologies require intense government involvement at all levels, creative collaboration between governments and the private sector and a willingness to undertake serious reforms in several areas, notably in education and skills development. Recent crises, notably the Global Financial Crisis of 2007-8, have demonstrated that markets by themselves cannot be relied upon to solve the myriad problems created by neoliberalism and its over-reliance on market mechanisms. In several countries, then, we are seeing the return of planning and industrial policy – both of which had fallen out of fashion in the neoliberal obsession with market-based approaches to spearhead such national approaches to the design and implementation of better futures.

Industrial policy can be broadly defined as an intervention by governments at various levels regional, national, state or local – to produce results that are superior to those possible by market mechanisms alone, and in this essay I want to explore what kinds of industrial policies are most appropriate for Australia in this current context. But first I want to ask what lessons we can derive from the application of such policies in a range of other countries both in the past and more recently.

LEARNING FROM OVERSEAS EXPERIENCE

Industrial policies of various kinds have been used successfully in several countries, and we can learn some useful lessons from their experience; although we need to recognise that it is not feasible to take policies that have been implemented in other countries, however successfully, and simply bolt them on to our existing framework.

In Australia we must be constantly aware of our own history, institutions and much else and think what would work here, and what modifications would need to be adopted if these innovations are to have any chance of success. But with careful and reflective thought it is possible to learn from overseas successes and failures, to provide inspiration for new initiatives and to avoid repeating the same old mistakes. With all these caveats in mind I want to examine what we can glean from various kinds of industrial policy frameworks that have been initiated at different times and in diverse places. What all these initiatives have sought to achieve is the harnessing of innovation processes to propel countries or regions to higher levels of growth through the creation of new political and economic structures, something I would argue is desperately needed in Australia.

Industrial Transformations are Possible

Critics, pessimistic about the opportunities for significant structural change in Australia, have often argued that small countries like ours struggle to compete in global markets and are inevitably at the mercy of wider forces over which they can have no influence. But in fact, there are numerous examples in recent history of small countries that have successfully embarked on programs of ambitious industrial transformation. Let me illustrate this point with reference to Sweden and some small countries in East Asia.

Regional policy in Sweden, and the industrial policy framework within which it has been set, has struggled with a series of important challenges since the early years of the Nineteenth Century: basically, the geopolitical challenge of being a small nation hemmed in by much larger powers. Since 1814 the policy response, especially during the Cold War, has been one of neutrality coupled with a determination to build an economically, politically, and socially strong nation able to forge an independent existence. A distinctively Swedish model emerged in the 1930s following the election of the Social Democratic Party, which was to remain in power for virtually the whole period between 1932 and 1976. The overall aim was to create a more egalitarian society, a place of safety for all citizens who could enjoy a comprehensive welfare system. During the 1930s the country avoided the worst effects of the Great Depression by implementing early versions of Keynesian policies. Between the end of the Second World War and the early 1970s increases in per capita income were among the highest in the world.

Sweden’s success in these endeavours has rested on some essential structural elements in the society: investment in a strong education system for all age levels, from kindergarten onwards; emphasis on technical and skills development, and on retraining workers displaced by structural change; the maintenance of a strong university system, and the fostering of productive links between universities and their local and wider communities; and the creation of a collaborative relationship between governments at all levels, employers and the trade unions. Perhaps most basic of all in creating a climate conducive to innovation has been the retention of a strong welfare state. Some elements of the social support system that existed in the 1970s have now been wound back but much has been retained, and this basic guarantee has given potential innovators the courage to strike out in new directions.

However, within the Swedish system the presence of support at the regional level has also been crucial: the challenges that are faced and the necessary support vary enormously across the country, hence policy needs to be tailor-made for specific locations to take account of, for example, the particular skills available in the labour force and the specific strengths of the local universities. Much innovation involves the sharing of knowledge between organisations, and this type of knowledge tends not to travel over long distances even in the current era of rapid electronic communications, hence a regional perspective is essential. Swedish regional policy has for many years stressed the importance of creative collaboration between private industry, the universities and various levels of government and this has been formalised in the ‘Triple Helix’ theory of innovation, which is the conceptual foundation for the creation of ‘Arenas’ of new activities. For example, the Saab aerospace company, noted for its high levels of innovation has based its whole strategy around productive collaboration with various university research centres as well as programs within national and regional governments.

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The development experience of some relatively small countries in East Asia is also instructive. Since the middle of the Twentieth Century, East Asia has been transformed from wartime devastation and poverty to a major powerhouse in the global economy. South Korea at the end of the Korean War in 1953 had average incomes well below those found in almost all African countries at the time, but before the end of the Century it was admitted to the OECd, the so-called club of the rich nations. Japan and Taiwan achieved similar transformations, and all this was made possible through the creative use of industrial policy.

From the very beginning, the success of industrial policy in East Asia was based on two essential pre-conditions. First, these policies did not address just questions of manufacturing industry or even the wider economy, but of society as a whole. Secondly, industrial policies were able to tap into shared understandings of a national project supported by all for the benefit of all, and hence enjoying widespread public support.

In the 1950s the urgent problem facing planners in Japan, South Korea and Taiwan was the creation of new industries that could generate increased levels of national income and jobs. These countries had few advantages and natural endowments, and few people had any experience of industrial work. Initially all three countries specialised in the production of simple goods that were within the capacities of their management and labour force. Certain companies were chosen to undertake this production and they were given special tax advantages and access to finance at very favourable rates. There was some public resentment against these favoured entities, but at the same time there was strong government action to ensure that these companies lived up to their promises and delivered benefits for the whole nation.

From the beginning it was recognised that exports would have to be the driving force in the economy, and foreign exchange levels were carefully managed to maximise export growth. As companies grew, as management and workers acquired more skills and greater experience, and as more sophisticated technology could be introduced, the product mix became higher value.

Government was central in planning and co-ordinating all aspects of the process, hence the term developmental state is usually applied to these administrations. With no real experience of sophisticated industries but with strong government backing, South Korea for example quickly became one of the largest steel manufacturing and shipbuilding nations in the world.

The international environment facing these countries, especially in the period up to the 1990s was certainly very different from today. Japan, South Korea and Taiwan were all seen as key allies of the United States during the Cold War, and hence were given significant trade concessions that would certainly not be available today, however there are still some important lessons for us today.

The constructive role that governments can play in fostering industrial learning and technological upgrading is central, and in the story of Asia’s rapid transformation there are no examples of markets operating alone to achieve such levels of success. While East Asian success was initially in more traditional manufacturing industries, more recent experience has shown that many of the methods of industrial policy – including many more examples of Triple Helix forms of collaboration - are equally applicable to high-tech and information technology industries in which the region is now a global leader.

New Initiatives in Industrial Policy

Many European countries have also implemented versions of industrial and regional policy. The European Union’s Regional Fund, also labelled (significantly) its Cohesion Fund, is the second largest item after the agricultural support fund in the EU budget. Its central aim being to invest in economically deprived areas.

Two particular forces have been contributing to growing inequalities within Europe: the decline of many older industrial regions hit by the effects of globalisation; and the periodic enlargement of the Union through the addition of less developed countries in Eastern and Southern Europe. Over the years a variety of policy targets and funding mechanisms have been put in place to support companies in deprived areas, upgrade educational opportunities, refurbish and expand infrastructure, and enhance opportunities for innovation. In its most recent iteration, the budget for this Cohesion Fund has been set at EUR 373 billion – or some 30 per cent of the total EU budget – for the period 2021-2027.

More generally, there has been a strong resurgence of interest in industrial policy in the EU as the region faces the challenges of climate change, the transition to new digital technologies and intensified competition from China and other Asian countries. There are also concerns for the future of small and medium enterprises and in early 2020 the European Commission put forward a vision for a new European industrial strategy dealing with all these elements. Included here are a European Green Deal and a Strategy on Shaping Europe’s Digital Future.

WHAT KIND OF INDUSTRIAL POLICY FOR AUSTRALIA?

Australia’s Experience with Industrial and Regional Policies

The history of industrial policy in Australia is a long one, going back to the period before Federation. It was spurred by concerns for lagging regions and a fundamental dichotomy in the Australian economy. On the one hand, Australia had an export sector sending first wool and other agricultural products, and then a variety of minerals to the world economy. On the other hand, Australia also had a poorly developed manufacturing sector, providing goods predominantly for the domestic market.

The export sector provided few jobs, hence the expansion of labour-intensive manufacturing was seen as essential. The colony of Victoria began a concerted push for new manufacturing enterprises shielded by high tariff wall. By the early part of the Twentieth Century these heavily protected industries did indeed develop, with car production commencing in the 1920s, and this was given added momentum during the Second World War.

By 1940 manufacturing provided about one-quarter of total jobs, and in the immediate Post-War period this expanded even further, contributing 30 per cent of GDP by the early 1960s. However, the sector still concentrated on products for the local market at a time when global demand for a wide range of goods was expanding.

With hindsight we can now say that this was a missed opportunity to establish Australia as an important exporter of industrial products. Instead, companies were comfortable behind the tariff walls and the ‘Lucky Country’ meandered on while the rest of the world, and in particular Asia, moved ahead at a breakneck pace.

The first steps were taken to open the economy to the world were taken by the Whitlam Government, with an across-the-board reduction of tariffs instituted in 1973. This was followed up by the Hawke-Keating Government with a much more ambitious program of deregulation.

After the defeat of Labor in 1996 the process went even further with the full embrace of the tenets of neoliberalism. Great swathes of government activities were privatised, and programs to stimulate research and development and industrial innovation were slashed. The dismantling of tariff barriers was inevitable but Australian industry was ill-prepared and poorly supported for this dramatic policy change. Most basic of all was the lack of a well-prepared and credible plan to guide the future of the economy and the place of manufacturing within it. As a result, Australian manufacturing was swept away by the flood of cheaper products and by 2020 contributed only 6.6 per cent of total employment.

Over the years Australia has implemented several policies designed to stimulate development at the regional level - for example the programs of the old Cities Commission and the Albury-Wodonga Development Corporation - particularly aimed at reducing inequalities between regions and attracting population away from capital cities and into regional centres and rural areas.

Much more limited in scope have been the numerous attempts to create and foster industrial clusters, in both metropolitan and regional areas. Here the generation of innovation is a clear requirement but there has been little understanding within various levels of government of how such processes work and can be facilitated, and how other actors such as the universities need to be incorporated into the programs.

Why Australia Needs a New Industrial Policy

As I have argued, Australia faces two massive challenges – a rapid and persistent increase in inequality and the truly existential crisis of climate change. The common element here is the quasi-mystical status accorded to the unfettered operation of the markets, which are portrayed as the only mechanisms able to determine the most efficient allocation of resources and the correct prices of all goods and services. But these narratives are looking increasingly suspect.

Socio-economic inequality has intensified in almost all countries that have implemented neoliberal agendas, and nations with higher levels of inequality have performed poorly in a variety of ways: social capital and levels of trust have been eroded, leading to social unrest and volatility, and growth has been significantly affected.

In the post-Covid environment the issue of jobs is also crucial. Responses by the Federal Government have included temporary assistance to companies to assist them until business conditions improve, but while emergency assistance to struggling companies is necessary in the current situation, I would suggest that we also need to evaluate and improve on-going programs to assist companies to be more productive and employ more workers in good, well-paying jobs.

The whole question of job creation has been made even more difficult by the rapid advance of the digital economy. It might be that automation will make many traditional jobs redundant, and thus generate massive levels of unemployment, but it is also plausible to suggest that many new kinds of jobs will be created by these new technologies. However, any future industrial policy will certainly need to take seriously the whole question of technological change and its impacts.

Underlying our efforts to plan for a more sustainable and egalitarian future, one in which far greater numbers of attractive and well-paid jobs are essential, is the question of how to prepare for new forms of risk, uncertainty and instability. It seems inevitable that there will be further pandemics, causing still more recessions. In past periods of crisis, as in the current pandemic, it has been clear that the markets are not capable of either dealing with current problems or planning how to deal with future events, and the weight inevitably falls on government. Part of the argument for an industrial policy in Australia, then, concerns the need to deal with any crises, and to prepare for these future events that we all know are inevitable.

What Kind of Industrial Policy with What Objectives?

In the design of this new policy framework there will need to be two distinct but interrelated phases.

The first will be essentially a rebuilding process, seeking to claw back some of the skills and capacities that have been lost through several decades of disastrous neoliberal approaches. As I emphasised earlier, until the 1970s Australia had a globally competitive manufacturing sector but that was allowed to be lost. In many countries the automobile sector has been seen as not just an important employer but as a reservoir of skills and manufacturing expertise that can be transferred and used throughout the economy, yet the Australian car industry was allowed to close for want of a relatively small amount of government support. By contrast, the German government now provides the equivalent of $A7.9 billion per year to encourage product upgrading and environmental compliance in its car companies. What had been a cornerstone of local industrial capacity was sacrificed on the altar of neoliberal purity. One part of a new industrial policy will be to rebuild such capacities – in particular the skill base in engineering - and their ability to propel other enterprises. This rebuilding exercise will be an essential prerequisite for the second part of this new policy, which will involve the development of industries of the future.

This is a daunting agenda that raises many complex questions, but at this stage it is also important to say what I believe a new industrial policy for Australia should not be.

First, I am certainly not suggesting a return to the old style, ‘hard’ industrial policies of the past, with a Tariff Board, import quotas and the like. Australia has gained great benefit from international trade and the regulations that govern it and will continue to rely on the benefits of free and fair trade. The design of modern industrial policy need not resort to such old-fashioned methods, nor to the kinds of economic nationalism that inspired the ‘America first’ slogans of the Trump administration. We are talking about something that is quite different, and much more creative.

Secondly, I am also not advocating the creation of a massive Soviet-style bureaucracy here that is involved in a detailed and all-encompassing national planning exercise.

Rather, what is involved is the creative steering and enhancement of markets to achieve more desirable outcomes for the nation and to ensure that some of the key priorities that I have already identified are achieved.

At an operational level, an important priority should be the creation of an independent authority charged with the development and management of Australia’s industrial policy. I believe that the new body needs to be established at the national level but one of its key roles must be the development of linkages between national policy mechanisms and the counterpart organisations in each of the states and territories, which will in turn work closely with local governments. This should replace the current Productivity Commission, which has done some useful work but is very much a creature of neoliberalism and has an agenda that is far too narrow. Designing a new industrial policy framework is a complex task that requires the widest possible consultation – with Federal, State and Territory, and local governments, as well as the private sector, trade unions, think tanks and research institutes, and a range of other stakeholders. Collaborative work at these sub-national levels will be essential, and it may be desirable for each state and territory to create its own equivalent body, since as I outlined earlier – particularly in relation to Swedish government programs - many of the most productive potential initiatives are located at the regional and local scales.

Questions of environmental sustainability including energy policy, the amelioration of climate change, care for priceless natural features such as the Great Barrier Reef, and the protection of threatened animals and plants – have been one of the key failures of government policies. There is now abundant evidence to show that the move to renewable energy can create many more jobs than it destroys, although there will need to be programs to retrain displaced workers. An innovative energy policy can also help to rejuvenate all parts of the economy. New and revitalised industries can emerge using low-cost electricity generated by solar, wind and other renewable technologies. New forms of aluminium and steel production can be created using these resources, and these new production facilities can be located in regions that have lost jobs with the closing of coal mining and similar carbon intensive activities.

The disruptions caused by the pandemic have also highlighted problems in the labour market. For several years the Reserve Bank and others have lamented the low levels of wages growth in many sectors of the economy, but a central principle of the neoliberal model has been to take all possible steps to reduce labour costs to an absolute minimum, and whenever minimum wage determinations are being discussed both the government and employers have argued that now is not the time for significant wage increases. Perhaps one-third of all workers in Australia can now be classified as being in ‘irregular’ employment of some kind. While these arrangements are hailed by some as providing the freedom and flexibility that is highly prized by some workers, others have argued that those who prefer such arrangements are probably in a minority. Clearly labour market reform is needed, but not the search for ‘flexibility’ that the adherents to neoliberalism champion. Rather, we need to look carefully at the labour market, how it works, how workers are rewarded and how skills need to be constantly upgraded as the economy moves forward to more sophisticated kinds of activities.

A key element should of course be the revival of Australia’s manufacturing sector to avoid dangerous over-reliance on global supply chains. Australia’s agricultural resources offer scope for expanded manufacturing activities – by value-adding in food processing, and wool spinning, weaving and fashion creation for example. There have been some promising signs in recent pronouncements by the Federal Government on the need to revitalise the Australian manufacturing sector as a key component of the post-pandemic recovery. Five key industries have been identified as offering special promise for the future – resources technology and critical minerals processing, food and beverage, medical products, recycling and clean energy, defence, and space.

While this initiative can be applauded as an initial stage in the development of a more comprehensive industry policy there is certainly no vision of how these industries of the future need to be supported within a broader framework of economic and social revitalisation. Similarly, the assumption that massive investment in a ‘gas-led recovery’ will magically push markets towards this new vision of the future is extremely simplistic, even leaving aside the serious environmental consequences of expanding gas production.

Rather, as I already noted, we need to think about rebuilding Australia’s industrial capacity and the longer-term generation and commercialisation of new innovations. Research on innovative clusters already outlined has emphasised the role of universities in the generation and propagation of innovations, and it is essential that the long running problems in university funding be addressed. The sector is under-funded and is overly reliant on overseas students and a more secure funding model is desperately needed. A more sophisticated and innovative economy will also need more highly educated and trained workers, and the key area of skills – including programs for the continued re-skilling and upgrading of all employees - will be central to this innovative future.

Efforts to escape the straight jacket of the resources curse will require the development of a long-term science policy designed to foster research and to provide future generations of scientists with the necessary skills and experience.

It is also important to remember that innovation is not just about the development of the ‘hard’ sciences. The dissemination of innovation also depends on the application of knowledge in a wide range of areas in the social sciences. As noted earlier, there is ample evidence on the role of cities in the exchange of ideas between companies, and between government and the private sector. It has also been demonstrated that some kinds of cities are more likely to attract and propagate innovative activities than others. Thus, we need to look at Australian cities in this light and develop strategies for the building of more innovative industries through the fostering of these effective networks of information exchange. But in recent years city planners and governments at all levels have been far too involved in a mad rush to keep up with high levels of population growth - through the provision of housing and infrastructure – to give any attention to visions of longer-term development. For many years economic strategies have had at the centre of their economic strategies the maintenance of high rates of population growth - especially in Sydney and Melbourne - allowing politicians to trumpet that GDP growth has been ensured. However, these policies have not resulted in increases in GDP per capita: rather, there have been steady declines in this more important measure of national well-being, and coupled with the general stagnation in wage levels there has been a dangerous lack of increases in aggregate demand. Part of the development of a new industrial policy should be a thorough review of this whole policy area, involving a hard look at whether high levels of immigration are in the national interest at this stage of our development.

This is a daunting agenda involving nothing less than a complete rethink of the economy, its structure and how it can deliver much more satisfactory outcomes for all citizens.

So far, I have looked at individual sectors or areas, but it is also important to remember that equally important will be the ways in which these sectors interact, stimulate and support each other. Thus, for example, in looking at opportunities to build larger and more innovative manufacturing industries we must consider how best to develop linkages with the financial sector. Examples like this abound, and an indispensable part of the whole industrial policy approach will be to develop a strategic overview of these linkages, how they can be improved and how any bottlenecks can be removed. Harmonisation of policies is vital, including the role of a reformed taxation system, to create credible incentives to move the economy in the positive directions that I have outlined.

Strong and innovative government leadership will be essential, but so will be our capacity to come together – government, the private sector and civil society – to create a national consensus on future aspirations and on the means that will be needed to achieve them. This will also involve a wide acceptance of the costs that will need to be borne and shared through, for example, a restructured taxation system, and an agreement on how the benefits of future developments can be distributed in a fair and equitable manner. Again, this presents a massive challenge, but we live in challenging times and the East Asian experience suggests that bold actions can yield great rewards, but only if citizens can unite behind a national agenda.

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