The concept of industrial policy – when a government attempts to steer economic development by supporting key industries – is back in vogue: many governments around the world have begun implementing opinionated and directional industry policies, like the US’ Inflation Reduction Act and the EU Chips Act.
Setting direction: A purposeful approach to modern industry policy is a report from the Centre for Policy Development’s Sustainable Economy Program, authored by program director Toby Phillips and program officer Esther Koh.
The report lays out a practical framework that Australia’s federal government could use in deploying its industry policy to invest in a sustainable and prosperous economy for tomorrow.
Setting direction: A purposeful approach to modern industry policy suggests the Australian Government needs to take a more hands-on approach to industry policy in order to meet productivity targets and tackle major challenges like climate change, supply chain resilience and adoption of new technologies.
The report lays out the essential elements required for successful modern industry policy, including clear direction from government, a diverse policy mix, and strong, coordinated governance.
The term ‘industry policy’ often conjures images of Australia’s interventionist approach prior to the 1980s and 1990s, characterised by higher taxes, tariffs and protectionism for domestic industries.
Since then, the prevailing economic orthodoxy has rejected industry policy, favouring a ‘hands-off’ approach that leaves industry development up to the free market.
As we face major challenges like the green transition, supply chain instability and resilience to future health crises, this hands-off approach will not be sufficient to tackle such tasks, and won’t secure Australia’s competitiveness for decades to come. Capital markets optimise for short return horizons. The long-term prosperity of the country relies not just on exploiting our comparative advantage today, but in setting up Australia to have strong industries in the future.
Governments around the world have taken different approaches in a common attempt to implement more modern, directional industry policy. The report’s integrated framework for modern industry policy provides the how for governments to do this well, and outlines the essential elements for success:
Directionality — Setting a clear direction (narrow, defined priorities), backed with a high-level political and fiscal commitment that signals directions to industry and the economy.
Policy mix diversity — Mobilising a comprehensive set of policy tools for a government-wide approach to support the directional goals, including boosting innovation, supply-side coordination, helping firms get to scale and building demand.
Governance — Convening ministers or departments at a high level to ensure alignment, providing a forum for engagement and leadership from industry itself, and building institutional capacity.
Globally and at home, there is deep uncertainty around major trends reshaping economies, from the risk of the knowledge economy to the implications of a changing climate. In Australia, governments are grappling with a narrow industrial base, an export basket that is heavily exposed to other countries’ industrial transitions, and an R&D and innovation system that is less active (as a proportion of the economy) than most OECD countries. Australia risks being left behind by relying too heavily on the industries of the past like mining and resources, and not properly utilising our competitive advantages in areas like innovation and green infrastructure.
Modern industry policy is a purpose-driven approach where governments provide a strategic direction or goal and implement an integrated suite of policies to signal and support industries in that direction. It acknowledges that complex challenges demand complex responses.
Governments should consider more directional industry policymaking in situations where:
These are compelling rationales for bold public action to catalyse innovation and shape future industries.
