Setting direction: A purposeful approach to modern industry policy



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.

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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.

What is wrong with our current approach to industry policy?

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.

What does the report recommend?

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. 

Why does this matter?

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: 

  • market failures prevent the most efficient and socially-beneficial industries emerging;
  • where the country’s long-term competitive advantage does not overlap with short-term investment horizons; or 
  • where the national innovation system is struggling to coordinate actors across the economy. 

These are compelling rationales for bold public action to catalyse innovation and shape future industries.

Setting direction in the media

Climate, worker and innovation experts have embraced the Prime Minister’s seismic shift on industrial policy that will see coordinated government intervention to help Australia compete in the global clean energy and manufacturing race.
New and existing subsidies and incentives designed to bolster domestic manufacturing will be brought under the umbrella of a “Future Made in Australia Act”, as the government seeks to boost its economic and national security credentials.
For most economists, the idea of a “planned economy” is laughable. Policy experts, in particular, are now happy to challenge the Cold War binary that a country is either “free” or trying to recreate Stalin’s five-year plan.
Australia must implement “directional” industry policy that utilises clear goals, a diverse mix of policy and strong governance to take full advantage of structural changes like decarbonisation and emerging technologies.
Australia has been warned it will miss out on future prosperity under its existing industry policy and cannot match the US or China.
The Australian Government needs to take a more hands-on approach to industry policy to meet productivity targets and tackle major challenges

About the authors