Industry policy for a changing world

Aug 17, 2022
Digital, technical and resource innovation concept
Image: iStock

The Biden administration’s ambitious new AUD 400 billion industrial policy initiative once again confronts Australia with the question of whether we want to be in the forefront of science and innovation, or way back in the slipstream.

Certainly, it was welcome news that we have achieved near to full employment for the first time in fifty years, thanks to the massive fiscal stimulus applied during the Covid-19 crisis, together with net zero immigration.

However, this outcome is unlikely to be sustainable in the absence of measures to address longstanding supply-side issues, in particular the lack of investment in research, innovation and skills. It may turn out to be just a ‘sugar hit’, underwritten by the latest commodity price spike.

What is clearly missing in Australia, by contrast with most other advanced economies, is a coherent and purposeful approach to industry policy. This would identify our current and potential areas of competitive advantage and enable a coordinated approach to the industries and technologies of the future.

Let’s reflect for a moment on where we are. Unlike the Norwegians with a resource rent tax and the world’s biggest sovereign wealth fund to underpin the future diversification of their economy, we have failed to take advantage of our once-in-a-generation commodity boom.

Essentially, the windfall gains from higher commodity prices have masked a structural deterioration in Australia’s productivity performance as a high dollar made much of our trade-exposed manufacturing uncompetitive. This was previously experienced by the Netherlands with North Sea gas in the 1960s and 70s.

Next came the UK with North Sea oil in the 1980s, where, as in Australia, deindustrialisation was accelerated by a consumption boom at the expense of investment. Only Norway has seemed able to learn from these episodes, and is now well placed to grow high wage, high productivity jobs in carbon-neutral industries.

The narrowing of Australia’s trade and industrial structure is reflected both in our precipitous decline in global competitiveness rankings and in the Harvard Atlas of Economic Complexity, which measures the diversity and research intensity of our exports. Here we now rank 91 out of 133 countries.

Even resource-rich Canada has understood the need for energy transition and diversification of its export mix. How long can Australia maintain its first world lifestyle with a hollowed out third world industrial structure? Nothing is guaranteed as Argentina found to its cost over the last century.

Combined business and government expenditure on R&D as a proportion of GDP has slumped to 1.79 per cent, compared with 2.2 per cent ten years ago and 2.4 per cent on average across the OECD. Some countries such as Israel, Korea and Switzerland are increasing their R&D spend to 4 and even 5 per cent of GDP.

Significantly, the new Albanese Labor government has committed to a $15 billion National Reconstruction Fund, a ‘Future Made in Australia Office’ and to the development of a more coherent and cost-effective research and innovation system.

This will be a topic at the forthcoming Jobs and Skills Summit and might encompass a number of key components, the first being a national coordinating agency. There is scope to build on CSIRO while more closely emulating models elsewhere, such as Sweden’s Vinnova, the Netherlands TNO and InnovateUK.

The second is support for public research, including ‘blue sky’ research, or there will be nothing to commercialise. Universities Australia estimates that a 1 per cent increase in research funding will generate an additional $24 billion for GDP over a 10-year period.

Third, while everyone favours increased industry-university collaboration, Australia lacks the institutional structures to conduct this at scale. Successful examples around the world, such as the German Fraunhofer Institutes, UK Catapult Centres and ManufacturingUSA Institutes, bring stakeholders together in ‘innovation ecosystems’.

Fourth, it has also become evident how important ‘place-making’ is for innovation and entrepreneurship precincts. Many of these will be grown locally, but there is scope for the Commonwealth to provide logistic and financial support on a cooperative basis, especially in Australia’s regions.

Finally, industry policy will only be as successful as the skills that are brought to bear in the adoption of new technologies and business models. This is a question not just of funding but the most effective structures for capability-building, including closer integration of university and VET pathways.

Australia’s future will not be determined by any single program or initiative but by a system-wide, policy driven transformation of our narrow and unsustainable industrial structure. Nothing less will enable Australia to diversify its trade mix and escape the path-dependency of its traditional reliance on unprocessed raw material exports.

Of course, mining and mining-related technologies will remain important to the Australian economy. However, the focus can now shift to the much in demand critical minerals for newly decarbonising industries as well as to capturing entire value chains in areas such as battery manufacturing, green hydrogen production and, ultimately, green steel and green aluminium.

Despite the global challenges of inflation, supply chain disruption and the rapidly changing geopolitics of our region, the Albanese government finds itself in the best position in a generation to undertake a fundamental and long overdue reshaping of Australia’s economy. And reshape it we must.

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