Other economics

Industry policy

In some circles of economists the very mention of industry policy (“industrial policy” in some countries’ economic lexicon) conjures images of the years up to the 1980s, when Australia maintained a high-cost, low-productivity, labour-intensive manufacturing industry behind a tariff wall. Or at worst it conjures images of Soviet central planning.

While those of neoliberal persuasion eschew any government intervention against the market, even more liberal economists and policymakers believe that government interventions in the economy should be limited to clear cases of market failure, if possible using interventions that neither favour nor discriminate against particular firms or industry sectors. Any hints of “key industries” should be strictly off limits.

Yet in reality the success of many east-Asian countries can be put down to the selective application of industry policies, in defiance of the wisdom of bodies such as the IMF.

Toby Phillips and Esther Koh of the Centre for Policy Development have pulled together what amounts to a framework for Australia to implement an industry policy: Setting direction: a purpose approach to modern industry policy. They suggest that industry policy should be shaped by three considerations – directionality (clearly-defined and effectively-communicated priorities), a coordinated mixture of policy instruments, and well-defined governance.

It’s a useful handbook, and it includes an informative matrix of the agencies involved in what may be called our key industries – renewable energy industries, agricultural industries, health and medicines, and minerals in their raw and processed forms. It’s not clear, however, what justifies the authors’ claim to modernity: although the specific industries differ, the framework is essentially the same as was used in Australia’s industry department fifty years ago: in fact that should endow it with a degree of respectability.

The handbook omits one strong justification for an Australian industry policy, our volatile exchange rate, which is taken on wild rides by volatile commodity prices. That volatility has done more to wipe out our manufacturing industries than any changes in tariffs or other specific policies. Economists’ arguments against industry policy generally assume there is a world with stable exchange rates.

An industry policy can be subsidiary to a general policy to broaden our economic base to reduce our dependence on commodity prices, and to decarbonize the entire economy. Such thinking is evident in another CPD paper Capital for kilowatts: The (non)-inflationary impacts of the green transition by Toby Phillips and Esther Koh, which is more realistic in that it sees industry policy in this broader context.

Another justification for an industry policy relates to cooperation with other countries that seek to diversify their sources of gas and critical minerals. On the ABC’s Saturday Extra last week Nick Bryant interviewed European Union Energy Commissioner Kadri Simson, who described areas where the EU could cooperate with Australia to reduce its dependence on Russian gas and on a limited number of sources of critical minerals: EU Energy Commissioner's stark warning to Australia. (10 minutes). Economic textbooks cite the doctrine of comparative advantage to argue against notions such as supply chain security, but that’s in the assumed context of countries wishing to cooperate to share the gains from trade. If countries have different objectives, policies to develop particular industries can easily be justified.

Towards an industry policy: the prime minister’s future made in Australia

If our policymakers are to be believed Australia is heading not just to an industry policy, but is on the way to energy transition affecting almost all economic sectors.

Albanese’s speech to the Queensland Media Club – A future made in Australia – fell short of articulating such a vision, but it certainly pointed in that direction.

In part the speech was about general facilitation of investment, for example in absorbing some of the risk associated with new ventures, and investing in skills and infrastructure. That’s fairly standard for responsible governments, and generally fits into economists’ ideas of intervening to compensate for market failure.

But he went further than that: the government is going to be more involved in re-shaping our industries. In part this is about adjusting to a world in which other countries are pursuing strongly interventionist policies, most significantly the US Inflation Reduction Act. To quote:

… we must recognise there is a new and widespread willingness to make economic interventions on the basis of national interest and national sovereignty.

And – critically – none of this is being left solely to market forces or trusted to the invisible hand.

The heavy lifting of economic transition and industrial transformation is not being done by individuals, companies or communities on their own.

It is being facilitated, enabled and empowered by national Governments from every point on the political spectrum.

Those are statements of general direction, but he also announced more specifically that the Commonwealth will be “a participant, a partner, an investor and enabler”, and in this regard the government has already announced some specific investments. The government intends to re-invigorate our manufacturing sector, but don’t expect to see the highly-protected, inefficient, labour-intensive , low technology industries of time past.

Our industrial landscape

It is fashionable to portray Australia as a technologically impoverished and de-industrialized backwater, propped up by a few extractive mining and agricultural industries. There is some validity in that portrayal, but our report card on the 2023 Global Innovation index reveals a more complex situation.

Out of the 132 countries surveyed, we come in at #24, behind most western European countries, and behind Canada, Korea, Japan, China, Hong Kong, Singapore and Israel.

Our country report card shows mixed performance. On indicators of education we do reasonably well, apart from a low government funding of secondary schools. We also do well in some areas of ICT engagement. But in “knowledge and technology outputs” our scores are poor in comparison with other high-income countries. It confirms the general view that our academic establishments are keeping up, but that for the most part the private sector is falling behind. It’s a manifestation of an economic structure resulting from policies that privilege resource extraction and property speculation over wealth creation.

Competition policy

Until supermarket prices came into prominence, few Australians would have heard about the Food and Grocery Code of Conduct. In fact few people in the industry would have heard about it, because there were no penalties for non-compliance, and there was little to be gained (but possibly much to be lost) from suppliers making a complaint.

Some may see the government’s release of Craig Emerson’s Interim Report on the Code, in which he recommends that the code be enforceable, as a common sense administrative matter: there’s not much point in having a code if it’s ineffective. Some others may see the government’s attention to the Code in political terms: there’s no political harm when the government demonstrates to shoppers and farmers that it’s taking on the supermarkets.

Such interpretations don’t do the Emerson analysis full justice, however. The first paragraph of his foreword captures the policy reasoning:

A heavy imbalance in market power between suppliers and supermarkets in Australia’s heavily concentrated supermarket industry necessitates an enforceable code of conduct. An effective code of conduct would benefit smaller suppliers and consumers by enabling suppliers to innovate and invest in modern equipment to provide better products at lower cost.


The report is about rectifying a market situation in which there is asymmetric power. That’s why it would apply only to supermarkets with annual revenues above $5 billion, covering the big four – Coles, Woolworths, Aldi and Metcash – and not to the other few supermarkets which don’t have much power in the market.

Notably, the Emerson Report does not recommend divestiture. It acknowledges that Allan Fels’ report on Price Gouging and Unfair Pricing Practices recommended that our competition law should be strengthened with divestiture powers for the ACCC, but it does not support the idea for supermarkets. In a 9-minute session on ABC BreakfastSupermarket Inquiry: Bigger fines and mandatory code recommended – Emerson explains the practical reasons why he’s unenthusiastic about divestiture: it simply wouldn’t work in our food market. He also explains how suppliers could make confidential complaints without fearing repercussions.

Will this recommendation, if implemented, keep a check on rising prices? One might believe that any reform improving suppliers’ power would do nothing to reduce shelf prices: it may be unfair that supermarkets are screwing farmers, but surely that helps keep prices low.

That logic is based on a zero-sum assumption. But in a fairer and more certain market there may be benefits for farmers and consumers. In another interview on the same morning National Party Leader David Littleproud supports the Emerson recommendations (while criticizing the government for not going hard and fast enough), and he mentions instances of farmers being treated unfairly by supermarkets, whose buyers, driven by commissions, behave aggressively. (9 minutes) As an example he mentions the case of a cherry farmer who, in response to terrible treatment from a supermarket, bulldozed all his trees. That’s a cost – a deadweight loss in economists’ terms – that benefits no one, reduces the supply of cherries on the market, and discourages other farmers from investing in ways to make their operations more efficient. Any sensible businessperson hangs back from investment in an uncertain market. A more assured and stable supply chain could be a lower-cost supply chain.

The idea of divestiture isn’t going away. It’s simply that it wouldn’t work in this market at this time. Writing in The Guardian John Quiggin suggests divestment may be a useful move in other industries: Big business in Australia faces less competition than almost anywhere else – and likes it that way.

Some privatizations have created loosely-regulated private monopolies. We have mentioned toll roads in previous roundups. A recent ABC 730 Report brought to our attention the market power of airports. John Sharp, who was transport minister at the time the Howard government privatized airports, is now on the board of Rex Airlines, and he admits that this change of role has given him a different perspective on airport privatization. Just as the Putin government gave away Russia’s publicly-owned assets to cronies, so did the Howard government give away public assets to the Coalition’s mates, in under-priced privatizations. That’s one reason we pay so much for toll roads and airfares – a wider and more general issue than supermarket pricing.

Assuming the government accepts the Emerson recommendations – it has made positive suggestions in that regard – it will adopt a “hands on” regulatory approach, accepting that this industry is highly concentrated, rather than trying to enforce competition through divestiture.

There is a different view that emphasises competition as the main or even only way to ensure fair outcomes for consumers. It’s the model taught in Microeconomics 1 lectures. But we can think of many industries with low barriers to entry and plenty of players that deliver poor outcomes for consumers – private health insurance, mortgage broking, sports betting. Competition, in itself, can impose high transaction costs on consumers without yielding any benefits.

A single-minded focus on indicators such as concentration ratios and regulatory barriers can blind policymakers to the way markets actually work, often with high costs and with detriment to consumers, even if all the structural variables look OK. The Productivity Commission has announced that it will be undertaking a study to assess the economic effects of national competition reforms. This may provide an opportunity for policymakers to think beyond the simple models of undergraduate economics.

Taxing multinationals – “do unto others …”

It has been a long-standing concern that foreign-owned companies with operations in Australia use accounting practices that shift their recorded profits offshore to low-tax jurisdictions.

To rectify this situation, at least in part, Australia is one of 136 countries cooperating to counter a global race to the bottom by ensuring there is a global minimum effective tax rate of 15 percent applying to large multinational companies. Australia’s cooperation in this agreement, co-ordinated by the OECD, was an election promise of the Albanese government.

An explanation is in the 2023-24 Budget (Pages 177 and 178 of Budget Paper 1), and specific details are in a Treasury consultation paper released last month: Global and domestic minimum taxes: Interactions with other Australian tax laws. Treasury estimates that it will collect about an extra $370 million over three years from when it comes into effect in 2024-25.

Writing in The Conversation Kerrie Sadiq of the Queensland University of Technology and Richard Krever of the University of Western Australia note that Australia has signed on to this initiative. They note, however, that Australia has joined another 47 rich countries that have refused to sign on to a UN convention to ensure multinational companies pay tax in countries where they make their money: Why is Australia helping to block a move to tax multinational corporations properly?. Although the OECD agreement and the UN proposals use different mechanisms, they are both directed to minimizing multinational tax avoidance through profit-shifting. As Sadiq and Krever point out, Australia has thrown its lot in with the rich, exhibiting a degree of hypocrisy in our approach to multinational taxation.

Historically Australia has been dependent on foreign investment, but Australian domiciled companies are becoming significant investors in other countries. That’s why we try to have a foot in both camps.