Australia’s economic transformation

We like the idea of a future made in Australia

The government’s Future Made in Australia has gone down well with the electorate, but it’s possible that some people see it as a return to traditional protectionism rather than as an industrial transformation to sustain our global competitiveness.

How do we understand the policy?

The Essential poll of April 24 shows about 50 percent of respondents support the policy, 20 percent oppose it, and 30 percent show neither support nor opposition.

There is a partisan division: Labor and Green voters show more support than other voters.

It is difficult to know how respondents perceive the policy. As a return to large-scale protected manufacturing, perhaps, or as an industrial re-structuring around renewable energy? Maybe it’s simply that some people are pleased to see that the government is at last doing something about modernising our economy.

The same Essential poll asks Australians about attitudes to global supply chains. We’re nervous about their reliability: 70 percent agree with the statement “The pandemic showed we cannot be wholly reliant on global supply chains”, and 43 percent of respondents agree that “The days of globalisation, where we just imported cheap goods from overseas are over” while only 22 percent disagree.

In these responses there are hints of a yearning for protectionism: 64 percent believe “It was a mistake to allow the Australian car industry to close”, and older people are much more in favour of keeping industry in Australia than younger people are. On the statement “It is not the government’s job to support businesses that can’t compete overseas” there is an ambiguous response: 37 percent agree, 27 percent disagree.

Support for the government’s policy varies by region. Essential classifies respondents by their location – inner metro, outer metro, provincial and rural. The further we live from urban centres, the less we support the policy. In terms of locational benefits, this gradation makes little sense: these new industries won’t be popping up in South Yarra or Tusmore –  they are most likely to be inland or on the coast. It is likely that they reflect ingrained political attitudes, towards renewable energy and Labor governments, rather than any considered view of national or local interests.

What we think of the transition from fossil fuels to renewable energy

By a two-to-one majority we believe the transition from fossil fuels will have a positive impact on Australia, even if we think the transition won’t be quite so positive for our local communities and for ourselves personally. There is sharp partisan division on the effects of the transition, confirming that a substantial proportion of Coalition supporters believe there is no benefit in Australia abandoning fossil fuels in favour of renewable energy. And as with the general attitude to the “future made in Australia”, the further we live from the cities, the less we believe the transition will have any benefits, even though the most damaging consequences of climate change are on our rural industries.

The Essential poll has a related question asking people when they think the transition will have a “direct, noticeable, impact” on our daily life, with six choices ranging from “already” to “never”. There is a bias in responses to such questions, in that people tend to respond to what they consider to be a safe mean. In this case “in the next 5 years” is the most common response. We don’t know whether people consider that impact to be positive or negative.

There is another question about whether we think we’re ahead or behind other developed countries in making the transition. The response from the well-informed would probably be that we’re behind where we should be, given our opportunities, even if we’re ahead of most other ‘developed’ countries. On a set of measures, including “converting homes to renewable energy power” and “building a renewable energy grid powered by wind, sun and water”, most people believe we’re ahead: only about 20 percent of respondents believe we’re behind other developed countries. It’s notable that 60 percent of respondents believe we’re ahead in “creating jobs in the renewable energy sector”.

Energy sources – we still don’t understand the economics

Essential has two related questions about energy sources – support for nuclear energy and the cost of energy sources.

There is reasonably strong support for nuclear energy – around 50 percent, while there is 30 percent opposition. Men and women show quite strong differences: women don’t like nuclear energy. There is a also a sharp and predictable partisan division. There is a common belief that young people are more relaxed about nuclear energy than older people, but this is not supported in this survey.

They really are the lowest cost

Mike Seccombe has an article in the Saturday Paper Dutton’s nuclear policy backfires (paywalled). The Coalition wants to appeal to those among its supporters who think we should do something about climate change, by advocating a policy that differs from Labor’s, but which does not go down the renewable path, in view of the Coalition’s having dug itself into a position of opposition to renewable energy. But in order for their policy on nuclear energy to have any traction they have had to lie about its cost, and to avoid stating where they would put the reactors. Farmers who kick up a fuss about the occasional transmission line are probably even less disposed to having a nuclear power plant in their sightline.

On the cost of energy sources we believe that renewables are more expensive than nuclear energy which is more expensive than fossil fuels.

Before we conclude that we have all been hoodwinked by misinformation and disinformation, it’s informative to think how we might respond to the question as put:

Please rank the following sources of energy – Renewable energies, such as wind and solar, Nuclear energy, Fossil fuels, such as coal and gas – in terms of total cost including infrastructure and household price, where 1 = Most expensive and 3 = Least expensive?

It’s a terribly-worded question, in part because it confuses cost and price, and even more seriously because it does not ask whether it refers to short-run or long-run costs and what people understand by “cost”. Importantly does that “cost” include environmental externalities?

In the short-run the lowest cost, ignoring externalities, is to flog the last few kWh out of our ancient coal-fired stations. In the medium to long run, even if we do not include environmental externalities in cost estimates, renewables are by far the cheapest, followed by fossil fuels and nuclear power vying for second place. (If fossil fuels wreck the planet there will be no one around in the future to worry about nuclear waste – a challenging question for ethicists.)

Australia as an industrial superpower in a changed world

In his Policy Post contribution Australia as an industrial superpower? Well, yes … Martyn Goddard places the government Future Made in Australia project in a policy context that’s much wider than what is understood by most economists and journalists. He writes that :

Anthony Albanese and Jim Chalmers clearly understand what many in the economics trade do not: that the world is not only in the process of changing, but has already changed almost beyond recognition.

Goddard provides a short economic history of the world since the mid 1980s, when the “developed” world went down the path of neoliberalism, endorsed and sanctified under the term the “Washington Consensus”:

Taxes were slashed, but budget deficits soared because cutting spending is harder than cutting taxes. An orgy of privatisation lasted for over 30 years as public assets were sold off. The profit motive, according to the new orthodoxy, would make almost everything more efficient and responsive. The list seemed endless: trains, trams, electricity, telecommunications, mines, water and sewerage systems, postal services, banks, insurers were all auctioned off.

It didn’t work. Public services were impoverished. Economic growth carried on, but at a slower pace than in the postwar years, and the gains went to the already rich, while the incomes of the middle and working classes stagnated or retreated.

Then came the global financial crisis, in response to which policymakers tried to apply the established models of counter-cyclical policy. They didn’t work to restore growth, but they did contribute to massive asset-price inflation and to even worsening wealth inequality. It took policymakers some time, however, to realize that the established prescriptions had failed.

That realization has come in the wake of the pandemic. Goddard writes:

Around the leading developed nations, massive and unorthodox policy shifts are underway. In the United States, Europe, Japan, Korea and elsewhere, enormous amounts of public money are being poured into essential industries – mostly in advanced information technology, critical minerals, renewables and other green industries. This investment involves a powerful trend to bring must-have enterprises into being and to keep the benefits onshore, rather than outsourcing them to unreliable countries like China.

The Albanese government’s Future Made in Australia pitch needs to be seen in the context of a profound shift in national priorities that has been the inevitable result of fundamental transformations in geopolitics and global economics.

Some commentators make the same observations as Goddard and conclude that capitalism has failed. But Goddard doesn’t go there. Rather, his message is that the model of capitalism that devalues government, and which valorises laissez-faire economics, has failed. The prescriptions Goddard proposes, and that he sees other countries adopting, are based on the orthodox idea of market failure, although they go somewhat further than the more conventional ideas Miriam Lyons and I wrote about in our work Governomics: can we afford small government? That’s because the market failures are more severe than we had envisaged.

Goddard makes the observation that the government’s policies are “undoubtedly protectionist”, but that’s an unfortunate choice of words because of the historical connotation of the word “protection”. He explains that the policies are not about closing our borders to keep foreign stuff out – the protection of the twentieth century. Rather the policies are about securing our place in a global economy, where forces well beyond our control could shut us out.

It’s OK to pick winners, but try to avoid picking losers

Des Griffin has drawn our attention to the work of Dr John Howard of the Acton Institute for Policy Research and Innovation, who specializes in science, technology and innovation policy.

His paper There’s nothing wrong with picking winners—just not too many losers is generally supportive of the government’s Future Made in Australia, but as an experienced policy analyst he warns that implementation will be challenging.

Much of the prime minister’s rhetoric has been about possible projects, such as green hydrogen, and these certainly capture the imagination. Howard points out, however, that the government should also be strengthening our public infrastructure that lifts our innovation capacity, such as the CSIRO, ANSTO (Australian Nuclear Science and Technology Organisation), and DST (Defence Science and Technology Group), which have been subject to rounds of budget cuts over the last ten years. Such investments are less newsworthy but they yield ongoing benefits.

In another paper Towards 3%: Turbocharging Australia's innovation effort: the statistics do not lie Howard points out how in Australia government expenditure on R&D has been declining over the long term – from around 0.4 percent of GDP in the 1980s, to less than 0.2 percent of GDP now. (The fall started with the election of the other John Howard, the one who had trouble with economics, in 1996.)  

There was a rise in private sector R&D, but as a percentage of GDP this peaked around 2007, and has been falling since. This fall is associated with the retreat of companies involved in complex manufacturing and other technologies from the Australian landscape. Universities have increased their expenditure on R&D, but much of this growth has been on the less-than-secure base of cross-subsidizing research from the revenue contributed by foreign students.

Has the Commonwealth lost momentum on electricity?

The Future Made in Australia initiative is about broad industry policy, but Tony Wood, Alison Reeve, and Richard Yan of the Grattan Institute remind us that the government is close to stalling on one important plank of its renewable energy. That plank is electricity: Keeping the lights on: How Australia should navigate the era of coal closures and prepare for what comes next. We will probably muddle through the closure of old coal-fired generators, but the next phase, the post-coal phase, will be more difficult, particularly as it will be a time of increasing demand for electricity.

Our present and planned renewable resources are, and will increasingly be, deployed sub-optimally, because of poor coordination between governments and industry. Construction of transmission lines has been slow. (Hindered by some recalcitrant farmers)

The National Electricity Market has served us well to date (an assertion with which some would disagree because of its irresponsible privatization), but will not serve our emerging needs. It will have to be re-built.