Key points
- Industry policy is rapidly gaining popularity with governments around the world.
- The Australian government says it will spend $22.7bn over 10 years to boost. manufacturing, fight climate change and boost economic resilience.
- A small group of economists and other experts argues government should be held much more tightly accountable for that cost.
In recent decades, almost every substantial economy on earth has seen manufacturing shrink as a share of its economy. Resource-rich nations like Australia, Norway and Canada have seen some of the biggest drops. Manufacturing made up 12.3 per cent of Australia’s gross domestic product in 1997; now it’s just 5.4 per cent.
Many economists suggest that as a matter of simple arithmetic, developed nations with growing economies and an increasing thirst for services are likely to see their manufacturing sectors contract as a share of GDP, particularly when – like Australia, Norway and Canada – these developed nations boast strong resources exports.
But most voters do not think like economists. All over the OECD, voters have voiced concern over fall in manufacturing’s relative importance. So, all over the OECD, from Australia to the United States, governments have responded with schemes to subsidise industry (mostly manufacturing industry) under the broad title of “industry policy”. Industry policies have rarely been more popular than they are right now.
But as new industry policies are rolled out around the globe, some policy experts are asking: shouldn’t we do better at holding government accountable for the results?
The new rationales
In this 2020s industry policy boom, OECD governments are using two new rationales for industry policy, over and above the desire to grow their manufacturing sectors. The first such rationale is the desire to respond to climate change, and to do it without imposing any system of carbon taxes or prices. The second is the desire for economic security and “resilience” – meaning less reliance on an increasingly assertive China and, if possible, less reliance on the global supply chains whose vulnerability COVID exposed.
So, the US aims to boost semiconductor manufacture and science and technology research through its CHIPS Act and encourage green energy through its Inflation Reduction Act. The EU in 2023 published its Green Deal Industrial Plan to help Europe reach net zero, as well as enacting a CHIPS Act of its own. Japan has its New Direction on Economy and Industrial Policy, Korea the K-Chips Act. Canada’s version is The Made-In-Canada Plan. Norway’s is the Green Industrial Initiative.
Australia’s government unveiled its Future Made in Australia (FMIA) Act in April of 2024. Over the next decade, Future Made in Australia would devote $22.7 billion to those three rationales described above: supporting manufacturing, making Australia a “renewable energy superpower”, and promoting “economic security”. “We can’t afford to be vulnerable … as an economy by not making things here, by being dependent just on what happens offshore,” declared Prime Minister Anthony Albanese.
Success not guaranteed
Such policies have enthusiastic supporters, in the policy community as well as in industry. In June 2024, some 70 academic economists, political economists and other experts signed an open letter supporting Future Made in Australia. They argued that Australia needs to overcome its “strategic weakness in manufacturing” and “strengthen and modernise its capacity to develop and produce a full range of technology-intensive, sustainable, globally marketable manufactured products”.
Veteran industry policy thinker and adviser Professor Roy Green of UTS was one who signed the letter. He wants to resurrect Australian manufacturing, making it a bigger part of the economy and making Australia a more economically complex economy.
But Green, for all his enthusiasm, concedes that the success of Future Made in Australia is not guaranteed; it will depend on how the package is implemented.
Here things grow tricky. How well do OECD countries implement their industry policies? No-one can say for sure. But the International Monetary Fund thinks the answer may be “not well”. It said in an April 2024 global report: “Historical experience suggests that getting industrial policy right is a tall order … An abundance of failed programs in countries with strong institutions shows that it is difficult to avoid policy mistakes”.
Australia’s industry policy failures
Australia’s experience suggests the IMF might be right. Its most famous industry policy –assistance for carmakers – ended only after foreign-owned Australian carmakers consumed billions of dollars over more than seven decades. Roy Green suggests the total spend may have reached as much as $15 billion. One company, General Motors Holden, revealed in 2013 that it had received $2.17 billion just in the previous dozen years, a period when at least four other companies also received assistance. The stated aim of this cash was to help the carmakers stand on their own two feet – but that never happened. Roy Green blames the problems on the industry’s foreign owners. But whatever the reasons, the last local car factory closed its gates for good in 2017.
And it’s not just the car industry that can swallow taxpayers’ funds without lasting benefit. In mid-2024, a team under Professor George Tanewski at the Institute of Public Accountants–Deakin University Small and Medium Enterprise Research Centre released a study that appears to be the first of its kind. It tracked the performance of firms that received a total of $4.2 billion in Commonwealth government business grants in the five years from 2018 to 2022. The study found more than 30 per cent of those grants failed to generate any significant business or economic benefits. Professor Tanewski calls that performance “alarming”.
Wanted: independent assessment
New Productivity Commission chair Danielle Wood was no doubt thinking of Australia’s mixed industry policy history when she chose Future Made in Australia as the subject of her first high-profile warning to the government. “There may be these policy rationales, but we need to be super clear that this comes with costs,” Wood told the ABC in April 2024. “We need some kind of process for independent assessment. Otherwise, we risk sort of a giant pork-barrelling scheme, or lobbying, dictating where these big pots of government money are going to go.”
At the time, Wood cited no specific example of pork-barrelling or lobbying. But as it happens, questions were soon being raised about a US-based quantum computing startup, PsiQuantum, which is to establish a regional headquarters in Queensland. The federal and Queensland governments will each invest $470 million. PsiQuantum is also reported to have hired a lobbying firm headed by two former Albanese government staffers. The Australian National Audit Office has flagged the deal for possible investigation.
As respected independent economist Saul Eslake points out, such episodes underline the need for government transparency. So too the IMF has voiced concern that as industry policy schemes grow, “subsidies may be diverted to politically connected sectors instead of being solely driven by social returns”.
Improving the government’s accountability plan
At least in some of its public statements, the Australian government has accepted that it needs to do more than simply channel money to industries, the way successive governments funded the car industry., It says it plans to hand out Future Made In Australia money in a more controlled and accountable way, with a “National Interest Framework” used to assess “priority sectors”. “Community Benefit Principles” will be used to capture the “wider societal benefits” of particular projects.
Danielle Wood has suggested this is not enough. The Productivity Commission which she heads has argued for six different measures aimed at bringing rigour and transparency to Future Made in Australia:
- Give support only to industry sectors that qualify through a National Interest Framework assessment.
- Apply those assessment to programs already announced under the FMIA program (presumably including the PsiQuantum deal).
- Publish the data and reasoning behind those underlying National Interest Framework sector assessments.
- Apply the Community Benefit Principles transparently.
- Periodically, have “an independent process or body” evaluate those sector assessments.
- Build in “off-ramps” so that support can be removed from specific projects that are not achieving their policy goals.
The IPA–Deakin Centre’s George Tanewski argues for going even further. In pursuit of transparency, he suggests that where ministers have discretion to provide a project with support, they should have to explain their reasons for that support and justify them against public benchmarks. And he wants to see more detail on the reporting requirements that companies will need to meet.
Tanewski has other suggestions to add rigour to the Future Made in Australia system. When his team previously tracked the performance of grant beneficiaries, they found the government usually did not record the data needed to assess whether grants were working as intended. He wants the FMIA program to gather information that can be used to gather and assess information on unsuccessful as well as successful applicants, to allow comparison. His ideal would be to gather data simultaneously from a “control group” of companies that do not receive Future Made in Australia money.
Without a system for rigorous assessment, he warns, we’ll be back in the old world of opaque subsidies. “I have seen it so often,” he laughs. “If there are no strict requirements, they’ll just spend the money.”
David Walker is a former head of policy for the Committee for Economic Development of Australia; he now runs report-editing consultancy Shorewalker DMS.