17 Jan, 2022 Boundless benefits of smart industry policy
We live in uncertain times. Our economy is slowing, our planet is warming, and our trust in our political system is at an all time low. Political trust is a difficult thing to pin down, but at its core, there is a belief that in uncertain times political institutions will provide certainty. It’s no accident that when we face external crises or conflict, the population expects that the government will provide support, security, and solutions.
Yet since the 1980s, industry policy has gotten a bad name. For generations, our political imagination has been hamstrung by a fallacious belief that the only benefit of government spending comes from the value it returns to shareholders, whether they are public or private. Having a public industrial agenda was seen as a protectionist approach to economic development that supposedly picked winners and propped up unsustainable companies. However, modern industrial policy is a process of working with a broad coalition of willing business partners to deliver mutually beneficial outcomes for public and private stakeholders.
Rather than picking winners, this approach encourages a collaborative, tripartite approach to economic development that brings together state, business, and unions to set targets for industry growth – and to share and distribute the associated benefits. Successful industry policy shows that public institutions matter and make an impact on people’s lives. An investment in creating new industries, regardless of the ‘business case’, presents countries the world over with opportunities to produce value, economic and social.
From the hundreds of billions of dollars that the United States government spent on developing the space and computing industries that have revolutionised our global technological landscape through to the industrial program that saw South Korea’s share of the shipbuilding industry grow from 0% to 63% in a little over 40 years, smart industry policy has revolutionised domestic and global economies.
World renowned economist and policy expert Marianna Mazzucato terms this kind of thinking a mission-oriented approach to industry policy, which rethinks ‘the role of government in the economy, putting purpose first and solving problems that are important to citizens. It means transforming government from being merely an “enabler” or even a “stifler” of innovation to becoming the engine of innovation’.
This approach recognises that the opposite of small government isn’t simply big government but is in fact smart government, where the state takes the innovative investment risks that the private sector doesn’t have appetite for.
A mission-oriented approach requires a number of steps for ambitious governments. First, the mission must be one that is bold and encourages buy-in from the general population; it has to be something that is socially relevant. For example, building 100,000 public housing units would reduce housing insecurity and homelessness while increasing housing affordability.
Secondly, it needs to be a solution that is grounded in observable outcomes, either by improving people’s day to day lives or appealing to their imagination. The long overdue high speed rail link connecting Brisbane to Melbourne with stops in major regional centres, has the potential to both reduce carbon emissions from Australia’s aviation sector and create regional development opportunities, as it places regional centres like Grafton, Wagga Wagga and Shepparton in commuting distance to state capitals.
Third, while any mission-oriented strategy must be ambitious, it needs also to be built on realistic, measurable and time bound interventions that are linked clearly to a political direction. These measures can either be binary (for example, in the space race: someone lands on the moon – or they don’t), or they can quantifiable and progressive targets that are linked to concrete actions, such as an interim emissions target of 65% reduction on 2005 emissions levels which could be achieved through an increasing renewable energy mix in the national electrical grid.
This milestoning allows not only for review and reflection on progress but encourages a diversity of tactics to help achieve different milestones across the implementation phase of the agenda. Any goal should be focused on attracting research and innovation investment, from public and private sources, and seek to crowd in funding around shared goals. Contrary to conventional logic which presupposes that government investment in research and technology crowds out private investors, in fact this early investment by government often does exactly the opposite, and ‘stimulates private investment that would otherwise not have happened…[expanding] the overall pie of national output, which has benefits for both public and private investors’.
The final criterion for a mission-oriented approach is that it must encourage multiple solutions instead of focusing on a single development path or technology. Put another way, while there must be a singular purpose to the industrial agenda that targets a specific problem, the goal should be one that is so broad as to encourage multiple projects working towards its solution. These criteria encourage smart government investment into a range of strategies, approaches and ‘angles’ that confront the various challenges that the targeted problem creates.
Smart industry policy has incentives for research & development, to maximize innovation and domestic productivity. It provides concrete and specialised supports for experimental research to be commercialised with domestic industry partners and allows our best and brightest to revolutionise technology without going abroad.
It ensures that benefits are distributed widely, by including workers and their representatives in the planning, execution, and delivery of industry growth plans, and develops dependable local content requirements and training ratios that maximize outcomes for local suppliers and workforces. It uses the machinery of government to develop agglomerated precincts (like the famous Silicon Valley) that provide easy access to industry partners, specialised infrastructure, and reliable supply chains.
Above all, it provides tangible benefits to the communities where these strategies are developed. When investing in smart industry policy, the benefits are potentially boundless. All it takes is imagination, commitment, and a vision of a future that all Australians can believe in.
Senior Fellow, Industry Policy