PM heralds dawn of new manufacturing era, but what does it actually mean?
Anthony Albanese’s set piece policy announcement on Thursday was not short on ambition.
The prime minister declared his government was at the crest of a “new wave” of public involvement in the private sector.
He pointed to a global “revolution” of governments putting their hands on the scales to support domestic businesses – seen in the US, the EU, Japan, Korea, Canada and China – and declared his intention to join in.
“We need to be willing to break with old orthodoxies and pull new levers to advance the national interest … combining market tools with government action.”
In other words, pouring public money into investments in renewable energy, hi-tech manufacturing and other “future” industries.
This idea of ‘picking winners’ has been anathema among Western policymakers for decades, although less so for Asian economies.
But there is evidence this is changing. In the US, the Biden administration has poured billions into private investment, prompting a panicked imitation elsewhere in the advanced world.
And China, master of the intervention arts, has roared to dominance in the solar panel industry and the electric vehicle industry.
But on the question of how exactly Australia could strike it rich in this new ‘green rush’, the PM was short on detail.
At least for now, his announcement of a new Future Made in Australia Act was more of a re-announcement, a new badge for an existing manufacturing fund and a few other old initiatives.
But the fact of new legislation suggests there will be something new, likely at budget.
What do experts and the international experience tell us about the prospects of getting it right?
Net zero-sum game
The shift towards more government intervention started in the US, and it started because of climate change.
President Joe Biden’s Inflation Reduction Act (IRA) pumped half a trillion ($US) into projects to aid the net zero transition.
There were other motivations too – competing with China and cutting inflation by expanding economic capacity – but the policy would be almost unimaginable without the climate factor.
The global target of net zero emissions by 2050 creates an unusual economic landscape. A large portion of economic activity between now and then is effectively preordained. To reach the target, low-emissions energy, industry, transport and agriculture must be achieved.
In other words: picking winners is easier because we know what the winners have to be.
The part we don’t know? Who will profit from all that activity.
That has set off a race. And while there is plenty of work to spread around, the fact that not everybody can win is apparent in the way government interventions have unfolded.
First the US moved, in large part because it recognised China’s own interventions had given it an edge.
Then Europe and other developed countries panicked.
While Mr Albanese suggested on Thursday it was a competition but “not an auction” – room for plenty of winners, in other words – French President Emmanuel Macron was not so circumspect.
He reportedly described the US IRA as “super aggressive” towards European businesses because it prioritised American businesses over European ones.
This view was broadly shared among politicians in the advanced economies of Europe and Asia – one South Korean politician called it a “betrayal”.
But once the US had moved, other hands were forced. The European Commission launched its own Green Deal Industrial Plan, South Korea a similarly-motivated National Security Strategy, and Japan an Economic Security Promotion Act.
The Albanese government has already moved along similar lines. It set up a $15 billion National Reconstruction Fund (NRF) to inject loans, funding guarantees and equity into manufacturing projects.
It has also poured billions into speculative investments in hydrogen, battery manufacturing and solar panels.
Business groups ‘suspicious’
But the early track record of these schemes shows success is not straightforward.
Even the US, with its enormous scale, has run into obstacles. IRA money made it out the door quickly, but often ran into regulatory barriers, supply chain troubles and project cancellations, which slowed progress and also blew the cost out to over $US1 trillion.
Other schemes, including those in Europe and Australia, have been much slower to get money out the door. The NRF has not yet allocated funding to any projects.
Steven Hamilton, associate professor of economics at George Washington University, said Australia faced an insurmountable obstacle of scale.
“The US, a country with a manufacturing sector that has been decimated in recent decades, has roughly as many manufacturing workers as Australia has workers full stop,” he said.
“With this scale, it can produce at reasonable cost. [That] is a totally different proposition to doing so in Australia.
“Without a large domestic market, exports are the only way for Australia to achieve scale. But we are so far away from the kinds of markets we could sell into that shipping costs put as at a distinct disadvantage. No amount of government subsidy is going to get around that.”
Then there’s the issue of funding certainty. US presidential hopeful Donald Trump’s pledge to rip up the IRA has made businesses less certain they can rely on government funding.
The Coalition has been highly critical of the NRF, which points to similar hurdles ahead in Australia.
Innes Willox, chief executive of employer body Ai Group, said the legacy of political disagreement had made business wary of working with government.
“Decades of policy delays, false dawns, reversals and double-speak have left us short of time and scared to act. Yet we are today invited to make a leap of faith that more government guidance and support is the answer to our ills.”
He said businesses would view the government’s promise “with suspicion, if not alarm … Fundamentally, governments should be enablers, not deliverers.”
Unions were more enthusiastic. ACTU President Michele O’Neil called the announcement “a historic step forward for workers [and] the climate … [It] will help Australia compete at the head of the pack in the global race toward our clean energy future.”
A small step or a giant leap for government?
Dr Hamilton said Australia should have “learnt the hard way over many decades” that reaching the head of the pack was difficult.
“We have spent many billions of dollars before cruelly tying the working lives of tens of thousands of young Australians to an industry with no real future,” he said, citing the car industry.
“We spent decades ignoring the long-term unviability of the car industry in Australia, pouring billions of dollars of subsidies into it, and it never became an industry that could stand on its own.
“I thought we’d learned these lessons, but apparently not. The bad old days are back.”
The prime minister and his treasurer, Jim Chalmers, are much more optimistic. Mr Chalmers is a noted fan of Italian economist Mariana Mazzucato, who recently visited Australia to present her argument that the most successful innovation in history has happened when the government and the private sector collaborate on “missions”, as they did for the moon landing.
The government’s mission is closer to home, but just as high-minded.
“We have unlimited potential,” Mr Albanese said. “We know that there is a world of opportunity out there – and we know the world won’t wait for us.”
