In 2021, President Biden signed an Executive Order on Promoting competition in the American economy. The Order is designed to combat the adverse impacts of rising market power on competition manifested according to studies cited in the Executive Order through higher prices (as the result of horizontal mergers) and a dampening impact on market innovation.  It is well-accepted that increasing market concentration presents significant risks to competitive intensity and and market innovation.  The Order instructs Federal Government agencies to apply an  economy-wide focus on improving regulation of market M&A activity and remove barriers to competition including non-compete clauses designed to restrict employee mobility and use of se procurement powers to improve market access for innovative SME’s.

In his recent 2024 Bannerman Lecture Treasurer Jim Chalmers copied the formula the Biden White House articulated in 2021.  The Prime Minister also pre-figured significant new government investment in industry based on the following propositions:
1.  Government investment has an on-going catalysing role as a ‘market-making’ (the thesis championed by Marianna Mazacutto).
2.  The development of ‘sovereign manufacturing capability’ is a rational response to the risk to global supply chains caused by geopolitical instability.  This is not seen as a temporary aberration to the rules-based world order that underpins economic globalisation but a fundamental challenge to it.
3.  Australia’s international competitiveness and technological sophistication has been declining relative to OECD economies.  Therefore substantial Government investment in advanced  technologies and new industries is needed to arrest this decline to match the very substantial investments in industry made by our major trading partners (China, US, Canada, Korea, Japan, UK, Europe) since 2021.

Each of these propositions contains kernels of truth as a targeted medium-term industry policy.  Yet these propositions are not unbounded.  What constraints are applied will determine the success of Prime Minister Albanese’s push to innovate and manufacture Australia’s future.  What are the constraints?
A. Australia’s declining international competitiveness is not driven by lack of government investment.  The failure of manufacturing in Australia has been driven by a range of factors including low labour productivity, skills shortages, poor efficiency, high local and international transport costs, and shallow capital markets to fund large scale enterprise and commercialise new technology.
B. Where are Australia’s natural and comparative advantages?  Mining and grain and livestock production are natural advantages.  However, this does not mean that Australia has an absolute or comparative advantage in downstream processing of minerals or food production. Where and how Government investment is targeted makes a difference. This applies as much to the manufacture of energy eg solar panels, hydrogen manufacture as to any other industry.  Comparative advantages are won and honed over many years of continuous investment by industry (eg micro-processors, Silicon Valley etc).  These advantages are typically won by high capital investment in sophisticated precision automation and robotics – capital rather than labour.
C. Government support is not needed for every new industry.  This applies to any new industry.  Arguments that Australia can lead global development in particular industries or develop competitive multibillion dollar export industries is vigorously advocated to attract and justify Government investment but in most cases this is a mirage.  Our scientists and businesses compete in a globalised economy where it always makes more sense to set-up manufacturing in-market close to customers than to undertake large-scale manufacture in Australia.  This is the inconvenient reality.                .

Amid all the fanfare about igniting new industries and the push to decarbonise our economy it seems that offering Government support for existing manufacturers wanting to scale who have demonstrated revenue, margin, cash flow and employment growth over time is no longer fashionable.  Surely, it is companies that have established export markets, a distinctive value proposition and the organisational muscle (skills, efficiency, speed, adaptability) to compete that most deserve Government support?

Share This