Globalisation and advances in technology are driving intense economic transformation. They are forces that have contributed to massive increases in wealth, but also substantial dislocation.
This is visible locally in the decline of heavy manufacturing, impacting significantly on blue collar workers. In the United Kingdom and the USA, seismic political shifts are at least partly rooted in the impacts of economic transformation. In this context, industry policy is now more important than ever.
However, contemporary industry policy looks very different to the policy settings that dominated the late 20th century. A new consensus is emerging on the most appropriate role for government in assisting with — or driving — economic restructuring. This new industry policy is demanding a new range of sophisticated and nuanced policy skills from the public servants involved in the execution of industry policy.
Popular debate about industry policy is yet to fully catch up to the more contemporary industry policies being applied by governments. The public service undoubtedly has a key role in assisting ministers to lead the public through the uncertainty associated with economic transformation.
In the 1990s and early 2000s, as tariff barriers were coming down around the world, a largely binary debate dominated discussions about industry policy.
On one side were those arguing that government’s role was to protect or insulate industry from global competition — by slowing down or stopping tariff reductions or maintaining substantial subsidies to industry.
Opposing them were those arguing that markets were efficient, so there was no need for the government to intervene in the sectoral allocation of resources. Regardless of whether markets were efficient, it was thought that government intervention was not likely to be particularly helpful.
While these positions have residual resonance in today’s public debates, both positions are substantially discredited in the academic literature, and have been disavowed by the actions of governments of all persuasions.
New industry levers emerge
In the 21st century, globalisation has fundamentally changed the context for industry policy. Firms form part of global value chains, there is greater mobility of labour and capital, competitors are from emerging countries, and knowledge-based sectors are increasingly global. Furthermore, traditional industry policy levers have little to contribute to the service sectors, which are key drivers of economic growth.
The Global Financial Crisis painfully underscored the point made by Nobel Prize winning World Bank economist Joseph Stiglitz, who concluded that “the issues of market failure are pervasive, even in high income countries with fairly well-developed financial markets”. In particular, markets do a poor job of maximising learning and knowledge, and they do not do an especially good job at managing structural transformations in the economy.
A large number of policy settings influence industry mix, regardless of whether they are conceived of as industry policy. These include infrastructure policy, tax settings and bankruptcy laws, as well as defence, energy and agriculture policy. None of these policy settings have a neutral impact on industry and all alter the structure of economic activity to various degrees.
Contemporary industry policy takes globalisation as a given. Rather than focus on responding to regular emergencies associated with the demise of traditional industries, it takes a strategic approach aimed at strengthening those sectors that will drive future growth.
According to the OECD and the World Bank, contemporary industry policy typically involves:
- A focus on improving framework conditions (competition policy, trade openness, availability of skills);
- Supporting linkages (knowledge sharing between firms, or between firms and universities; cluster policies);
- Supporting upstream technologies (eg platform technologies);
- Public procurement to influence the diffusion of innovation;
- Supporting entrepreneurship (addressing barriers such as access to finance, markets, skills);
- Attracting foreign multinationals and strengthening the role of domestic companies in global value chains;
- Evaluation of initiatives.
States stepping forward with developing industries
Efforts to leverage industry strengths inevitably lead to a greater focus on state-based or regional policies. Consequently, state governments are arguably now at the forefront of industry policy in Australia.
While economic analysis and the ability to land a deal are still critical, a contemporary approach to industry policy is demanding different skills of public servants. Of particular importance is the capacity to build partnerships with industry and unions, and to work collaboratively to respond to challenges and opportunities. According to Dani Rodrik of Harvard University, this is fundamentally “a discovery process — one where firms and the government learn about underlying costs and opportunities and engage in strategic coordination”. As part of this process, public servants involved must also have the skills to work collaboratively across government, influencing portfolio areas as diverse as skills, health or agriculture policy.
In recent years, especially in the aftermath of the Global Financial Crisis, industry policy has been enthusiastically embraced — or re-embraced — by governments around the world, including the USA, the United Kingdom, Japan and most of the EU countries.
Australian governments are also embracing this approach to industry policy. For example, the Victorian government has reorganised around “future industries” such as biotechnology and professional services, and has worked with industry and relevant unions to develop sector strategies underpinned by considerable resources. The Commonwealth has established “industry growth centres” at arm’s length from government to work with industry to grow industry sectors of “competitive strength and strategic priority”. The Commonwealth and a number of states also have comprehensive innovation policies in place.
Industry policy is enjoying a resurgence in government. Although there are signs of a new consensus, there is still much work to be done to understand the way the public service can support ministers to respond to — and lead — the process of economic restructuring. What’s clear is that the economic and social impacts are enormous, so it will be an important area of public policy to get right.