Australia’s growth model policy framework is expected to change in response to a transition from a benign international environment to something much more challenging. 

    In the concluding chapter of his economic history Why Australia Prospered, the late Ian W McLean reviewed the shifting bases of Australia’s prosperity. For all small, open economies, he wrote, a tension exists between exploiting comparative advantage and increased vulnerability to external shocks. In this context, he continued, “ almost dialectic process appears to operate in Australian history between the confident pursuit of rapid growth and openness when international economic conditions are favourable and, after a deterioration in these conditions reveals the downside risk inherent in the earlier growth strategy, there is a reaction. The search for economic security or stability is then assigned greater weight even though this may require trading off a higher rate of economic progress — growth through openness. This process is evident at the political level in reversals in policy directions, as well as at the intellectual level in changes in the relative influence on policy formation of contending economic theories.”

    For McLean, these economic, political and policy transitions were apparent across the span of Australian economic history, from the mid-19th century shift to protectionism following the end of the initial boom phases of the Victorian gold rushes; through the post-Federation policy responses to the economic downturns, recessions and financial crises of the early 1890s; across the interwar years after the severe shocks of World War I and the international slump that scarred the early 1930s; and on to the post-1983 policies of the Hawke government, which were partly a response to the shocks and slowdowns of the 1970s plus opportunities afforded by new resource discoveries and East Asian industrialisation.

    A new world order?

    McLean’s “dialectic process” is at work again. On 1 May, Australia’s Treasurer gave an address to the Lowy Institute on economic security and the Australian opportunity in a world of churn and change. Jim Chalmers’ (pictured above) thesis was that the global economy, which had proven so congenial for Australia in the decades straddling the start of the 21st century, had been upended, first by the 2008 global financial crisis and recession, and later by COVID-19 and Russia’s invasion of Ukraine. To this can be added both climate change and the transition to net zero.

    Gone — or going — was the old order of free trade, open capital accounts, limited government intervention in the economy and relative geopolitical stability. Emerging in its place was a global order characterised by protectionism, investment controls, multibillion-dollar industrial policies and intensified geopolitical competition.

    Building on the Prime Minister’s April 2024 “A Future Made in Australia” speech, Chalmers said the government would aim to upgrade Australia’s growth model via more emphasis on national and economic security. To that end, there would be “targeted, temporary support to crowd in private investment” around two investment streams — a “national interest stream where domestic sovereign capability is necessary to protect our national security interests or ensure our economy is sufficiently resilient to shocks” and a “net zero transformation stream, where industries support decarbonisation and there is a reasonable prospect of a self-sustaining comparative advantage”. Chalmers also pledged “financial incentives, regulatory changes and other enablers” to attract private sector capital. Plus, changes to Australia’s foreign investment regime intended to streamline the process for trusted foreign investors while simultaneously intensifying the screening of investment into critical infrastructure, minerals and technology, and other sensitive areas.

    In other words, Australia’s policy framework will change in response to a transition from a benign international environment to something much more challenging.

    Given McLean’s lesson that efforts to reinvent the Australian growth model are a recurring theme, it is unsurprising that the seismic shifts underway in the international economic environment are triggering another such response. Indeed, it would be far more concerning if the official response involved a complacent shrug of the shoulders and a determination to continue as if nothing had changed.

    Major challenges

    Still, that is not the same as saying that plans for dramatic shifts in policies and economic orthodoxies are uncontroversial or destined for success. While acknowledging the compelling case for a policy refresh, it is also worth flagging that efforts to pursue a new Australian growth model raise at least four major challenges.

    First, grant that the diagnosis — big shifts in the external environment require a policy response — is sound. That still leaves room for different policy prescriptions. The Future Made in Australia strategy leans into the new international vogue for ramped-up industrial policies. But in a recent commentary, the IMF warned that history shows such policies can be prone to (often expensive) mistakes, suggesting that sometimes governments might do better to foster innovation in other ways. The IMF listed public funding for fundamental research, R&D tax incentives to encourage applied innovation, and developing a “coherent and simple tax system with broad bases and low rates” as possible alternatives. Last July, the Productivity Commission produced a cautious-sounding review of calls for Australia to respond to the US Inflation Reduction Act and related policy interventions.

    Second, to successfully administer a new policy regime, governments must possess the capacity and frameworks required to manage the information asymmetries involved, deliver the appropriate incentives and avoid the associated dangers of capture and rent seeking. The necessary institution and capacity building could be more demanding than the policy changes themselves.

    Third, the pursuit of industrial policies could be very expensive. Both in terms of the direct costs when interventions involve spending, subsidies and tax breaks, but also indirectly in the form of opportunities foregone or foreclosed.

    Finally, in a world where the US, Europe and China deploy vast resources to secure geo- economic advantage, the scope for smaller players to influence the competitive landscape is highly constrained. The Treasurer acknowledged that the scale of subsidies delivered by these big three “dwarfs anything Australia can offer” meaning that Australia would have to be “smart and strict”, which brings us back to the importance of capacity building and institutional development.

    This article first appeared under the headline 'A State in Transition’ in the June 2024 issue of Company Director magazine.

    AICD chief economist Mark Thirlwell GAICD has focused on the international political economy at the Bank of England, JPMorgan, Austrade and Export Finance Australia.

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