policy brief An Industry Policy for Queensland Professor Paul Boreham Emeritus Professor Institute for Social Science Research The University of Queensland Contact: https://www.issr.uq.edu.au/staff/boreham-paul Dr Chris Salisbury Research Associate Institute for Social Science Research The University of Queensland Contact: http://researchers.uq.edu.au/researcher/10581 An Industry Policy for Queensland 1 TJ Ryan Foundation Policy Brief 02 2 Aug 2016 An Industry Policy for Queensland Paul Boreham & Chris Salisbury any countries are pursuing innovation-led industry policies engaging in long-run M strategic investments to create and shape industry trajectories rather than just responding to problems of industry decline. This has required public agencies to lead and direct the creation of new technological opportunities and innovations. The predictable response from bureaucrats and politicians steeped in economic liberalism (that industry policy is not an appropriate instrument of public policy) must face rebuttal as both economically ill-informed and unjustified by evidence. This paper provides an overview of the key issues exemplifying the development of industry policy in many of the advanced economies and draws an outline map of how they might be applied to the Queensland economy. Introduction The structure of the Queensland economy has changed significantly in the past decade. Manufacturing, as a component of Gross State Product, has declined from 10.4 per cent in 2004-5 to 7.2 per cent in 2014-5. The sector’s contribution to State employment has declined from 10 per cent to 7.2 per cent. Likewise, mining’s contribution to Gross State Product has fallen from a peak of 14.8 per cent in 2008-9 to 7.3 per cent in 2014-5 while its contribution to employment has increased only slightly from 2 per cent to 2.8 per cent. Underlying these figures are significant changes in industry and occupations: a freefall in An Industry Policy for Queensland 2 TJ Ryan Foundation Policy Brief 02 2 Aug 2016 An Industry Policy for Queensland Paul Boreham & Chris Salisbury heavy manufacturing offset in part by new ‘advanced’ manufacturing processes; a downturn in mining construction and housing associated with the mining industry; a substantial growth in some but not all of the disparate occupations involved in the services sector. These changes in economic activity and employment have happened, if not serendipitously, then without a great deal of political oversight or direction. The challenges currently facing Queensland’s economy and society require policy responses at odds with the narrow frame of reference in which they are generally cast. Some political attention has recently been focused on rebalancing the economy with new sources of innovation and productivity to offset diminishing industry sectors associated with commodity exports and heavy manufacturing. What is at stake in these deliberations is the need to develop a public policy competence taking cognizance of the need to foster regional economic development, employment growth in a high skill, high wage economy and an equitable distribution of income. The contemporary process of policy formulation in this context takes as axiomatic the proposition that markets, in the absence of regulatory impositions, normally generate optimal outcomes for economic development and employment. These assumptions inspire policies aimed at the removal of impediments through deregulation of product and labour markets and privatisation of public enterprises. More disappointingly, they determine an emphatic rejection of enhanced regulation and industry support by government (see Banks 2008). An Industry Policy for Queensland 3 TJ Ryan Foundation Policy Brief 02 2 Aug 2016 An Industry Policy for Queensland Paul Boreham & Chris Salisbury Based on a review of research evidence over several decades, this paper takes a contrary view. We argue for a more integrated, strategic industry policy which emphasises both demand management intervention through using government capital expenditure to provide the infrastructural support for private investment, as well as interventionist supply-side measures designed to influence the level and composition of Queensland’s investment and productivity. The aim is to give direction to and accelerate the transformation of Queensland’s industrial structure from one based on resource-based exports whose terms of trade are declining to internationally trade knowledge-intensive manufacturing and services. Why does an Industry Policy Matter? Policy versus the market Historically, the approach to industry policy in Australia involved tariff protection for the manufacturing sector together with an arbitration system overseeing a fair distribution of the returns to industry and labour. Several reports in the mid-to-late 1970s made a case for reduction in tariffs which accelerated throughout the 1980s. These reductions were rarely accompanied by any coherent structural adjustment policy framework. The era was dominated by the influence of neo-classical economics which reached its zenith with the so called microeconomic reforms of the 1980s and 1990s. This involved what were deemed to be major ‘efficiency’ benefits to the Australian economy through the removal of impediments to the operation of markets (see Hampson 2012). An Industry Policy for Queensland 4 TJ Ryan Foundation Policy Brief 02 2 Aug 2016 An Industry Policy for Queensland Paul Boreham & Chris Salisbury In this view, the state is conceived of as imposing a burden of taxation and regulation upon capital amounting to a disincentive to invest and a brake on economic activity and growth. There is no consideration of the disjunction between what is privately profitable and what is socially desirable. There is no connotation governments may have a role to play in guiding the otherwise capricious nature of private investment which usually produces major fluctuations in employment, living standards and social inequality. The policy implications are clear cut: social and economic welfare is maximised when production and exchange is determined solely by unfettered markets. The role of government is limited to the provision of ‘public goods’ and redressing a variety of ‘market failures’, which by definition are assumed to be both limited in extent and remedied through policies such as taxes and incentives which are “market conforming” (Green and Roos 2012). Many economists and other adherents to market orthodoxy assert industry policy is tantamount to ‘picking winners’ (that is, predicting which industries might prosper) as opposed to allowing market mechanisms to determine which firms/industries are successful based on ‘the market’s perceptions’ of rates of return on capital. Unfortunately, for proponents of this view, there is no evidence that such mechanisms produce socially or economically beneficial outcomes. The market is amoral and makes no judgements about social consequences. Nevertheless, proponents of market mechanisms tacitly reject decision-making by policy makers who can make principled judgements taking into account An Industry Policy for Queensland 5 TJ Ryan Foundation Policy Brief 02 2 Aug 2016 An Industry Policy for Queensland Paul Boreham & Chris Salisbury national social and economic outcomes. The preoccupation with microeconomic reform still dominates the current policy agenda. Since the 1980s and early 1990s, there have been few constructive developments towards a comprehensive and coherent productivity-enhancing agenda. Labor governments have often provided rhetorical support but have fought over whether industry policy should represent a new protectionism or market-enhancing development policy. The Coalition in opposition and in office has generally opposed the idea of industry policy, but has continued to support ad hoc and costly policy interventions notably in agriculture (see Conley & van Acker 2011). The rationale for industry policy In the current economic environment, the primacy given to market forces has inhibited the essential foundations of a much needed debate about industry policy and cast the debate in unfavourable terms about ‘picking winners’ and industry protection. An effective industry policy for Queensland needs to adopt a different trajectory to the current preoccupation with knee-jerk opposition to any initiative involving picking winners. ‘Picking winners’ misses the point that industry policy cannot be made on an industry-sector by industry-sector basis, but rather has to focus on the inter-industry linkages and complementarities underpinning clusters of technological innovations. It must engage with other areas of policy concerned with science and innovation, higher education and skill development, employment and industrial relations. An Industry Policy for Queensland 6 TJ Ryan Foundation Policy Brief 02 2 Aug 2016 An Industry Policy for Queensland Paul Boreham & Chris Salisbury Despite the assertions of the majority of Australian and Queensland policy makers, almost all developed and developing countries pursue forms of industry policy. Indeed, while most countries now condone general assistance to all industries, rather than specific assistance to selected industries, no developed country has abandoned all forms of sectoral assistance (Green 2015). The following sections provide a short summary of the arguments underpinning the case for industry policy. Essentially, industry policy involves interventions, first to affect the industrial structure of an economy, including the share of