A capital idea

Australia’s economy is often celebrated for its resource wealth and robust property market, yet it faces a critical paradox: despite its relative prosperity, capital misallocation has created significant economic and strategic vulnerabilities. One of the most pressing consequences is the decline in domestic manufacturing, particularly high-value and strategically significant industries such as pharmaceuticals, semiconductors, renewable energy, and oil refining.  

While thriving in sectors like mining and real estate, it has neglected manufacturing, a once-vital cornerstone of economic growth. This misalignment of capital not only weakens long-term economic resilience but amplifies vulnerability to global disruptions. Realigning Australia’s investment priorities is not just an economic challenge but a national imperative. 

The dominance of real estate and mining has profoundly shaped Australia’s economic landscape. Tax incentives such as negative gearing and capital gains tax discounts have inflated property prices, encouraging speculative investments that yield limited productive output. Similarly, the mining sector—reliant on volatile global commodity prices—delivers short-term returns but contributes little to economic diversification.

This over-reliance on resource exports ties Australia’s economic fate to a single trading partner, creating strategic vulnerabilities in times of geopolitical tension and economic instability. Together, these sectors have absorbed vast pools of capital while sidelining industries with greater potential for sustainable growth. 

Manufacturing has borne the brunt of this imbalance. Once contributing over 13 percent of GDP, the sector now accounts for less than six percent. While Australia’s economic conditions differ from Germany and South Korea, both countries illustrate how prioritising manufacturing can enhance economic resilience and technological innovation. Germany’s emphasis on advanced manufacturing and workforce development, and South Korea’s strategic industrial policies, demonstrate the long-term benefit of maintaining a strong industrial base.  

Australia’s industrial decline is not solely the result of capital misallocation to mining and real estate. The impact of Dutch Disease during the mining boom exacerbated an existing trend, as high resource prices inflated the Australian dollar, making domestic manufacturing less competitive internationally.

Yet manufacturing had been in decline long before the mining boom due to multiple factors such as trade liberalisation, offshoring, automation, and shifts in consumer and corporate preferences towards imported goods. The reduction in tariffs during the 1980s and 1990s fostered economic efficiency, but also exposed domestic manufacturing to intense global competition.

This led to structural changes in the workforce and a policy environment which favoured services over industry and contributed to the erosion of Australia’s industrial base. Addressing these historical causes is essential for crafting a sustainable strategy to revitalise manufacturing and build long-term economic resilience.  

The consequences of manufacturing’s decline ripple across the economy. Without a robust industrial base, Australia has become increasingly dependent on imports, particularly in high-value and strategically important industries such as pharmaceuticals, electronics, and advanced manufacturing components.

This reliance exposes the nation to supply chain vulnerabilities, as seen during the COVID-19 pandemic, during which global disruptions led to shortages of essential goods. Unlike economies with strong domestic manufacturing capabilities, Australia lacks the flexibility to scale production in response to crises.    

I have argued that revitalising manufacturing is not just an economic necessity; it is a strategic imperative. A strong manufacturing sector generates innovation in high-tech fields such as renewable energy, robotics, and biotechnology. It creates a multiplier effect, stimulating growth in logistics and research and development (R&D), while boosting national resilience.  

While importing goods can be cost-effective, over-reliance on imports leaves Australia vulnerable to supply chain disruptions and shifting trade relationships. Comparative advantage suggests economies should specialise in their strengths, and historically Australia has prioritised resources over manufacturing.

However, for strategic industries like pharmaceuticals, semiconductors, and defence, the benefits of domestic production—supply chain resilience, innovation, and skilled jobs—outweigh short-term cost savings. By selectively investing in key industries, Australia can mitigate external shocks and safeguard critical supply chains.  

Embracing Industry 4.0—the fourth industrial revolution driven by automation, data exchange, and smart technologies—could serve as a compelling alternative. By integrating advanced digital technologies, such as the Internet of Things (IoT), robotics, and big data analytics, Australia can transform its manufacturing landscape by leveraging advanced technologies and targeted policy interventions.  

A clear example of this potential is the rapid expansion of Australia’s space industry, where strategic government investment and partnerships with private firms have fostered high-tech manufacturing grown. This shift would enable more efficient production processes, enhance product quality, and reduce waste through precision and automation.

By integrating these innovations, Australia can build a globally competitive industrial sector that prioritises sustainability, and long-term economic growth.   

The Albanese Government’s “Future Made in Australia” policy recognises the need to strengthen domestic industry by investing in advanced manufacturing and clean energy technologies. However, this is not the first attempt at revitalising Australia’s industrial base.  

Past initiatives, such as the Automotive Transformation Scheme (2011-2020) and the Industry Growth Centres program (2015-present), sought to support manufacturing sectors affected by global competition. Despite these efforts, many programs have suffered from inconsistent funding, shifting policy priorities, and insufficient long-term strategic focus.  

To ensure lasting impact, current manufacturing policies must be scalable, regionally targeted, and sustained beyond political cycles. Strategic investments in automation, robotics, and AI-driven manufacturing, coupled with robust workforce retraining, would enhance industrial resilience, prevent skills shortages, and position Australia as a leader in high-value production. Learning from past policy failures, a successful approach must prioritise stable investment frameworks, stronger-industry-government collaboration, and clear long-term objectives.  

To achieve these goals, targeted strategies are essential not only to stimulate growth but also to ensure that past policy shortcomings are not repeated. Manufacturing-specific investment funds, supported by government co-investment, could channel resources into high-tech, export-oriented industries.

Tax incentives for local manufacturing facilities, especially those focused on emerging technologies and sustainability, would encourage private investment. Expanding R&D tax credits would further drive innovation within the sector. 

The financial sector also has a role to play. Green bonds could fund environmentally sustainable projects like renewable energy infrastructure and electric vehicle manufacturing. Superannuation funds, managing significant pools of capital, could allocate a portion of their portfolios to domestic manufacturing, balancing long-term returns with national interests. 

Government policy must address the structural barriers that have hindered manufacturing growth in Australia. These include high energy costs, which make industrial production less competitive; labour shortages and skills mismatches, where existing workforce training programs fail to equip workers for advanced manufacturing roles; and a lack of long-term investment certainty, as inconsistent policy settings deter private sector commitment.

Additionally, infrastructure gaps, such as limited industrial land and outdated transport networks, increase production costs, while regulatory complexities, such as compliance burdens and zoning restrictions, slow down industrial expansion. Overcoming these barriers requires a coordinated approach, aligning government incentives, workforce development strategies, and infrastructure planning to create an environment where high-value manufacturing can thrive.

Developing regional manufacturing hubs—supported by affordable infrastructure and workforce training programs—could attract investment to underutilised areas. These hubs could serve as innovation incubators, combining logistical support with a focus on high-value industries.  

Australia faces a choice: continue pouring capital into speculative sectors that deliver short-term gains but exacerbate economic vulnerabilities, or realign investment priorities to revitalise a manufacturing sector capable of driving long-term growth and resilience. This is not about nostalgia for a bygone industrial era but about securing economic stability in an increasingly volatile world. 

Addressing this investment paradox would enable Australia to foster a thriving manufacturing sector, drive innovation, create jobs, and enhance resilience. It is not merely an economic necessity but a strategic imperative. 

This article was published by the Australian Institute for International Affairs.