Rebooting Australia’s defence industry

| August 9, 2023

In the US, the ‘Washington consensus’ of fiscal stringency, deregulation, trade liberalisation and disdain for industry support is dead. It was killed by a new politics capitalising on the anger of a hollowed-out middle class, and now bipartisan agreement that China is eating America’s strategic and economic lunch. Replacing it is a maximalist industry policy that subsidises technology development, champions the onshoring of industrial capability and jobs, and reserves national technological endowments to the US and its allies.

In China, the Washington consensus never held any sway, and in other great technological economies like Germany, Japan, South Korea, Taiwan and Israel, it was observed only in the breach. In Australia, its policy prescriptions have been applied with varying degrees of vigour, and until recently some success. A vast resources endowment combined with the rule of law and restrained government has generated great wealth.

But our success has come at a cost, and it’s time for policymakers to move on. Australia is now significantly economically dependent on China, which compromises our economic security, and the economy is relatively narrow and underweight in sovereign technology development, relative to its wealth and education levels. We also now lack the policy heritage required to build industries and national technological capabilities of the type needed to thrive in a contested post-globalisation strategic environment.

The failure of our economic policymakers to engage with these strategic realities is well illustrated in the Productivity Commission’s latest five-year report, Advancing productivity. It proposes to address Australia’s flagging productivity growth (which occurred on its watch) with more of the same—by leveraging imported technology. It maintains that the economy should be optimised via Ricardian comparative advantage, effectively oriented to primary products and services, with local industrial and technological capability continuing to be displaced by imported capability.

Such advice made sense while Australia operated in a relatively open, peaceful, free-trading world, with few worries about supply shocks. But whatever great benefits economic optimisation has delivered, it has also narrowed Australia’s economy and made it more susceptible to supply shocks. It has diminished our access to sovereign capabilities that are key to national security—especially in the defence and energy sectors. And it has depleted the public service’s capacity to develop concerted industry policies to address these issues.

In the name of economic optimisation, we’ve abandoned industry planning and reduced our industry policy to a rump compared to countries that have successfully built the capabilities and the capacity we now need. Our industry policymakers can scarcely imagine government taking an active role in directing activity towards strategic needs on a meaningful scale.

Defence has tried to work around that by developing its own suite of defence industry policies, but that approach has significant limitations.

However, national security is now a whole-of-economy challenge, and Defence has neither the mandate nor the expertise to deal with that. Defence industry policy is detached from broader industry policy initiatives at all levels of government. There have been attempts at intergovernmental and interdepartmental coordination, but those efforts have been challenged by the inherent shortcomings of our broader industry policy institutions.

A better approach is to build an industry planning and policy capability that supports all industries relevant to national security—not just, defence, but also energy security and economic security. The creation of the National Reconstruction Fund and its inclusion of the defence industry as an investment target indicate an understanding of the links between national strategic goals, but those links can’t be fully leveraged through a single initiative. Full policy integration is needed.

Australia needs a powerful department that spans industry, trade and investment, mandated with extensive powers and equipped with resources to shape the economy to strategic needs.

The kernel of that department can be created by merging Austrade and Export Finance Australia into the Department of Industry, Science and Resources, bringing under one roof all the key levers of industry planning—policy development, concessional financing, grants, export support and investment attraction. This will mimic the set-up of countries that have excelled at industry policy in the past 70 years.

The new department needs considerably greater planning and regulatory powers than DISR has. The lead minister would need to be equal in seniority to the defence and foreign affairs ministers, and supported by ministers responsible for industry, science, trade and investment. A separate minister for defence industry should be retained, given the peculiarities of that sector, to validate that industry capability is converging on strategic need, and to ensure the controlled use of sensitive information.

The role of the various departments is clear. Defence defines technology and capability needs and controls flows of sensitive information. The new industry and trade apparatus plans the industry required to deliver those needs and designs and delivers policies to enact the plan. The Department of Foreign Affairs and Trade explains to allies, neighbours and institutions that this is directed to national security and so falls within free-trade commitments.

DFAT and Austrade can also create opportunities for policymakers to work with and learn from our allies. This is critical because DISR and its predecessors haven’t been asked to do economic planning on this scale for decades. Thirty years ago, when the Collins-class submarines were entering service, we had a deeper industry planning heritage than we do now, and AUKUS alone is much more complex in scale and depth. We have a lot to learn.

A powerful government department actively shaping whole industries may feel alien to Australia, but there are precedents. Our mighty banking industry is a product of banking and prudential regulations. Our equally strong natural resources sector is as much a creature of Foreign Investment Review Board interventions and aggressive government efforts to attract investment as anything else. Why should manufacturing and technology be exempt, especially when they’re essential to national security?

There are ways to deliver on industry policy that harness our strengths and make allies of established interests. For instance, Australia has a mighty financial services sector relative to the size of the economy. Let’s call that sector into service.

What I’ve proposed here is transformational, but politically and bureaucratically difficult. Odds are that Defence will continue with its ownership of defence industry policy and must build out its own industry planning capabilities. In the next article, I’ll propose the principles by which that can be done.

This article was published by The Strategist.