No sooner had Anthony Albanese outlined his interventionist plan to transform Australia’s economy last week than the neoliberal economic establishment began howling its disapproval.

The Australian newspaper’s contributing economics editor, Judith Sloan, slammed the prime minister’s “Future Made in Australia” speech as a dog’s breakfast of failed thinking.

The Australian Financial Review urged Treasurer Jim Chalmers to “join with whoever can claim to be an economic rationalist in Labor to yell stop, wrong way, go back”.

Loudest of all the critics was Chalmers’ own pick to lead the Productivity Commission, Danielle Wood, who warned Labor’s plan would divert investment from more productive parts of the economy and lead to higher-than-necessary costs for taxpayers.

When Chalmers’ mentor and current national Labor president, Wayne Swan, accused Wood of being “completely out of touch” with international reality, all of Wood’s Productivity Commission predecessors rushed to her defence, publicly echoing her concerns.

The Future Made in Australia Act will provide a governing framework to coordinate government support for industry, such as the $15 billion National Reconstruction Fund, the $2 billion Hydrogen Headstart fund and the $1 billion Solar Sunshot fund, as well as other measures and incentives to be released in the May budget.

The fact the Albanese government’s embrace of industry policy to make Australia more competitive has caused a stir among certain policy experts should not be a surprise.

After all, as an economics paper co-authored last year by Harvard University economist Dani Rodrik observed, there are few policies “that generate more kneejerk opposition from economists than industrial policy”.

Still, with research published by the International Monetary Fund this week cataloguing more than 2500 industry policy interventions globally last year – a threefold increase since 2019 and largely in the world’s richest, most advanced economies – maybe Swan has a point when it comes to the global shift in economic policy.

Government insiders point to a speech last April by the United States national security adviser, Jake Sullivan, on renewing American economic leadership, saying it had a significant impact on Albanese’s own thinking. Generally, Australian economists don’t seem as wary as Wood when it comes to government intervention.

When 42 leading economists were asked by the Economic Society of Australia and The Conversation last month on the best way to respond to US President Joe Biden’s Inflation Reduction Act, which is pumping more than US$400 billion ($620 billion) into clean energy, more than two thirds backed government “grants to innovative firms across the entire economy”.

Another quarter backed support specifically tied to renewable energy projects. Only four of the 42 economists surveyed counselled against extra support for industry.

“This is kind of a no-brainer,” says Stephen Bell, emeritus professor of political economy at the University of Queensland, and the author of the 1993 book Australian Manufacturing and the State: the politics of industry policy in the post-war era.

“What we cannot afford to do is rely solely on the market, mainly because markets can suffer from a range of failures and coordination problems.”

Bell broadly agrees with Albanese’s pledge to bring together in a comprehensive and coordinated way a whole package of new and existing initiatives to boost investment, create jobs and seize the opportunities of a future made in Australia. The trick, he cautions, is to ensure very clear accountability mechanisms and targets are put in place that can be carefully monitored and checked off.

“Australia has been stuck in this weird corner of having one of the worst industry policy frameworks imaginable through most of the 20th century, with very generous protectionism with no strings attached,” Bell says. “It was a recipe for rent-seeking and inefficiency, and that was exactly what we got.”

Any future industry policy, he says, must give government the power to sanction companies who are receiving taxpayer grants and subsidies but are not delivering tangible results.

“A Future Made in Australia is a good idea, but there are pitfalls that need to be very carefully thought through in terms of outcomes and what they’re actually trying to achieve. Because the implementation side of things is not something we have typically done well.”

Exactly how the Future Made in Australia Act – to be introduced to parliament later this year – will combine financing facilities and investor incentives to drive new economic growth remains to be seen.

An indication of the type of assistance that is likely to be forthcoming was given on Wednesday, when the prime minister announced almost $600 million in assistance for two critical minerals projects.

The first was $400 million in loans to Queensland company Alpha HPA to help it establish a processing facility for high-purity alumina – a critical mineral used in LED lighting, semiconductors and lithium-ion batteries.

The second was another $185 million in loans to Renascor Resources to fast track the development of its Siviour Graphite Project in South Australia, to help it produce purified graphite, another vital component for lithium-ion batteries.

“We are about to enter the biggest industrial transition in the world’s history since the Industrial Revolution, which is the shift from fossil fuel energy sources to renewables,” says Professor Roy Green, special innovation adviser at the University of Technology Sydney. “And the big question for us is not whether this is the right thing to do but whether we have left this too late.”

Green points to Australia’s abysmal place on the Harvard Atlas of Economic Complexity, which assesses the current state of a country’s productive knowledge. Countries improve their ranking by increasing the number and complexity of products they successfully export.

Ranked 93 out of 133 countries, Australia sits a rung above Namibia and Pakistan, and a rung below Uganda and Malawi, but is way behind less wealthy countries such as Albania and Sri Lanka.

“We have the lowest complexity of any country in the world,” Green says. “And if we stick to exporting unprocessed raw materials like iron ore and coal, then we are making ourselves a lot more vulnerable as the rest of the world transitions to a net-zero economy.”

With critics of the new wave of industry policy arguing Australia should base its future economic trajectory on our comparative advantage in areas such as mining and agriculture, Green maintains a common trap into which policy experts fall is the belief the choices we face are binary.

“That we’re either making solar panels here, or we’re not. Or we’re making energy storage batteries here, or we’re not. The point I want to emphasise is that this is not a binary choice – it’s a question of where we play to our strengths in global value chains.”

The way Green sees it, neoliberal faith in free-market capitalism has created a narrow and precarious trade and industrial structure. If the national goal is to develop a more complex, higher value-added economy, one that is more resilient to external shocks, then the federal government has a role in identifying and solving areas of market failure.

“For example, if companies are not investing in research and development, how do we ensure that there are incentives to do so?” Green asks. “But not just areas of market failure like that, but also shaping markets themselves in areas where we feel that, due to our capabilities, we can develop a global competitive advantage. Those are things that we can identify if we have a coordinated approach to industrial policy.”

Take Denmark, which 30 years ago decided to make wind turbines an area of the global economy in which it could make an impression, eventually turning it into a successful global industry by mobilising government resources.

“Of course there will be, in determining where resources go for the development of industrial policy, losers and failures as well,” Green says. “But we need to give ourselves the best chance we can to gain success and, if we don’t try, then we will not reach that end point we’re aiming for.”

Green is scathing when it comes to the Productivity Commission’s consistent efforts over the past three decades to disparage any attempts for Australia to move up the value chain.

“Their answer to everything that smacks of industry policy is to say that it is likely to result in a misallocation of resources and suboptimal outcomes, when the rest of the world shows that, in fact, the clever deployment of industrial policies can transform an entire economy,” Green says. “If you take Korea, Japan, Finland, Ireland – these are all countries that have made successful use of industrial policy to reposition themselves in the global economy.”

The executive director of The Australia Institute, Richard Denniss, also questions why the Productivity Commission and other bastions of the neoliberal establishment have been content to remain largely silent with regard to other subsidies, incentives and projects that soak up billions of dollars of taxpayer funds.

This includes boondoggles such as the Inland Rail project, which has blown out to $31.4 billion, or public money for private schools with recurrent government expenditure, totalling $17.3 billion in 2020-21, the most recent year for which figures are available.

Private health insurance is another sector benefiting from tax breaks and exemptions that, in the current financial year, add up to more than $3 billion.

“Economics 101 tells you that you subsidise things you want more of, and tax the things you want less of,” Denniss says.

“The reality is that subsidies, tax incentives and other forms of government assistance happen all the time and people are largely silent,” he says. “Government assistance is not a new idea, and there is all sorts of evidence showing that if done well, it can deliver substantial economic and social benefits.”

With the precise details surrounding the Future Made in Australia Act still to be worked out over the course of the year, what is clear is industry policy will be at the heart of next month’s federal budget – and Albanese’s strategy to win the next election, due about March next year.

While Albanese and Chalmers seem unlikely to win over the neoliberals in the short term, will they be able to persuade voters?

“My hypothesis would be that it would appeal to younger, inner-city, Labor/Green-leaning voters, and I think that’s probably how it’s pitched,” says John Scales, a career researcher specialising in contemporary social and political issues, and founder of JWS Research.

Scales, though, doubts the Future Made in Australia Act will have any impact on voters in middle- to outer-suburban electorates, where there’s a more classical Liberal versus Labor divide.

“My guess is that middle-income earners will sort of sit and wait and say: ‘Let’s see what this is about, but I don’t necessarily see what’s in it for me.’ ”

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