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Governments cannot pick winners but losers can pick governments

By Sinclair Davidson - posted Tuesday, 17 June 2008

To be fair new governments always make mistakes. A combination of inexperienced ministers and opportunistic public servants are likely to generate an alcopops tax. Rash election promises give rise to FuelWatch and GroceryWatch. Industry policy, however, has no such excuse. Government intervention in the microeconomy lies at the very heart of the federal government's economic policy.

When Kevin Rudd became leader of the opposition he made the point that he didn’t want to be prime minister of a country that didn’t "make things" (PDF 75KB). To that end he installed Senator Kim Carr as Industry Spokesman; now Minister for Innovation, Industry, Science and Research. At the time Carr was quoted as saying, "The Howard government … believe that industry policy can be fixed by the market. That sort of market fundamentalism is an old-fashioned view inconsistent with the facts". Actually industry policy has not just been mugged by reality, it has been savaged.

The ALP released a comprehensive plan (PDF 1.23MB) setting out its industry policy well before the election. This plan can be summarised into three points; pick winners, throw money at universities, and streamline government. This was not just pre-election fluff; both Rudd and Carr were serious. That plan is now being put into operation.


Money is being spent from the Green Car Fund and yet another government think tank is being established. Money is been thrown at universities. While numerous inquiries are due to report in the second half of the year it is not entirely clear how government is to be streamlined. The intention to "do something" is clear.

Early failure has not distracted nor deterred Carr from picking winners. In February Mitsubishi Australia announced the closure of its Adelaide plant. Just this month Holden announced it will discontinue production of four-cylinder engines.

The Australian automotive industry has been dying for decades. This is not entirely due to tariff reductions. Over time Australian road vehicle exports have risen while tariff protection has fallen. Those parts of the automotive industry that are internationally competitive will survive despite government intervention.

The Productivity Commission estimates that the automotive industry received $1.1 billion of support in 2006-07 alone. That money is ultimately paid by consumers and the taxpayer. Of course, it isn’t just consumers and taxpayers who lose out. Workers are huge losers too. Inefficient industries continue to attract employees who often develop specific skills that are not easily transferable. When those jobs are lost some employees lose their invested human capital and while they often get other jobs their market value can be somewhat diminished. Not to mention the emotional costs and stress of having lost their job.

The dangers of industry policy are obvious in the automotive industry but less obvious elsewhere. The closure of manufacturing plants and the retrenchment of workers in protected industries are clear signs industry policy has failed. Consumers and the market have moved on.

It is all very well saying that we need to think about consumer preferences in the future. That is what entrepreneurs do, not government. Government needs to concentrate of creating an environment where entrepreneurs and business can flourish and where consumers can dictate their preferences.


Having a minister for innovation and industry is antithetical to the notion of consumer choice and entrepreneurial risk taking. On the other hand, it is ideal for rent-seeking. It has been said that governments cannot pick winners but losers can pick governments. This has long been obvious in the market for tangible goods but Carr is also minister for intangibles - innovation and research. Policy here is to give more money to university research, but not teaching.

Government intervention in innovation also does not work well. In a recent US study it was found that privately funded research was more valuable over time than government funded research. True the US government has fostered a lot of innovation but that is largely due to civilian application of military research and development and NASA. Innovation does not require a large cadre of research-trained university graduates. Better teaching at university, as opposed to more research, is likely to improve innovation outcomes.

The Rudd Government was elected to provide "new leadership" and "new ideas". Yet it was well known that Kevin Rudd opposed "market fundamentalism" and supported "industry policy". This is not new; it is a return to the bad old days of big government and state intervention in the economy.

Sound economic policy is inconsistent with interventionalist government. Government adds value by enforcing property rights and maintaining the rule of law.

If the Rudd government wants to directly add value to the economy they should lower personal and corporate taxes, reduce bureaucracy, and rein in the ACCC. That is mundane hard work and not nearly as exciting as picking winners - yet it would do more for "working families" than anything else.

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This article was first published in The Age on June 12, 2008.

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About the Author

Sinclair Davidson is a senior fellow at the Institute of Public Affairs and Professor in the School of Economics, Finance and Marketing at RMIT University.

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