Identify Australia's vulnerabilities and then develop a plan to fix them urgently - the case for government intervention in Australia's markets

Australia's strategic vulnerability is no longer theoretical. In two recent pieces, "A national audit for a stronger Australia" (Defence Connect, June 2026) and "First find Australia's economic vulnerabilities, then vigorously fix them" (The Strategist, ASPI, July 2026), I have argued that the evidence of that vulnerability is now clear. I made the same case on Defence Connect's Contested Ground podcast with host Steve Kuper and Gravity Group chair Steve Hayes. Taken together, they lead to a single conclusion: incremental reform and yet another cyclical review are no longer good enough. Australia needs a national audit of its sovereign capability, and the political will to act on what that audit finds.

What the evidence already shows

We don't need to speculate about where the gaps are. The Office of Supply Chain Resilience's monitoring of critical goods, the 2021 Productivity Commission review and wargaming by CSIS and others have already mapped the shape of the problem, and it is sharper than most people realise. Australia has not met the International Energy Agency's 90-day fuel stockholding standard since 2012, and even the Government's May 2026 fuel security package aims to lift diesel and jet fuel cover only to about 50 days. Water-treatment chemicals, pharmaceuticals and their precursors, munitions and precision missiles all sit in the same category: goods where a serious regional disruption could produce critical shortages within a week to a few weeks, not months.

The 2021 Productivity Commission review found most of the economy's supply chains reasonably robust, and that finding is worth holding onto: it means we're not chasing a phantom crisis across the whole economy. But as I've written before, that robustness is no comfort at all for the handful of genuine exceptions. Resilience cannot be assumed. It has to be measured, mapped and built, sector by sector, good by good.

Why the market can't fix this on its own

There's a temptation to treat this as a problem the market will eventually solve on its own: that price signals and private investment will fill the gaps if we're patient. That's true for most goods, most of the time. It stops being true once you're dealing with strategic industries exposed to foreign subsidy, monopoly supply or outright coercion.

This is where the economics gets genuinely useful rather than merely rhetorical. The "theory of second best" (Lipsey and Lancaster, 1956) tells us that when one or more of the conditions for a perfectly functioning market are absent, as they plainly are in sectors shaped by state-subsidised foreign competitors and national-security constraints, piecemeal, partial reforms don't reliably move you closer to the efficient outcome. Sometimes they make things worse. In a distorted global system, a government that only nudges at the margins can end up further from the goal than one that acts deliberately. That's not an argument for indiscriminate subsidy across the economy. It's an argument for targeted, disciplined intervention in the narrow set of sectors where the market genuinely cannot deliver what the nation needs, and it should be tested against transparent cost-benefit analysis rather than political convenience.

What a serious audit, and a serious response, looks like

The starting point has to be a formal national audit: a proper inquiry, chaired by an industry leader, taking submissions from industry, unions, defence contractors, infrastructure operators and the states, with Defence, Home Affairs, Treasury, Industry, DFAT and CSIRO providing the analytical backbone. Done properly, this delivers something Australia has never really had: whole-of-government visibility into where the strategic gaps sit, rather than a series of disconnected departmental reviews.

An audit only matters if it turns into action, though, and here the toolkit is not exotic. It's a matter of using it with discipline: a co-investment fund that shares risk with private capital to get critical domestic production off the ground, rather than leaving early-stage strategic manufacturing to shoulder that risk alone; tax incentives (accelerated depreciation, investment allowances and R&D credits) aimed specifically at viable projects in the identified gap sectors; Strategic Sovereign Industry Zones in secondary cities with the existing industrial bones to support this (Newcastle, Townsville, Whyalla, Geelong, Gladstone, Rockingham and Launceston), offering the infrastructure, tax settings and fast-tracked approvals that make investment decisions easier; long-term procurement contracts from Defence and other agencies, giving manufacturers the multi-year demand certainty that brings unit costs down; and workforce development through TAFE and university partnerships, because none of the above means anything without the engineers, technicians and logisticians to deliver it.

None of this holds together without an institutional home. A dedicated Department or Ministry of Sovereign Industry, coordinating energy, manufacturing and technology policy alongside Defence, is what gives this continuity beyond a single electoral cycle. Reviews that live and die with a single minister's term don't build sovereign capability; they generate paperwork. South Korea's post-war industrialisation is the model worth studying here, not because Australia's circumstances mirror Korea's, but because it demonstrates what long-term policy consistency, export-oriented industry strategy and sustained state involvement can actually build over a couple of decades: globally competitive shipbuilding, electronics and automotive sectors from a standing start.

Getting the politics right

One of the more useful threads from the Contested Ground conversation was about implementation realities rather than ambition: what's achievable within a single parliamentary term, how you build bipartisan consensus so the policy survives a change of government and how you avoid the audit itself becoming another exercise in bureaucratic capture: a report that gets tabled, welcomed and shelved. Those are the right questions, and they're precisely why this can't be framed as a partisan project. The vulnerabilities identified in a properly conducted audit don't belong to one side of politics, and neither should the response.

There's a democratic dimension to this too, and it shouldn't be an afterthought. Done transparently, a national audit doesn't just inform policy; it gives the public a genuine stake in the country's preparedness. Communicated well, without unnecessary alarm, it turns a disengaged public into an informed one, and an informed public into a partner in building the resilience the country actually needs.

Australia has the analytical tools, the institutional know-how and, increasingly, the political appetite to do this properly. What's been missing is the urgency. Identify the vulnerabilities. Then fix them: deliberately, transparently and without waiting for the next review to tell us what we already know.

This post draws on my articles for Defence Connect and The Strategist (ASPI), and on my discussion with Steve Kuper and Steve Hayes on the Contested Ground podcast.