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Industrial Strategy: taking back control

Intervention alone will not be enough

By Craig Berry & Richard Jones  

Mandatory Credit: Photo by REX/Shutterstock (7977393p) Theresa May, Philip Hammond and Greg Clark arriving. Theresa May regional cabinet meeting, Cheshire, UK - 23 Jan 2017 Prime Minister Theresa May holds a regional cabinet in Cheshire, North West England, January 23 2017. On the week she is set to meet Donald Trump, the PM is announcing an initiative to boost the tech industry.

For a long time, industrial strategy was something that belonged in the 1970s, along with British Leyland and cars with square steering wheels. But after the decade of stagnation that followed the 2008 financial crisis, the idea that our economy might need some strategic direction no longer seems far-fetched.

The post-crisis governments led by Gordon Brown and David Cameron experimented with industrial policy. But it is Brexit, like it or not, that has reinvigorated the drive to make Britain more productive. Upon becoming prime minister, Theresa May (who backed Vince Cable’s attempt to revive industrial policy in the coalition era) made the formation of an industrial strategy one of the key pillars of her economic programme.

But leaving the EU does not make industrial strategy any easier, and those who suggest that state aid rules prohibit the UK from doing industrial policy are wrong. In fact, we will need to recreate the EU’s state aid regime domestically if we are to protect industrial strategy from capture by powerful private incumbents. And while the immediate impact of leaving the single market will be felt in the City, it will also jeopardise the ability of firms and industries in all parts of the country to participate in transnational production networks. Thinking only of the finished goods that Britain exports to the continent overlooks the reality of modern industrial development.

Nevertheless, it should be acknowledged that EU membership allowed the UK economy to develop a growth model based on its structural advantage in financial markets. The Brexit vote was, in part, a form of voice for those left behind by this growth model. Brexit makes industrial strategy harder, but it forces a rethink of our economy which was long overdue.

The UK economy, in all its scale and complexity, is not without its strengths, but we now need to confront its real and persistent weaknesses: poor productivity performance, low investment and R&D, weak diffusion of innovation, a chronically poor trade performance, stagnation in earnings, and regional inequalities.

In the view of the Industrial Strategy Commission, the government must focus its resources on addressing all of these problems through an industrial strategy. This has to be more than just a collection of policies. There needs to be an understanding that there is scope to shape the economy’s developmental model—this is the ingredient that has been missing from recent attempts to revive industrial strategy in the UK. In this vein, the Commission recommended six strategic goals, which all parts of government would pursue simultaneously, and over the long term, providing a modicum of certainty for investors, producers, entrepreneurs, workers and research institutions.

“We need to move beyond a focus on the supply side, and think about how government can do more to create an environment in which innovation can flourish”

The goals would be: ensuring adequate investment in infrastructure; decarbonisation of the energy economy; developing a sustainable health and social care system; unlocking long-term investment; supporting high-value industries and building export capacity; and enabling growth in all parts of the UK.

We also need to move beyond a focus on the supply side, and think about how government can do more to create an environment in which innovation can flourish. This helps to explain the Commission’s interest in our energy system and health and social care provision.

Government should use its enormous purchasing power and regulatory influence to assist the development of innovative ideas in a much more purposeful way than has been done up to now. Done right, an industrial strategy will generate solutions to major societal challenges, while creating opportunities for the private sector.

The government’s industrial strategy white paper begins to move UK policy in this direction, and the four challenges—artificial intelligence and data, future mobility, clean growth and the ageing society—are well chosen. These will give focus to the commendable aspiration to raise the R&D intensity of the UK economy from its current low levels to something closer to OECD average. Since the larger part of R&D is carried out by the private sector, this needs to be supported by financing mechanisms that are developed alongside the government’s new industrial strategy.

The emphasis on infrastructure is welcome, too, and it is good to see the commitment to an improved method of assessing infrastructure investments that takes more account of the potential to make qualitative changes to the productivity of regions. But we need to go further; as such, the Commission suggests the adoption of “universal basic infrastructure” for all citizens in all places. While strategic imperatives will differ from place to place, all parts of the UK should expect to have the physical infrastructure they need to grow sustainably. This would include transport, energy, and digital infrastructure, as well as high quality “soft” infrastructure, such as health and education services.

Crucially, however, this agenda must be underpinned by institutional reform. Supporting innovation and generating long-term finance requires more durable and strategic institutions in these areas. We also need further and faster devolution, allowing economic policy instruments, like skills provision, to be attuned as closely as possible to the economic activities they seek to shape.

Institutional change is also required, however, within central government. Industrial strategy must become the responsibility of the Treasury, the only department with the capacity to steer the work of every other. But the Commission’s plan would entail significant reform of the Treasury, with the creation of a new industrial strategy division which would be responsible for the strategy, and act as an institutional hub for the co-ordination of all policies connected the strategy across government.

An independent body, with regional representatives, would monitor the government’s success in meeting its long-term strategic objectives and, importantly, it would develop new measures of how best to gauge economic success. The white paper’s proposed Industrial Strategy Council is a good start, but it would need to be put on a statutory basis to have the influence and staying power that is needed.

Above all, a new industrial strategy requires intellectual heft. This means, in part, a robust evidence base, with better data at the regional level. It also means a new understanding of the relationship between state and market, so that those charged with implementing an industrial strategy may have the courage of their convictions. Government has unique powers of coordination and convening, and an ability to pool risk, create markets and provide public goods. Public authorities need to have the confidence to pursue long-term strategic goals.

Since the financial crisis, nearly a decade ago, we have seen a mismatch between rhetoric and action in many areas of government. There is a danger of the industrial strategy agenda going the same way, with lofty ambitions not matched by purposeful policy action. And the danger is greater than one of simply being disappointed by government. Political programmes such as rebalancing and austerity promised radical reform, while at the same time undermining the legitimacy and capacity of the state to deliver it. The Brexit vote was a direct consequence, as political disenchantment swept away all in its path.

This leaves us in uncertain political times. But the current administration, while it lasts, can still do some good. It can establish and embed a new understanding of the state’s role in managing the economy, even if it is not willing or able to provide the resources to ensure that its own immediate plans are realisable. A comprehensive, and transformative industrial strategy will only succeed if there is a lasting national consensus supporting it.

We should conclude by reiterating that an industrial strategy is not necessarily about more intervention; the government already intervenes quite broadly in the economy, supporting all kinds of economic activity. It is however too often too weak in the face of short-term private interests, and vulnerable to regulatory and resource capture. Government should do more in some ways, but perhaps less in others. Whatever it does, it can do it better by thinking more strategically. Nuance like this probably won’t work on the side of a bus, but it is what taking back control really looks like.

Brexit Britain: the future of industry is a publication which examines the future of UK manufacturing through the prism of the recently released Industrial Strategy White Paper. The report features contributions from the likes of Greg Clark MP, Miriam Gonzalez, Richard Graham MP and Frances O’Grady.

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