History shows that state bribery and coercion are no substitute for the free marketby Frances Cairncross / October 3, 2020 / Leave a comment
Last year, a couple of economists from the International Monetary Fund published a book called The Return of the Policy That Shall Not Be Named. What was this daring breach of economic taste?
Industrial policy. For economists of a certain age, the very words are an uncomfortable reminder of wasted taxpayers’ millions. Some studies have indeed reviewed policies in countries like South Korea, Taiwan, and above all China, and suggested that some kinds of government intervention could boost growth, and these have caught the eye of later cohorts of think-tankers and politicians. But other analysis has continued to find that government subsidies to industry—state aid—do more harm than good.
Successive British governments have tried (and usually failed) to bribe and coerce companies to do better. In the 1950s and 60s, politicians attempted to use a combination of planning controls and public funds to drive particular industries to parts of the country that needed jobs—and might offer votes. The system of Industrial Development Certificates, devised soon after the Second World War, forced companies to get government permission before building or expanding a plant. The scheme aimed to divert jobs from the industrial southeast and the midlands to “development areas.”
This regime sent Rootes, manufacturer of the Hillman Imp, to build a factory at Linwood in Scotland, where the militant workforce had no experience of building cars and the main suppliers were many miles away. In spite of repeated government bailouts, the plant shut after less than 20 years.
Sceptics recall other disasters. British Aluminium was persuaded by the promise of cheap nuclear power to locate a smelter at Invergordon: the power plant never materialised and the smelter shut after only 10 years in operation. Indeed, Scotland was home to a disproportionate number of failures of state aid. In 1971, Upper Clyde Shipbuilders, sustained initially by a generous dollop of government money, collapsed when the government refused further subsidies. And British Leyland, the country’s biggest car company, had to be rescued by the government in 1975, at the cost of more than £3bn. With the arrival of the Thatcher years, industrial policy of this crude sort was dead.
But now industrial policy is creeping back into…