Policy Exchange welcomes Government’s Industrial Strategy

January 23, 2017

Policy Exchange welcomes Government’s Industrial Strategy

Today, the Government launched the first details of its long-awaited Modern Industrial Strategy with the publication of a Green Paper. While many people still think of Industrial Strategy narrowly as activist intervention to promote the country’s manufacturing and industrial base, the Green Paper explicitly rejects the idea of “Government directing the economy or determining the industries of the future from Whitehall” and sets a much broader objective “to improve living standards and economic growth by increasing productivity and driving growth across the whole country”.

As we argued in our paper, The New Industrial Strategy, last December, some economists claim old-fashioned ‘picking winners’ and interventionist Industrial Policy may have helped some developing countries accelerate catch up growth in manufacturing. However, even if this is true — and the evidence base for it is far from clear — it is unlikely to be suitable for a modern economy at the innovation frontier, like Britain. The UK’s central economic challenge is not to seek to emulate the companies of other countries, but to develop the companies of the future — and to do so while addressing the despondency created by stagnant productivity and those who feel left behind or alienated by globalisation and technological change. Old-fashioned Industrial Policy went wrong when it tried to pick winners and support national champions, rather than supporting effective competition and free trade.

The Green Paper shares much of our analysis, setting out three overarching challenges:

  • Building on strengths such as our world-beating universities and research base, financial capital, and sectors from cars to the creative industries
  • Closing the gap in productivity between our best and less well-performing companies, industries, places, and people
  • Ensuring we do not repeat the mistakes of the past and artificially protect incumbents, by making the UK one of the most competitive places in the world to start or grow a business

It is difficult to quarrel with these propositions as being the right priorities for a new Industrial Strategy. With the best will in the world, any Industrial Strategy has to work with the grain of the country as it is, building on its strengths and alleviating its weaknesses, rather than attempting to reshape its economic model fundamentally. Britain will never be Germany. The focus on competition will help reduce the dangers of more activist Government elsewhere, while, given that just last week the Government was promising to create a Global Britain — the international champion of free trade — we were unlikely to backslide into a protectionist fortress. Most important of all, however, will be what the Government does to tackle Britain’s poor relative productivity performance, our long tail of underperforming companies and cities, and a decade of stagnating incomes. There are unlikely to be any easy answers.

The Green Paper is surprisingly comprehensive in setting out further challenges and policy questions based around its ‘ten strategic pillars’: science and innovation, skills, infrastructure, start-ups and scaling up, procurement, trade, environment, sectors, place, and institutions. While sectoral strategies have their place within the Industrial Strategy, the majority of the agenda is instead focused on a broader, cross-cutting agenda to improve overall productivity.

One particularly interesting section is the much-needed focus on ‘affordable energy and clean growth’. As we argue in our recent report, the Industrial Strategy should focus on maximising the economic benefits from the transition to a lower-carbon economy, whilst also remaining consistent with broader environmental considerations, such as carbon targets.

The Green Paper rightly highlights the tension between decarbonisation and rising energy costs, and suggests a focus on energy affordability. This is very much in line with previous Policy Exchange reports (e.g. The Customer is Always Right), which have argued that the Government should place greater emphasis on affordability, and focus on cost-effective routes to decarbonise the economy. The green paper is right to focus on energy and resource efficiency, and how this can raise business productivity, more generally. A second area of focus in the green paper is on how the transition to a lower-carbon economy will impact on energy networks. Policy Exchange produced two major reports on this (accessible here and here) highlighting the network challenges associated with decarbonising heat, and the potential of new technologies such as Demand Response and storage. Finally, the green paper also discusses how to harness the economic opportunities from new clean technologies. The UK already has world-class capability in many clean technologies, but more could be done to ensure that the UK captures value from the transition to a lower-carbon economy. The combination of DECC and BIS into a single department opens up new opportunities to align energy and industrial policy, as highlighted in a previous Policy Exchange blog.

Overall, the Green Paper makes a strong start in setting out the UK’s central economic challenges, and a comprehensive list of ways we might seek to address them. However, while being comprehensive is good, there is perhaps also a danger from a lack of focus. Strategy is as much about what you don’t do, as what you do. There is also a definite danger in seeking to create too many institutions and initiatives, rather than building on the stability of what we already have.

Many of the economic problems facing the country are not new — it is not so much that they have never been recognised before, as they have lacked the long-term Government focus and priority to overcome political obstacles. Brexit and a new Industrial Strategy offers the UK a once-in-a-generation opportunity to shake up what Mancur Olson would identify as stale institutions and parochial, self-serving alliances of special interests. However, this will not happen if the Industrial Strategy becomes too broad-ranging, and starts to lack focus.

One way to help clarify the approach would be for the Government to be clearer about the over-arching aims and objectives of the strategy. What are the Key Performance Indicators? How will we know in, say, 2030, if the Industrial Strategy has succeeded? Given that goal, what set of interventions are most crucial in getting us from here to there? And conversely, which interventions are ‘nice to haves’ or actively work against the over-arching objectives?

No set of metrics is likely to be perfect, but just asking the question helps to clarify what our priorities should be. There are many reasons to be sceptical about President Trump’s target to achieve a 4 percent growth rate, but it certainly has the virtue of clarity. Ideally we would want enough metrics to represent our principal goals and offset the weakness of a particular measure, without multiplying out beyond the point of comprehensibility.

One potential answer would be that a successful Industrial Strategy will make serious headway in reducing the gap between Britain’s most productive and its long tail of underperforming places, companies, and people — and that we will achieve this without levelling down, but instead by turning Britain into one of the world’s most innovative economies. (According to the Global Innovation Index, we are already number 3.) Others might choose a slightly different set of metrics, such as our productivity gap with the rest of the G7, growth in real disposable household incomes, or ensuring that we stay on track with our long-term carbon budgets. But it should be possible to find a set of 2 to 5 metrics that capture what we are really trying to do.

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