Developing an Industrial Strategy for the UK

Dita Eckardt, Jay Lee, Inna Grinis, Victoria Peihang Lu (left to right)

The "Industrial Strategy research team" (Dita Eckardt, Jay Lee, Inna Grinis, Victoria Peihang Lu, Ryohei Nakmura) is working on a project proposed by the New Economics Foundation.

On Monday, February, the 27th, the team attended the launching conference organised by the NEF together with the IPPR at the Livery Hall, Guildhall, in London.

The conference was organised in four parts:
_ 1) Speech by Vince Cable MP, Secretary of State for Business, Innovation and Skills
_ 2) Panel debate: What should industrial policies aim to achieve?
_ 3) Panel debate: What should industrial policies look like?
_ 4) Speech by Iain Wright MP, Shadow Minister for Competitiveness and Enterprise

Here are the main arguments made by the speakers as summarized by the researchers:

1) Speech by Vince Cable MP, Secretary of State for Business, Innovation and Skills

(written by Ryohei Nakamura) 

   He opened his speech with reference to Lord Mandelson’s remark on industrial policy in the past which

-assumed that the Government planners knew better than the market

-ended up supporting expensive losers

   He posits that now the industrial policy is in different context, especially as the result of globalisation, and an outcome after the realisation of the decade of economy based on a wrong model and the belief in financial market self-correction, which led to the disaster in the banking sector.

    He claims that the UK is missing opportunities from global market.

Points made by Vince Cable:

-Government economic strategy is to sort out deficit, achieve creditworthiness, and escape from high public and private debt is economic growth.

-Despite its 12% share in GDP, manufacturing is the key

-Currently Government policies are short-term and passive, what is needed is a long-term, strategic vision Sector policy

-Horizontal policy (tax regime to encourage investment and work)

-Currently Government is scared away by this policy, Government can make more explicit, fully aligned support around strongly trading sector

-Auto-industry as on-going success: councils secure agreements, supply chain, trying to make Britain more welcoming to car manufacturing. Started off from Japanese inward investment but has developed to build confidence in the UK as investment destination (Ford 1.5bn, Nissan in Sunderland, Toyota’s hybrid production in the UK)

Government levers and policies:

-Regulation, public spending, public procurement (already used in Singapore, Korea, Germany)

-After the crisis science has been taken as the centre of economic policy however in practice government intervention at innovative stage to solve market failure is very risky.

-Actions taken: Creating network of science institutions. Maintain support in difficult financial situations (funding increased by 495m since Dec. 2010)

-More of this is needed -Role of public sector spending is significant. It influence and shape the market intentionally or not.

-Need to reduce unnecessary formality in procurement e.g. national infrastructure plan on railway, road, etc

-Strengthening supply chain, removing obstacles

-There exists tension in terms of trade-off between Government policies, for example, in defence, whether to opt for the cheapest weapon, or strategic procurement. Also 50% of energy is supplied by UK firms. -The key in modern industrial policy is a plan for recovery.

2) Panel debate: What should industrial policies aim to achieve?

(written by Victoria Peihang)

Participants:

Sir Geoffrey Owen (LSE)

Charles Seaford  (NEF)

Tim Page (TUC)

Rod Bristow (Pearson)

Sir Geoffrey Owen’s main point was that the ability of the government in predicting which industries will prosper in future is very limited and that this should be left to the actions of the entrepreneurs. That is not to say there is no role for government at all but their role is to provide a broad institutional environment for entrepreneurs. He briefly referred to selective industrial policies in the 1950s and 1960s which did not lead to an improvement in growth performance. In contrast in the 1980s when policies emphasised free market competition the productivity gap between UK and the European countries such as France and Germany narrowed.

 Charles Seaford took a more regional approach to identifying industrial policy objectives. He emphasised that instead of trying to improve labour mobility policy-makers should aim to create ‘good’ jobs around the country. Regional specialisms ought to be identified and regional specialisation is important; regions need to be competitive in the sense that businesses and firms aim to be. Finally government should not be the only agent in shaping industrial strategy; many more players need to be involved.

 Tim Page presented a view that is quite the opposite to Owen’s and somewhat different to Seaford’s. He believed that the government and politicians should be making choices with regard to industrial strategy. Government should support small firms that are competitive and have growth potential so they can grow into medium sized firms, and small firms can also act as suppliers to large exporting firms.

 Rod Bristow spoke about no risk equals no return. He believed that we need to be confident and optimistic about the economy. The UK in the 19^th century led the world through risk taking and now we need to do this again. We need to be bold, set high standards and have higher expectations for our children so they are able to excel.

3) Panel debate: What should industrial policies look like?

(written by Dita Eckardt)

Participants: 

Ian Coleman, PwC
Ha-Joon Chang, University of Cambridge
Geoff Mulgan, NESTA
Tom Crotty, INEOS

Ian Coleman:
- Industrial policy should focus on growth but good growth which implies a broader measure as e.g. GDP per capita
- Policy needs to focus on the creation of jobs across all ranges of skills
- The UK must be considered in an international context (must consider export growth as well as import substitution, old and new areas of strength)

Geoff Mulgan:
- Most generalisations in relation to industrial policy are misleading, i.e. they do not fit the evidence
- Policy should thus be specific;
- Industrial policy needs to address the issue of speculative, predatory investments in finance which crowd out investments in manufacturing;
- Industrial policy should try to mobilise supply and demand not lead to the creation of monopolistic institutions which are "too big to succeed";
- Current debate on industrial policy should not lead to the creation of monopolistic institutions which are "too big to succeed"
- Contrary to a popular belief, industrial policy should not be a policy of risk-reductions but a policy of incentives for more risk-taking in technology, innovation, ideas.

Ha-Joon Chang:
- UK needs a sense of urgency of industrial policy
- Industrial policy cannot be free it is therefore necessary to restrain competition in certain areas
- It is necessary to study other countries in order to come up with UK ind. policy
- There is no such thing as general industrial policy and the UK needs specialisation and particular strategies
- Industrial policy has to be risky, there should be some "willingness to fail".

Tom Crotty:

- The government has to make sure not to encourage competitive disadvantage, i.e. fix the right legislation and policy aims
- UK needs to focus on clean energy
- Risk in new technology developments is huge since (1) it depends on government regulation (2) the financial sector is reluctant to invest here, hence it is the government’s role to step in
- Need to invest in education, especially more practical learning (new apprenticeships)
- The UK needs to get the image of manufacturing right

Questions by the audience:

The financial sector does not meet the needs of the economy anymore. What investments are needed to solve this problem? E.g. a green investment bank?

Coleman:
- The debate should focus on” carrots rather than sticks”
- Policy should not demand the impossible, banks cannot become safer by accumulating more capital and at the same time give out more credit

The financial sector is always viewed as not serving the needs of the economy anymore. Wasn’t growth in the UK economy also facilitated by the financial system?

Crotty:
- The financial sector did indeed perform well until 2008
- Yet, the system did not function properly from 2008 onwards
- It is not possible for the sector to grow at the same pace again
- The sector is not taking sensible risks anymore

What would you do with 10bn GBP of possible investments in industrial policy?

Chang:
- The government needs to get the incentives right before spending money, the problem is that UK companies pay out dividends/profits instead of investing
- The government should make high risk financial investments more difficult

Mulgan:
- The system should point capital to its most productive use which does not work currently
- Part of the answer should be to block bad investments

4) Speech by Iain Wright MP, Shadow Minister for Competitiveness and Enterprise

(written by Jay Lee)

Focus: Industrial policy in manufacturing

-       We need a more sophisticated approach to manufacturing e.g. Rolls Royce generates most of its revenus from engine after-service

-       What the British industry must do/focus on:

n  Reduce use of raw materials (-> sustainable)

n  Health

n  High education standard

n  High premium products

-       Sectors of the future:

n  Health

n  Sustainable technology

n  green energy

n  Pharmaceuticals

-       Current problem:

n  Growth concentrated in far too few sectors and far too few regions

n  Absence of active and consistent industrial policy

-       If you examine other countries, they have active government + competitive business

-       Currently, we have a lack of clear direction from the government. Active government frowned upon in the last 30 yrs. But now is the time to change.