Britain needs a 4th generation industrial policy
The furore over Vince Cable's leaked letter to No 10 bemoaning the lack of a more coherent industrial policy is yet another instalment in a debate about the right industrial policy in the UK that has been going on for decades. Ever since the industrial upheavals of the Thatcher era , Tory, Labour and now the coalition government have been agonising over what a strategy for industry should consist of. Labour now in opposition is doing its own review under Andrew Adonis.
In the most recent years, as money was increasingly being squeezed, the rhetoric changed but little changed in practice. The going has not been easy. Industrial policy, though well meaning, has in my experience often been reactive - whichever company / sector shouted loudest or threatened to leave the UK; whichever powerful MP lobbied to save a firm that was employing potential voters in their constituency; whichever minister insisted on a pet project however expensive (ie HS2) .
Some good things were done along the way based on evidence - a bit more emphasis and money on innovation; support for exporters and inward investment; spending more on science. There have also been some very good examples of help to companies such as through the Manufacturing Advisory Service(MAS) and on technology through the Technology Strategy Board(TSB). But this has been bitty and has left the UK with no coherent approach to allow increased productivity across the whole of the economy - and not only in manufacturing where a lot of the money has traditionally gone. This has become even more urgent now given the difficult economic circumstances all around us.
The financial sector woes and the need to ensure that money continues to flow to companies and individuals has encouraged a re-look of the role of the state in that area. But elsewhere the introspection continues. And yet it is undeniable that the government already intervenes hugely, not necessarily with money, in all areas of the economy. It is a major procurer, it sets regulations, it supervises the proper functioning of markets, it polices and enforces competition rules, it provides the economy with a skills framework and through the tax and remuneration system it provides incentives to firms. So its actions can make a huge difference. If properly harnessed this could make a material difference by providing the right signals to encourage investment and growth in the UK. A new industrial policy requiring a proper partnership between the state and the private sector is long overdue.
I call this a 4th generation industrial policy.
The first generation policy adopted after the second world war abandoned laissez faire economics and adopted national planning , picking winners and keeping many 'strategic companies' under state ownership. The second started in 1979 with the election of Margaret Thatcher focusing on privatisation and financial deregulation but run out of steam when that process run its course - and all of it was good. What then followed was a third generation policy - often piecemeal and sector specific but with no coherent strategy in mind as it tended to be reactive. A fourth generation policy argues against picking winners which governments in general are not very qualified to do well - the world is changing so rapidly and technology is advancing to such an extent that opting for one area rather than another carries obvious dangers while globalisation means that sectors can now suddenly move elsewhere with very little warning .
So the fourth generation industrial policy needs Instead to focus on cross cutting policies and sorting out underlying issues to allow the economy to thrive. This is true both in the conventional sense of providing good laws, infrastructure and a well educated workforce and in the less conventional sense of government using its might to borrow long and cheap in order to share the risk in new and yet unproven technology areas and help in their development and commercialisation. But the interaction between government and industry is complex and can be done well or badly. All stakeholders need to have clear roles and responsibilities – not just the government. What I am suggesting is not necessarily easy and it requires trust from both sides. But a hand off approach is not an option, especially not now.
Vicky Pryce is a city economist and former Joint head of the Government Economic Service. Her book Greekonomics: The euro crisis and why politicians don't get it on the eurozone crisis and its impact is published by Biteback Publishing in September