If the UK is going to rebalance its trade account, and stop living beyond its means in the global economy, then it needs to boost its exports; and clusters are a key way to achieve that.

The UK has recorded a current account deficit in every one of the last 30 years, and the deficit in 2013 was the second largest since records began over 60 years ago. The government is right to say that stronger export growth is needed to rebalance the economy – and to reduce the current account deficit – but the latest data does not paint an encouraging picture. The chancellor has set a target for exports to double between 2011 and 2020, but in the first nine months of 2014 they were actually 1.6 per cent lower than in the first nine months of 2011.

Evidence shows that, contrary to standard economic theory, the countries that are most competitive in the global economy – such as Germany – tend to diversify their exports rather than specialise. The UK, however, has become more specialised in its exports, which helps to explain its lack of international competitiveness. Britain has some strong export sectors – in pharmaceuticals, aerospace, cars and chemical industries – but these are too few, and investing more in these areas of existing strength will not help to broaden the country's export base. Similarly, the UK's strengths in financial and insurance services leave it vulnerable to global shocks like that provided by the financial crash of 2008.

This report publishes new analysis of 'economic fitness', which shows that the UK lags behind comparator countries, and more successful countries, in terms of the diversity of its exports. It also shows that this situation has been getting worse: the UK's 'export basket' is less varied now than it was 20 years ago, and the average complexity of its products has fallen as well. Therefore, a primary aim of economic policy should be making the UK economy look more like those economies that perform well in global markets, in particular by increasing substantially the number of product areas that are export strengths.

One way to achieve this aim is to support industrial clusters. As a result of the interaction, collaboration and competition that goes on there, industrial clusters are hotbeds of entrepreneurialism, innovation, productivity gains and economic diversification. They represent proven areas of competitive advantage and are ideally placed to develop new ones, thereby enabling the cluster – and in turn the UK – to widen its scope.

Focussing industrial policy on fostering clusters would mark a crucial change from the sector-neutral policies of the past 30 years, but also from the 'picking winners' policies of the 1970s, because within supported clusters the 'winners and losers' would still be determined by market forces and commercial success, and government would not be favouring or 'propping up' individual firms.

This report provides particular policy recommendations relating to four elements that are crucial to strong clusters: networks, innovation (and access to finance to fund it) and a skilled workforce.