Changing Direction: How Industrial Strategy Can Help Remake the UK Economy
Within hours of becoming Prime Minister last year, Theresa May made an important economic statement. She put ‘Industrial Strategy’ in the title of the Department for Business. No longer, she was declaring, would a Conservative administration regard active government intervention in the economy as anathema. The economy was too weak for such a luxury. Henceforth the state would play a leading role in getting markets and private enterprise to work better.
In most developed countries this would not be news. But industrial strategy in the UK has tended to be regarded as something we did in the 1960s and 1970s - and it didn’t go well. Governments tried to ‘pick winners’ and ended up picking losers (Concorde, British Leyland) instead.
This view was always a caricature, but it’s now so outdated that it ranks as fake news. Today industrial strategy is essential - because the British economy is simply not performing the way we need it to. As the Interim Report of the IPPR Commission on Economic Justice shows, the UK has the weakest performance on investment, productivity, trade and geographical imbalances of any major European economy. This has given rise to the longest period of earnings stagnation for 150 years. The UK economy badly needs, not just minor improvement in these areas, but fundamental structural change.
What does this mean, in practice? Critically, industrial strategy must be more than just a collection of ‘supply side’ economic policies in areas such as infrastructure, skills, research and development, land use planning, competition, business taxation, regional economic development and export promotion. Industrial strategy must mean the overall coordination of these fields, aimed at a clear set of objectives or purposes.
In the latest IPPR discussion paper for the Commission, we set out these objectives - raising productivity, improving our balance of trade, broadening the economy’s innovation base, reducing geographical imbalances and lowering the economy’s environmental footprint. We then identify four key directions which industrial strategy needs to take.
First, it must be about more than the ‘supply side’. There’s little point improving the conditions for investment when demand is so weak. Since the financial crisis private sector investment has flatlined. There’s a vital need for Government to increase public investment to pick up the slack. In our report we call for an injection of £20bn in additional annual public investment spending by 2020-2, or 1% of GDP. This would take net public investment to 3% of GDP, its OECD average. Around half of this, we argue, should go to industrial strategy spending – on infrastructure, housing, innovation and business growth.
Second, industrial strategy must have a much wider focus than is often assumed. Most discussion about industrial strategy focuses on its role in supporting ‘frontier’ sectors – those such as aerospace, automotive and life sciences at the leading edge of technological innovation. These are vital, not least to improving our balance of trade position. But this is not where the UK’s productivity problem lies. The top 5% of leading firms have had rising productivity in recent years. Our problem lies not in the best, but the rest – the ordinary firms in the ‘everyday economy’ where productivity growth has completely stalled over the last decade. It is these low-productivity, low-wage firms, in sectors such as retail, tourism, hospitality, light manufacturing and social care, which perform worse than their counterparts in other countries. And there are huge regional disparities between them across the UK.
More support for new technological innovation will not help such firms. They are ‘innovation takers’, not ‘makers’. So they need help to adopt new technologies, utilise the skills of their employees better and improve management capacity. We make various proposals on how government can do this.
Third, innovation policy should aim to diversify the UK’s base of global-leading ‘frontier’ firms rather than simply deepen our comparative advantage in existing sectors. Unlike more successful advanced economies, the UK has a particularly narrow base of exports and innovation specialisms, and many of our exports are import-intensive. To reduce the UK’s trade deficit and boost R&D, the UK’s export sectors need to be broadened and domestic value chains strengthened. The goal should be to make the UK economy ‘nationally diversified and regionally distinctive’.
This means, in particular, expanding and developing university-based industrial and innovation clusters around the UK. Much more can still be done to strengthen the ‘innovation ecosystem’ of research centres, businesses and finance to bring new R&D to commercial markets. The IPPR paper proposes a number of reforms to the funding of innovation to help make this happen.
Fourth, geographic rebalancing of the economy requires the creation of stronger regional institutions in England. As the UK economy has changed over the last 30 years, areas of the country with more sector-concentrated economies, lower-skilled workforces and poorer transport connectivity have suffered long-term decline. The overwhelming evidence of experience in other countries is that balanced regional growth will require much stronger subnational institutions, with more fiscal autonomy and greater borrowing and investment powers. The IPPR paper makes some specific proposals on how these could be developed.
The advent of a new industrial strategy marks an important moment in the evolution of economic policy in the UK. We need to seize this moment to ensure that it leads, not just to another round of incremental improvements which are quickly reversed, but to a long-term shift in the shape and direction of this country’s economy. Nothing less will do.