Time to Revive Multi-Sector Industrial Policy?

For the UK, there are a number of problems with the theory and practice of this approach: First, small and medium-sized enterprises (SMEs), which provide some 60% of UK private sector employment, are starved of credit despite Government entreaties for banks to lend more. This acts as a drag on growth, with no end in sight. Second, science-based and manufacturing industries endure heavy competition for talent, when a high proportion of science and engineering graduates still head for the City when they graduate. They can also expect to be adversely affected by cuts in government spending on research. Third, investment in infrastructure and education is squeezed by austerity measures, when such counter-cyclical spending is usually thought to be most beneficial. Fourth, private capital concentration in the shadow-banking sector remains surprisingly high, and may lead to volatility and crises in the non-banking sector. Finally, some of the UK’s competitors, such as China and Korea, already have successful, multi-sector industrial strategies.

The case for reinstating multi-sector industrial policy can be summarised as follows: When the crisis struck, governments did not stick to free market theory. In panic, they tried almost any measure to revive the banking system; in doing so, they undermined the credibility of free market theory, and instituted industrial policies that give absolute priority to protecting the financial sector, while leaving other sectors at a relative disadvantage. It is hard to escape the conclusion that waiting for economists to develop new economic paradigms and bankers to build their Basel III mandated levels of capital might take too long for much of UK industry. It is also hard not to contrast the glacial pace of these measures, which affect the entire economy, with the speed with which central banks and treasuries moved to help banks by providing liquidity, deposit protection and purchases of troubled assets in the dark days of 2008. At that time, they did things that were previously unthinkable. The rest of the UK economy needs such decisiveness now.

The crisis behaviour demonstrates, if there were any doubt, that the Anglo-Saxon economic model is based on ‘managed markets ’ rather than ’free markets’. This is a crucial distinction because it means that, instead of relying on the benign outcomes of Adam Smith’s ‘invisible hand’, governments need to decide on which goals they are trying to achieve in managing each sector of the economy. Democratic governments might be expected to make these goals explicit, and might aim, for example, for high employment, a balanced portfolio of industries, and investment in infrastructure and human capital. But for governments like the UK government, unenthusiastic about setting such goals, the current ace in the pack is ‘the deficit’. While deficit reduction is the overriding policy priority and bond markets exist to discourage austerity-waverers, new economic thinking and action on industrial policy appear paralysed.

It is important to find a way through this logjam in the UK. I suggest, for discussion, seven steps, each of which could be treated as an urgent project:

1.   Develop new economic theories of industrial policy. This could be jump-started by funding studies of how economics should be reformed as well as ‘what actually works in the domain of industrial policy’. The need to reform economics is not an original thought; it is hotly discussed inside and outside the economics profession, but progress is slow.

2.    Set up a national investment bank along the lines of the European Investment Bank. The aim would be to fund projects with long-term economic benefits that could not get private sector funding. This idea is being discussed; it needs to gain rapid support and action.

3.    Introduce measures to damp down volatility in the housing market. These could include mandatory deposit increases when prices rise rapidly, and first time buyer incentives when sales activity falls rapidly.

4.    Set up working groups involving banks and government (national or regional) to find new ways of providing credit to SMEs, especially in downturns. There is no reason why such approaches should not be strictly commercial, but they do need innovative and co-operative thinking. Given its size, making the SME sector just marginally more efficient could have a big economic impact.

5.    Provide incentives for new players to enter the SME banking market in a significant way. This could provide competition and innovation. Such new players could include retailers, e-commerce providers, and telecommunications companies. This is possible at present, but not occurring on a scale to make a meaningful difference.

6.    Set up working groups involving government and the science-based and manufacturing sectors, to identify problems restricting their development, and discuss how these could be addressed.

7.    Initiate focussed studies to identify the problems and opportunities faced by a range of successful UK sectors, such as the creative industries and professional services. Many business strategists advocate backing winners, and the UK has a world-class range to choose from.

These ideas are old wine in new bottles. There are trade bodies, government departments, and academics addressing each of them. The difference lies in a new sense of urgency. There is much to play for in developing a ‘New UK Industrial Policy’. The UK, with a high standard of living and few natural resources, must, more than most, use the full economic potential of its population. The projects outlined do not require protracted study in order to start making progress. Neither do they require budget-busting spending.

If the UK really thought like UK plc, each project would be set up with a core team, and involve all of the sector players. The brief would be to think radically, without preconceptions. With demanding deadlines, this could lay the foundations for long-term sustainable growth and reduced economic volatility. Failure to act may consign the UK to economic irrelevance.

Rod Dowler is a Senior Research Fellow at the Global Policy Institute.

About the GPI

The Global Policy Institute is a research institute on international affairs. It is based in the City of London, and draws on both a rich pool of international thinkers, academics as well as policy and business professionals. The Institute gives non-partisan guidance to policymakers and decision takers in business, government, and NGOs.