Why Britain needs a fresh approach to industrial policy
It's time to get over our prejudices against having an explicit industrial policy - and start learning from overseas success stories, writes Tim Bradshaw
Industrial policy still has a tarnished reputation in Britain – with memories lingering of the central economic planning of the 1960s and 1970s and its effects. Following that experience, the past 30 years have been characterised by a much more hands-off, laissez-faire approach to markets and sectors. We are now learning that this has also proven less than perfect.
We need to learn lessons from the past, look again at how to make industrial policy work in practice, and put it firmly back into our plans for stimulating growth- Tim Bradshaw
It is becoming clear that, left to its own devices, the market does not automatically deliver a balanced and resilient economy. What we thought was a trend towards stable and predictable growth from 1993 onwards now looks more like a quirk of emergent behaviour in a system that is much more connected, interdependent and complex than economic models could allow.
The result is that we have an economy that is dominated by consumption and government spending – we face a serious task to change course towards investment and trade. Business investment – with a 2.4% compound annual growth rate - has grown at less than half the rate of government investment (5.1% CAGR) over the past 20 years.
Our exports to fast-growing markets are well behind where they could be – in 2011, Germany exported £55bn of goods and services to China (6.1% of its total exports), compared with our total of £8.8bn (3% of total exports). And while manufacturing is very strong in some sectors – we have some of the most productive car plants on the planet – its value to the economy (at around 17% of gross value added) is less than half what it was in 1970, when the gross value added figure was 38%.
It is time to get over our prejudice against having an explicit industrial policy in the UK. We need to learn lessons from the past, look again at how to make industrial policy work in practice, and put it firmly back into our plans for stimulating growth. The approach has to be practical to engage business in developing future value chains in the UK and to realise “sticky” investment to create a more sustainable industrial base over time. We should be using all available tools such as the tax system and public procurement to develop our industrial capabilities.
We also need to learn lessons from other countries that have been more hands-on with industry over the past few decades. Free market countries, such as Singapore, Germany, the US and South Korea are much more proactive in their approaches to industrial policy - and have succeeded in galvanising business to deliver a long-term economic vision. They are also our competitors in many markets and we should be using them as a benchmark for best practice, even if we can’t fully replicate their policies wholesale because of cultural and practical differences.
Singapore has taken a very active approach to attracting inward investment, with its vision to become a regional hub for key sectors such as chemicals, engineering and life sciences. Its efforts focus on creating a critical mass of activity with major capital investments in infrastructure and R&D, alongside a low corporation tax rate of 17% and an excellent education system. But what stands out is its government’s can-do attitude. Businesses are actively courted from around the globe and interventions are aimed at bringing supply chain partners to the country to build a sustainable presence of activity and investment for the future. Germany takes a similar approach – joining up the dots where government support is available to make it easy for companies to invest and grow organically.
It is rare for businesses in the UK to say they have been actively courted by our government. Here, engagement between business and government tends to be based around specific projects and contract negotiations, rather than open-ended and long-term corporate investment models.
The South Korean version of industrial policy also targets the development of strategic industries and future growth engines such as green technology, while improving the overall environment for investment and innovation. This policy has helped the success of ship-building facilities such as the docks at Ulsan, pictured above. It maps common capability needs for the future across different sectors and sets a strategy to ensure that these are met, typically with a goal of maintaining or building a world-leading presence in each area.
The UK has dabbled here with Innovation and Growth Teams and the Technology Strategy Board, but we lack the ongoing depth of research into technology and capability road-mapping across multiple sectors. South Korea is meticulous in its approach. There is a real sense that all areas of government policy pull together in the same direction and that the sector goals feed through into cluster, regional, innovation and education policies too.
It is rare for businesses in the UK to say they have been actively courted by our government. Here, engagement between business and government tends to be based around specific projects and contract negotiations- Tim Bradshaw
When benchmarking public procurement it is useful to look at the US. Clearly there are significant advantages of scale over the UK, but the approach is also markedly different. The US is renowned for its mission-driven attitude, exemplified by NASA and DARPA, which are continuously setting challenging targets for outcomes they wish to achieve. They work closely with business to develop innovative ideas through to demonstration and into practical use – often generating wider commercial spill-over benefits to the economy.
The forthcoming announcement of procurement pipelines in the UK is a welcome step in the right direction, as these will give businesses the certainty they need to invest. We should use this as the basis for identifying future strategic capability needs to link with other investments – such as in infrastructure, R&D, and training – to develop and strengthen value chains in the UK.
To rebalance the economy and secure long-term growth we have to get the underlying economic conditions right. That is why our Budget submission this year focuses on targeted tax measures that will have an immediate impact on business investment decisions.
For the long term we have to be even more ambitious, but practical too. We need a concerted effort to build up our industrial capability and secure future competitive advantage. This requires a radical rethink of the strategic role of government in the economy and, in particular, how government engages with business. Other countries are taking the lead and we shouldn’t be precious about learning from the best. It is time to take a fresh and pragmatic approach to industrial policy for the 21st century.
Tim Bradshaw is the CBI's head of enterprise and innovation