Industrial strategy: here come the British

Craig Berry - Deputy Director at SPERI

Nevertheless, Brexit has the dubious honour of making the challenge ever more pressing. Upon becoming Prime Minister, Theresa May made the revival of industrial strategy one of the key elements of her economic agenda, believing it would help to address some of the distributional issues to which she attributes the Brexit vote.

The independent Industrial Strategy Commission (upon which I sit, alongside Dame Kate Barker, Diane Coyle, Richard Jones and Andrew Westwood) has run in parallel to the government’s policy-making process. While May’s commitment to industrial strategy has been important, the Commission’s starting point is the UK needs an industrial strategy which endures beyond the life a single premiership or government. May’s encounter with ‘events, dear boy, events’ in the June 2017 election underlines this prescription rather well.

Politicians depart, institutions endure: this is why we made the institutional landscape around industrial strategy a focal point of our inquiry. As such, one of the key recommendations of our final report, published today, centres on Her Majesty’s Treasury, the UK’s omnipotent finance and economics ministry. Under the 2010-2015 coalition government, the Liberal Democrats’ Secretary of State for Business, Vince Cable, consistently complained that the Treasury was hampering his efforts to develop a more interventionist industrial strategy. And when the Conservatives became a majority government in 2015, the  Chancellor of the Exchequer, George Osborne, effectively marginalised the Cable agenda and adopted a Treasury-led ‘productivity plan’ focused on tax cuts, labour market deregulation and local government reform.

The Treasury retains ownership of this policy, and associated areas, even as Theresa May and the new Secretary of State for Business, Greg Clark, put together an industrial strategy which itself, to a large extent, seeks to address the UK’s chronically poor productivity.

Refreshingly, the green paper did suggest a concern with the institutions through which industrial policy is made and implemented. But it is clearly focused more on intermediary institutions such as sectoral bodies and innovation centres than those at the heart of central government. To succeed, and last, May’s industrial strategy must confront the Treasury’s dominance directly.

In the view of the Commission, however, the Treasury should probably be given being given more power, not less. Crucially, our plan would entail significant reform of the Treasury, with the creation of a new industrial strategy division which would own the strategy, and act as an institutional hub for the co-ordination of all policies encompassed by the strategy across government. The current orientation of the Treasury hamstrings British industrial policy – but a reformed Treasury able to use its spending controls and high-calibre civil servants to drive a coherent approach to economic management throughout Whitehall would transform this negative into a sizeable positive.

It would be wrong to assume that countries with more successful records on industrial strategy already uphold such an institutional framework. In most of these countries, economy ministries already prevail above finance ministries. But as long as the Treasury exists, I am sceptical that such an approach would work here. We need a British solution to a British problem.

Such changes need to coincide with a reimagining of what industrial strategy is (that is, the ideational landscape). We should be thinking instead about ‘strategic economic management’, that is, about what kind of economy we want and how the state’s unique role and vantage within the economy can be deployed to bring this vision to life.

This is why the creation by May of the Department of Business, Enterprise and Industrial Strategy – although it is welcome that ‘industrial strategy’ now exists in the nomenclature of a Whitehall department – was such a frustrating mis-step. The change reinforces the notion that industrial strategy is not something that the Treasury does. But only a department at the apex of central government with a whole-economy remit would be able to support the strategic economic management approach envisaged by the Commission.

It was disappointing, for instance, to see the government’s reviews of patient capital and corporate governance proceed quite separately from the industrial strategy process (as well as each other). As our final report makes clear, support for and regulation of forms of both long-term investment and company organisation should be intimately related to the state’s wider, strategic goals for the economy.

Clearly, the absence of an explicit industrial strategy does not mean that governments do not act to steer and shape the national economy (buying things, employing workers, educating people, collectivising risk and, occasionally, owning bits of the economy). Rather, it means that government intervention is ad hoc and uncoordinated, and thus invariably ineffective from a long-term perspective. More cynically, we can speculate that the British state has quite successfully pursued a finance-centred industrial strategy, albeit surreptitiously – and hardly ever using formal ‘industrial policies’ in order to do so.

Within a robust and progressive industrial strategy framework, individual policies will be more or less interventionist – vertical or horizontal as appropriate – but they must also be designed in service of a strategic intent. An independent body (which the Commission is calling the Office for Strategic Economic Management, or OfSEM) would monitor the government’s success in delivering against its long-term strategic objectives and, importantly, develop new measures of what economic success looks like.

Interestingly, the main overlap between the government’s prospective new strategy and the productivity plan is a focus on ‘place’ – an echo of the 1997-2010 Labour government’s own experiments with industrial strategy, which amounted to little more than regional policy to assist deindustrialised areas.

However, May is clearly sceptical of Osborne’s preference for a new city-region tier of metropolitan governance and his Northern Powerhouse branding, and the industrial strategy green paper published in early 2017 failed to turn its many warm words on localism into a systematic and actionable understanding of the UK’s economic geography.

The Commission believes that enabling sustainable growth in every place should be an enduring strategic goal for the state. This is partly to ensure an equitable distribution of economic gains – but also because we recognise that all areas have unique assets which can be better mobilised to support the national economy as a whole.

Local areas must be represented therefore within the Treasury’s new division, and the governance of OfSEM. From an implementation perspective, local authorities are obviously much closer than central government to the economic activities that policy seeks to shape, and should therefore be afforded a much stronger economic role than that envisaged by recent administrations. The Commission consciously avoids, however, prescribing the forms that governance at the local level should take: even if it were possible to find one size to fit all, British central government’s poor track record on devolution suggests it would not be up to the task.

A stronger focus on local economies also sits behind the Commission’s conception of ‘universal basic infrastructure’. While strategic imperatives will differ from place to place, all parts of the UK should expect to have the physical infrastructure they need to grow sustainably, such as transport, energy, and digital infrastructures, as well as high quality ‘soft’ infrastructure such as health and education services.

We can expect some very worthwhile initiatives in the forthcoming industrial strategy white paper. At the very least, May and co. will probably reinforce elements of the coalition government’s agenda – perhaps with fewer austerity-related constraints (although, equally, perhaps not) – including more support for R&D and infrastructure investment. But Brexit means the stakes are even higher now than when the coalition took office after the financial crisis. Leaving the EU may yet prove economically calamitous for the UK, but the Brexit vote was, among other things, a demand for political and economic transformation – not another round of tinkering. If the UK’s industrial strategy is to become authentically transformative, we should start with the way it is made.

A shorter version of this post was originally published on The Conversation.