Thursday, 19 December 2013

Economics of the White Paper Pt 2: Industrial Strategy

The White Paper (and the Economic PolicyChoices paper publication which preceded it by a week) is heavy with references to ‘industrial strategy’. This is, in general terms, a good thing.

After all, until the latter part of the last decade uttering the words ‘industrial strategy’ risked banishment from mainstream policy debate. It was widely accepted that Government’s role was limited to horizontal supply side measures; to ‘creating the best business environment’. Active intervention of any shape or size was scorned. Now it seems everyone – even George Osborne - is cheerfully riding the industrial strategy bandwagon.

But what does it mean? Is the phrase consonant with ‘manufacturing strategy’? It often appears so at UK level. But manufacturing policy is addressed separately in the White Paper though the distinction isn't clarified. Maybe active support for manufacturing is part of a wider industrial policy? Or is industrial strategy simply another way of framing the Scottish Government’s current key sector led model of economic development? Reading the papers it looks like the latter to me but let’s take a step back…

In a recent paper the consistently provocative and really rather brilliant Centre for Socio-Cultural Change (CRESC) at Manchester University attacked the thinking behind what they call ‘new industrial strategy’:

“…debates about the new industrial strategy’ are structured so that there are commonalities or motifs and important absences in the collective conversation about what to include in an industrial policy. The preoccupation with adding new high tech sectors (without rejecting neoliberal structural reform) makes new industrial strategy a politically and intellectually non-disruptive form of policy innovation”. (my emphasis)

By focusing on the external restraints on production, CRESC argues that new industrial strategy suffers from two key problems:

  1. Assumption that problems of business models and supply chain dynamics don’t’ matter/exist: “business problems are largely assumed to be exogenous, stemming from environmental conditions”, and;
  2. An absence of geography: “new industrial strategy policy proposals are for the UK economy as a national entity, and there is an unwillingness or inability to explain how these policies relate to the differing needs and capabilities of the UK’s regions”.

I think the Scottish Government’s thinking as expressed in the White Paper and Economic Policy Choices certainly reflects the first problem and until a couple of weeks ago I would‘ve had little hesitation in accusing them of the second.

However, Economic Policy Choices includes a paragraph with fascinating and potentially far reaching consequences:

“8.48 Other parts of the country face different challenges with some less well placed to immediately take advantage of growth sectors – and areas of Scottish comparative advantage – identified throughout this report. In these cases, a broader approach is required. For example some areas are particularly well placed to benefit from sectors such as health, education and utilities (for example foundational economies) and appropriate policies to support the spatial concentration of such activities can lead to more sustainable and balanced levels of growth at the national level”.

Two things stand out here: a welcome if belated recognition that some areas simply don’t have the assets to grow activity in the Scottish Government’s key sectors and a commitment to the foundational economy. This commitment maybe poorly expressed and based on a misunderstanding of what is meant by the term but it would be churlish to doubt its sincerity at this stage. So what is the foundationaleconomy?

CRESC again:

“The UK has lost much of its manufacturing. But it retains its 'Foundational Economy'. This is the network of institutions and employees that work in health, education and welfare; and in 'mundane' but essential activities such as infrastructures, utilities, food processing and retailing, and distribution. The 'foundational economy' is often unglamorous but necessary to everyday life. It's used by everyone, regardless of income or social status. On a broad definition it employs around 10 million. It's often neglected or underemphasised by the policy makers. But this is a mistake. As part of …industrial policy there's a strong case for supporting and developing it”.

This might all seem very mundane but it's potentially transformational in the development of future industrial strategy/economic development strategy. By all means continue to try to develop new sectors – for too long this has been beyond the scope of Government thinking - but please pay attention to those where people work now and are likely to work in the future.

With all the above in mind, here are some recommendations for a new approach to industrial policy (like CRESC, I prefer 'policy' to 'strategy' – it suggests a propensity to action) which might start to fill in some of the gaps left by the White Paper:

  • Don’t pretend this stuff is easy, obvious or straightforward. Industrial policy is difficult, the payoffs are uncertain and long-term and some investments are bound to fail. Government can expect to receive little if any credit for the successes of industrial policy but it certainly won't avoid scathing criticism for its failures. It’s the way of the world. 
  • Be careful with loose terminology: where do manufacturing, industrial and economic development strategies/policies begin and end? The potential for damaging confusion is high and I’m sorry to say that’s where the White Paper seems to lead. If industrial strategy is to achieve anything at all then a minimum requirement is that people should know what’s being talked about.
  • (with reference to point 1 above) Don’t assume that industrial strategy must necessarily focus only on external constraints on production – I know it’s difficult for politicians to acknowledge but too many companies (whole sectors?) operate lousy and/or damaging business models. Such models may succeed in providing the quarterly growth in earnings demanded by the City while actively reducing the systemic capacity to replicate the skills the firm/sector needs to sustain and improve production. Even if government got its supply side interventions exactly right, Scotland’s private sector manufacturers could not and would not morph into a Caledonian Mittelstand overnight.
  • It’s a similar story with supply chain power relations. Think of supermarkets and food processors. A handful of very powerful monopsonistic buyers forcing prices down prevent the type of patient investment in skills and capital equipment necessary for the supplier to thrive in the long-term. CRESC again: “let us suppose that the problem is the stock market together with Sainsbury and Tesco and their effects on food processing which is our largest manufacturing sector. The new industrial strategy literature contains no clear answer as to what should be done because it is concerned mainly with adding new sectors and sources of finance and has proposed nothing more than talking shops for different interests in the food chain as the means to ‘win-win’ supply chain improvement”
  • Put geography right up front – I recently attended a meeting in a market town in one of Scotland’s local authority areas not long since described as having a soviet style economy (which was of course palpable nonsense). Having recently suffered the demise of two major private sector employers a new economic development plan was being developed for the area based on 1) using local assets to engage with Scotland’s key sectors and 2) growing the local business birth rate. A highly orthodox approach and one doomed to failure. The area has no such assets and creating more marginal under sized poorly performing enterprises (step carefully with the acronyms) is likely to reduce rather than increase local employment. A foundational approach here will involve using every tool at Government (at all levels) to drive up the economic and social return from sectors like the privatised utilities, supermarkets and retail banking. National action (e.g. living wage) will also be necessary to drive up private sector employment standards and returns to the local economy. 
  • Get real about structural reform of finance: the White paper just doesn’t go there and the Scottish Government’s recent banking strategy paper is very weak. There’s simply no point promoting a new approach to industrial policy while continuing to treat finance as a priority sector i.e. promoting growth in the sector as an end in itself. This is bad not just for the economy’s productive sector but also I would argue for equality and democracy. If an independent Scotland wants to be less fair, equal and democratic while growing an economy that is inherently unstable then, yes, continue to pump up big finance;
  • Innovation policy and industrial policy should be developed and implemented as intimately as possible. It was, I believe, a mistake for the Scottish Government to recently publish a joint entrepreneurialism and innovation strategy thereby further embedding the notion that private entrepreneurs are always and everywhere the key driver of innovative change. I’d start again from an Entrepreneurial State perspective.
  • Drop all the silly stuff about the pivotal role of very small firms. As Mazzucato notes, 'the majority of start-ups end up as marginal, undersized, poor performance enterprises that can drive down profits, increase factor prices for high-potential firms, confuse investors and fail to generate benefits commensurate with the amount of public support they receive'.

  • Finally, if done properly, industrial policy is potentially expensive and Scotland already spends much more than rUK on direct economic development. Corporation tax cuts are expensive and could – if paid for by removing allowances which favour manufacturing – actively undermine the purposes of industrial policy. It’s also essential that the Government captures at least some return from its investments to reinvest back into the system.

Let’s hope the White Paper starts a proper debate about industrial policy for its remarkable how economic development policy in general has been lost from public discourse over the last decade. Remember the fuss A Smart, Successful Scotland caused on publication? The current Scottish Government’s economic strategies received much less coverage. This is depressing because economic development policy should serve the needs of every citizen. We should talk about it.

Stephen Boyd

Friday, 13 December 2013

A Just Scotland: fiscal sustainability and income inequality

Today at the STUC we held a small conference, one of a series to help inform our next A Just Scotland report due for publication early in the New Year.

David Comerford, Stirling University asked a highly topical question: is the IFS report consistent with the Scotland's Future White Paper? The slides from this excellent presentation are available here and I'd encourage you to read them. What really struck me was the contrast between this patient and effective critique of the IFS report and the hyperbolic ad hominem nonsense which followed its publication. There are many on both sides of the referendum debate who could learn from Comerford's analytical approach.

David Eiser (chaired by Dave Moxham this was one helluva Davefest), also Stirling University, then presented on Income Inequality in Scotland; a subject much discussed but tragically under-researched. The slides are available here and I'd also recommend the important paper written by Eiser and David Bell on which it was based. There has I think been a laziness about the inequality debate in Scotland; a tendency to assume that 1) the trajectory of inequality in Scotland has closely imitated that of the UK, and 2) the trajectory has followed a relentlessly upwards path. Eiser punctured these canards. I'm also far from convinced that people understand the role of working hours (rather than hourly pay) in driving inequality. The presentation concluded with some slides which described the stark difficulty of tackling inequality through tax policy changes alone. Much food for thought.

The conference finished with a debate between John Foster of the Red Paper Collective and Robin McAlpine of the Jimmy Reid Foundation but on this it would be very difficult to comment without preempting the next AJS paper. And I'm not going to do that.

Stephen Boyd

Monday, 9 December 2013

Economics of the White Paper: Manufacturing

This is the first in a series of short blogs around the economics of the White Paper. 

It might often be exaggerated but the steeper decline of manufacturing in the UK relative to many other advanced nations is real enough. Unit wage costs are significantly higher in nations like Germany, Sweden, Finland and France where labour and product markets are also more stringently regulated.  

So, if it’s not the usual suspects of wage and regulatory costs to blame, what is it about the UK economic model that’s so hostile to manufacturing? In a recent paper on manufacturing and constitutional change for the Red Paper Collective I argued that the following factors surely apply: 

1.    Lack of political support: UK political class has been hugely complacent about the decline of manufacturing and ability of services to sustain growth and create decent jobs. Industrial policy has been inconsistent and erratic. Indeed, for years prior to the financial crisis, simply using the term risked the ridicule of senior policymakers. Monetary policy has tended to be set to benefit the City and at times – the early 1980s in particular -  has simply been disastrous for manufacturing;

2.    Short-termism: the short-term nature of the UK financial system disadvantages manufacturing firms who are unable to access the patient, committed capital necessary to sustain crucial investment in R&D, capital equipment and people.

3.    What Robert Skidelsky describes as the ‘imperial overhang’: UK firms, used to exploiting captive markets, were wholly unprepared for, and unable to deal with, globalisation; and,

4.    Ownership and control: among advanced nations, the UK is quite unique in its relaxed attitude to ownership. Other nations identified by the current Chancellor as ‘more competitive’ operate regimes less accommodating of foreign purchases of indigenous firms. Migration of ownership leads to loss of control and decision making and key functions such as R&D. It also leaves workers more vulnerable to redundancy as it’s much more difficult for owners to close domestic workplaces.

 In short:

 “Other nations have been much more successful in building models that support long-term investment; workers have direct input into decision making, finance is more knowledgeable and supportive, political commitment is strong and enduring.  Other EU member states retain much higher proportions of procurement spend domestically and give more to manufacturing in state aid”.

I went on to argue that:

“…there are no quick fixes under any constitutional scenario. The factors explaining Scotland’s relatively steep decline in manufacturing are systemic, with deeply embedded economic, institutional, historical and cultural roots. At risk of stating the obvious, it is how additional powers are patiently applied to overcome these problems that will determine manufacturing’s long-term future in Scotland.

 “It’s not credible to assume that constitutional change in and of itself will boost manufacturing output and jobs. Global economic forces have acted to reduce manufacturing’s share in all advanced economies. These forces, particularly the rate of productivity growth due to technological and process innovation, will continue to constrain jobs growth whether Scotland is independent or not. Bad domestic policy may help explain Scotland and the UK’s relative performance but it’s very far from the whole story.

 I then noted that:

“Under current devolved powers, the Scottish Government already possesses the ability to support the long-term future of manufacturing in vital areas such as skills (where it holds full powers), public procurement (powers limited only by EU Directives) and finance (powers are available as the establishment of the Scottish Investment Bank testifies, but it can be reasonably argued that budget constraints seriously limit effective action)”.

After citing a number of areas where policy could be more supportive of manufacturing, I concluded by arguing that:
“Maybe the greatest opportunity is constitutional change precipitating radical change in Scotland’s business culture. Freed from the dead hand of the City, it’s possible to see a new manufacturing and innovation eco-system developing in which firms can grow organically with committed – public and private – funding partners.  As investment horizons widen, management and policymakers may start to see the benefits in an approach which works for employees, communities, suppliers and customers as well as shareholders.”

I guess this is why I find both the Scottish Government’s White Paper and the Economic Policy Choices paper that preceded it ultimately disappointing on the issue of manufacturing.

They do promise much: in the chapter in Policy Choices entitled ‘Boosting Competitiveness and Reindustrialising Scotland’ the case is set out for why ‘Scotland like the rest of the UK needs to rebalance…creating a greater role for manufacturing and securing more private investment’. The importance of manufacturing to quality employment, economic stability, equality, innovation and regional growth is correctly emphasised. The commitment seems genuine and strong.
However the analyses of why industrial decline has been steeper in the UK than other nations and what might be done to reverse the trends are pretty inadequate. More words are expended on the benefits (all justified) accruing from a ‘strengthened’ manufacturing sector than on how it might be strengthened in the first place – and, pertinently, exactly how additional powers flowing from independence might be applied in this respect.
But it’s the refusal to take on the role of finance that’s most problematic. Although Policy Choices argues that the interests of the City have been catered for to the detriment of manufacturing, there is no developed assessment of the failure of UK finance to support industry or of the disproportionate amount of resources (e.g. STEM graduates) it absorbs.

The White Paper could have been much, much bolder on structural reform of the banking sector, new public investment vehicles and how they might be funded and corporate governance reform. Models of independence or enhanced devolution which seek to retain or replicate essential elements of the current system (e.g. predominant role of finance) are very unlikely to deliver manufacturing growth. It’s interesting that one of the few clear policy priorities of the Scottish Government remains cutting corporation tax; a policy that’s likely to prove actively detrimental by further embedding short-termism and pressurising the investment subsidies which benefit manufacturing over finance.

Stephen Boyd - STUC

[STUC discussion papers on manufacturing 2007 and 2011. Presentation to National Economic Forum 2010] 

Next post: industrial policy – what does it mean?