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