7 December 2016

How Britain can forge a new industrial strategy

By Richard Howard

When most people think of industrial policy, they think of British Leyland. Once the world’s largest carmaker, by the 1960s Britain had been overtaken by America, France and Germany. The British industry, it was believed, simply lacked the scale to compete with its rivals.

By merging its old smaller brands, Britain created one “national champion” in British Leyland. The Government stepped in and encouraged consolidation, bailed out short-term losses, and ultimately part-nationalised the struggling conglomerate in 1975.

Needless to say, the plan was not a success. Nicknamed British “misery” in Germany, the company was never able to overcome its problems with the trade unions or poor management. After continually losing market share, the company was sold in turn to BAE and BMW, until finally the last remnants of the British owned business went bankrupt in 2005.

Ironically, the British car industry made a striking recovery from the 1980s – but this was through foreign direct investment and ownership by international brands like Ford and Tata, not government stewardship.

Under Theresa May’s leadership, the Government has signalled an intention to develop a new industrial strategy, as part of a broader objective to “make the economy work for everyone”.

The underlying political motivation for this is strong. Whilst globalisation has been good for Britain in general, the “Just About Managing” feel increasingly pessimistic about their economic future.

Brexit voters generally think that life in Britain is getting worse, according to polling by Lord Ashcroft. Real household incomes have been static for over a decade. Families already worry about their energy and utility bills, notwithstanding the fact that these will likely need to increase as we decarbonise Britain’s energy and transport infrastructure.

Beyond the broad narrative, there are few details on what the new industrial strategy will mean in practice. Many people worry that it could repeat all the mistakes of the 1970s and British Leyland.

But industrial strategy doesn’t have to be like that.

Arguably, the most successful industrial policy Britain ever saw came under Margaret Thatcher: by privatising inefficient state utilities, reforming labour relations, and encouraging foreign direct investment, her government helped turn around Britain’s relative decline and disappointing productivity.

Today, Policy Exchange has published a blueprint for a modern industry strategy for Britain – focusing on the key challenges of productivity, innovation, place (or regional growth), and the environment.

Ultimately, our economic performance and household incomes will only start to take off again if we can solve Britain’s problem with productivity.

While Britain excels in many areas, such as our universities and science base, we still suffer from a long tail of under-performing companies, low skilled workers and pinch points in our infrastructure.

Instead of picking winners and shielding “national champions” behind protectionist trade barriers, a new industrial strategy will need to encourage more competition and champion new trade deals.

This will only become more urgent upon leaving the European Union, removing one source of competitive pressure and opening up old questions around state aid.

Many parts of Britain have not shared the same success as London and the South-East – economic value added per head in Camden and the City of London is a staggering 20 times higher than in Blackpool.

However, past attempts to redistribute economic activity around the country, such as the 1945 Distribution of Industry Act and Green Belts, were largely counter-productive. Driven by an overly centralised politics, they did little to create sustainable economic regeneration, but instead stifled the growth of previously thriving areas.

Birmingham, the once the “city of a thousand trades”, found itself an economic monoculture centred on the car industry, leaving it vulnerable to shifts in the second half of the century.

Overly restrictive planning laws then led to office space in Birmingham becoming more expensive than that in Manhattan, making it difficult to pivot to the knowledge economy.

The new industrial strategy needs to include a regional dimension, but needs to avoid creating a zero-sum competition between our great cities. London can be as much an asset as a rival to Birmingham or Manchester.

The new industrial strategy also needs to be about innovation – pioneering the industries of the future, rather than trying to reverse the economic tide. It must be as much about services and knowledge industries as manufacturing, not least because the line between the two is already blurring.

If we get this right, Britain has the chance to become a world leader in innovation.

It is already ranked third in the Global Innovation Index, and is developing an increasing reputation for friendliness towards disruptive technologies, from fintech to self-driving cars.

To truly make this strategy work, however, Britain will have to overcome its longstanding struggle to commercialise new research. At present, only seven out of the world’s 179 “unicorns”, tech start-ups valued over $1 billion, are located in the UK.

Finally, in order for an industrial strategy to be successful and sustainable, it must take a long-term view of resource and environmental concerns.

The Government needs to ensure that economic growth goes hand in hand with the protection of natural assets, sustainable use of natural resources, and climate change mitigation and adaptation.

This should not be seen as putting a limit on growth, but as part of a sensible strategy to maximise the benefits and minimise the costs of transitioning to a lower carbon and more environmentally benign economy.

Rather than seeking to grow the “green economy” or create specific pockets of “green jobs”, as past policies have attempted, we need to green the economy as a whole.

Fundamentally, the goal of the new industrial strategy should be to address the long-term economic challenges that Britain has failed to address for too long – and stop our economy from becoming increasingly divided.

It is about creating a British economy which is innovative and competitive, and which benefits everyone.

Richard Howard is Head of the Environment & Energy Unit at Policy Exchange.