At The Times CEO Summit this week, the need for an industrial strategy was front and centre of big business’ pitch to the next government. Dame Emma Walmsley, CEO of pharma giant GSK said the UK should introduce a strengthened industrial strategy along with a stable tax environment. Sir Jim Ratcliffe, who declared his support for Labour this week, joined other business leaders in echoing Dame Emma’s call.
No one can refute the need for a long-term, stable and predictable fiscal environment to ensure investment in British business, but is an industrial strategy, which often encompasses much more than tax incentives, really imperative for the UK’s economic success?
The business lobby has certainly been banging the drum for an industrial strategy for many years. Industry bodies such as the Society of Chemical Industry and Make UK, the UK’s voice of manufacturers, have produced their own industrial strategy manifestos. Thought leaders and think tanks have done the same. For example, Tony Blair and William Hague jointly produced a series called ‘A New National Purpose’ for the Tony Blair Institute and think tank IPPR published an eco-friendly take titled ‘Growing Green’.
All this advocacy is about to pay off, at least for the lobbyists. Theresa May introduced an industrial strategy in 2017 only to see it replaced in 2021 by Boris Johnson and Rishi Sunak’s Plan for Growth – a move business leaders at the time called ‘short-sighted’. In this election, industrial strategy is set to win big. If the polls are correct, Britain will once again have an industrial strategist PM. Indeed, if the most apocalyptic polls are right and the Lib Dems end up as the official Opposition, keen industrial strategists will be leading the debate from both sides of the House.
Sir Keir Starmer has pledged to implement an industrial strategy with a sectoral focus, underpinned by a new National Wealth Fund capitalised with £7.3bn over the next Parliament. The Industrial Strategy Council will return, but this time on a statutory footing to prevent it being scrapped by another pesky Tory Prime Minister in the future. Details of which sectors will be prioritised and how they will be supported is yet to be revealed, although Labour say they have been working with the automotive, life sciences, and creative sectors among others to formulate their plan.
Taking this at face value, there will be much back-patting among the business lobby if Labour get in and much vying for a seat on the new Industrial Strategy Council. But while the lobbyists and special interests celebrate, we must cut through the noise and ask: do industrial strategies work?
The fundamental problem is that an industrial strategy requires government to pick winners – and it may get it wrong. There is no shortage of competing literature on what sectors and projects the government ought to prioritise in an industrial strategy. It cannot fund them all, so a great deal rests on the quality of government decision-making in HM Treasury and the Department for Business and Trade.
For those who believe in free markets, the warning lights should already be flashing. A recent blogpost at the Institute of Economic Affairs laid bare the fallacy of the state’s ability to plan accurately and predict the industries of the future. While international comparisons can point to ‘successful’ industrial strategies in Asia, there is growing evidence to rebut this, highlighting that industrial strategies can make nations reliant on a foreign power for trade and concentrate economies, leaving them vulnerable to shocks – important considerations in today’s more volatile world.
Our last industrial strategy, introduced by the May government, was built around exploiting four ‘great challenges’ facing the UK: AI, clean growth, an ageing society and mobility. It too had a sectoral focus, with sector deals with industries like aerospace. In practice, its decisions were political and counterproductive, as can be clearly seen in the cushy sectoral deal granted to off-shore wind, but not to on-shore or wind power in general.
The National Grid states that on-shore is ‘one of the least expensive forms of renewable energy and significantly less expensive than offshore wind power’. On-shore wind turbines are also cheaper to maintain and repair. So why then was off-shore given priority? A good guess would be a desire to appease the Nimby vote, which had already led David Cameron to place more stringent planning requirements on on-shore wind sites in 2015. Rather than following the evidence and relaxing regulation, May doubled down on bad planning laws. Political considerations skewed our industrial strategy to the detriment of the government’s own objective of clean growth.
Acknowledging this mistake, Labour now want to double onshore wind. It should ask itself instead what perverse and politicised ‘strategic choices’ it is about to force us all to subsidise.
With the triumph of industrial strategy’s advocates imminent, free marketeers must get their notepads out and begin to tally the pledges and the financial commitments against the results. It is easy to claim success in decisions by failing to acknowledge the ‘unseen’ costs of neglecting one industry or technology for another, so we must keep an eye on the losers from this new strategy as well as the politically-connected winners. And as we have seen with on-shore wind, today’s loser might well be tomorrow’s winner.
Like all of us, I hope Britain regains its economic mojo, seizes the opportunities ahead and bolsters its comparative advantages in various sectors. I question whether any of this can be achieved through a blind faith that government knows best.
Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.
CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.
