23 January 2017

The best industrial strategy for Britain is not to have one

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So now we know what Theresa May’s industrial strategy is going to be. It might even be Greg Clark’s. He’s in the report too. The strategy, alas, is one that proves the British state simply cannot learn from past mistakes. Indeed, it seems to consist of doubling down on those errors.

The report shows plainly their inability to realise that our economic problems more often stem not from what government is doing, rather than what it isn’t. The solution, shouldn’t be to dream up more things to do, it should be to stop doing what’s causing the problems.

Anyway, the Industrial Strategy Green Paper has landed and it’s as comfortable a collection of platitudes as you’re likely to find outside a Jeremy Corbyn speech. This is the usual quote about productivity:

“The objective of our modern industrial strategy is to improve living standards and economic growth by increasing productivity and driving growth across the whole country.”

Well that’s nice, because we all know productivity is important. Increase it and our wages and living standards will increase too. One way to read the rest of the paper is as a steadfast refusal to adopt, or perhaps even be aware of, the one single policy which might improve productivity. Instead, 10 policies – or “pillars” – which won’t work are set out rather than the one which will.

First off, they intend to promote spending on research and science. Fine by me, of course, but then they spoil matters by saying that they’re going to spend more taxpayers’ money on this. That is not the correct response. For as Matt Ridley has pointed out more than once:

“In 2003, the Organisation for Economic Cooperation and Development published a paper on the ‘sources of economic growth in OECD countries’ between 1971 and 1998 and found, to its surprise, that whereas privately funded research and development stimulated economic growth, publicly funded research had no economic impact whatsoever. None. This earthshaking result has never been challenged or debunked. It is so inconvenient to the argument that science needs public funding that it is ignored.”

When research is driven by commercial gain, often enough it produces commercial gain. When it’s not, it doesn’t. Therefore, if our aim is commercial gain, science and research should be driven by it.

They are entirely correct in pillar two – developing skills – when they suggest that technical, as well as academic, education should be carried out in Britain. The creation of a new technical education service is mooted. A better idea would be to claim back from the academic education sector all those technical and polytechnic schools that were turned into universities.

While they’re at it, returning a few Gender Studies departments to metalwork would do wonders for the quality of the tin bashing workforce. There is no evidence, contrary to what Tony Blair said, that 50 per cent of youths should do academic courses – so let’s repurpose those assets, not add yet another layer.

Their third pillar is that there should be lots more lovely infrastructure. This might be quite a nice idea if it weren’t for the way in which politicians treat their train sets. The cost-benefit analysis for HS2, for example, has already been shown to be terribly flawed. It shouldn’t be built but it will be.

We’ve already discussed the latest version of the Severn tidal project, the Swansea Lagoon, and how it is a boondoggle of monstrous proportions. More Government spending on infrastructure would be a lot more credible as a productivity strategy if they weren’t so appallingly awful at deciding what projects to invest in.

Pillar four is that we really must have more patient capital for investment. This need is illustrated with figures showing how we invest less in plant and machinery than other countries:

The UK invests on average two to three per cent of GDP less than France, Germany and the United States in fixed capital – such as plant and machinery. This is a long running problem: the UK has ranked in the lowest 25 per cent of all OECD countries for investment in 48 out of the last 55 years.”

Somebody really should have noticed this. We’re about as rich compared to the other OECD countries today as we were back then. Relative positions haven’t changed all that much. The reason there are lower investment levels is because we do more services and less manufacturing than the others to achieve the same general position. Yet the report states that it’s manufacturing that needs the plant and machinery, not the services. What they describe isn’t some structural weakness, it’s just an outcome of the sectoral bias.

Of course, they could be right in pillar five, to improve procurement. But all they really mean is that suppliers will have to tick a few more boxes about apprenticeship schemes and the like before they can sell to Government. A more sensible approach might be to get Government to buy the best from whomever, meaning that the taxpayers get a decent deal, and encouraging all suppliers to be the best so they can get a slice of that cash.

Their sixth pillar is that trade must be encouraged – and and we’ll get to what they’re doing wrong about this at the end.

Number seven focuses on affordable energy and barely mentions the hugely expensive two Eds’ (Miliband and Davey) green energy structure and how it should be dismantled. They’re not being serious therefore.

Pillar eight – cultivating world-leading sectors – shows the worst thinking in the whole report though. This is where an industry, if it joins forces and agrees to work with government, can be helped to become a world-leading sector. This could mean the recreation of the guilds – even though we’ve been told not to do that since Adam Smith came along in 1776.

But it’s actually far worse than that; the idea is that industries could sign up to a “Sector Deal” and gain freedom from regulatory barriers. This one example is ludicrous on two counts. First, why do we have any regulatory barriers which can be lifted at the whim of government? Either regulations are necessary to protect the general public from the nefarity of the capitalists – or they’re not. And if they’re not, then why do we need them at all?

Secondly, world-beating sectors are rarely obvious or planned, they are emergent. So a level playing field for all is what allows us to work out where we do have a comparative advantage and indicates where we should focus to wow the world. Rather than, say, five years negotiation with Whitehall to see whether we’ve permission to do so.

The last two pillars – “driving growth across the whole country” and “creating the right institutions to bring together sectors and places” – are so platitudinous that I’ve barely the heart to critique them, let alone criticise. It should go without saying that growth should be across the country and we should have the right institutions to drive growth. Oh yes? And how’s Mom’s apple pie these days?

Which brings us to nub of the matter: how do we increase trade and productivity, given that productivity is the thing they claim the whole schemozzle is about. There is one simple and single policy which will do both. One policy which will increase British productivity simply by allowing more trade.

This policy is so simple that even the Treasury (yes, that’s our Treasury, the one in London) was able to get right, even when being run by George Osborne. As they set out in their analysis of Brexit repercussions:

“The benefits of trade in terms of increasing productivity are well understood… greater openness to trade creates a larger market which the most productive firms expand to serve. Openness also increases competition between firms, enhancing the incentives for domestic firms to innovate or adopt new technology… It increases returns on investment, and encourages UK firms to make greater use of new technologies, either by improving the quality of inputs, or through the more effective adoption of technological innovations. Greater openness to trade also increases consumer choice and reduces prices. Lower trade costs give consumers access to cheaper imported goods and competition reduces the price of domestically-produced goods.”

In plain English, it is the competition from imports which forces British firms to buck up their act and become more productive. So here is how we improve British productivity: we move to unilateral free trade. No barriers to imports, no tariffs, just the same regulation as domestically produced items.

British industry, facing the stiffest competition from the best in the world, would be forced to meet global standards of productivity. So the best industrial policy would be to stop trying to have an industrial policy about what we can and can’t buy from beyond Britain’s borders – and the rest should take care of itself.

After all, we wouldn’t need an industrial policy to unpick our productivity problems if we didn’t have a productivity problem created by the Government’s policy upon imports and trade restrictions.

My advice? Ditch the industrial strategy, declare unilateral free trade and let’s all go get rich.

 

Tim Worstall is senior fellow at the Adam Smith Institute