With Brexit imminent, the government is set to respond with a new industrial strategy to reshape the economy after we leave the single market. Delivering such a strategy presupposes a coherent economic vision, coupled with a logical set of goals for delivering the industrial restructuring needed.
But what we’ve seen so far from this government has been more of a random collection of policies characterised by politicisation and short-termism. And while Dominic Cummings is largely the architect of these plans, his departure from Downing Street bodes ill for improving coherence, even if his pet projects may ultimately prove unworkable. The absence of even a flawed vision will simply exacerbate the incoherence that marks out this government’s approach to economic reform.
This policy drift could hardly come at a worse time, with the economy at an inflection point brought about by the coincidence of Brexit with the Covid-19 crisis. Deal or no deal, Brexit represents a deep rupture with our largest trading and investment partner, entailing massive disruption to trade and supply chains and deep damage to the financial services industry. Meanwhile, Covid-19 has produced a steep recession and unleashed behavioural changes that may permanently damage the domestic services sector.
At the same time there are several other pressing policy goals that require profound changes to the economy, notably levelling up and the net-zero agenda. Sclerotic productivity growth, stretching back over a decade, and the social and economic challenges of technology and automation also need to be faced and embraced.
Tackling these challenges simultaneously requires a clear-sighted plan of action with concrete goals and a willingness to manage the inevitable policy trade-offs. Instead, obsessed by Brexit and paralysed by Covid, the government’s priorities are skewed towards political imperatives of shoring up Red Wall seats and justifying Brexit.
Boris Johnson has proposed a new industrial strategy roadmap to replace his predecessor’s 2017 White Paper. From what we’ve seen so far, this appears to rest on four policy pillars: technology, net-zero, infrastructure and state aid. These are sensible priorities individually, but do they constitute a plan?
Tackling these challenges simultaneously requires a clear-sighted plan of action with concrete goals and a willingness to manage the inevitable policy trade-offs.”
The focus on technology and innovation is the right one but is let down by an obsession with producing ‘national champions’ to rival Google or Microsoft. France has discovered, to its cost, that fostering national champions can be an expensive commercial and technological dead end, only achievable via favouritism and protectionism. A potentially better idea is creation of a UK version of America’s ARPA (Advanced Research Projects Agency). The theory behind ARPA – overcoming market failures in innovation systems by publicly funding high-risk, high-reward research – is a sound one.
However, the UK’s innovation problem has often lain more with difficulties encountered by firms themselves in scaling up once promising technologies have been developed, rather than in developing the technologies in the first place. ARPA could help here, but only if attention is also paid to developing the broader national and international ecosystems and applied research networks in which firms collaborate to bring technologies to market. Many of these networks are European and will be undermined by the government’s flagship Brexit policy.
Moreover, ARPA’s budget of £800 million is far smaller than its US counterpart, and the nature of its mission means it will have to back a lot of failures before it finds a winner. It will therefore be exposed politically, especially since there is confusion over what exactly it would do that UK Research and Innovation, an institution already in existence, currently does not. Even if a UK ARPA is given the time and space to succeed, many of the technologies developed by the original US version that Cummings so admires are global public goods (the internet, GPS etc.) that will benefit the UK economy only indirectly.
On climate change, the government sensibly recognises the critical importance of putting net-zero at the heart of economic policy. Achieving a net-zero carbon economy requires rapid and significant intervention to change attitudes and leverage private-sector investment. But Boris Johnson’s 10-point plan is a disparate set of initiatives that falls far short of what is needed. To deliver it, the government needs a credible road map consisting of medium-term objectives for how to achieve it.
Providing much better infrastructure will also be critical part of a wider industrial strategy, as firms and industries upgrade to take advantage of new technologies and business strategies, as well as adjusting to more of their staff working from home. But there is little sign of the huge extra investment needed in, for example, the fast broadband pivotal to making this a reality outside London and other big cities.
It’s difficult to tell if the government has an underlying philosophy behind its approach to industrial strategy. But one key plank appears to be a much greater appetite for state aid and direct intervention in key sectors. Indeed, state aid has emerged as very much the tail wagging the Brexit dog in EU negotiations.
But singling out companies, and even entire sectors, for selective interventions can quickly degenerate into ‘picking winners’ or, more aptly, backing (well connected) losers. It is strange that Conservatives need to be reminded of where this leads. It’s not even as though the government has shown much consistency so far in its approach: £400 million for unproven satellite startup, OneWeb, but nothing for the industrial jewel, Rolls Royce. At the same time, new security laws restricting foreign takeovers risk having a chilling effect on overseas investment.
The government is right to look again at using industrial strategy to tackle weaknesses in the UK’s economic model at a moment when that model is undergoing profound change. But industrial strategy is just that – a strategy, which still requires a coherent plan to achieve its objectives. Without this, the government risks failure and public disillusionment, particularly in the economically disadvantaged communities it is rightly setting out to help.