Labour must iron out the kinks in its industrial strategy
Labour’s draft industrial strategy is a good start, but there are a few tensions that need to be resolved, Chris Dorrell writes
Few areas of economic policy divide opinion like industrial strategy.
Very broadly, industrial strategy is the idea that there are objectives that the government is aiming towards and that intervention in the economy – be it through regulation, direct subsidies or some other means – can help achieve those goals.
For those on the right, it represents the apogee of left-wing interventionism, a refusal to accept that there are limits to a government’s understanding of how the economy really works.
Those on the left, in contrast, think the state needs to set out its thinking on how the global economy will change and how the UK will adapt as a result.
Unsurprisingly, the new government falls into the second category. It published the first steps of its industrial strategy on Monday alongside the Global Investment Summit.
The government revealed which sectors it would prioritise and set out the rationale behind its industrial strategy, identifying a range of problems which it could help address.
These problems include persistently low investment, weak diffusion of new technologies and regional inequality.
The green paper is also aware of the limitations of industrial strategy. Rather than indulge in high-level state planning, it stresses the strategy will “place private business, entrepreneurship, and innovation at its heart”.
It is too early to tell where the government will land on the details of the industrial strategy (this, after all, is just a consultation) but there’s no doubting the green paper is a good start.
However, a couple of tensions have arisen between the government’s messaging and the logic implied in the green paper.
The first concern is about sectors. The top-line of the government’s press release said the strategy was ready to “reignite our industrial heartlands,” which might raise a few eyebrows.
Given the new government has already pumped in £500m to Port Talbot and is reportedly considering another support line for steelworks in Scunthorpe, the concern is that ministers are using industrial strategy to prop up old industries rather than support growth sectors.
The green paper stresses that this is not the case. Alongside some specialist manufacturing, the green paper picked out the creative industries, tech & AI, finance and professional services.
This approach is certainly the right one. George Dibb, associate director for economic policy at the Institute of Public Policy Research (IPPR), said it was vital for the government to focus on the future if the strategy is to be successful.
“I really firmly believe that an industrial strategy has to focus on the areas of future competitiveness. It’s important we take a rigorous data-led approach to identify which sectors will have a comparative advantage,” he said.
Jonathan Reynolds, the business secretary, stressed this point to CityAM too. The industrial strategy was “not nostalgic,” he said.
“I think if you look at the sectors we’ve chosen, where the UK has got genuine comparative advantages, they reflect the economy today and where it’s going in future”.
So what’s the problem?
As the green paper itself makes clear, an industrial strategy is necessarily about making choices: Support for high-growth sectors is support which cannot go to sunset sectors.
By explicitly framing an industrial strategy around the UK’s industrial heartlands, the strategy risks losing its focus on growth. The government needs to guard against this risk.
One other concern is competition policy, which was thrown into relief by the appointment of Microsoft UK’s boss Clare Barclay to head the new Industrial Strategy Council.
A number of reports noted that Barclays’ appointment signalled a thawing in relations between Microsoft and the UK after the tech giant’s public falling out with the Competition and Markets Authority (CMA) last year.
The CMA blocked Microsoft’s attempt to acquire Activision, citing fears about market concentration.
Although the deal was eventually waved through, many raised concerns about how the CMA’s approach impacted the perception of the UK.
Microsoft vice-president Brad Smith said the CMA would “discourage innovation and investment” (comments he has since rowed back from) while Activision accused the UK of being “closed for business”.
Speaking at the investment summit, Keir Starmer said he would ensure that “every regulator in this country – especially our economic and competition regulators – take growth as seriously as this room does”.
This might imply that he believes the CMA’s activist approach has been harmful to growth, but the government’s own green paper reveals why this would be misleading.
The paper points out that there has been a “modest deterioration” in competition over the past two decades, singling out the tech sector as a prime example.
“A key concern for competition (in the tech sector) is large firms with dominant positions gained through scale economies, lock-in, and network effects,” it says.
In short, the document implies that growth-friendly competition policy should stand up to large firms with dominant market positions.
As Dibb said: “Strong competition policy is an important part of a growth strategy because monopolies don’t have to invest or innovate”.
In two instances then, there seems to be a slight conflict between the government’s messaging and the reasoning in its own policy document.
The government needs to have the courage of its convictions.