Manufacturing decline and Britain’s ‘radically redundant’ industrial policy

Industrial policy is being rediscovered, again, but the incompleteness of the policy-making environment means it will fail to halt the ongoing decline of manufacturing

Craig BerryGordon Brown in 2008. David Cameron in 2010.  And now Theresa May in 2016. Since the financial crisis, Britain has had three prime ministers, and each one has promised a manufacturing renaissance based on a more activist approach to industrial policy.  The first two failed, but we need to understand how they failed in order to understand the challenge facing the May government (one which is of course compounded by Brexit).

In my recent SPERI British Political Economy Brief, UK manufacturing decline since the crisis in historical perspective, I contrast the recent performance of the British manufacturing sector with evidence of its decline in the last 40-50 years.

The good news is that since 2011, the historical decline in manufacturing jobs has gone into reverse, with the number of jobs having risen by around 5 per cent. Focusing on more recent decades, there had been a decline in jobs of 21 per cent from 1981 to 1991, 15 per cent from 1991 to 2001, and 33 per cent from 2001-2011.

However, while jobs growth has resumed, it has done so from a very low base in relative terms, and may indeed represent a post-recession ‘bounce’. Recent growth may have bucked the historical trend, but it is not in-itself remarkable; manufacturing has been outpaced by other sectors in this regard.  Furthermore, we should not discount the possibility that the structure of employment in the manufacturing sector has changed in line with the British economy in general (with higher levels of casual employment, especially in high-growth manufacturing industries such as food production).

Most importantly, while there are now more manufacturing jobs, manufacturing output has effectively stagnated. Output had continued to grow strongly in the 1980s and 1990s even as jobs were lost.  This historical pattern was first disrupted, however, in the 2000s, when job losses on a much larger scale coincided with a small decline in manufacturing output.

The most recent data suggests a more acute set of problems whereby, after decades of increasing productivity (acknowledging this is a fairly slippery concept) by retaining higher-skilled jobs, British manufacturing has become adept at instead creating lower-skilled jobs, with a more limited impact on the sector’s productive capacity.

The underwhelming performance of the UK’s high-tech manufacturing industries – in which, as discussed in detail in the Brief, output growth remains mostly negative or negligible – is consistent with this picture.  Indeed, growth in the strongest performing industry, transport equipment (which principally consists of car manufacturing), is arguably due to the partial transformation of UK car manufacturing into a lower-skilled industry.

This is a different kind of manufacturing decline than we have experienced in the past – but it is decline nonetheless. Of course, arresting decline is a long-term process, and we should not necessarily expect overnight results following the partial rediscovery of industrial policy in the post-crisis period.

However, the industrial policy agenda pursued since 2008, and especially since 2010, is an inadequate response to decline in several key regards, and may indeed have helped to facilitate the new form of decline now evident. In my paper ‘Industrial policy change in post-crisis Britain’, I argue that British industrial policy is marred by its dependence on ‘an incomplete institutional and ideational environment’.

Three specific flaws in the ideational environment stand out. Firstly, industrial policy is too often treated as a discrete area of policy, distinguishable from macroeconomic policy.  Secondly, industrial policy is often framed by a simplistic understanding of separateness of state and market.  Thirdly, the core objective of industrial policy (increasing the productive capacity of the economy) is often obscured by more nebulous aims related to supporting business in general.

Perhaps the most serious flaw, however, is one of omission. Policy-makers have consistently failed to recognise decline as a crisis – rather a habitual condition – despite the profound impact it has had on Britain’s current account and productive capacity.

In terms of the institutional environment, industrial policy mechanisms in Britain have invariably been dispersed between national, regional and local government, with the identity of the lead department in central government in constant flux – and very much subservient to the Treasury in the Whitehall pecking order.

May has shown no real inclination to transform this inheritance. She has in fact replaced BIS with the Department for Business, Energy and Industrial Strategy, but her approach to the departmental configurations of industrial policy remains unclear. While the return of a direct reference to industrial strategy in the department’s name is noticeable, so too is the fact that the department has lost responsibility for higher education and trade policy (both integral to industrial policy in a broade sense) and effectively been merged with the Department for Energy and Climate Change.

We are confronted therefore with what appears to be a radical policy shift, but without challenging the frameworks within which industrial policy is conceived and delivered, the May strategy will probably be as radically redundant as its predecessors.

Brexit of course exacerbates the challenges facing the British manufacturing sector (which has seen no noticeable boost from sterling’s devaluation, which should in theory benefit manufacturing exports). I maintain that Britain is heading for a ‘soft’ rather than ‘hard’ Brexit, despite the mood music emanating from the Liam Fox and David Davis.  Yet even soft Brexit, where tariff-free trade with Europe is maintained, could ‘eliminate’ manufacturing over time, as the only prominent economist to advocate leave, Patrick Minford, has argued.

As discussed by Tom Hunt, May’s response to Nissan’s very public complaint about the implications of Brexit for its car manufacturing plants in the North East showed that she understands well enough the threat of Brexit to Britain’s residual manufacturing capacity (Nissan imports into Britain much of what is then reassembled for export, so devaluation is largely irrelevant). Yet ‘corporate welfare’ to persuade an overseas-based MNC not to take flight is inadequate, and should not be seen as remotely synonymous with a comprehensive strategy to enhance the capacity of Britain’s native producers over the long term.

Worryingly, the Labour opposition – again, despite the hyperbolic rhetoric – has demonstrated little understanding of the plight of British manufacturing. They promise hundreds of billions in new investment, but virtually no detail on what a Labour government would invest in.

Shadow chancellor John McDonnell is clearly a fan of Marianna Mazzucato’s account of ‘the entrepreneurial state’, which details the decisive role of public investment in driving technological innovation. Yet while a more sophisticated approach to generating R&D (including via a state investment bank) is welcome, a progressive industrial strategy will need to be augmented by a comprehensive approach to shaping (transnational) market and industry structures, addressing manufacturing supply chain vulnerabilities, and reforming capital markets more generally.

Labour has also said little about the institutional framework of industrial policy. A review of the Treasury led by Bob Kerslake for the party was expected to call for a new, powerful industry department (although SPERI advised Kerslake to instead seek to reform the Treasury from the inside out). Yet the review appears to be on an indefinite hiatus.

It is worth reflecting finally on what the post-crisis development of British industrial policy tells us about the future of neoliberalism as an economic policy paradigm. A growing number of progressives have ventured the suggestion that May has now ditched neoliberalism, or even undertaken a bit of off-the-cuff revisionism in arguing that neoliberalism never existed in the first place because, as Colin Talbot argues, ‘no-one calls themselves a neoliberal’.

Above all, such arguments expose a misunderstanding of how political ideologies function. Large, complex ideological families like neoliberalism do not need card-carrying adherents to prosper.  Their strength lies in their appearance as ‘common sense’.  As such, the May government will by necessity operate in a framework which has absorbed neoliberal assumptions around the primacy and inviolability of private enterprise and individualism.

The absorption process took decades, and is not about to unravel overnight (especially without a serious challenge from the left). If a brief historical contrast would be useful: Clement Attlee self-identified as a socialist, but that does not mean Britain had been transformed into a socialist country by 1951.  Ideologies die hard, and common sense dies harder.

Crucially, while May’s discourse challenges some of the tenets of neoliberal economic statecraft (just as the coalition government’s did, initially), appreciating the wider institutional and ideational environment in which this discursive shift takes place helps us to comprehend how what could be seen as a partial repudiation of neoliberalism can nevertheless serve to reinforce a growth model animated by neoliberal rationality. Fundamentally, the role of manufacturing in the British growth model appears hardly less marginal now than it did before the financial crisis.