General election 2017 and the incompleteness of industrial strategy

Industrial strategy is the Achilles heel of British economic statecraft, but the radical approaches promised by both the Conservatives and Labour fall short of a transformative agenda

Craig BerryWhen Theresa May suggested that economic growth would be pursued much more inclusively under her premiership than under David Cameron and George Osborne, a renewed focus on industrial strategy was offered as a key plank in the UK’s post-Brexit healing process.  The status of the vow, given the political uncertainties created by the general election, is, frankly, anyone’s guess.  We should not be too quick to assume, however, that a Labour government would have offered a more transformative agenda in this regard.

Labour’s Richer Britain, Richer Lives – an accompanying document to its main manifesto – offers a useful definition of industrial strategy: ‘a vision of the kind of economy we want and a plan for how to deliver it’.  This is a classic (but not exclusive) hallmark of social democratic statecraft, insofar as industrial strategy is conceived as a means by which capitalism can be harnessed to deliver public goods.

Crucially, this is essentially where the May government started from in 2016 too. As actual policy proposals began to materialise, it was clear that May’s agenda did not differ significantly from the 2010-2015 coalition government’s own attempt at industrial strategy, but the language offered a sharp retort to Osborne and co.: May intended to fix the economy, not simply rebalance it.  This kind of language provided an opening for more radical industrial policy proposals – a challenge taken up by the independent Industrial Strategy Commission, of which I am a member.

The 2017 Conservative manifesto was, again, frustratingly policy-lite (albeit in virtually every policy area!).  But its language was, again, quite extraordinary.  In essence, May was essentially bringing ‘the economy’ back into the public realm, making clear that steering private economic activity towards delivering equitable outcomes was a legitimate function of the state.

For all that has been, and will be, said of Theresa May’s inevitably brief tenure as Prime Minister, she is much stronger on this terrain than the two larger camps of Conservative thought that she seeks to straddle: liberal Tory remainers and hard Brexiters differ on lots of things, but not on the apparent futility of an interventionist industrial strategy. May is much more Heseltinian than Thatcherite on the economy; this is one of the main reasons – beyond the obvious failure to secure a majority – that she is now such an isolated figure within the party.

So where does the election outcome leave UK industrial strategy? There is the curious possibility that an alliance with the Democratic Unionist Party (DUP) will push May to further strengthen her approach, given the DUP’s apparent support for an industrial strategy (reflected in its 2017 manifesto).  Of course, the DUP’s focus is exclusively Northern Ireland, which may prove inconsistent with an efficient allocation of industrial policy resources within a UK-wide strategy.  Any accommodation of DUP priorities would put an interesting twist on the British state’s traditional resistance to ‘picking winners’ – given the DUP is the only party which can plausibly be said to have ‘won’ the 2017 election!  In reality, the DUP’s views on the economy are rather incoherent – the perception that they are a party of the centre-left in this regard is a significant misreading.

Where is Labour on industrial strategy? Insofar as the election result validated Jeremy Corbyn’s left-wing leadership, it would be fair to assume that, even after May departs, the political space for a radical industrial strategy will widen further.  But this is a conclusion we sadly cannot yet jump to.

Richer Britain, Richer Lives outlined a ‘mission-based’ industrial strategy, influenced by Marianna Mazzucato.  The notion of industrial strategy missions is useful insofar as it suggests a longer-term purpose for economic statecraft beyond delivering short-term growth for its own sake.

But the first mission, focused on energy, is a problematic one (specifically, the mission seeks to ensure that 60 per cent of the UK’s energy comes from low-carbon or renewable sources by 2030). It is of course imperative that, given the threat of climate change and the importance of energy as a foundation for other economic activities, policy-makers consider how to make our economy greener.  There is also a degree of helpful pragmatism here, given the UK’s potential advantages as a home for green industries.  But many such industries are already expanding in the UK – the priority now, from an industrial strategy perspective, is less one of cultivating them, but rather capturing the value they create for British firms and workers.

Labour proposes substantial interventions into energy markets. But the economic rationale for this is never cleanly divorced from the moral imperative of reducing carbon emissions and, more problematically, controlling energy prices for consumers (which could of course conflict with industrial strategy objectives, since renewable energy is currently more costly to produce).

Labour’s second mission is focused on the more generic, and conventional, territory of innovation (therefore concentrated on improving productivity, the classic rationale for industrial policy). But innovation is of course a means rather than an end, and so the ‘mission’ framing is slightly misapplied in this case.  More generally, the policy proposals associated with this mission are much less ambitious (and also, as a consequence, more coherent).

The big three policy agendas are public investment in infrastructure, greater occupational training and more support for private sector R&D (it is worth noting that such support was denounced as an example of ‘corporate welfare’ by Jeremy Corbyn during the 2015 Labour leadership campaign).  None of this is transformative.  Labour also has a very strong approach to using public procurement to support industrial development – an agenda pushed most notably by James Dyson in his review for the then Conservative opposition in 2010.

Labour differs sharply from the Conservatives in suggesting the creation of a National Investment Bank (NIB), with regional outposts (seen as a way to support private investment in infrastructure and R&D). But the proposed plan is a tentative one.  In general, Labour’s industrial strategy agenda says very little about private finance.  Reorienting the gigantic volume of institutional investment away from global capital markets and towards longer-term productive activity is vital to the UK’s economy – interestingly, the Conservative government is currently developing proposals in this area.

Problematically, Labour’s industrial strategy includes no reference to Brexit. To be clear: despite inferences made by John McDonnell in recent media appearances, EU membership is not a barrier to anything in Richer Britain, Richer Lives – but leaving the EU would be a barrier to almost everything in Labour’s industrial strategy. Even more strangely, there are only limited references to place and local economies, despite the centrality of this issue to the Conservative government’s agenda, and the potential opportunities for Labour-led local authorities in this area.

The energy mission includes proposals for new forms of public ownership, but interestingly Labour policies on nationalising rail companies and Royal Mail are not presented as part of the party’s industrial strategy; public ownership was of course central to Labour’s economic statecraft in the postwar era. In practice, nationalisation for Labour is now largely about protecting consumers (see page 19 of the manifesto).

An unkind – but not implausible – account of Labour’s approach to supporting innovation is that it is Osbornomics reheated, and partially radicalised. Peter Mandelson’s 2008-2010 tenure as Business Secretary is probably a more accurate comparator, although some of the delivery mechanisms Corbyn’s innovation policy would have relied upon were only developed under the coalition government.  Labour offers much more policy substance in some areas than the May, coalition or previous Labour governments – but arguably a thinner sense of strategic purpose than that developed by May.

If UK industrial strategy is undergoing substantial reform, what stage of the policy innovation cycle are we at?  Both parties seem stuck at what Peter Hall defines as ‘first-order’ policy change, that is, revisions to numerical or quantitative terms associated with existing policy instruments – although Labour’s energy policy, and to some extent its NIB proposal, also encompass ‘second-order’ change, that is, the replacement of existing instruments with alternative policy levers.

There is a real danger at present, however, that these limited changes are being presented in paradigmatic (or ‘third-order’) terms. Andrew Baker’s response to Hall, using the case of macroprudential financial regulation, argues that policy elites are often adept at capturing seemingly radical reform agendas in order to maintain the status quo.  This helps to explain elites’ accommodation of the May agenda so far.  Most of Labour’s current programme could also be accommodated rather straightforwardly – thereby dissolving the radicalism of its narrative into the incrementalist habits of Whitehall.

My own response to both Hall and Baker, which focused on post-crisis industrial policy, argued that institutional density is a key element of radical policy reform.  New policy frameworks may emerge – both the Conservatives and Labour have made important contributions in this regard – but will not be translated into a realisable policy agenda without the necessary institutional machinery.  In the Whitehall machinery, despite the recent creation of the Department of Business, Energy and Industrial Strategy, the Treasury holds most of the levers relevant to industrial strategy, yet is not sufficiently focused on either the development or delivery of a genuinely strategic agenda.

So far, both parties have been relatively quiet on this issue (although a promise to consult on Lord Kerslake’s review of the Treasury was included in the Labour manifesto).  The Industrial Strategy Commission will not be!  The UK needs a whole-of-government approach to industrial strategy; Theresa May’s personal association with this policy area is therefore very much welcome.  One of the downsides of adopting several missions is that they may slot too easily into existing departmental responsibilities, detracting from the need for a single, strategic approach to which all departments are oriented.