Five things you should know about industrial strategy
Industrial strategy is back. It featured in Theresa May’s Birmingham leadership speech as one of the economic reforms necessary “to get the whole economy firing”. As prime minister, May has followed through by elevating the former Department for Business Innovation and Skills’ competitiveness remit ‘to develop a long term industrial strategy’ to the title of the new Department of Business, Energy and Industrial Strategy (BEIS).
Some of the concerns about the loss of the Department for Energy and Climate Change have been ameliorated by the prospect of a joined up energy, climate and industrial policy, particularly in the hands of the Greg Clark. Clark has talked about a comprehensive industrial strategy and Jesse Norman, the new minister for industry and energy, has tweeted that “industrial strategy is not just about companies; it’s also about making markets work better”, signalling the department’s preference for a broad rather than narrow industrial strategy.
So it is a good time to ask, what is industrial strategy? And what could it mean for climate and energy policy?
1. The UK has blown hot and cold on industrial strategy, but it is a vital part of the economic toolkit
Industrial strategy acknowledges government has a bigger role in delivering economic growth than just providing the right macroeconomic conditions for business to flourish. It says the government should also make strategic interventions to address market failures which prevent a sector reaching its potential. Very few markets meet the conditions for perfect competition, so there are multiple information and co-ordination failures, and externalities, that the government could address to improve the functioning of markets. Industrial strategy focuses on addressing the barriers that are most important for the economy.
2. Success depends on a clear objective and focusing on the sectors that help you to achieve it
Industrial strategy can have various objectives. Good arguments can be made for focusing on productivity, export growth, decarbonisation or structural objectives like rebalancing the UK’s economy sectorally or geographically. The last industrial strategy, developed under the coalition, targeted the productivity problem and the remit for this week’s Cabinet Committee on Economy and Industrial Strategy looked very similar. But Theresa May has committed to “govern for the whole United Kingdom” and “build an economy that works for everyone”. A strategy that builds on existing strengths doesn’t offer much for the former industrial towns left behind by globalisation. But manufacturing could be the missing link that brings the industrial heartlands and the decarbonisation agenda into the fold.
3. It could catalyse growth in the green economy if delivered right
Industrial strategy can have horizontal (cutting across the whole economy) and vertical elements (focusing on particular sectors) but it is usually characterised by both. The horizontal elements affect all businesses in the economy because they improve the factors of production all businesses rely on, ie workforce skills, finance, infrastructure, energy, resources etc, or the competitiveness of the environment all businesses operate in, ie entrepreneurship, innovation, markets etc. The vertical elements address exactly the same things but focus resources and delivery on a sector’s particular needs.
An industrial strategy with a horizontal theme of energy and resource efficiency and a vertical focus on the sectors important to respond to climate change would be essential to an integrated industry, energy and climate policy. But energy and climate policy needs to play its part too. Ideally, it would do this through a long term framework for investment that rewards businesses for low carbon decisions. And the new remit of BEIS means it should pay special attention to the sectors needed for the UK’s decarbonisation where the UK also has the potential to develop a competitive advantage, like CCS, network management , electric vehicles, storage, green finance, marine energy, novel materials, low carbon infrastructure design and construction, and R&D.
4. It should cover manufacturing and services, and the link between them
The UK’s GDP is composed of 15 per cent manufacturing and 78 per cent services. Some of those services – engineering, education, media, architecture, design, finance and legal – are highly productive and exportable. Globally, 45 per cent of value added from exports comes from services compared to 37 per cent from manufactured goods. The UK’s industrial strategy should build on the UK’s world leading expertise in services. But it should also acknowledge the strategic significance of manufacturing, which functions like a keystone species in the industrial ecosystem. Manufacturing and services are linked, and growth results when science, design, engineering, manufacturing and construction come together to innovate. Delivering the infrastructure and products needed by the UK and the rest of the world in a sustainable way will require unprecedented innovation in energy generation technologies and efficiency, as well as the development of new materials and smart approaches to their use and reuse. Heavy industries, like steel and concrete, face particular energy and resource challenges that the UK is well placed to solve. Industrial strategy that supports lean, green manufacturing and construction would be good for productivity, competitiveness and sustainability. And it would generate expertise that would be in high demand around the world.
5. A strategy which doesn’t respond to the changing business environment will fail
Great businesses know how to change, to adapt to the availability of new technologies and respond to customer’s changing needs. Industrial strategy should prepare businesses for change, not protect them from it. The greatest danger for government is that its industrial strategy becomes protectionist, captured by the interests of an individual business or group of businesses that don’t know how, or don’t want, to respond to transformational change in their sector. Industrial strategy can avoid this by designing interventions that emulate successful systems, like Porter’s clusters or Schumpeter’s waves of innovation. This type of strategy builds the conditions for new ideas to be commercialised and businesses to start up and grow, encouraging the disruption that forces businesses to adapt or die. The number one risk highlighted in the recent World Economic Forum 2016 Survey was the failure to mitigate and adapt to climate change. An industrial strategy that doesn’t help UK industries respond to the biggest challenge the global economy faces will not be worth having.