Why we need to steel ourselves for a new industrial policy

By Mike Emmerich

There is a view that after its post war flirtation with Morrisonian nationalisation and then Thatcherite privatisation, British industrial policy has settled into a new and desirable norm. As I write this blog, Janan Ganesh’s latest piece for the FT is staring at me. “The quiet success of Britain’s anarchic economic model” reads the headline, setting the tone for an argument to be heard often in parts of Britain that we have moved beyond the rigidity of our more doctrinaire past, and in doing so past our old rivals in France, and maybe even in Germany too, in creating a model that has fixed the generations-old British disease.

But is the British model something of which the country as a whole ought to be quite so proud? There is merit in such claims. The British labour market is performing very strongly. Growth, if not breaking records, is now well established. That said, at the aggregate level these two facts go a long way to explaining why our productivity figures are so dire. Perhaps the way we measure productivity exaggerates what looks like a post-recession step down in our performance but the labour market’s robust growth and weak pay inflation suggest that this could be overstated.  The conclusion I draw from the analysis is that only if the London and the greater South East is taken in isolation does the picture look so unambiguously rosy. The capital region’s output, productivity and service exports are all robustly strong. The logical consequence of this, given the scale of London in the UK is that the rest of the economy is less so. Looked at through the lens of the great cities, or the mill and mining towns that surround them, Ganesh’s argument looks at best optimistic and in many cases, wrong.

With the exception of Bristol, all of the so-called core cities of the UK probably run a negative balance, spending more in public services to protect the old and vulnerable than they generate in taxes from the economy. Even Greater Manchester, the much heralded success of city region renewal is in deficit to the tune of some £5bn a year, around 10% of its total output. If this were a statistical artifice it wouldn’t matter, but it’s not. The productivity of cities, though hard to measure, is much lower in the big cities than it is in the capital, and the best guess we have is that the majority of that is due to the legacy of industrial change: weak industrial composition, poor skills and low labour market attachment that seem to have dragged on from one generation to the next since the great shocks to manufacturing industry culminating in the 1980s. So if nationalisation is argued to have failed UK industry and its rapid unwinding through privatisation made what is left lean and fit to succeed, the legacy in most of our big cities and towns is a residualised economy, and a model a long way from that which Ganesh and many others who think similarly, want to argue is a national success. It is not, and the Northern Powerhouse has a long way to go before that will change.

As I wrote in my last blog, the Northern Powerhouse will only succeed with the application of the right policy, at scale and for a very long time. But in one or two very important areas it really isn’t clear what constitutes the right policy. Nowhere is this truer than industrial policy. The great cities of the North neither could, nor should, seek to become pale shadows of London and the satellite towns and cities of the M1, M4 and M11 corridors that have driven the model Ganesh describes. The Southern and Eastern parts of the country are what they are for reasons that are not replicable.  But what should other cities do over and above getting the fundamentals of the supply side broadly right? It is here that the complacency of Ganesh’s argument looks most obviously wrong. The policy cupboard looks really very thinly stocked with interventions that work in the kind of open, liberal economy we have. The Government’s own What Works Centre’s review of business support found little robust evidence to back up the notion that traditional business support adds long term value: signposting, business advice and mentoring may be things that a place should do to help promote business, but not if we expect them to make a major contribution to GVA. And for all the clamour to support the Port Talbot steelworks, the evidence of most studies, including the Aston University study for the Manchester Independent Economic Review, suggest that subsidies don’t work either, even in the medium term. There’s usually a jurisdiction offering a bigger subsidy somewhere in the world. Businesses can and do hop the globe in search of them.

This is not to argue there is nothing to be done. A well functioning supply of suitable business lending and equity is vital. Skills need to be improved. The focus on transport in the Northern Powerhouse looks vitally important. But these supply side policies merely create the conditions in which all business can improve, usually at the margins, which, over time is fundamentally important. Only in the Catapults and the like do we see more targeted support that looks like they can catalyse growth in promising newer, scalable and more game-changing industries. But the scale looks small still. The balance between this and grants to business, business support and activity with little value beyond exhortation to grow, looks all wrong for our major city economies to warrant the warm glow of Ganesh’s article. More to the point the reassurance of all our national political parties that they have the answers does not ring true enough to the ears of people living in cities and towns that simply don’t feel the prosperity.

There is, and has been for more than a generation, a yawning chasm in British policy for industry with a model in place which has worked well for much of the South and East but which has as yet left much of the rest of the country a long way behind. Where Ganesh may be right is that the search for grand national solutions imported or dreamt up has run its course and that what works in Britain is something we’re best placed to work out in practice. If so, I’d follow that through to its logical conclusions. Our national model is better at paying the welfare bills of the great cities than it is at generating the tax receipts for cities to do so themselves. The cities should be given the freedom, encouragement and incentives to experiment as widely as they want, to reinvent their own civic cultures, their own models of industrial policy, their own solutions to their own problems, with national Government getting out of the way where possible, bending national rules where appropriate. We need our cities to have a period of purposeful experimentation: with real and wide-ranging control over policies such as skills, transport and planning and with the potential to capture the fiscal benefits of sound policy, led by Metro Mayors with the power to make change happen. This will scotch myths, help us better to understand what works and may eventually create new national models too. So let flowers bloom, but perhaps not thousands. We will need investment, new forms of policy and some well judged risk taking. For that we will need to find some steel.