At the core of these announcements is a belief that the UK economy is inherently weak due to over-dependence on the financial sector – as well as an alleged reliance on cheap labour from abroad. But how would the Labour party propose to realise these aims?
Firstly, it seems, by using the government’s purchasing power to prop up industry. New procurement rules would oblige public contracts to be awarded to British companies – along with “a real industrial strategy”, that would presumably out-spend what the Conservatives have already committed. There are also plans to increase spending in education, skills, and lifelong learning through the National Education Service – as well as facilitating business investment through a much-touted National Investment Bank and a network of regional development banks. The use of subsidies has also been hinted at.
Here, we can detect a strong note of protectionism and the anti-competitive harm it brings. By ensuring that government contracts remain domestic, and that government procurement is limited to British companies, these policies would not encourage UK firms to improve and innovate but would remove such incentives altogether. Lack of competition begets complacency – ultimately leading to lower quality goods.
In this climate, it is hard to see how Britain could become an export powerhouse or compete on the world stage. Such protectionism is analogous to limiting the number of foreign players in the Premier League, and then expecting England to win the World Cup. Playing against the likes of Sergio Aguero and Mo Salah every week has undoubtedly made Harry Maguire a better defender. The same, of course, is also true for competition on a macro level.
Another problem with this rather optimistic view of protectionism is the issue of reciprocity. If the UK government were to shield domestic firms from foreign competition, it is unlikely that other countries would give British firms free rein to sell goods in their domestic markets. Of course, Labour’s current policy tends towards joining a new customs union with EU, which would “provide the same benefits that we currently enjoy in the EU’s customs union…”, and in which Britain would have a say. Whether or not such a customs union is desirable is another matter – but there are serious questions about whether the EU would give a protectionist UK any significant role in this imagined structure at all. Politically speaking, it is doubtful that such a customs union could even exist.
As recent economic history suggests, the introduction of a National Investment Bank (NIB) would also carry unintended consequences. As Oliver Riley points out here, a previous attempt in Tony Benn’s National Enterprise Board proved incredibly wasteful, splurging money on inefficient enterprises like British Leyland and the British leather industry. As well as the high opportunity costs of such investment, we would also expect to see a “crowding out” effect. As the government borrows more, interest rates climb and private firms find it harder to borrow, thereby reducing overall investment.
Politics and finance make uneasy bedfellows. If the government, for example, pushed the NIB to lend ever-increasing amounts to keep failing enterprises afloat, we might see a situation similar to that of India, where government-owned banks are flooded with non-performing assets. Ultimately, the costs of these industrial bailouts will be borne by the taxpayer.
Finally, it is worth questioning the assumption that our economy relies ‘too heavily’ on financial services? One thing is for sure, Britain – the world’s second largest exporter of services – does it well. The Germans are comparatively better at manufacturing, and hence, produce more goods. Yet they also trade fewer exotic derivatives. Tipping the balance of our economy towards manufacture, as per David Ricardo’s famous example, would be akin to the Portuguese wine-merchant switching to cloth making – or the English yeoman attempting to open up a vineyard.
I do not doubt Labour’s commitment to building a more equal Britain, with equality of opportunity for all. Yet idealism alone rarely lends itself to sensible policy-making.
As Milton Friedman pointed out, “one of the great mistakes is to judge policies and programs by their intentions rather than their results.”