Economic Theory

Does Britain need a ‘proper industrial strategy’?


Jeremy Warner yesterday echoed the Prime Minister’s goal of a “proper industrial strategy” for Britain. He rightly cautions against the wrong-headed interventionism that did the country so much harm between 1945 and the late 1970s, but he nonetheless advocates “a middle way,” a “genuine partnership” between private and public sectors in a range of areas including procurement, tax and energy costs. Such actions, Warner argues, will become much easier once the UK extricates itself from EU state aid rules which prevent governments from funneling money to ailing industries or sectors of the economy.

Interventionists might, with good reason, claim that state activism ceased to be a taboo with the bank bailouts of 2008. Yet, the ostensible rationale for the bank rescues was not the need to prop up individual financial institutions, but rather to restore confidence in the banking system through a mixture of liquidity injections and recapitalisations. The argument was that the cost of not acting, in terms of short-term turmoil which would bring down with it not only the insolvent institutions but also a good share of solvent but temporarily illiquid ones, was greater than the explicit cost of intervention.

This is not an argument that most free-market economists support, yet it is quite different in substance from the sorts of firms and sectors for which industrial policy is now advocated. Consider the steel industry, which is beset by chronic financial difficulties and is – allegedly – also the victim not of market forces but of state intervention – namely, high subsidies to Chinese steel producers from the Chinese government.

There is, however, no systemic justification for a state-sponsored rescue of the steel industry. Insolvency and restructuring of some firms in that sector do not readily seem to threaten significant negative spillover effects to the wider British economy, beyond having recessionary consequences in communities where steel manufacturers are big employers. But such temporary adversity is present whenever any reasonably large undertaking – say, a hospital, factory, or military facility – closes down or moves.

To have the state step in to halt the periodic redeployment of capital and resources would completely stifle economic dynamism. It is, of course, right to try and assist individuals affected by this transformation to find new opportunities as swiftly as possible. There is a debate as to how much the state – through welfare transfers, retraining grants, and other programmes – can help rather than hinder worker mobility and adaptation. Families and civil society organisations are often more efficient because more responsive to local conditions.

What is clear from the UK’s own record, and the experience elsewhere in the world, is that sectoral strategies almost always fail, and when they do not, they tend to cost more than the benefits they deliver.

Jeremy Warner does, admittedly, concede that “state intervention [should not] be confused with […] government funding” – although arbitrary funding is precisely what the EU state aid rules which he resents so much are there to prevent. Still, the alternatives to direct funding – price and wage regulation, quotas, monopoly licenses, structural interventions to break up firms – are hardly more appealing as growth-promoting measures.

The Government has been unclear as to what it understands industrial policy to mean. There is, of course, a sort of industrial strategy, based on input cost reductions via planning liberalisation, a market-based system of energy provision, and pay deregulation, which is perfectly compatible with, indeed reinforcing of, economic growth and industrial expansion. But we should be weary of the vagueness of the discourse around industrial policy. It would not be the first time that grandiose rhetoric is used to conceal the troubling implications of an economic agenda.

 

Policy Analyst at the Cato Institute's Center for Monetary and Financial Alternatives

Diego was educated at McGill University and Keble College, Oxford, from which he holds degrees in economics and finance. His policy interests are mainly in consumer finance and banking, capital markets regulation, and multi-sided markets. However, he has written on a range of economic issues including the taxation of capital income, the regulation of online platforms and the reform of electricity markets after Brexit. Diego’s articles have featured in UK and foreign outlets such as Newsweek, City AM, CapX and L’Opinion. He is also a frequent speaker on broadcast media and at public events, as well as a lecturer at the University of Buckingham.


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