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UK’s current version of industrial strategy will do little to boost productivity, argues IEA


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IEA releases report on the effectiveness of 'industrial strategy'

A new report released today from the Institute of Economic Affairs debunks several of the Government’s claims around the efficacy of pursuing an industrial strategy. The UK’s economy and population would be better supported by a revival of a horizontal rather than sectoral strategy. That is, one that creates the conditions for growth, enterprise and entrepreneurship as opposed to one which picks winners. Policies which boost competition should be prioritised, as well as a liberalisation of planning controls and energy markets, and tax reform.

Manufacturing is not the panacea to productivity:

  • A focus on manufacturing would do little to boost productivity considering the former amounts to just 10% of GDP and 8% of employment.

  • The decline of manufacturing has been overstated. All developed countries are experiencing a fall in the relative share of manufacturing; the UK is not seriously out of line with many comparable countries.

  • Policymakers should not frustrate our growing comparative advantage in services by favouring manufacturing.

  • The boundaries between manufacturing and services are becoming blurred. Up to a fifth of the revenue of manufacturers now comes from services such as design, development, maintenance and support. This makes policies to favour manufacturing difficult to design.

  • Although manufacturing does account for a disproportionately large share of UK exports, this share has been declining sharply. Many of the exports go to the EU, reflecting the way the Single Market has favoured manufacturing at the expense of services.

  • It is often claimed that much of today’s manufacturing is concentrated in ‘high added value’ sectors. Whilst this is true for bio-sciences and pharmaceuticals, much other manufacturing is less glamorous.

International evidence

Alleged models such as France and Japan do not actually provide a convincing case for government intervention. More recent examples often lauded, such as South Korea, are more ambiguous than their advocates suggest. Much of the latter’s success is down to trade liberalising policies and a greater willingness to withdraw funding from unsuccessful projects than other administrations around the world.

Policy proposals to boost productivity:

  • Liberalise the energy market to lower costs to consumers and businesses

  • Scrap renewables subsidies and emission targets, perhaps to be replaced by a neutral carbon tax or a cap-and-trade scheme.

  • Deregulate planning laws to make it easier to change land-use and boost housing supply.

  • Labour market deregulation in the wake of Brexit, looking at working time, the role of unions in key sectors such as transport, and the apprenticeship levy.

  • Occupational licensing, which increasingly protects producers at the expense of consumers, should be cut back.

  • Immigration policy should not restrict firms’ ability to recruit skilled labour.

Commenting on the report, Diego Zuluaga, Research Fellow at the Institute of Economic Affairs and the report’s co-author, said: 

“The fetishisation of manufacturing is backward-looking and ignores the many opportunities that exist for innovation and growth in services where the UK has a clear comparative advantage.

“Confidence must be restored in the evolutionary benefits of the market process. This will always yield greater prosperity in the long-run than a return to the dirigiste industrial strategies of the past. The idea of picking winners should be consigned to the history books. Our politicians should focus on creating the conditions for growth across the entire country, and every sector.”

Notes to editors: 
To arrange an interview about the report please contact Stephanie Lis, Director of Communications: [email protected] or 07766 221 268.

The full report, by Prof Len Shackleton and Diego Zuluaga, Balancing the Economy – The hand of government or the invisble hand?, can be downloaded here.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.

The IEA is a registered educational charity and independent of all political parties.