As Trump puts 25% tariffs on steel Dave Levy outlines problems with Labour’s industrial strategy
One of the tasks facing any government succeeding 14 years of Tory misrule would be to repair the economy. How do Labour plan to do it?
Starmer’s government has published an industrial policy green paper, which claims to be a classic investment/innovation programme. They say,
“The strategy will focus on tackling barriers to growth in our highest potential growth-driving sectors and places, creating the right conditions for increased investment, high-quality jobs and ensuring tangible impact in communities right across the UK… The strategy’s goal is to capture a greater share of internationally mobile investment.”
The Strategy identifies growth sectors, proposes a new industrial council with sector plans, and a national wealth fund. It plans to leverage the London capital markets and public sector pension funds to fund the investment, and tune regulation and trade policy to encourage growth. It identifies weak and aging infrastructure (including energy supply) as supply side constraints but makes non-SMART promises to improve them.
The chosen industrial sectors are advanced manufacturing, clean energy industries, creative industries, defence, digital technologies, financial services, life sciences, and professional and business services. It is a goal that growth is consistent with the UK’s net zero commitments.
The strategy is comprehensive in its aims, and optimistic in assessing the competitive advantage of the British economy. They rightly claim that the UK has a powerful research base due to its University sector and claim a diverse and talented labour force; alongside the claim that the “Global Talent network” is bringing the best in the world to the UK. The reality is that the inherited immigration system places many barriers for even the most talented to come to the UK.
A critical part of the strategy is to ensure that private capital finds it easier to invest in the high growth parts of the economy. Much is made of the UK’s venture finance marketplace. However, it is unclear how much of the capital raised is invested in the UK. Just because there’s a capital markets venue in the UK, doesn’t mean that funds raised will be invested there. Historically, British industry has funded itself with retained profits. Capital Markets are not patriotic and British management and old money are exceedingly risk averse.
An industrial policy focusing on innovation and startups needs to mitigate the risk of backing investments that do not work. It is very difficult to identify tomorrow’s winners, until they’ve won. Industrial policy also needs to offer a “just transition” from legacy industries.
The green paper identifies that the UK’s ability to adopt new technologies, ideas and process is relatively weak compared with other OECD countries. The paper has little to say about the cultural barriers to fixing this; its answer is capital mobilisation which may not be enough. The strategy is sadly silent on how Universities can contribute to the growth and adoption of innovation.
The paper identifies the UK’s regulatory capability and its strong rule of law as competitive advantages for the attraction of international capital. The idea that this is an advantage to the growth mission seems to be undermined by the recent change in personnel at the top of the CMA and Reeves’s all-points bulletin to the regulatory bodies instructing them to prioritise economic growth.
The paper also identifies weak infrastructure and low investment as a weakness. The big idea to solve this is the claim that the planning system reforms will enable the timely delivery of essential infrastructure including energy generators and data centres. Both the house building programme and energy market reform are mentioned as contributions to improving the supply chain economics for the growth sectors.
On international trade, the paper is unsurprisingly unambitious about the relationship with the European Union. It repeats the mantra about reducing friction and focuses on, what is for the European Union, the least attractive part of Labour’s proposals, that of mutual recognition of professional qualifications. Note that since 2020, the second fastest growing economy within the UK is Northern Ireland which is part of the European Union’s customs union and single market.
The big unasked question is whether investment/innovation industrial policies can work. Some economists including Meadway, Graeber, Dillow and Edgerton question the effectiveness of industrial policy, especially that aimed at innovation and start-ups, not least because of the need to combat climate change. Meadway & Graeber argue that the climate crisis is or should be changing the nature of the questions of economics. Dillow argues that the multiplier effect of investment is low and that identifying the successful future is too hard. Edgerton argues that the goal of policy should be a better life, not more jobs and that investment needs to be directed at health and education, both of which can offer comparative advantage.
He also argues there needs to be a wealth distribution agenda; a wealth tax and Financial Transaction Tax would both raise money for whatever investments are needed. Increasing public sector pay, the minimum wage, and benefits will lead to increased demand allowing the new industries to sell their product.
Edgerton’s argument that the funding of health, education and the care sector, together with a more redistributive tax system can be important as drivers of growth is an important counterpoint to the green paper.
References:
https://www.nationalwealthfund.org.uk
https://www.theguardian.com/commentisfree/2024/oct/11/labour-carbon-capture-climate-breakdown
https://onlinelibrary.wiley.com/doi/10.1111/newe.12357 Industrial strategy or foundational economy approach? By David Edgerton Nov 2023