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Rt. Hon. Lord Mandelson, First Secretary of State, Secretary of State for Business, Innovation & Skills, Lord President of the Council
The Royal Society for the encouragement of Arts, Manufactures and Commerce, London, 17 December 2008
Anyone who stands up to deliver a lecture on new industrial policy immediately has a couple of problems. The first is one of definition. What does industry mean exactly? Back when the BBC still had an industry correspondent, he – and it was usually a he – was typically reporting heavy industry. In part because of those associations, I briefly considered abandoning the word altogether. But on reflection, I’ve decided to launch a personal campaign to reclaim the word industry from the mills and the smokestacks. When I talk about industry I mean the smallest high-tech start-up along with the largest companies making cars, jet engines or aeroplane wings. I mean modern manufacturing and knowledge industries, drawing on and rooted in a world class services sector.
The second, much more serious problem is the somewhat treacherous history of industrial policy itself. Memories are long enough to equate any mention of industrial policy with a 1960s and 1970s style approach where the government attempted to pick winners – or, rather, where losers picked the government. Where government supported unviable industries and had a very hands-on approach, including setting prices and wages. For all the good intentions of these policies, they failed because they worked against the grain of markets and of economic change – they sought to fossilise the status quo rather than facilitate change. Or confused protecting industries with promoting their development. Or substituted the calculus of politics for commercial or economic reality. So the burden of proof is on anyone proposing a new industrial activism to show that they have fully understood the failures of the past.
The dynamism of a market economy is something that we should value and protect. Indeed one of the failings – comparable to that of the ‘70s - of some of the industrial privatisations of the ‘80s was precisely that they did not make enough allowance for the necessary competition that forces large market players to lower prices and provide better services. Nothing I have to say tonight will suggest that I think we help business by trying to block or reduce competitive pressures. I do not. However, I also believe strongly that the idea that the best industrial policy is no industrial policy is both complacent and naïve. I think it misjudges the potential of both markets and government to shape long term industrial outcomes. Government policies will always impact on industry. The question is; will they impact positively or negatively, coherently or incoherently?
As one of nature’s born optimists, I am more confident about the role of the state. Two weeks ago in my Hugo Young lecture I set out a case for what I called a capable, strategic state – one that works with markets and enables us to get the most out of globalisation. Part of that is about building a fair society socially equipped to create more winners from globalisation. Part of it is about putting in place the conditions that will help British business succeed in a global economy – and this I called market-based industrial activism. What I want to do tonight is to explore further this activist role for government - not in busy-body mode but in getting-it-right mode. I will expand on a basic idea of industrial activism that is rooted in five core principles.
First, industrial activism does not mean propping up failed companies or running industries from Whitehall. No protection of industry from international competition – because we believe that competition is in our long term interests.
Second, industrial activism means being pragmatic about the ability of markets to enable companies and people to succeed in a rapidly changing global economy. Policy should be activist in the sense that it recognises that government can and must complement market dynamics to get the best outcomes for our society and economy.
Third, industrial activism is shaped not just by what we conventionally label industrial policy but by all government policies –regulation, planning policy, migration policy, transport policy and a range of others – as well as the way government spends money and encourages innovation and entrepreneurship. The central point about industrial policy is how successfully it aligns all these relevant policies to target and deliver industrial outcomes.
Fourth, industrial activism means looking strategically at each sector in the economy, not in order to apply top-down political patronage to companies in these sectors but to assess how horizontal policy can secure maximum benefits across all sectors and reinforce our particular strengths.
Fifth, industrial activism means engaging in Europe and globally to shape the institutions and policies that manage globalisation and global regulation and making sure British companies are exploiting open markets.
These are not abstract points – they have real practical implications for the way government acts and complements the private sector. They have real implications for how we go about ensuring that the UK encourages entrepreneurship and creates quality, high value jobs in sectors that will be at the centre of the big global and technological trends in this century. They shape the way we think about Britain’s industrial future. It is precisely now, in a downturn, that it is most important to be reflecting on our long term strengths and to put in place the conditions for future success. There is a huge amount of good work being done across government that reflects one or other of these principles. The Stern, Leitch, Sainsbury, Eddington, Barker and Killian Pretty reviews, for example, have all made important contributions on climate change, skills, innovation, transport and planning. What we need to do now is bring all that work together into a single clear-eyed vision of Britain’s industrial future in a globalised economy.
It is important to stress that this activism is in many cases a question of amplifying past success rather than compensating for past failure. From 1997, under the economic stewardship of Gordon Brown and Alistair Darling, UK GDP growth has been good. Underpinning this growth was a step change in productivity performance, with the UK narrowing the output gap with France, disappearing with Germany, and keeping pace with the US’s impressive productivity performance.
Driving that improved performance of the UK economy has been an effective market-based economic policy and practical reforms to promote fairer and more flexible markets. We have a strong enterprise culture in the UK and competitive markets that deliver efficiency and benefits for businesses and consumers. We have a good record on regulation – and are embarked on an ambitious programme to further reduce the administrative burden of regulation. Over the last decade the government has tackled the historic backlog of under-investment in the UK's infrastructure and its skills and science base. Our openness to both trade and foreign investment has delivered huge benefits. Despite the short term pressures to change tack – both in Britain and in the EU - we need to ensure that the open competition and labour market policies that drive growth in the UK and Europe are protected for the long term.
However there will be major consequences from the current economic slowdown for the structure of the UK economy, long after growth has resumed. The economy will emerge with a consolidated financial services sector. Household consumption is likely to grow more slowly than the rest of the economy as British consumers cut back on debt. Public sector job creation will add far fewer jobs to the economy in the future. We therefore need to widen and diversify the specialist bases of the UK economy and focus on how we further commercialise and internationalise these bases.
This will matter because the global economic order will continue to be reshaped, especially by the continuing re-emergence of China and India. These economies are radically changing the global division of labour and forcing us to consider our comparative advantages, and our emerging strategic markets. What we know for certain is that our specialisations must be built on knowledge and value-added. They will be in business and financial services, where smart regulation, combined with the depth of commercial and legal experience in the City, for example, have the potential to make Britain a clear market leader – even if it’s not fashionable to say it right now. But they will also be in the knowledge and creative industries and the technological and manufacturing process revolutions that will define the current century, for example in the biosciences. The global shift to cleaner and more efficient energy usage will also throw wide open the market for new forms of energy generation and a host of other low carbon or post-carbon goods and services.
Success in all these and other areas is fundamental to Britain’s economic future. But it will mean more than simply ‘not standing in the way’ of British ingenuity and entrepreneurialism. Of course, these things will be key drivers. But our success will also be defined by high levels of research, the commercialisation of innovation and the creation of a world class workforce and infrastructure. Here the role for strategic government becomes vital, because these are not things that the market will automatically deliver on its own. That is not an entirely uncontroversial thing to say. But to say, pragmatically, that markets may fail or may not always produce the outcomes we need is not to question their fundamental role in a modern economy. It is simply to say that we need to understand better how they work and shape government policy accordingly.
The market failures that really affect our long term economic capacity are often complex and concern the basic allocation of resources in the economy. For example, spending on skills is vital for a dynamic economy, but for individual businesses the spillovers from that spending often makes it unattractive. Companies want apprentices, but they may not want to pay to train apprentices who may one day work for their competition. Innovation is vital for a cutting edge economy, but innovation can be too long-term, risky, expensive and difficult for markets. Modern economies also need high levels of general, scientific and technical education, but the market will not produce these on its own. A modern economy needs intensive digital and transport infrastructure, but we cannot necessarily rely solely on markets to produce these things. These are cases where markets may fail us, not in dramatic crisis, but quietly and in a way that can easily escape notice. But they fail nevertheless to produce the best outcome for our economy and society as a whole. That’s why government must be willing to complement the market when the evidence suggests it is able to make a positive difference in promoting long-term growth and prosperity.
I want to spend the rest of this lecture expanding on this idea – asking what it might mean for government and business, in particular for the structure and decision-making process of government. Firstly, I think it implies that we need to take what we might call a total business environment approach. Government has to be aware that business is affected by far more of what the government does than just the spending or policies explicitly marked ‘industrial policy’. Skills policy, transport policy, planning policy, energy policy, infrastructure policy, public procurement, environment policy, migration policy, education policy, social welfare policy, consumer policy and intellectual property frameworks all shape the enterprise environment in the UK. Encouraging domestic business growth and attracting foreign business investment to the UK will both depend on the balances we strike across these areas.
So government, even more than it currently does, needs to reflect on how it pulls on these levers, with a clear idea of the priority outcomes it is seeking. The challenge is aligning these policies in a way that serves business needs in general – something we do well - but also specific industrial objectives as well, which in my view, is something we do less effectively. Other European governments do not achieve this seamlessly, but my recent continental secondment suggested to me that we may have something to learn when it comes to creating a strategic focus across government on our industrial future. In this, it is absolutely essential that we engage fully with business at every step. Remember, if we knew everything business needed, we would probably not be in government. And when I say business, I mean all those involved in delivering business success – owners, managers, employees and consumers – who are the ultimate arbiters of business success.
Obviously a total business environment approach can be as fundamental as ensuring that regulation or business taxation do not cancel out pro-enterprise policy in other parts of government. This is why it is so important to see what government does as a regulator as critical to the environment in which enterprise operates. But it does not simply mean making sure we are not putting unnecessary obstacles in the way of business growth, important as that is. It means recognising that government can actually use the way it shapes the total business environment positively to enhance business potential and growth.
A good example is clusters, where groups of firms and talented people form business ecosystems whose comparative advantages are greater than the sum of their parts. Government policy cannot create clusters from scratch, but we can use a whole range of government interventions to encourage their success. An incomplete list would include: research policy that reinforces university centres of excellence and encourages ties between universities and companies commercialising cutting edge technology. World class transport and digital and communications infrastructure. Planning rules that encourage small start-up companies to build local factories or production sites for new products, rather than being implicitly or explicitly encouraged to move their production away from a company’s R&D base, or out of the UK. The point is that our industrial economy is made up of sensitive business ecosystems and supply chains – and like any other ecosystem they are shaped by hundreds of factors. Government has to understand this.
This obligation to see the big picture is also crucially important at the level of policy delivery. If there is one message I have heard repeatedly from business since I returned to government, it is that, while the government has transformed the enterprise environment over the last decade, on major decisions affecting a company or a sector’s future, government still struggles to speak with a single voice. Talk to government and you have to have fifteen different conversations, I was told by one senior industrial leader.
And that’s just central government. Policies of delegation and devolution over the last decade have had the consequence that there are now dozens of agencies and partnerships charged with aspects of industrial policy delivery. MAAs, LAAs , RDAs, an HCA, PTEs, LSCs and JCPs – and many more. Nobody disputes for a moment the importance of their work. And I am certainly not arguing that everything should be done from London – regional expertise is vital for ensuring that industrial policy is driven by knowledge of what works on the ground. But business is absolutely clear, and I agree, that in mapping out our industrial future we must ensure that policy delivery is joined up and consistent and straightforward for business.
This is something I want to make a priority. I will start with RDAs, for which I am responsible. The RDAs have an important frontline role in ensuring that we weather the downturn and prepare imaginatively for the upturn. I want to work more closely with them in delivering national priorities and they need to work with each other to shape areas of common interest. I also want them to continue to focus on the coherence and accessibility of the services government delivers. We are already working with the RDAs and local government to streamline existing regional plans into one coherent vision focused on promoting long term economic growth. That must combine infrastructure planning, with support for business, skills, enterprise and innovation. The onus is on government to ensure this delivers, and delivers in the right way, at the right level.
We also need to look at science, technology, innovation and the way we encourage and finance it. The innovation that produces new technology and improvements in productivity will define our economic success. As will the way that we capitalise on and apply innovations developed elsewhere – especially some of the process innovations that now drive success in the services and retail sectors. We need to consider the ways in which government supports new forms of innovation. This is particularly important during a downturn, where firms may be tempted to cut down on investment in innovation and vital intangibles like skills, development and marketing.
The Innovation Nation White Paper set out how government can send signals or set policy in a way that encourages innovation. For example, government spends billions of pounds every year procuring public services and building vital infrastructure. John Denham has argued rightly that this money should be spent with long-term strategic outcomes in mind. This means helping small businesses grow by bidding for government contracts – an idea that both Alan Johnson and John Hutton are currently developing. We also need to use regulation and procurement to give certainty so that sectors can make investment decisions for the long term and grow. For example, by making clear long term commitments to reducing our carbon footprint, government can change the risk calculus for companies considering investments in low carbon technology. The UK already has a strong environmental goods and services sector. Providing regulatory clarity and policy certainty will encourage the world class research and computer science that drives these businesses, and the growth industry in helping firms become more energy efficient. It will help ensure the UK continues to lead European venture capital investment in low carbon technologies, and strengthen the UK companies that will then compete internationally in this growing market.
There is also the question of money. It is vital that we ensure that UK firms have access to finance for innovation, especially risk capital for smaller, path-breaking firms. The government is doing what it can to ensure that credit remains available for viable firms through the downturn. But it is important also to think long term. We need to make sure that Britain’s financial system is able to provide the kind of start-up and development capital that the UK economy will need – especially given that risk aversion in markets is likely to be high for some time.
Huge amounts of money are channelled through the UK’s financial markets, especially through pension funds. Government action both directly and indirectly affects where and how these billions of pounds are saved and then invested. I think government could understand better what overall impact government policy may be having on how savings like pensions are allocated to long term productive investment in our industrial future. We need to ask if there are other ways in which the government could work closely with the private sector to encourage risk capital both at initial business stages and in the crucial expansion phase. Some, for example, have suggested that we now need a 21st century version of the original 1945 Industrial and Commercial Finance Corporation, or 3i as it was originally conceived.
Our decade-long investment in fundamental research, the UK’s science base and the creation of the Technology Strategy Board give us a powerful set of tools for promoting innovative research. They are tools we need to use to maximum effect. But even with the doubling of research funding over the last decade, we need both to ask if the scale of spending is enough, and make sure that we are adequately investing in both academic research and the companies that commercialise that research. These questions have been highlighted in the debate about Britain’s manufacturing future. Inevitably, they are now being given heightened importance as a result of the credit crunch. In an increasingly knowledge-driven economy it is also important to look closely at the ways we protect and promote innovation through the flexibility, cost and efficiency of our intellectual property frameworks, especially for small companies.
As developing countries move up the value chain there will also be an increasing premium on skilled workers. We will have to compete globally to retain workers and jobs. Improving British productivity will often depend on the skills of our workers. John Denham is already setting out a strategic vision of how we need to go forward on skills. We will need to continue to invest in world class general education to provide a sound platform of skills on which to build. But life long learning will be an inherent part of life for everyone in the UK.
This will require a cultural shift in our thinking about the jobs we are going to have over our lifetimes and the skills we are going to need to develop. Seventy five percent of those who will make up the UK’s workforce in 2020 are already out of compulsory education. Because industries will change fast, adaptable and portable skills will matter, as will employees with the capacity to learn on the job – especially the ICT skills that drive productivity gains. We need to make sure that employers are actively engaged, so that the system is delivering the skills they need to grow their businesses. But also the flexibility for employees that ensures that training and job mobility go together.
With all these issues we need to be ready to tailor our horizontal approaches to the needs of individual sectors where appropriate. We already do this kind of tailoring through National Skills Academies and our export promotion work. We need to recognise that needs are different from one sector to another and that the impact of government policy may differ from one sector to another. We need to know what makes each individual sector tick. Sectoral approaches should not politically privilege some industries over others. We need to let the dynamics of competition operate within sectors, so that even in strong sectors weak companies can and do fail. It is a simple reality that we need strong companies in all sectors in the UK.
It’s important to be clear that government cannot predict the future. But we do know broadly where the UK’s future strengths need to lie: in high value-added, knowledge-intensive areas where the combination of skilled workforce, innovative companies, and a world class research base have maximum effect. We also know that these are areas where developing global markets will present us with the biggest opportunities. So the UK’s comparative advantages and strategic opportunities in the knowledge and creative industries, financial and business services, and advanced manufacturing need to be at the front of our minds when we design horizontal policies.
One example of the value of strategic approaches is Stephen Carter’s Digital Britain work, which is looking at the way in which a strong digital and communications industry in the UK can be supported by a clear regulatory environment and continued support for public service content. He will offer his initial thinking on this in January. Ed Miliband’s Office of Nuclear Development is working with UK industry to signal the opportunities ahead and aiming to use maximum clarity on regulatory intentions to give business the confidence to make the sizeable and necessary investments in civil nuclear technologies. The same kind of approach should be taken by his forthcoming Office of Renewable Energy Deployment – ensuring that public procurement and infrastructure choices create explicit incentives for the development of world-beating green industries in the UK. We have to back this with a skills and innovation policy focused on the same outcome. Again, the government’s further thinking on this ‘green’ industrial revolution and the jobs associated with it will be initially presented in January.
Finally, a crucial focus for our industrial activism involves not looking inwards but outwards. It involves making sure that UK is doing all it can nationally and through the EU to shape the openness of global markets for both trade and investment. We need to continue to make the case for a free and fair global trade, and for the progressive integration of the developing world into the world trading system – especially in the face of the protectionist pressures that will come with a global downturn. Pressures that I am all too familiar with after four years as EU Trade Commissioner.
As chair of the G20 next year, the UK is well positioned to shape emerging models of financial governance and to ensure that they balance effective regulation with a commitment to economic openness. We should be doing the same in the EU: reinforcing the essentially liberal instincts of the European Commission. We need to ensure that we are doing all we can to attract inward investment to the UK and to ensure that our smaller firms, in particular, have the necessary support they need to access growing overseas markets. This means actively positioning ourselves through trade promotion and the EU trade policy agenda to succeed in strategic markets like India, China and the growing economies of Latin America. Our trade and investment promotion work through UKTI will only become more important.
So let me sum up. We are going to emerge from the current downturn into a world that will confront us with both immense opportunities and immense challenges. The pressure from globalisation to continue to improve our productivity and focus on the specialist bases of the British economy will be relentless. We have to get better at growing smaller companies into big ones. What I have done tonight is to set out the case for a new British industrial activism in government that complements markets to produce better long term economic outcomes for the UK. Especially in ensuring that we continue to develop the skills, innovation and infrastructure that will support a world class manufacturing sector as part of a modern mixed economy. Whatever the short-term decisions we make on transitional assistance for businesses faced with the extraordinary strains of the downturn, in the long term there is no propping up unviable companies or running businesses from Whitehall. No heavy handed state. No backing away from free trade or open markets or the discipline of competition. On the contrary, I believe these things more than anything in the long run forge strong industry.
What I want to do now is launch a debate on how we take this work from here. This process cannot take place in a vacuum. We must look closely at how other OECD countries are addressing the same challenges – and recognise that many of these countries have well developed strategies in this area that we must respond to. I also think we would do well to reflect on some of the conclusions that Asian economies have drawn about how to equip their societies for rapid industrialisation, especially in technical education. Always recognising of course that what works elsewhere may not always work here. This is to throw down a real challenge to Ministers and to the civil service. While we manage the present, we need to think strategically about the jobs and economy that the UK will need in the 21st century. We need to think in terms of outcomes, not in terms of the dividing lines between departments.
We need to go forward in mapping out a successful industrial future for the UK with some simple questions at the front of our minds. How can the intervention of a smart, strategic government better complement the market in allocating resources in the UK economy to ensure UK companies have the best possible chances to compete in a globalised world? How can we see the total business environment better when we legislate and invest public money, realising how much of what government does to shape business outcomes? Are we using government’s role not just as a legislator and regulator, but as a networker and facilitator to maximum effect? Are we really joining-up the delivery of policy nationally, regionally and locally for the businesses it is designed to benefit? Are we focusing on emerging strategic markets and relating to these the UK’s productivity and comparative advantages and specialist bases in knowledge industries and advanced manufacturing? Have we recognised the individual needs of individual sectors in the UK? Are we fully networked into the institutions that shape and regulate globalisation, including the EU and whatever structures emerge in response to the current financial crisis?
Today’s unemployment figures are a reminder that there are few more important ways of standing up for people and their families, than by looking out for the long term interests of the businesses that they build and work for. We have to come out of the economic downturn better equipped to prosper in the upturn. That is why we have to ask ourselves in government some searching questions about our own performance rather than rest on past success. There is a huge amount at stake.
Confidence is key to getting the best out of a market economy: confidence to invest, confidence to innovate, confidence in the stable frameworks in which the market operates. Through its own actions government can and must help build and maintain that confidence and the entrepreneurship that capitalises on it. Britain’s long term economic success will be defined and determined by its innovators and entrepreneurs and their workers. But government must step up its own role in equipping people and companies to maximise their potential, coherently and strategically. That is the essence of industrial activism. This will require not bigger government, but a smarter strategic government that is an informed analyst of British and global markets and technological change and a trusted partner of business. To my mind, we do this not because we want particular companies to succeed, but because we have a duty to ensure that Britain as a whole is equipped to get the most out of a rapidly changing economic world. That is the government’s first duty – never more so than now in the critical conditions we face – and we must be determined to live up to it.
