On 9 May this year BMW sold the Rover group to the Phoenix consortium led by the former Rover executive John Towers.
This brought to an end what had been for me personally the most difficult period I have experienced as Secretary of State for Trade and Industry.
The threat of closure of the Longbridge plant in Birmingham with the loss of 9,000 direct jobs and a possible further 15,000 jobs in the supply chain and the wider economy led to the demand that the government "should do something". Although when pressed most found it impossible to say exactly what it was that government should do.
A decision taken by a German based company, quoted on the Frankfurt Stock Exchange, which had direct consequences for thousands of UK jobs and British manufacturing generally, highlighted for many the nature of our global economy. It also raises the broader question of exactly what is the role of national governments in these circumstances. What part can or should governments play in ensuring that they provide industry and business with the framework and environment within which they can succeed in the economy of the 21st century?
This pamphlet draws on the lessons that I believe should be learnt from Longbridge but puts them into a wider context. It looks at how we can harness the benefits of globalisation so that it is a bringer of opportunity and not a threat, while acknowledging that we need to do more to promote the benefits of globalisation to an increasingly sceptical public.
It also considers the nature of support that government should provide to industry. How do we help tackle the structural weaknesses that have held back our economy for so long and how do we spread the benefits of economic growth to all parts of the United Kingdom?
I should make it clear from the outset that my underlying approach is that there is a role for government.
Government needs to be active but must not be interventionist.
In doing so I reject the approaches of the past. That of the new right who took the line that the market should be the "be all and end all" and that government should simply keep out.
And that of the old left who believed in large scale intervention, coupled with massive state subsidies which either sought to back winners or to rescue failing companies.
An active government is one which recognises that we cannot stand in the way of change but that change itself needs to be managed so that its consequences are not traumatic or so disruptive that they actually hold back economic growth. People and their communities need to be involved and prepared so that they can be partners in change and not its innocent victims.
In a pamphlet of this length I am not able to address all the issues of relevance and importance to business and industry in the United Kingdom issues such as how we - arrest the growing skills gap; balance rights and responsibilities in the workplace so that we avoid conflict and achieve consensus; develop a strong and effective competition policy; update our company law so that it?s relevant to the 21st century and not Victorian times. However, these are all issues on which government has already begun the task of implementing change or consultation to determine the nature of change necessary.
I want this pamphlet to be the start of a debate about industrial policy.
The stability we have achieved as a government through our macro economic policies has already brought huge benefits to UK business.
A consensus around industrial policy can help underpin this stability and allow business and industry to plan ahead with confidence, secure in the knowledge that we have moved on from the lurches of policy that occurred when we moved between the politics of the old left to those of the new right.
2 Introduction
We are living through a period of massive industrial change. The consequences of which will be as significant both economically and socially as the changes we witnessed in the 19th century when we moved from an economy which was essentially based on agriculture to an industrial one.
That new industrial order was built on raw materials, heavy industry, battalions of mainly male unskilled or low skilled workers and a willingness on the part of many national governments to adopt protectionist trade policies.
We are now experiencing the move from an industrial economy to one which is knowledge based.
Some refer to this as the new economy as opposed to the old. I think such a description is potentially misleading and divisive. Some of our older industries are successfully making the transition to a knowledge based approach.
Take manufacturing for example. Some would argue this was part of the old economy with no real potential in the 21st century. Yet if we look at those parts of manufacturing in the UK which are currently most successful ? IT and communications, aerospace, pharmaceuticals and even some parts of the automotive industry - this success is based on the application of knowledge.
The challenge for government is how to prepare Britain for a world in which knowledge is the currency that will really count. Successful economies and indeed societies will be those that can adapt to the demands of rapid change. That are flexible and creative.
The main source of value and competitive advantage in the modern economy is human and intellectual capital. For most of our history wealth and power has come from the control of physical assets - land, coal, iron and steel. In this century it will come from human capital. This means that we need to find ways of including all our people not just a new knowledge elite.
The nature of the industrial economy was such that there was a part in the labour market to be played by those with no or low skills. Increasingly this will not be the case in the knowledge economy.
This means that we have to find new ways of ensuring that each individual is able to achieve their full potential.
To deny such an opportunity to the individual offends against the basic concept of justice and fairness. But it is not just damaging to the individual. It is a waste of economic potential that will be damaging to a nation?s economy at the beginning of the 21st century.
The market left to its own devices will not educate or equip all our people to play a part in this world of rapid change. This is a key role for active government.
The market can be a good servant. It is not a good master.
Given that it is the private sector that will be at the forefront of wealth creation and job creation we need a new partnership between business and government to meet the challenges that lie ahead.
Increasingly every product and almost every service will be ruthlessly exposed to global competition in one form or another. This raises important considerations about the nature and consequences of globalisation and the industrial policy needed to prepare us so that we can harness the benefits of the knowledge economy.
3 Globalisation
For many BMW?s decision to dispose of the Rover group represented the unacceptable face of globalisation.
A German company determining the future of an important part of the West Midlands economy putting at risk thousands of jobs and for reasons that seemed to have little to do with factors under the control or even influence of Rover workers.
It is events like these which make the new global economy look so threatening. Rapid change, decisions over which individuals have no control. Driven by market pressures, creating greater inequality and even a threat to our culture.
Yet I believe that with the right international structures in place and working effectively then globalisation can be a bringer of opportunity and not a threat.
If we turn our backs on globalisation then we will end up retreating into nationalism and protectionism.
That of course was the response of many countries to the financial crash and depression of the 1920?s and 1930?s. We all know the bloody and destructive results that were produced as a result.
Compare that situation with the long period of growth in the US and Europe as trade barriers came down in the 1950?s and 1960?s.
Or look at the situation of Singapore or Taiwan. Both have seized the opportunities of international trade to develop economies and generate prosperity rivalling that in the Western world.
A recent study by Sachs and Warner found that developing countries with open economies grew by 4.5% a year in the 1970?s and 1980?s while those with closed economies grew by just 0.7% a year.
But we clearly need to do far more to make the case for open trade. So that our people can realise the opportunities and benefits that globalisation has to offer. We must do this because in a democracy we will not be able to embrace globalisation if too many individuals and organisations feel they are being left behind.
And we need to be in no doubt - the backlash against globalisation is real and it is gaining power and momentum. An unholy coalition has been cobbled together. Media aware pressure groups and old-fashioned protectionists stand together shoulder to shoulder.
Last December at the WTO ministerial conference in Seattle through the clouds of tear gas I could see redneck steelworkers from Philadelphia walking alongside anarchists. Grandmothers dressed as turtles alongside unemployed textile workers from San Francisco.
Often with contradictory demands nevertheless it is the diversity of these groups which make them such a potent force in any democracy.
Politicians can be rightly criticised for not having done enough to explain the nature of our global economy and to ensure that the power of national governments being exercised through international organisations can be harnessed to the public good.
In rising to this challenge we have to recognise that open trade and commerce can cause enormous and sometimes painful upheavals. Whole sectors of an industry can be devastated under the challenge of foreign competition.
Domestic companies can lose profitability and Governments can lose revenue. So companies need constantly to innovate, keep their products ahead of the competition and drive for higher productivity. And Governments need to be
active not interventionist in support of them.
The role of Government should be to lead people through this process of change. With support through retraining and updating skills. To help companies identify and then diversify into new markets or products. To foster a culture where companies share knowledge and good practice to boost efficiency and productivity.
As politicians we must reject the soft, easy choice that the difficulties we face could lead us to, calling a halt and putting up barriers to trade.
This might be popular in the short term but it would prevent our country reaping the much bigger and permanent gains that come from open trade.
Open trade causes change and boosts economic growth. It is about greater competition which weakens the power of vested interests. It provides greater opportunities and improved standards of living for millions rather than privileges for a few.
Of course the alternative view is often put that globalisation simply plays into the hands of the big multinationals. They can operate through cosy cartels and that by removing trade barriers we are simply allowing them to monopolise an even bigger market.
I don?t believe this approach stands up to scrutiny. The corporate world itself is changing dramatically. Greater competition and the march of technology have led to the creation of new companies and the expansion of others, as well as to the decline or disappearance of those whose markets have changed or who are no longer as able to compete as well as they did.
So I believe that globalisation can be a force for good not just for the developed world but for the poor wherever they might live.
Nations, it is said, act out of self-interest. Anything else is a delusion.
In some respects this of course is true. Politicians will rightly back the national interest first. But recognising that we are part of a wider international community is, in the long run, in our own self-interest. In the UK we must not lose sight of the opportunities that have flowed from the age of globalisation.
Situations like BMW?s decision in relation to Rover will lead people to call for a change in direction, to close parts of our economy to the effects of globalisation.
When this call is made we need to remind people of the benefits. In just two years the value of inward investment in the UK has risen from £173 billion to £252 billion.
A shared commitment to open trade and orderly progress - certainly among the G7 and in the EU - has been a driving force for growth, even in countries that not so long ago seemed permanently left behind.
The essential answer to the problems of the moment is not less globalisation and not new national structures to separate and isolate economies, but stronger international structures to make globalisation work in harder times as well as easy ones.
Under political pressure there are soft options, easy but dangerous shelters ?such as a return to protectionism, the breakdown of co-operation, the rise of beggar thy neighbour policies. But this can only yield a worsening of the situation, not renewed growth.
Let us be clear, protectionism anywhere is a threat to prosperity everywhere. Closing off national economies only increases national and international instability.
And across the world it is the poorest, the most vulnerable members of society who suffer from financial crisis and stagnation.
In the new global economy, neither the United Kingdom nor any other country or trading bloc can afford the easy illusion of isolationism. We are all part, and ultimately the product of, events happening in the global economy. Never in economic history have so many depended so much on genuine economic co-operation between the leading industrialised nations.
We must never forget that the path of open trade and open capital markets that we have travelled in the last 30 or 40 years has brought unprecedented growth, greater opportunity and a better life for people across the world.
The Single Market is undoubtedly one of Europe?s greatest achievements. No sensible policy-maker wants to turn the clock back to protectionism or the belief that we can operate in isolation from the very real pressures and challenges facing the world economy.
To do so would be a simple recipe to export employment and growth to more competitive rivals outside Europe. But to move forward, we need active governments, working together through reformed international institutions.
For the DTI, here in the UK it means marrying together an open, competitive and successful economy, which allows businesses to prosper with a just, decent and fair society in a healthy, sustainable environment.
This then begs the crucial question: what should our industrial policy be to ensure that we succeed in the world economy of the 21st century?
4 A 21st century industrial policy
I am clear that there is a role for government in ensuring that the restructuring of our economy which is taking place in Britain, like in almost every major industrialised country, can be achieved without traumatic or damaging consequences which would be bad for both individuals and also the economy itself.
In these circumstances the role of government is to be active but not interventionist.
We need to establish a new partnership for this economy and do so in a way which addressees the needs of the traditional or more longstanding sectors of industry as well as gaining global leadership in the cutting edge sectors.
This is not a time for complacency, not a time to pause and relax our efforts.
To those urging us to slow the pace of change, or simply stick to the old ways, whether it be old labour market policies, old attitudes to enterprise or old approaches to competition, I reply that if we slow the pace of change we will fall behind our competitors. Nor can Britain assume that the new information technologies will automatically bring the higher productivity growth being seen in the United States.
To equip ourselves best to meet and master these challenges, we need as a country to raise our game. We have some of the greatest companies, some world class sectors, some global champions, in whom we do and should take pride, and once again we have record levels of inward investment in our country.
But over the last 50 years, productivity growth across the UK economy has been just over two and a half per cent a year, compared to between three and a half per cent and four per cent among our main European competitors.
In recent times productivity has been increasing but the gap still exists and meeting the productivity challenge must be a top priority.
One of the reasons for our poor productivity record has been the fact that we are a low investment country.
Although business investment in the UK has been broadly similar to most of our main competitors expressed as a proportion of GDP, the fact that our economy has tended to grow more slowly means that British workers have to work with less investment than workers in comparable countries - see Figure 1.
Figure 1
Perhaps most worrying of all in this knowledge economy of the 21st century is that our companies spend less on research and development than do those in several key competitors. Spend as a proportion of GDP will have to almost double to match the US and Japan - see Figure 2.
Figure 2
Greater macro-economic stability will reduce uncertainty and encourage investment. The government has reduced rates of corporation tax which will leave more money with companies to invest and we have specifically targeted improved investment allowances in our growing small business sector. We have also introduced new incentives to support R&D spending. But if we are to overcome the longstanding weaknesses in the British economy then business must play its part.
The modern economy is fast moving, dynamic and ever changing. To be successful companies must innovate and take risks. They must learn how to compete in world markets against global competition.
Government too must learn. The old approaches of left or right will no longer do.
Some on the right argue that Government has no role any more. Deregulate, liberalise, a hands off approach, letting people and business sink or swim. But it is clear to me that it is a mistaken view. As is the traditional approach of the left: interventionist; picking winners and supporting lame ducks; running nationalised industries and protecting monopolies.
I believe that the role for government is to be active but not interventionist.
Having a clear industrial policy is not old fashioned or backward looking provided it is not a prisoner of the past but is tailored to the needs of the future.
It needs to help British business meet the challenges of the 21st century.
Two years ago we identified the global knowledge economy as the challenge. In the last two years the scale of change which this economy is driving has become apparent:
- The human genome has now been mapped - much sooner than we expected.
- Two years ago there were nearly 10 million mobile phone users in Britain. Today there are over 30 million.
- In the last two years revenue generated on the internet has increased tenfold and the number of users has more than trebled.
- Digital television has taken off. Coverage has increased from zero to 4 million in less than two years.
In this world of great complexity and rapid change, the need for Government to be clear about its industrial policy is even greater. My view is that we do not want the extremes of interventionism or laissez faire or even a half way house between them.
Instead, we must think again to shape a new approach, based on knowledge and skills, on maximising the potential of all parts of Britain and on exploiting the talents of all our people. To put in place the building blocks, the regulatory framework and the business support we need for the future. We must shape a positive, active industrial policy. A policy which creates an environment for world class business success, and promotes positive change in the economy which recognises the challenges of the global, knowledge driven economy, and which promotes sustainable development.
Business needs economic stability. That?s why we took immediate and decisive action to secure and lock in low inflation and economic stability, opening the way to steady growth.
But getting the economic conditions right is only the beginning. In the knowledge economy we shall need to use the talents of all our people.
At a time of globalisation when we are seeking to extend the benefits of open trade around the world, how can we meet our clear responsibility to spread the benefits of economic growth to all parts of our country?
The issue is complex. Within each region there are areas of prosperity and pockets of poverty. Different communities face different local problems.
The challenges facing inner cities, rural communities and areas of industrial decline are shared between regions. So the description "north-south" divide is clearly an over simplification. Nevertheless it is clear that there are disparities between regions and that these are growing. The latest figures from the Office of National Statistics Show that in 1998 just two regions - London and the South East - accounted for around a third of the GDP of the whole of the United Kingdom.
Although UK GDP has grown over the past ten years by roughly a sixth, and all our regions have grown in some degree, a detailed breakdown of the figures reveals a worrying growth in the disparities between regions in terms of GDP per head. See Table 1.
Table 1
| |
1989 |
1998
|
|
North East |
84.3 |
78.8 |
|
North West |
92.1 |
88.2 |
|
Yorkshire & Humberside |
88.7 |
87.8 |
|
East Midlands |
96.3 |
94.8 |
|
West Midlands |
93.2 |
91.7 |
|
Eastern |
114 |
114.2 |
|
Greater London |
128.2 |
130.6 |
|
South East |
111.8 |
116.8 |
|
South West |
91.2 |
91.9 |
|
Wales |
84.2 |
79.4 |
|
Scotland |
95.8 |
95.6 |
|
Northern Ireland |
72.6 |
74.1 |
GDP per head with 100 as average for UK
This state of affairs cannot be ignored. Particularly by a government elected with a clear pledge to govern for all our people. Our future economic success as a country depends on all parts of the United Kingdom achieving their full potential. Taking action to address the underlying causes of this economic under-performance must be regarded as a top priority. There will be no quick fixes or easy answers. We are after all dealing with problems which go back generations.
We need a new approach to these deep seated problems, one which will form part of our new industrial policy. It will need to be about investing skills; promoting enterprise; supporting business start ups; fostering links between universities and local business; backing innovation and ensuring adequate availability of regional venture capital.
So an active government will have an industrial policy which provides opportunities for people in all parts of the country to turn their ideas into successful businesses which create jobs and prosperity.
I believe that we need an industrial policy based on three clear principles.
First, putting in place the building blocks for the future.
To ensure that the science base is properly funded and linked to industry.
That the skills of our workforce meet the future needs of industry.
That we have the communications infrastructure we need to be at the forefront of the IT revolution.
That we create a strong enterprise culture in Britain.
Second, creating a regulatory framework that drives innovation and encourages growth and increased productivity.
Modern, industrially advanced economies are complex. Governments take a huge range of decisions which affect industrial success.
It is the role of the Department of Trade and Industry to ensure that sustainable wealth creation and business growth are at the heart of these decisions.
To promote competition and open new markets at home and abroad.
To build a modern legal framework fit for modern companies - for example to bring Company Law from its 19th Century origins into the 21st Century.
To promote new ways of working; partnership not conflict in the workplace with a proper balance between home and work.
To ensure balance in the labour market. Retaining flexibility but underpinned by basic minimum standards.
And third, supporting business.
Providing world class, forward-looking business support for businesses to expand at home and overseas. Helping manufacturing and services.
Promoting innovation with more contacts between business and Universities and support for successful clusters in the regions.
Opening opportunities for emerging industries and markets. Supporting start-ups and tomorrow?s high growth companies with incentives to invest in R&D and backing for venture capital.
Helping established industries to modernise and compete in new markets.
Being a champion of business in government and on the international stage. So that the voice of business is heard.
Looking to the future is the only way of ensuring sustained growth and employment. But as a Government we also have to look at the present. As industries restructure and the economy changes, some industries will face traumatic change.
We must not be in the business of stopping change in industries which need to modernise. Propping up old ways of working, inefficient processes doesn?t do anyone any good.
What we must do is to help established industries to modernise and compete in new markets. And to support people and communities through periods of change, to encourage excellence and creativity.
To invest in training and skills to ensure that those made redundant can find new, quality jobs. To encourage enterprise - help individuals who want to start up in business and new small firms with the potential to grow. To step up our work on attracting new investment in growth industries. And to help companies in the supply chain to innovate and adapt.
Cash hand-outs are not the solution - we need new instruments focused on giving companies the knowledge and capabilities they need to succeed. In terms of large scale financial assistance to companies, I believe there should be a strong presumption against intervention.
As part of our active industrial policy we should restrict support to the following areas:
- to help industry through a period of change which has come about because of a government policy decision. This is the reason for the support we are giving to the coal industry due to the government?s decision to lift the stricter gas consents policy on the build of new power stations;
- to provide support in areas where there are potential net economic benefits which would not be realised by the private sector on its own. This is the background to our repayable launch investment in the A3XX aircraft and our continued support for the Export Credit Guarantee Department;
- Regional Selective Assistance to secure investment in geographical areas of greatest need. However this should not just be about job creation or retention but will increasingly be linked to raised productivity and improvement in the skills base;
- we cannot ignore the international environment in which our companies compete - for example in aerospace or shipbuilding. UK companies should not be put at a competitive disadvantage. But our primary objective - within the European Union and more widely - is to achieve this goal by arguing for cuts in state aid by others.
These must now be seen as very much the exceptions. History shows that in the long run, intervention and state subsidies do not build strong profitable companies.
As a consequence I see no future in the old model of industrial sponsorship that has been pursued by my department in the past. The task today is to promote growth and innovation and to improve the competitive position within and across sectors.
To support enterprise, to encourage innovation and responsible risk taking, the DTI itself needs to be more enterprising and innovative and less risk averse. It needs to be forward looking, creative, and ambitious. These are the characteristics which any organisation needs to succeed in a rapidly changing world.
Businesses have changed their organisation and behaviour to reflect changes in the economy and in society. Government needs to change too. We need to work across boundaries; to back initiative; to make the most of people?s talent, to encourage new ideas and not to stigmatise failure. We also need to be more business friendly and business-like in the way we work.
We need to be customer focused. Many successful businesses market a few simple concepts or products, which they then adapt to the customer?s needs. Government too often takes the opposite approach: a wide range of services and schemes, with inflexible rules.
We must become more responsive and less bureaucratic - if we are dealing with business we should aim to work to business timescales. Whilst businesses continually cut product development times and customer delivery times, in government it still takes too long to put in place new schemes of support and months to make individual grants.
We also need to draw on outside skills and experience. The DTI, with around 170 inward and outward secondments, including British Trade International?s Export Promoters, are leaders in Whitehall in this area. But we need to build on this - using secondments to bring in specialist know-how.
And we need to create and use knowledge and research. To produce quality analysis which adds value. To look across Government at all issues affecting business innovation and growth.
To learn from the private and public sector. And from other countries - just as we have already drawn on the US experience in looking at support for clusters and encouraging the commercial application of university research.
This calls for a new approach to our sectoral capabilities:
- new audits of the competitive position of sectors across manufacturing and business services;
- a thorough examination, sector by sector, of the opportunities and threats offered by e-commerce;
- strengthened sectoral teams, including more industrial secondees, to support business innovation and growth. Encouraging best practice. Drawing on the work of the audits, to ensure that the regulatory framework supports enterprise and does not obstruct it. To maximise the UK?s potential as a location for internationally mobile investment and a supportive environment for home-grown businesses.
This represents a new direction for the DTI. We have already started the process. The Spending Review settlement and July?s Science White Paper underlined our focus on enterprise, innovation and scientific excellence in all parts of Britain.
We will now take this forward - building on economic stability to create a dynamic, knowledge economy based on enterprise, innovation and scientific excellence. With an active industrial policy fit for the 21st century which will enable British business to meet the challenges that lie ahead.
5 Conclusion
It is clear that there are many lessons that need to be learnt from Longbridge.
But at the beginning of the 21st century there is one important lesson above all that we need to learn.
No matter how enlightened and supportive a company might be; how strong and powerful a trade union might be or how concerned or caring a government is, there can no longer be a guarantee that anyone can hold a particular job for life in today?s dynamic and changing global economy.
We need to be responsive to the fact that such a state of affairs is deeply unsettling for many people especially when combined with change taking place on a scale and at a speed unprecedented in the post war period.
It leads to greater insecurity and more uncertainty. People simply don?t feel part of what?s taking place.
But we cannot try and stand in the way of change. The knowledge economy represents the future. It is the key to spreading opportunity and prosperity to all parts of our country.
The knowledge economy applies to all sectors of industry and isn?t going to happen at sometime in the future but it?s here and now. It affects us all. When we use a mobile phone, send an e-mail or watch satellite TV.
We are beginning to see the benefits of this economy but there is a widespread perception that what we have is a privileged "winners circle" limited to certain people, geographical areas or sectors of the economy.
The challenge for government is to expand this winners circle. In the knowledge economy it is vital that we do so otherwise talent will be wasted, opportunities restricted and our economy held back as a result.
In order to meet this challenge achieving economic stability has been a crucial first step.
To harness fully the benefits of the knowledge economy we cannot simply leave things to the market.
That is why we need a government which is active but not interventionist. Ensuring that as a country we are in a position to exploit the new opportunities.
Building capabilities but not offering subsidies.
Giving clear guarantees to individuals who may be affected by economic change - not simply the security of benefits but the opportunity of retraining.
We need to move away from the image of the "safety net" and replace it with that of the trampoline. By this I mean that we need a system of support that not only catches people when they fall and offers basic security but also then propels them into new jobs and careers.
The task then for government is to create the right framework, climate and environment for the knowledge economy.
So that companies can innovate and adapt. To help people through the process of change and not to resist change and deny opportunities as a result.
Our role put simply is to manage change in order to extend opportunity and prosperity for all.
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