State: your business

Barker: “Politicians are perfectly entitled to do things to political ends but you’ve got to have somebody who encourages them to stop and think before they do.”

The government has unveiled ambitions to up the state’s role in guiding industrial development. The Mint talks to Dame Kate Barker, chair of a commission that has charted a way forward for the administration that includes creating a new industrial strategy watchdog.

Prime minister Theresa May unveiled her industrial strategy green paper early in 2017 with a list of ambitions relating to improvements to the country’s research and development, skills, infrastructure, funding and growth outside London and the South East.

May pledged that the strategy would be “not just stepping back and leaving business to get on with the job, but stepping up to a new, active role that backs business and ensures more people in all corners of the country share in the benefits of its success.” She committed also to addressing the country’s weaknesses, singling out productivity in her foreword.

While the strategy has “growing support” there is currently “neither consensus nor clarity about what industrial strategy should entail or seek to achieve, according to an independent commission report in November. The report, The Final Report of the Industrial Strategy Commission, has high ambitions. The commission has said it aims to “redress the situation” and it would “seek to shape the design of a strategy and steer it towards a policy framework that can ensure future success.”

The Mint asked chair of the Industrial Strategy Commission, Dame Kate Barker, whether her belief that the commission has “introduced new and well-founded thinking” meant a new take on economic thinking that might guide the strategy. “I certainly wouldn’t describe it as new economic thinking, I’m always a bit sceptical about the idea of new economic thinking. It often turns out to be old ideas relabelled,” she says.

She continues: “I would describe it as taking a different view principally on two things. One is the role of the state, how active or otherwise should the state be in guiding the economy? And the other is in thinking about the importance of rethinking how we deal with the issues of regional imbalances and inequalities in society. And how far they might influence how we manage ourselves economically.”

The proposal of an industrial strategy is readily cast as a U-turn from the leave-it-to-the market thinking that has governed government industrial policy for some 30-odd years. So the implication follows the strategy is a bid to address market failure? Barker cautions against that interpretation.

“That doesn’t mean politicians shouldn’t work to political ends by the way. They’re perfectly entitled to do things to political ends but it does mean that you’ve got to have somebody who encourages them to stop and think before they do.”

She says it is “somewhat simplistic” to say that the state sets the rules, regulations and law, and then “everybody else gets on with it,” adding: “The state’s always interfered in all kinds of ways,” but goes on to say that the current mix of market and state influences has not worked for many communities and regions. And she sees the existing combination of market and state as having fallen short in other fundamental matters: “It’s resulted not only in inequalities within society but also deepening inequalities of places within the UK. And it has failed to improve our rate of productivity growth and failed to improve our trade balances.

“So I think it’s saying it is time to look afresh and say actually we should start from a slightly different position.” Barker says the proposed paradigm is less one of market failure and more one in which “there are some things the state can do to work better, be more coherent and meet the goals that we’re pursuing as an economy.” A predictable response to any proposal that greater government intervention is the way forward is to assert that government has, to date, largely failed in its interventions. It’s a point raised in the report which predicts aversion to government intervention “will no doubt continue to be the response in some quarters now.” It goes on: “After all, poor government implementation of policies is a genuine concern, not least as it may reflect capacity gaps among the cadres of politicians and officials who are trained for analysis but not implementation.”

But Barker questions the popular estimation of state incompetence in business intervention: “I’m not entirely sure whether it’s fair to say that all the interventions in the market have been failures. Clearly people think back to the big industrial failures of the 70s. I’d say principally what they were doing was propping up failing industries. And I’m certainly not suggesting, and I don’t think anybody on the commission is suggesting, we move back to that era.”

Arguably the most radical proposals in the commission’s report are those that address the potential for the industrial strategy ball to be dropped by government. The commission calls for the establishment of an independent regulatory body for industrial strategy and a new division, within the Treasury to keep industrial strategy policies on track across Whitehall. “It’s clearly true you can have state failure as much as you can have market failure,” says Barker.

The industrial strategy division within the Treasury would have the power to ensure that all other departments “devise and implement policies consistent with the industrial strategy.” The commission proposes that officials from departments, including the Department of Business, Energy and Industrial Strategy (BEIS), the Cabinet Office and 10 Downing Street, as well as local, regional and devolved authorities would be “involved in the day-to-day work of the new division.”

Barker says the proposed regulator, the Office of Strategic Economic Management, would have “monitoring, forecasting and horizon-scanning capabilities” with a similar model to that of the Office of Budget Responsibility (of which she was a non-executive member). “You often need an independent watchdog looking in to say, ‘well actually you’re not really using the state appropriately’ or ‘you’re using it in some other sense or to a political end.’ ”

Barker is swift to say the she doesn’t advocate shackling politicians’ decision making: “That doesn’t mean politicians shouldn’t work to political ends by the way. They’re perfectly entitled to do things to political ends but it does mean that you’ve got to have somebody who encourages them to stop and think before they do.” She continues: “You can’t stop, politicians being legitimately able to make choices but I would see [the office] as stopping knee jerk reactions to short-term trends… making an informed commentary on decisions, which perhaps are not in the best long-run interests.”

But for the past 30 years, there has been little or no strategic economic management in the UK. And it’s been largely ignored by mainstream economic research and thinking. So it could it be said that there isn’t an adequate technical or research basis to inform an Office of Strategic Economic Management. Barker rejects this:

“Well I’m not entirely sure that I think that’s a fundamental objection. And it would suggest that we should never try to do anything new or set anything up,” she says, adding: “We might equally say that until the Bank of England started to have a go at macroprudential policy recently it hadn’t really had a period of doing it. But now we think that’s very important and the banks are setting about it.”

She points to examples given in the final report of states, including Australia and South Korea where similar bodies to the proposed office have been implemented but concedes that they are not a perfect fit to UK needs. The report says the office would “complement rather than replace the government’s industrial policy capabilities, including those in our recommended new industrial strategy division at the Treasury.”

The Industrial Strategy Commission’s report’s various lists of ambitions and areas of focus are populated with the natural suspects. For example the report recommends a focus on: decarbonisation; infrastructure; sustainable health and social care; long-term investment; high-value and export industries, and enabling growth everywhere. “These are familiar issues,” the report says, “but it is less familiar to see these, rather than a set of sector deals, as the framing for an industrial strategy.”

The commission’s aims, which include skills improvements, sustainability and greater devolution clearly interact in their impacts on the crucial outputs the commission seeks in productivity, ending regional disparity and so on. So the report calls for an end to Whitehall department silos in addressing economic strategy. It singles out the Treasury’s “rather narrow and unstrategic stewardship of policy areas related to improving productivity,” and says it, in particular, “has not consistently committed to strategic supply-side economy policy.”

Given that history, might the Treasury’s enthusiasm for the commission’s proposed change in direction to managing the economy be less than boundless? Barker is not so doubtful of Treasury’s commitment: “Well the Treasury’s job as I understand it in a humble way is to take on board the views and policies which ministers are interested in pursuing. With the coming of Brexit we’re all having to think about things again. And I’m sure the Treasury is thinking about things again just as much as the rest of us,” she says.

Economical with Strategy?
Anyone would be hard pressed to find an economics department that taught a unit on Strategic Economic Management or the Economics of Place. The report talks a lot about universities, but these curriculum shortfalls are not addressed. The Mint suggested that there may be a need to increase the capacity of economics to provide a clearer understanding of how effective industrial strategy might work.

Barker held up the Cambridge Department of Land Economy, where she is a visiting fellow, and some other centres as reasons why capacity within in economics was an issue. But she does see data as a concern. “We do need better statistics, particularly on places. So putting some light on thinking about how to ensure that more places are more resilient to economic shocks. One of the things you need, if you’re going to do that, is to build better data at the local and granular level.

“But a lot of work has been done in the recent past on, what for want of a better word I’ll call spatial economics, I think some of it’s due to the centre at LSE and work’s been done around Manchester and the economic review there. So this isn’t starting from afresh, it’s building on and making more coherent something that’s going on already.”

The Mint questioned whether place and state planning were adequately present in current economic models to support thinking about economic strategy. Barker is not convinced: “I don’t think there’s a lack of view about place, it’s simply perhaps it hasn’t had as much thought in terms of overall policy. And it was difficult to do it in advance because they haven’t had so much data to hand. We have got more data to hand now so the economists could make a better job of it. And a lot of them are very interested in it.”

She says there was a lot of work underway in planning and it is “unfair” to suggest that it was being overlooked. But she conceded that when she began her work on the economics of place, “Quite a lot of the economists weren’t so interested in place. And equally on the other side few planners were interested in the economics of place.

“Now there are plenty of planners who are interested in it but it hasn’t been married together very well. There is now some interesting work being done to try and bring those things together and we’ll move to build that up.”

At the launch of the commission’s final report, secretary of state for BEIS, Greg Clark, gave what could be a telling account about Treasury support for the prospect of industrial strategy. He told how on his starting to promoted the need for local economic development, the Treasury said it was impossible. It argued, he said, that if any one area grew faster, that would, by definition, be at the expense of another area.
He said he subsequently brought overseas investors to meet with Treasury officials. The investors said that they would only invest in the Cambridge area if there were government investment in the region’s infrastructure. That investment would, Clark said, be international and therefore extra and not drawn from another area of the UK. Treasury, he explained, was then convinced that local economic development was possible.”

“You often need an independent watchdog looking in to say, ‘well actually you’re not really using the state appropriately’”

Regional disparity is highlighted in the report as a weakness in the current economic landscape. “While the political consequences of great regional inequality have clearly become significant, addressing those inequalities is an economic imperative”, it says. “We did spend quite a lot of time thinking, as you will see from the report, about spatial inequality,” says Barker. “A difficultly is, we can’t all live in agglomerated places like London. But it must be worth the effort to say well actually shouldn’t we have some more places where agglomeration works?” she asks.
“There’s a gap between saying, ‘well everywhere can’t be agglomerated, so lets not worry about it’ and saying, ‘well actually there are other places in the UK where we can build powerful agglomerations, that will help with the regional imbalance and improve the productivity of people in those areas and the areas close to them.’ And the failure to do that seems to be rather striking.”

In considering the UK’s weaknesses, the report looks naturally at its poor productivity but makes no attempt to define its causes. The Mint asked Barker whether the commission had a working hypothesis on the reason for poor UK productivity: “I have my own views about why it is. We don’t comment on it necessarily [in the report] except I think in the section on investments. But I think that’s very well trodden territory,” she says. “And I’ll just say something else. I think measured productivity is important. But one of the things I hope that exercises any new body that looks at the industrial strategy is people’s well being.”

Meanwhile, a return to government industrial planning comes amid the political and economic tumult that is Brexit. This could easily be viewed as a hurdle to growth in productivity and is a voracious consumer of political will and public faith. How much might the huge challenge of Brexit curb progress in industrial strategy?

And on Brexit’s impact: “While there’s difficulty here, there’s a widespread agreement among all political parties that they want to have an industrial strategy. I suspect however they have somewhat different ideas about how that might look.

“I’ve been conducting this and heard politicians talk and I don’t sense any great resistance to most of the things that we are saying. Different parties will of course take different views about it. But the idea that the parties aren’t interested in moving this agenda along isn’t right, I think they all clearly are.”

Barker’s confidence in the prospect of successful industrial strategy is compelling. But there is an emerging and considerable threat to its realisation.

Theresa May took up the mantle of bringer of industrial strategy following on from tentative steps by her predecessor. But as The Mint writes, her cabinet is disintegrating. Priti Patel jumped before she was pushed after Michael Fallon jumped before he fell. And more may follow as their pasts catch up with them. It’s not hard to imagine how a patched-up cabinet might not be fully motivated in all aspects of policy while tied to the Brexit tracks.

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