As the axe of spending cuts hovers over the department for business this week, do spare a quick thought for Ian Swales, the new Lib Dem MP for Redcar

Rolling the state out of industrial policy

Tapping into local anger over the recent mothballing of the Corus plant, Swales unseated the sitting Labour MP on a cry of ‘more support for industry’. He might now have a bit of explaining to do.

For the savage cuts in business support announced on Monday are not merely a regrettable bit of belt-tightening across Whitehall. They are part of an ideological move to take the state back out of industrial strategy – one of the areas where the Conservatives and Liberal Democrats have long been marching in lockstep. Going into this election, both coalition parties had called for much business support to be scrapped. The Lib Dems might not have gone as far as their 2005 proposal to abolish the DTI, but last September Vince Cable wrote a pamphlet for think tank Reform which advocated scrapping much industrial support, including the regional development agencies.

Sadly, industrial strategy didn’t feature much in the election campaign – though clues to the real ideological differences between the parties could be picked up from the entertaining pre-match skirmishes between former business secretary Peter Mandelson and his then Tory counterpart Ken Clarke (Clarke likening Mandelson to a ‘Bourbon monarch’, tossing gold coins out to business as part of his industrial policy; Mandelson quipping that, whenever he tried to find out what the Tories were actually prepared to do for British business, Clarke’s mobile phone had mysteriously been switched off).

Now, post-election, these differences are beginning to come out into the open. That’s why Progress today is publishing a collection of essays looking at the role of government in industrial policy, and other challenges of the new economy. They challenge the new coalition’s approach, showing how rebuilding industry and nurturing competitiveness are about so much more than simply rolling back the state.

Of course tax and regulation are important (though Labour might point out that they did cut corporation tax by 5p in the pound, and capital gains tax by 22p in the pound). But on many other issues, the right’s libertarian anti-statism won’t help UK industry. Skills, science and infrastructure are areas where competitiveness requires more spending, not less. And from addressing regional weaknesses to filling equity gaps, tackling market failures first requires believing in them.

Perhaps the most politically controversial aspect of this agenda is targeted support for particular industries. Labour’s Strategic Investment Fund provided a billion pounds of selective investment over the last year, in areas like low-carbon vehicles and industrial biotech.

The Tories and Lib Dems hate it – assuming it must necessarily equate to the failed industrialism of the 1970s. Before the election, Vince Cable called the Strategic Investment Fund ‘a really dreadful Old Labour idea’ and ‘a massive waste of money’.

But it is Vince and the Tories who are a bit out of date. In an era of increasing specialisation, competitiveness increasingly means developing comparative advantage in key sectors. A whole generation of new economic studies, like those of Harvard’s Dani Rodrik and Cambridge University’s Ha-Joon Chang, illustrate the crucial difference that the right kind of government support can make – whether helping fledgling industries gain the critical mass to compete, assisting their integration into markets, or helping with transition costs to move to higher-value production strategies.

Scrapping this kind of support, as the coalition propose, will pull the rug out from under many emerging industries. Government might not be able to ‘pick winners’, but we can at least identify those areas where we have a chance of being world leaders in future. Are the Tories and Lib Dems really saying that if we can identify areas of potential future competitive advantage, where government support can make a difference, we should not act? That would be to wave the white flag in the race to the top, hoping instead that tax cuts and deregulation could help us compete on the basis of lowest cost.

It’s not good enough just to like the idea of Britain becoming a world leader in future growth industries, like advanced manufacturing, life sciences and low-carbon technologies. What those at the cutting edge will want to know from any government is what they are prepared to do about it.

 

Tim Horton also wrote today for the Independent

Photo: freefotouk 2008

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