From the TUC

Message from Rome: industrial policy and social policy go together

12 Jul 2012, by in Economics

I am in Rome today at a fascinating conference organised by East Forum, supported by Unicredit and the OECD. It is called ‘The Challenge of Economic Growth: New Approaches to Industrial Policy’. It holds some essential lessons for those studying this subject in the UK.

Starting with a little history, Robert Wade, Professor of Political Economy and Development at the LSE, said that for 30 years, industrial policy was a hidden phrase, but in the last two years, the World Bank and the ILO have both held conferences on this subject. Why? There were three reasons, although two of them link together. First,China has arrived as the world’s manufacturing workshop, which has been good for China, but bad for lots of other countries. This development has pushed up the price of commodities but, and here’s the second reason, China’s state investment model has been copied by other countries, meaning the role of active government is fashionable again in key emerging economies. Third, of course, the world economic downturn has undermined the credibility of neo-classical economics, which stresses the primacy of the market. Professor Wade said there are dangers in overstating industrial policy. It can overshadow other important drivers of competitiveness, such as free exchange rates and the importance of education, infrastructure, etc.

Xavier Vives, Professor of Economics and Finance at the IESE Business School, agreed that, as China has shown, industrial policy works in those sectors that have high skills and face competition. Industrial policy fails where it tries to defend industries against international competitive pressures, but works where it is supporting sunrise industries, protecting their growth to an extent, but not insulating them from competition. There is no dichotomy between industrial policy and comparative advantage or free markets; Chinese industrial policy “stretches” comparative advantage, accepting it to a point but moving beyond it to develop growth sectors.

Romano Prodi, the former Italian Prime Minister, said industrial policy has often been criticised by countries that practice it in reality. He made the important point that we lack knowledge of the dynamics of industry and business. Finance companies, oil companies, examine future dynamics very well, but they do it from their own perspective. Professor Prodi also said that we must rebuild supply chains: labour costs between east and west are narrowing,but we have lost the supply chains that they have built in recent years and this undermines western competitiveness.

I got in it a question: is there a more positive role for trade unions, if we want greater competitiveness? Does the German co-determination model have lessons for us? Prodi said that Italy doesn’t have the pluralism of Germany, but when companies undergo transformations that may be good for the overall economy, if there are too many tensions, this is a problem. Andre Sapir, the Chair in International Economics and European Integration at ULB University, spoke of flexicurity, in the real sense. The exiting of firms in decline and the entry of firms in new industries, requires a better social model. The more security that exists, to go along with the flexibility, the more society will be prepared to accept this “churn”.

I’d like to write more, but time to get back. However, I think the message is clear: industrial policy and social policy clearly compliment each other. In his quest for a new, better capitalism, I hope Ed Miliband will give this his consideration.