From the TUC

Industrial Strategy: Which sectors should we focus our support on?

11 May 2017, by in Economics

If industrial policy is suddenly so popular amongst politicians wanting our votes, why was it so controversial before now?

The answer to that question lies in the fact that industrial policy has been based on an understanding that some business sectors are favoured over others, usually against market signals. This was directly contrary to the UK attitude; since the 1970s, Britain had taken the free market road and the political consensus was that the market knew best.

So what has changed? Why should a politician interfere in the market and support one industry over another?

A politician should get involved when the free market, left to its own devices, will not deliver an optimal outcome. For example, investors looking for safe bets will shy away from breakthrough technologies, as they may take some years to develop, but if nobody backs them then they may never come to fruition.

The industrial mix changes over time. Western Europe in general, and the UK in particular, was the workshop of the world throughout much of the twentieth century, with large manufacturing industries providing good jobs with good wages. Eastern Europe, the Soviet Union and China were all closed economies. As those countries opened their economies, they took a share of our markets and, as a result, we have had to adapt. When trying to compete in the global economy, the UK cannot succeed by trying to match Eastern Europe’s pay rates; instead, we must compete through high tech, high innovation products. And if those products can’t always make a quick return, there might be a role for government in backing them.

The TUC has long argued that industrial strategy should focus on those industrial sectors where the UK can survive, and even thrive, in a global economy where the likes of China, Russia, the United States, Germany, as well as emerging economies like Mexico and Indonesia are the competition. Automotive, aerospace, pharmaceuticals and the creative sector are all examples of where we can succeed. By focusing on high value, high skill goods, the UK can export and pay its way in the world.

Of particular interest is green technology. As the TUC report, ‘Powering Ahead’ made clear, the low carbon economy offers rich pickings: Lord Stern’s 2006 report predicted a market of $500bn in environmental goods and services by 2050. A country that is serious about economic rebalancing – which the UK claims to be – would not sit on its hands and leave those opportunities for others.

‘Powering Ahead’ put forward a series of recommendations for government and other stakeholders. These included a new target that 50% of the UK’s energy should come from renewable sources by 2030 and a study into the technologies that the UK would need to bring us up to that target, including a consideration of which of those technologies could be developed in the UK. Those new industrial sectors should be targeted on those communities which lost their livelihoods with the demise of heavy industry. We also called for an international consortium to finance a Carbon Capture and Storage demonstration project. The Committee on Climate Change has highlighted the importance of CCS technology if we are to meet our carbon reduction targets in the most cost effective manner.

But even that isn’t the whole story. The UK has achieved near full employment, but our economy continues to produce many low value, low skill jobs. Can we improve those jobs so that they become medium skill, medium value opportunities (and dare I say high skill, high value ones too)? Why shouldn’t hospitality become a more desirable sector to work in? And if none of us would want a family member of our own looked after by a low value care worker, why can’t we raise the value of this sector – which will only become more important in the light of an ageing population – as well? In the modern age, the TUC believes this is also a role for industrial policy; not just targeting high value sectors, but helping lower value ones to raise their game.

Finally, a health warning. Many good companies do not fit into neat categories. We can’t have an industrial policy that highlights all companies (including inefficient ones) in one sector, while ignoring all companies (including ones with exciting potential) in another. This is why horizontal policy, targeting all sectors, is also important. There is no zero sum game between sectoral and horizontal industrial policy; both have their place, both have their limits. A smart, agile government will work with that grain.