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Industrial policy (The Cambridge Judge Business Debate podcast series)

15 August 2018

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The financial crisis has revived the notion of industrial policy in the UK. But how is it different today from the ‘discredited’ …

The financial crisis has revived the notion of industrial policy in the UK. But how is it different today from the ‘discredited’ policies of the 1970s, and do we risk betting on winners once again?

In this episode, joining podcast series host Michael Kitson, University Senior Lecturer in International Macroeconomics at Cambridge Judge Business School, are Alan Hughes, Professor of Innovation at Imperial College Business School and former Director of the Centre for Business Research at Cambridge Judge Business School, and Michael Pollitt, Professor of Business Economics at Cambridge Judge.

This is the sixth in a series of “Cambridge Judge Business Debate” podcasts featuring faculty and others associated with Cambridge Judge Business School and the broader Cambridge community.

This sixth podcast focuses on the topic of Industrial Policy, which has been in the news since the November 2017 publication of the UK government’s White Paper entitled “Industrial Strategy: Building a Britain Fit for the Future”. Here are some of the issues raised in the podcast, along with edited excerpts of remarks made by the panellists:

The financial crisis has revived the idea of “industrial policy”

Michael Kitson: “Since the financial crisis and the great recession, there’s been a re-evaluation of the role of public policy to increase growth and the standard of living. And as part of this re-evaluation, we have seen the re-emergence of industrial policy, previously derided by some as unhelpful government intervention and picking winners. Today’s topic is what a modern industrial policy should look like.”

Alan Hughes: “In the aftermath of the financial crisis there was a really important debate about the need to rebalance the economy, a perception that the UK and US economies had become far too service dominated and service oriented, and this made them less resilient and more fragile. And so initially the reintroduction of industrial policy definitely had a structural purpose. But what we’ve seen happen is that as the memory of the recession has perhaps receded a bit, the structural arguments have been overcome by the usual arguments used to discredit industrial policy in the past.”

UK manufacturing is still worth saving – in a targeted way

Alan Hughes: “The Thatcher revolution undoubtedly undermined the UK’s manufacturing capacity. We may have ended up with a more efficient sector, but what was left was very small in relation to our trading requirements and that’s why financial services became so big and so important, and why the financial crash was so damaging. Now, even though employment in manufacturing is falling, it’s a source of very high-skilled jobs, much higher skill than in some sectors of the service economy. On average, skill levels are higher and wages are higher in manufacturing.”

Michael Pollitt: “Any industrial policy needs to recognise where the UK is in its lifecycle of economic development: we’re simply not going to be able to compete with China and Vietnam for mass-produced manufacturing. We need to exploit our relative position in our economic development, which would naturally suggest that we de-industrialise and move into higher-value sectors. We want managed relative decline in manufacturing.”

It wasn’t all bad in the 1970s

Michael Pollitt: “Although there were many (industrial policy) failures in the 1970s, one of the successes of the 1970s is that Rolls-Royce aerospace was rescued by the government, in a sense saved from bankruptcy, and then released back to the private sector. So there is a role for targeted industrial policy. The UK had a long history in aerospace: it’s a high-value manufacturing area, it’s an area where we already had critical mass. So with hindsight that looked like a good save by the state where the longer-term growth prospects were good.”

Michael Kitson: “So this is about picking winners?”

Alan Hughes: “It’s a big policy challenge. You’re placing a bet. You have to have the ability to decide you’re going to follow on success with more bets, or you’re going to cut your losses. Having that flexibility in policy is very important. It’s politically difficult, because once you’ve set out on the route of subsidising you’ve got to stop it. You have to think of policy not as picking winners, but about placing bets.”

Michael Pollitt: “I love the idea of placing bets. One of the lessons of the 1970s, when the government was told that it would pay off if we keep investing in the British car industry or the British computer industry, is that we can’t wait forever for some of these bets to pay off. Intelligent industrial policy requires you to make good decisions about when to take things over by the state and keep them for awhile and release them back, when to let foreign ownership take effect, and when to just let the thing run down.”

Location, location, location

Michael Pollitt: “The lessons of economic geography tell us about the importance of scale and scope. Certain regions have critical mass in certain types of skills, so you do get agglomeration benefits you should exploit – for example, the City of London for finance and the Coventry-Derby area of the UK for cars.

Michael Kitson: “There is a regional challenge, because if there are powers of agglomeration then those areas that don’t have the strengths may find regional imbalances widening – and actually one definite result has been widening regional disparities in the UK, with London persistently accelerating ahead of most regions on most economic measures.”

Alan Hughes: “If it matters a lot that you need a lot of iteration between the design and research and production, it’s important to co-locate things. A place can be attractive for people to live and work. Cambridge is a good example: it’s being strangled by its success, it’s going to require a lot of infrastructure investment to really reach its full potential, and that applies to a lot of other areas too.”