Time for a rebranding of industrial policy?

If you'd like to get an immediate read on someone's politics, their age and where they are from just wander up to them and say 'industrial policy' or even use it in a sentence, like "There is a need for industrial policy in leading economies, just as much in developing economies". The reaction, usually extreme whether it is eye rolling, banging a shoe on the table or the sigh of the worn down, should tell you a lot.

This is a real problem. Right at the moment when we should be having a grown up debate on the role of the state in industrial development, how industry can play a role in national growth for G7 economies, and whether we've been misleading one another about the nature of competitiveness, the words act like a landmine. Step on them and boom there goes all rationality in the discussion you were having.

A great example of how the label of 'industrial policy' is misused and is divisive is contained within the recent PCAST report to the President on how to maintain the USA's claimed leadership in advanced manufacturing (full text of the report here). As Clyde Prestowitz has discussed in his Foreign Policy blog, the argument is well made that the US (akin to countries like the UK) had a lead in this area but that lead has been eroded. But then we get on to what to do about it.

According to the PCAST report -

"We do not believe that the solution is industrial policy, in which government invests in particular
companies or sectors. However, we strongly believe that the Nation requires a coherent innovation policy to ensure U.S. leadership support new technologies and approaches, and provide the basis for high-quality jobs for Americans in the manufacturing sector."

This to me is a misinterpretation of what industrial policy can be, as well as a desire to live in the narrative of the 1990s. As long as we have a strong innovation base (for many oversimplified to high R&D spending) all will be well. This ignores how the value chain operates, that research is not the preserve of the West, that R&D spending is an incredibly blunt measure of innovation, and that innovation without control will lead to nothing.

Overall the PCAST report is a depressing example of how old labels get in the way and that we have not advanced at all in our discussions on economic growth and renewal since the credit crisis in 2008. We are failing to shed ideas which do not apply in the current context and failing to adapt to the realities in front of us. Somehow we have to find a way to stop having old debates and move on.

F

What is a balanced economy?

The phrase ‘balanced economy’ has been thrown about a lot in the past year. It trips off the tongue easily and insinuates itself into the discourse on growth for countries like the UK. According the BBC it has become a mantra across Whitehall and in economic think tanks. David Cameron used it as the focus for his first major economic speech after the election. In the speech he fairly tied himself in knots - 

Today our economy is heavily reliant on just a few industries and a few regions – particularly London and the South East.  This really matters. An economy with such a narrow foundation for growth is fundamentally unstable and wasteful – because we are not making use of the talent out there in all parts of our United Kingdom.
We are determined that should change.  That doesn’t mean picking winners but it does mean supporting growing industries – aerospace, pharmaceuticals, high-value manufacturing, hi-tech engineering, low carbon technology. And all the knowledge-based businesses including the creative industries.

But what does a balanced economy mean? Are we looking for a 50/50 split between services and manufacturing? Do we want to have exports and imports in perfect balance?

No one really knows. 

Answering this question means answering some much harder questions on what growth really is, where it comes from and how nation states and companies large and small interact in the highly globalised world. 

The economic consensus that prevailed before the credit crisis has not been replaced by a new narrative. There is no clear model for how the economy is supposed to sustainably grow and that is the greatest weakness for policymakers at the moment. In some ways an overconcentration of belief in a watered down version of economics (free the market, get small government, the market will adjust etc etc) still remains. 

Unfortunately taking on these questions requires significant time, leadership and patience. None of these commodities is in great supply at the moment, so rebalancing looks like a phrase that will continue to be abused as it slips into Economist articles and speeches.

Until we're willing to have open and engaged debates on how we think about growth, the relationship between countries and companies, and the adjustment to the emergence of new economic powers we'll not be able to move this discussion forward. Here's hoping that there are some enlightened voices in Treasury and No 10 able to see the forest for the trees.

F

Writing while watching Made in Britain part 3

Just for fun I'm tapping away as Evan Davis warbles away on BBC2 in the third part of Made in Britain, talking about the service sector, so called. Apologies if this post is therefore a little staccato, but I'll type as I react rather than trying to put a smoother piece together after the fact.

So first things first, Evan has started by referring to the UK as a 'unique experiment' - total rubbish if you look at the service content of most developed economies. For the numbers see Dirk Pilat's paper on structural change in the OECD economies from 2007 (I think, will check later).

Very interested in the overall trade balance debate, 100 billion pounds trade deficit on goods ... what did we export in services last year? Come on Evan, show us the numbers ...

Evan's example of a service is a classic- Inmarsat satellite communications. This is not intangible, it is a service completely dependent on manufactured goods, massively complex and high quality goods, with an engineering team keeping the satellites ticking over correctly. The interconnection between manufacturing and services is clear ... ah there is Evan saying that all services need manufactured goods, and he sneakily says that manufacturers use services as well. Correct but not a parallel.

The point is not services versus manufacturing! Again and again people make this error - it is about the interplay of the two and how companies can use a mixture of both to attain a strong position in a value chain, capturing as much value as they can that is created across the value chain from end to end.

The real discussion is about labour intensity, wages, automation, linkage between elements of the value chain, in all a much more complicated discussion than manufacturing versus services.

Deep breath.

OK so here's a real bug bear for me, the structure of the statistics is misleading. The standard industrial classification codes come from the 1930s in the US, and the 1940s in the UK. They hard wire a split between making and services which we inherit and continue to stumble over. There are significant parts of reported services which are done by manufacturing so called companies. There really needs to be a reconsideration of the structure of the statistics, beyond the missed opportunity of the Allsop review of a number of years ago.

Ah the exporting of services question ... but again lets note while Evan has given us the hard number for goods trade deficit, he has not given us anything contextual for services. Quoting a number of 2 billion in exports to Dubai is smoke and mirrors.

Is a service based economy sustainable?

Again Evan what are the numbers for what we have exported in services?

Now we are back to the City, our financial services strength ... Oh and tourism! A host nation. Hmmm, some taxes from the foreign nationals of high powered companies who are very good at structuring their tax exposure! And there goes another throw away of "running into billions of pounds". Love the fact that the estate agent is wearing his shoes while Evan has the silly blue shoes on ... Oh sorry looks like he's in socks!

The butler to the world's elite! Not sure we would all agree to that characterisation.

Potential landmine here, the selling of our universities. And he's just described them as businesses. Not sure my tv will survive the whole episode. Sorry but ignoring the role of universities in the innovation system, producing knowledge and graduates for UK companies, is mad. If we make universities factories for foreign graduates what happens to our research base?

Back to the City ... Here comes the collapse ... Interesting example of ICAP, but for Evan to say no risk is slightly misleading. Critique of the City? Burden on the economy ... Paul Wolley saying that it is too easy for the bankers to appropriate the profits, through complexity in financial instruments that is unnecessary and costly. Second charge, that the banks live on subsidies. Because of the public guarantee leading to lower costs of borrowing for the banks. Interesting part of the programme, and for once Davis is doing well at being even handed.

And finally the numbers on service exports 160 billion, well below our need for trade balance overall.

Into a call centre we go on a bland industrial estate in Sunderland. The issue here is relative wages to other jobs, not whether the task itself is different. And lots of the issues on services are coming out - high staff turn over, stress rather than physicality, and inequality in earnings (as shown by regional inequality).

So the wrapping up begins, and the important point of reinvention and evolution of the economy is well made. But the overall tone of manufacturing and services as being in competition with one another, that niche manufacturing is sustainable, that our knowledge will keep is ahead, all of these things soft soap the stresses in the economy and the significant challenges coming from emerging nations.

All in all great to have a programme discussing these big issues, but it is a programme that is out of date with industrial reality and overly optimistic that we will continue to invent and innovate our way to growth.

Apologies again if that was too staccato, will put a link into the iPlayer for the episode so you can read along.

Best

Finbarr

The trouble with the future

Working on issues of policy and strategy at the national level you have to at some stage get involved in futures exercises. Delphi, scenarios, projections, the whole kit and kaboodle that people use to try to frame and structure how they think about the future. Lots of post-its and paper covering the walls of workshops around the world, attempting to build compelling and consistent narratives about possible futures.

Part of this world is the grand vision book, the accessible reader that will let you in on the mega trends for the coming 40 or 50 years and paint you a picture of the world as it unfolds. I'm in the middle of one such book, Outrageous Fortunes by Daniel Altman. Subtitles tell you a lot and his is "The twelve surprising trends that will reshape the global economy" which lets you know early on that he's swinging for the fences. So far, so usual in this world. However the book has been a real disappointment for me. Maybe because he was a writer for the Economist and the New York Times I'm expecting too much, but as well as being fragmented the prose is lacklustre and the book never really shines. It feels like this is a book that had some great ideas behind it, access to data and people, but was rushed either to be part of the post crisis discussion or just because there was too much else on.

Which is a pity, as what we need more than anything else are new narratives of the possible in the global economy. It might be that I'm being naive, but more pieces from within economics, or from a decidedly traditional economics foundation, is not going to help us right now. We need to look outside of economics, cut across boundaries and be willing to challenge all of the assumptions of the discipline to make progress and to be able to do what Daniel Altman tried to do, but for me came up short in the execution.

Best

Finbarr