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Economic Prosperity

RIP Industrial Strategy


Commentary17th March 2021

Kwasi Kwarteng, the new Business Secretary, has confirmed what a lot of people suspected. He’s a free marketeer who believes that government interference in the economy should be kept to a minimum.

Accordingly, Theresa May’s activist ‘Industrial Strategy’ is to be ostentatiously abandoned and replaced with a far looser ‘Growth Strategy’. This bundles together the remnants of the government’s supply-side agenda - such as the investment tax breaks and Freeports announced in the March 2021 Budget, as well as former No. 10 advisor Dominic Cummings’ new science research agency.

Meanwhile, the Industrial Strategy Council (ISC) – an independent watchdog set up to monitor how policy is being implemented – is also to be scrapped. The ISC issues its final report next week and it will be interesting to see what it makes of the government’s record and approach as a parting shot.

Was the government right to do all this? What will be the long-term consequences?

Dumping May’s strategy has certainly attracted the ire of industrial policy advocates. In their view the UK is facing unprecedented supply side upheaval from Covid-19 and Brexit. These shocks, together with other ongoing challenges such as the net zero agenda and dealing with the disruption caused by technological change, make a coherent industrial strategy more essential than ever.   

To these critics, the Growth Strategy which replaces it is a ragbag of ideologically-motivated schemes that is neither a proper strategy, nor likely to do much to boost growth. What is needed instead is a concerted and coordinated effort to encourage UK firms to invest to develop new technologies and capabilities in high-growth global markets. Government has a role to play here in helping to shape the supply side of the economy by supporting innovation in key areas and underwriting some of the costs, or intervening to develop complex supply chains for things like car batteries.

Kwarteng, though, clearly believes May’s industrial strategy is ill-conceived and wants to go with a more laissez faire approach. The move represents a clear break from more than 15 years of solid political consensus around industrial policy. But the ISC itself had been critical of the complexity and slow implementation of May’s strategy.

To be fair to the government, if you believe that markets, not the state, are best able to tackle the UK’s looming economic challenges, then why persist with the fiction that you have an effective, far-reaching industrial strategy when experts are saying you don’t? Does simply naming something an ‘industrial strategy’ constitute actually having an industrial strategy? If not, then isn’t it better just to admit this and move on?

The government is still wrong to abandon industrial strategy, however, for two reasons. First, the objectors are surely right that markets alone will not engender the shift by firms into higher value markets and activities that the UK needs to stay competitive, post Brexit. Lots of other countries, including the supposedly free market US, have successfully deployed industrial policies - either on a case by case basis or as part of a purposefully interventionist strategy - to adapt their industrial bases to changing global markets. If emulating this success means also tackling the ‘government failure’ which seems to bedevil the application of industrial policy here in the UK, then this is something that should be looked at.       

Second, the decision sends out a message to investors that policy pledges aren’t worth planning around. Industrial strategy is best thought of as a partnership between firms and governments in which policy shapes the incentives for firms considering whether to invest to enter risky new markets. But to activate this partnership, governments need to be able to offer credible commitments about the long-term direction of policy. It is no wonder industrial policy often fails here when it is subject to so much chopping and changing, often driven by ideology. The commitments offered by government are just not credible.

Scrapping the industrial strategy doesn’t just remove the current government’s ability to intervene strategically to shape the economy. It also wrecks any prospect of a future government doing this, even one with a much better plan than the government has. Dispensing with the ISC as well sends out the additional message that the government doesn’t care about outside scrutiny of its growth plans. Faced with the threats of Covid-19 and Brexit, this sends out the wrong signal at the worst possible time.

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