Alison Wolf argued controversially that the economic benefits of education are limited
It is suddenly fashionable again to talk about industrial policy. For years, ministers have shied away from the notion that they should try to promote or rescue businesses, scarred by the history of failures of “picking winners” or saving national champions. But since 2008, the need to rescue banks with billions of pounds of taxpayers’ money, and calls to “rebalance” the economy away from finance towards manufacturing, have prompted them to think again; so has the rise in unemployment, the struggles of apparently viable businesses to secure financing, and the fierce battle with the rising economies of Asia. Ministers have openly asked whether they should try to stop companies from failing, and work harder to promote those which might give competitive advantage in taking on Asia. Prospect’s all-day conference on regenerating the British economy, held with Cityforum, the conference group, captured the new energy in those questions—of whether there should be an industrial policy at all, and if so, what. The day concentrated on practical recommendations. Signs of recovery in the United States injected an upbeat tone into the fierce discussion. Richard Lambert, former director general of the Confederation of British Industry, member of the Monetary Policy Committee, and now chancellor of the University of Warwick, opened with a provocative, detailed pitch that Britain should indeed have a clear policy. He allowed that some might disagree, gesturing at “my former boss at the Financial Times,” Geoffrey Owen, his predecessor as editor, in the audience in front of him. Owen, speaking later, argued that the main function of capitalism was to encourage experimentation. “And that’s not a job for government. It is also not the job of government to turn uncompetitive businesses into competitive [ones].” That way lies the biggest trap of all, he said: “Industrial policy must not become a cloak for protectionism.” For years, many have agreed with Owen’s view, and not just in Britain, arguing that governments should not meddle with market economies. World Bank economists have advised ministers across the globe to deregulate markets. But the World Bank has begun to hold that some developing nations could benefit from more planning (see “The Role of the State in the Dynamics of Structural Change,” (2010) by Justin Yifu Lin, chief economist at the World Bank). And Lambert’s argument for an explicit British policy, covering government support, bank lending and education, supports the recent change in emphasis in ideology. Lambert noted that manufacturing’s share of the British economy has declined faster than in other advanced nations, although as Tom Williams, executive vice president of programmes for Airbus pointed out, it still accounts for 15 per cent. True, western governments have always quietly supported their favourites. The US government was happy to pour money into Silicon Valley and to invest in research that led to the creation of the internet. In the 1970s, it bailed out Lockheed Martin, a company that last year began operating the world’s first quantum computer—the D-Wave. More recently it also bailed out General Motors and, controversially, the insurance company AIG. Britain has recently tried to codify a similar style of selective support. In 2009, the Labour government set up a Strategic Investment Fund (SIF) to put £750m behind industry. At the launch, Peter Mandelson, then secretary of state for Business, Innovation and Skills, noted that the fund was intended to “help get good ideas off the drawing board.” The coalition government has since reversed some of the fund’s decisions, not least the £80m loan promised to Sheffield Forgemasters, but has stuck to the fund’s principles. Last month, Vince Cable, business secretary, said that “government has a legitimate role in making choices and addressing the market failures that hinder the development of core technologies, especially during the innovation phase.” Alistair Darling, former chancellor of the Exchequer, told the conference dinner that “Britain needs an industrial policy. The 1970s were a reaction against government social planning and in the 1980s, 1990s and 2000s, the notion was that an economic plan would do. Now we need to ask what government can do to encourage the competitive advantage of our businesses.” What should an industrial policy be? Tom Williams argued for more long-term research and development and graduate places in engineering. Mike Wright, executive director of Jaguar Land Rover agreed, saying that Britain is 24th in the OECD rankings of engineering degrees. Lambert suggested that civil aerospace might be pushed as a British growth sector and Luke van Beek of Raytheon noted the health of the aircraft sector. Demand for passenger aircraft is set to climb steeply, and Britain has more leading aerospace firms than France, Germany, Italy, the Netherlands and Spain combined. *** Ruth Lea, economic adviser to the Arbuthnot Banking Group and a former civil servant, was concerned that “manufacturing is of the regions, not London. But policy-makers are immersed in the London media bubble and don’t really get manufacturing.” Lea pointed out that wind power—favoured by the government—is the most expensive way to produce electricity, and yet ministers push on with plans. She also called High Speed Rail (HS2) the government’s plan to construct a high speed rail link between London and the West Midlands, “an odd obsession.” Lambert had made it clear that large capital-intensive projects were unattractive to investors if it was felt that government might at any time introduce rule changes—and Lea vehemently agreed. At this point, an apostate entered the debate in the form of David Kern, chief economist at the British Chamber of Commerce. “But really,” asked Kern, “what is so special about manufacturing? Are we a bit sentimental about manufacturing? We were much more sensitive when Kraft took over Cadbury’s—but less so when Walmart bought Asda.” He went on to suggest that anything that helped growth would by definition help manufacturing and that British growth was underpinned by small and medium-sized businesses (SMEs). Perhaps, he suggested the government should consider establishing an “SME bank.” Soon after, a member of the audience suggested that bank employees should have bonuses linked to national GDP, a notion that reduced the room to momentary silence. There was broad agreement that banks should lend more to SMEs. A senior banker indicated that blame for this shortage of lending rested with new regulations, which force banks to hold greater reserves. He pointed out that banks were “increasing capital from the 4 per cent capital ratio and moving to 10-12 per cent—so banks either shrink, or lend less.” The same individual went on to comment that “banks are for finance, risk and transactional services. That is what we do.” In his analysis, 25 per cent of all US debt finance comes from banks, whereas in Britain, the figure is closer to 75 per cent—a number that is falling, meaning that Britain is becoming more like the US. George Magnus, senior economic adviser at UBS, offered a potted industrial policy of his own: “Research and development, training, education and finance. The US has been doing this for 100 years.” This comment went straight to the central quandary, by suggesting that government could influence a free market without distorting it, perhaps by the Cass Sunstein approach (popular in No 10) which talks of subtly nudging an industry towards success, by tax breaks, funding research and development and so on. There was agreement that training should be central to policy, especially maths and engineering (Lambert and others cited the March Prospect feature on teaching maths). Bob Bischof, chief economist at German Industry UK, pointed out that 67 per cent of German children who leave school become apprentices. “The Blair idea of sending 50 per cent to university is ridiculous. It’s a disgrace that Britain needs to hire 600,000 Polish plumbers,” an exaggeration that does not lessen an important point. Alison Wolf of King’s College London made one of the day’s most provocative points. “The thought that training policy drives growth is wrong. Training doesn’t create innovation or growth.” Wolf’s contention was that after a grounding in the basics, extra training and qualifications add little. This led to testy exchanges. But there was agreement that general standards of education in Britain are poor, which constrains growth. All agreed that Britain cannot cut its way to a balanced budget or to prosperity; growth is essential. The conference’s strongest consensus was on finance. As new rules force banks to store cash on their balance sheets, they face a choice between shrinking in size and cutting lending. They have opted for the latter. For so long as this remains the case, industrial policies, no matter how well intentioned and thought-out, will struggle. The conference was sponsored by EADS and Raytheon
Peter Mandelson Curse of "the British way"
It is suddenly fashionable again to talk about industrial policy. For years, ministers have shied away from the notion that they should try to promote or rescue businesses, scarred by the history of failures of “picking winners” or saving national champions. But since 2008, the need to rescue banks with billions of pounds of taxpayers’ money, and calls to “rebalance” the economy away from finance towards manufacturing, have prompted them to think again; so has the rise in unemployment, the struggles of apparently viable businesses to secure financing, and the fierce battle with the rising economies of Asia. Ministers have openly asked whether they should try to stop companies from failing, and work harder to promote those which might give competitive advantage in taking on Asia. Prospect’s all-day conference on regenerating the British economy, held with Cityforum, the conference group, captured the new energy in those questions—of whether there should be an industrial policy at all, and if so, what. The day concentrated on practical recommendations. Signs of recovery in the United States injected an upbeat tone into the fierce discussion. Richard Lambert, former director general of the Confederation of British Industry, member of the Monetary Policy Committee, and now chancellor of the University of Warwick, opened with a provocative, detailed pitch that Britain should indeed have a clear policy. He allowed that some might disagree, gesturing at “my former boss at the Financial Times,” Geoffrey Owen, his predecessor as editor, in the audience in front of him. Owen, speaking later, argued that the main function of capitalism was to encourage experimentation. “And that’s not a job for government. It is also not the job of government to turn uncompetitive businesses into competitive [ones].” That way lies the biggest trap of all, he said: “Industrial policy must not become a cloak for protectionism.” For years, many have agreed with Owen’s view, and not just in Britain, arguing that governments should not meddle with market economies. World Bank economists have advised ministers across the globe to deregulate markets. But the World Bank has begun to hold that some developing nations could benefit from more planning (see “The Role of the State in the Dynamics of Structural Change,” (2010) by Justin Yifu Lin, chief economist at the World Bank). And Lambert’s argument for an explicit British policy, covering government support, bank lending and education, supports the recent change in emphasis in ideology. Lambert noted that manufacturing’s share of the British economy has declined faster than in other advanced nations, although as Tom Williams, executive vice president of programmes for Airbus pointed out, it still accounts for 15 per cent. True, western governments have always quietly supported their favourites. The US government was happy to pour money into Silicon Valley and to invest in research that led to the creation of the internet. In the 1970s, it bailed out Lockheed Martin, a company that last year began operating the world’s first quantum computer—the D-Wave. More recently it also bailed out General Motors and, controversially, the insurance company AIG. Britain has recently tried to codify a similar style of selective support. In 2009, the Labour government set up a Strategic Investment Fund (SIF) to put £750m behind industry. At the launch, Peter Mandelson, then secretary of state for Business, Innovation and Skills, noted that the fund was intended to “help get good ideas off the drawing board.” The coalition government has since reversed some of the fund’s decisions, not least the £80m loan promised to Sheffield Forgemasters, but has stuck to the fund’s principles. Last month, Vince Cable, business secretary, said that “government has a legitimate role in making choices and addressing the market failures that hinder the development of core technologies, especially during the innovation phase.” Alistair Darling, former chancellor of the Exchequer, told the conference dinner that “Britain needs an industrial policy. The 1970s were a reaction against government social planning and in the 1980s, 1990s and 2000s, the notion was that an economic plan would do. Now we need to ask what government can do to encourage the competitive advantage of our businesses.” What should an industrial policy be? Tom Williams argued for more long-term research and development and graduate places in engineering. Mike Wright, executive director of Jaguar Land Rover agreed, saying that Britain is 24th in the OECD rankings of engineering degrees. Lambert suggested that civil aerospace might be pushed as a British growth sector and Luke van Beek of Raytheon noted the health of the aircraft sector. Demand for passenger aircraft is set to climb steeply, and Britain has more leading aerospace firms than France, Germany, Italy, the Netherlands and Spain combined. *** Ruth Lea, economic adviser to the Arbuthnot Banking Group and a former civil servant, was concerned that “manufacturing is of the regions, not London. But policy-makers are immersed in the London media bubble and don’t really get manufacturing.” Lea pointed out that wind power—favoured by the government—is the most expensive way to produce electricity, and yet ministers push on with plans. She also called High Speed Rail (HS2) the government’s plan to construct a high speed rail link between London and the West Midlands, “an odd obsession.” Lambert had made it clear that large capital-intensive projects were unattractive to investors if it was felt that government might at any time introduce rule changes—and Lea vehemently agreed. At this point, an apostate entered the debate in the form of David Kern, chief economist at the British Chamber of Commerce. “But really,” asked Kern, “what is so special about manufacturing? Are we a bit sentimental about manufacturing? We were much more sensitive when Kraft took over Cadbury’s—but less so when Walmart bought Asda.” He went on to suggest that anything that helped growth would by definition help manufacturing and that British growth was underpinned by small and medium-sized businesses (SMEs). Perhaps, he suggested the government should consider establishing an “SME bank.” Soon after, a member of the audience suggested that bank employees should have bonuses linked to national GDP, a notion that reduced the room to momentary silence. There was broad agreement that banks should lend more to SMEs. A senior banker indicated that blame for this shortage of lending rested with new regulations, which force banks to hold greater reserves. He pointed out that banks were “increasing capital from the 4 per cent capital ratio and moving to 10-12 per cent—so banks either shrink, or lend less.” The same individual went on to comment that “banks are for finance, risk and transactional services. That is what we do.” In his analysis, 25 per cent of all US debt finance comes from banks, whereas in Britain, the figure is closer to 75 per cent—a number that is falling, meaning that Britain is becoming more like the US. George Magnus, senior economic adviser at UBS, offered a potted industrial policy of his own: “Research and development, training, education and finance. The US has been doing this for 100 years.” This comment went straight to the central quandary, by suggesting that government could influence a free market without distorting it, perhaps by the Cass Sunstein approach (popular in No 10) which talks of subtly nudging an industry towards success, by tax breaks, funding research and development and so on. There was agreement that training should be central to policy, especially maths and engineering (Lambert and others cited the March Prospect feature on teaching maths). Bob Bischof, chief economist at German Industry UK, pointed out that 67 per cent of German children who leave school become apprentices. “The Blair idea of sending 50 per cent to university is ridiculous. It’s a disgrace that Britain needs to hire 600,000 Polish plumbers,” an exaggeration that does not lessen an important point. Alison Wolf of King’s College London made one of the day’s most provocative points. “The thought that training policy drives growth is wrong. Training doesn’t create innovation or growth.” Wolf’s contention was that after a grounding in the basics, extra training and qualifications add little. This led to testy exchanges. But there was agreement that general standards of education in Britain are poor, which constrains growth. All agreed that Britain cannot cut its way to a balanced budget or to prosperity; growth is essential. The conference’s strongest consensus was on finance. As new rules force banks to store cash on their balance sheets, they face a choice between shrinking in size and cutting lending. They have opted for the latter. For so long as this remains the case, industrial policies, no matter how well intentioned and thought-out, will struggle. The conference was sponsored by EADS and Raytheon
Peter Mandelson Curse of "the British way"
Peter Mandelson delivered the keynote speech, in which he lamented the British tendency to do things by half-measure.
“The British way is stop-go, fast-slow and the re-invention of the wheel,” he said, in comments that attracted much support, but which were described by one panel member as a “classic piece of British self-flagellation.”
“In postwar Britain, there has been an unhappy pattern,” said Mandelson. In his view, post-election, the baton is passed and usually dropped. A short-termism dominates. And this is the learning curve that all governments have to travel up.
“In the most recent announcements of my successor at the Business Department,” he said, “I read, with a certain wry amusement, the heralding of initiatives originated by the last government.”
“Short-termism in business has had an equally baleful effect. John Kay’s report on short-termism and the tyranny of quarterly reporting is to the point. Business should not be chained to a process of quarterly speed dating with the analyst community.
“We need an industrial policy rooted in consensus. It needs adequate resources, including private capital. This needs to be sustained for decades. But, this is no substitute to simply having effective businesses. And the test is what works and lasts, not what sounds good.”
“The treasury has an innate problem of defining value for money in very short term ways. The treasury calculates value for money on a penny spent/penny returned basis. But this is so short term. In China they use an aggregate return measure—much more long term. If we used this model it would mean much more spending and blue skies research.
“Gloom and uncertainty have constrained growth… politicians have cast around looking for another story and they’ve come upon manufacturing. But we Brits do things in such a piecemeal way.”
