public money over many years. Parliament was inadequately involved in
both cases. Public money was spent on management consultants, yet
much of their work was – and remains – confidential. Proposals were
published without prior consultation. Rather like the rail privatisation
Bill of the early 1990s,77 the Railways Act 2005 was not well defined in
advance and had to be put together ‘on the hoof ’ in parliament.
There was much turbulence in transport policy during Blair’s terms of
office but little progress. The Prime Minister’s initial attempt to delegate
failed. John Prescott at the DETR generated several genuinely new policy
initiatives but they were undermined by No. 10 or blocked by the
Treasury because they were unrealistic, unpopular or not consistent with
Treasury policies on the use of the private sector, on control of public
expenditure, on public borrowing and on the needs of the economy. Blair
was drawn into attempting to make transport policy in Downing Street,
with little help from the Chancellor.
On Blair’s resignation it was unclear where, if anywhere, the real initiative lay. Symptomatic is the growing number of internal and official advisory bodies attempting to develop transport policy outside the official
Department for Transport, including internal units in the Treasury and
in Communities and Local Government (formerly the Office of the
Deputy Prime Minister), the Prime Minister’s Strategy Unit in No. 10,
and the Commission for Integrated Transport advising the Department
for Transport. As Blair left power his government had stimulated and
received reports relevant to transport from four major independent
studies. In addition to Sir Rod Eddington’s review on transport there was
Sir Nicholas Stern’s review on the economics of climate change, Kate
77 See Foster, British Government in Crisis.
Barker’s review of land use planning and Sir Michael Lyons’ inquiry into
the future of local government.78 It was not clear how either the outgoing
or the incoming Prime Minister intended to make a coherent response to
these important and substantive documents. Political scientists may be
able to offer comment on what it says about the state of government to
have so many overlapping and concurrent policy reviews by independent
outsiders. Overall, the effect has been substantial additional centralisation of powers over transport policy in the hands of the Prime Minister
and, separately, the Chancellor but with little clarity about how they
ought to be used.
Alistair Darling’s 2004 Transport White Paper did take a sensible long
view. Whilst it took great care not to give any hostages to fortune by
quoting numbers, it did, with the endorsement of Blair in his foreword,
realistically set out major conflicts that future governments would have to
deal with. It presaged a process for forcing government to reveal a coherent position on funding the railways (which was timed to come to a head
just after Blair left office). In particular, it showed the beginnings of the
unavoidable debate about how best to address the insatiable wish of the
electorate to move around in their own private vehicles. Unfortunately
this was thrown into disarray by No. 10’s stimulation and then mismanagement of a public debate about national road pricing. Meanwhile the
biggest ever Public Private Partnership for the London Underground,
which Blair and Brown had spent so much money and effort forcing
through over five years, was looking distinctly precarious. A satisfactory
resolution of the conflicts – if there can ever be such a thing – will require
a return to an analysis of the facts, clear policy subject to scrutiny, building unheard-of public consensus and considerable leadership.
78 Sir Rod Eddington, The Eddington Transport Study (London, TSO, 2006); Sir Nicholas
Stern, The Economics of Climate Change (Cambridge: Cambridge, 2006); Kate Barker,
Review of Land Use Planning (London: TSO, 2006); Sir Michael Lyons, Lyons Inquiry into
Local Government (London: TSO, 2007).
13
Industrial policy
Introduction
The starting point for this chapter is to consider what is meant by ‘industrial policy’ and what might be its rationale. The traditional notion was
that government should intervene to promote manufacturing as a whole
or key industrial sectors to widen the country’s industrial base and to
increase the rate of growth of manufacturing output and productivity.
These objectives could be pursued through subsidies or tax breaks to
investment, encouragement of mergers that created ‘national champion’
firms, state ownership and protectionist policies. In this guise, ‘industrial
policy’ reached its apogee in the 1970s.
Economists might see a rationale for such interventionist policies in
terms of seeking to correct market failures. For example, while free trade
and specialisation along lines of comparative advantage represent an
efficient allocation of today’s economic resources, it may imply neglecting infant industries with high productivity growth potential and positive externalities in the future. Advocates of traditional industrial policies
would frequently argue that they were needed to counter the ‘shorttermism’ of British capital markets. And a more radical approach might
have entailed the creation of new financial institutions or more direct
state control of investment decisions.
By the mid-1990s, government policy was focused on ‘competitiveness’. This was defined in terms of ‘the degree to which it can, under free
and fair market conditions, produce goods which meet the test of international markets, while simultaneously maintaining and expanding the
real incomes of its people over the long term’. In effect, this places productivity performance at the heart of the matter. This was made more
explicit under the Blair government through its emphasis on ‘the
Productivity Agenda’. These more recent incarnations of supply-side
policy retain the stress on raising the long-run growth of productive
potential in the economy through encouraging investment and innovation but with increasingly less emphasis on the special role of manufacturing and without the overt protectionism and dirigisme that many
traditional Labour thinkers would have wanted.
A very interesting aspect of the design of supply-side policies intended
to raise the long-run rate of economic growth is the role of competition
policy. In the 1970s, this was seen as unimportant, and Schumpeterian
arguments that large firms with market power did more R & D, achieved
economies of scale, and thus were good for productivity, often held sway.
During the 1990s, empirical research by academic economists undermined these claims and pointed to the importance of competition as an
antidote to principal–agent problems (managerial slack) in firms with
weak shareholders and thus as a stimulus to the rapid adoption of
improved products and processes. So, whereas in the earlier post-war
period competition policy was seen as an irrelevance o
r possibly an
obstacle to faster growth, in the recent past its role in improving productive efficiency, as well as addressing the consumer losses from firms’
market power, has been increasingly recognised.
The Labour Party and industrial policy in the early 1990s
By the early 1990s, the context of industrial policy had changed considerably compared with 1979 when Labour was last in government. On the
external front globalisation had advanced significantly, with increased
competition from Asian manufacturers and much greater international
mobility of capital. On the domestic front, the Thatcher government had
moved away from the interventionist policies of the 1970s, allowed
market forces to downsize manufacturing, implemented privatisation on
a large scale, introduced industrial reforms and reduced marginal rates of
direct taxation. 1970s-style industrial policy had received a seriously bad
press in terms of incurring substantial costs but few benefits while propping up losers rather than picking winners.1
Labour could respond either by reinventing interventionist policies or,
in effect, accepting the thrust of Thatcherite policies and seeking to refine
them. Until Gordon Brown became Shadow DTI Minister late in 1989 the
former seemed to be the preferred option. A vision of a new industrial
11 See the assessments by Derek Morris and David Stout, ‘Industrial Policy’, in Derek J. Morris
(ed.), The Economic System in the UK (Oxford: Oxford University Press, 1985), pp. 851–94,
and Aubrey Silberston, ‘Industrial Policies in Britain, 1960–1980’, in Charles F. Carter (ed.),
Industrial Policy and Innovation (London: Heinemann, 1981), pp. 39–51.
policy was proposed by the Policy Review Group under Bryan Gould,
Brown’s predecessor. This stressed the need for a pro-active industrial
policy under the auspices of a ‘developmental state’ and envisaged the
creation of a much more powerful DTI responsible for industrial strategy
along the lines of the Japanese MITI and a long-term commitment of
substantial funds to key manufacturing sectors through a new National
Investment Bank.2
By the time of the 1992 election, there had been a significant shift
towards a greater reliance on tax incentives rather than the creation of
new institutions, but the party’s rhetoric still stressed the need for industrial policy to modernise the manufacturing base. When Brown became
Shadow Chancellor in 1992 this move was accentuated, and between then
and the 1997 election the shadow Treasury came to dominate the shadow
DTI.3 Tony Blair aided and abetted this outcome by moving Robin Cook
from the DTI brief to Shadow Foreign Secretary. At the 1997 election,
Labour’s manifesto had effectively abandoned traditional industrial
policy; proposals for a super-DTI and a National Investment Bank were
no longer on offer.4 Thus, Blair’s leadership consolidated the move that
was already under way to something much closer to American-style
rather than Japanese-style policy.
In 1992 Labour was still promising to return essential services to
public ownership as and when funds permitted. By 1997, this promise had
been dropped and replaced by making essential services accountable. In the
meantime, in an important symbolic move, the old Clause 4 which committed the Labour Party to large-scale public ownership had been revised
in 1995 to refer to belief in a dynamic economy in which the enterprise of
the market would be joined with the forces of partnership and cooperation.
With regard to globalisation, Blair set a tone in a 1996 speech that
marked a big departure from the protectionist tendencies of the 1980s
in stating that the driving force of economic change today is globalisation and that New Labour’s economic philosophy was to accept globalisation and work with it.5 Similar sentiments were repeated in the 1997
manifesto.
12 These proposals are set out in Keith Cowling, ‘The Strategic Approach’, in Industrial
Strategy Group, Beyond the Review: Perspectives on Labour’s Economic and Industrial
Strategy (London: The Labour Party, 1989), pp. 9–19.
13 See the account in Colin Hay, The Political Economy of New Labour (Manchester:
Manchester University Press, 1999), ch. 4.
14 The evolution of policy between 1992 and 1997 is well reviewed in Richard Hill, The
Labour Party and Economic Strategy, 1979– 97 (Basingstoke: Palgrave, 2001), pp. 111–23.
15 Reported ibid., p. 44.
Policy since 1997
When Labour won a landslide victory in the 1997 election, it was possible
to wonder whether in government it would revert to ‘Old Labour’ policies.
The answer to this question soon became apparent and is a resounding
‘No’. 1970s-style policy was conspicuous by its absence in that there was
no nationalisation programme, no move to subsidise manufacturing
investment, no counterpart of the National Enterprise Board, no return to
high marginal rates of direct tax, no attempt to resist de-industrialisation
by supporting declining industries and no major reversal of industrial
relations reform. Overall, there was certainly no desire to reinstate the de
facto policy veto held by the trade unions that had characterised that
period. Implicitly, the Thatcher supply-side reforms had been accepted.
One episode underlines both the distance that Labour had travelled
since the 1970s and the failure of earlier interventionist policies, namely,
the collapse of MG Rover with the loss of about 6,000 jobs just before the
2005 election. It is generally agreed that this company, the rump of
British Leyland which was nationalised in 1975, and received £3.5 billion
of public money in subsidy between then and 1988 when it was sold to the
private sector, failed through a history of low productivity and inadequate product development.6 Now the approach of the DTI was to try to
broker a takeover by the Shanghai Automotive Industry Corporation
and, in this context, to provide a loan of £6 million to keep the
Longbridge plant open for just one more week. This was probably illjudged, but taxpayers escaped very lightly by earlier standards.7
Following the 1997 election, Blair continued to allow Brown to run
supply-side policy. In this area the Treasury rather than the DTI has
dominated, and the Treasury has become increasingly involved in microeconomic rather than macro-economic policy. The focal point has been
the productivity agenda, with no particular bias towards manufacturing
as somehow special. In opposition, as Shadow Chancellor, Brown made a
much-derided reference to ‘post-neoclassical endogenous growth theory’
in a 1994 speech written by Ed Balls. In office, insights from modern
growth economics have been central to the way that productivity policy
has been framed.
16 A good summary of the state’s involvement with this company over thirty years is in Nigel
Berkeley, Tom Donnelly, David Morris and Martin Donnelly, ‘Industrial Restructuring
and the State: The Case of MG Rover’, Local Economy, 20, 2005: 360–71.
17 A report by the National Audit Office, The Closure
of Rover (London: TSO, 2006), concluded this was the case.
The main thrust of this approach is that growth of output and productivity depends on investment in physical and human capital and on
innovation. Decisions to invest and to innovate respond to economic
incentives such that well-designed policy can raise the growth rate a bit.
This implies that government needs to pay attention to direct tax rates, to
undertake investment that complements private sector capital accumulation, to support activities like R & D where social returns exceed private
returns, and to facilitate competitive pressure on management to adopt
cost-effective innovations. These ideas are clearly reflected in the ‘five
drivers’ of productivity growth which were articulated initially by the
Treasury in 2000.8 These are investment, skills, innovation, competition
and enterprise.
HM Treasury publications on productivity are based on this framework and like to announce progress in each of these areas. The current
summary points to the stability delivered by the post-1997 macroeconomic policy framework and an increase in public capital spending as
positives for investment, additional public expenditure on schooling and
expansion of higher education as good for skills, the introduction of the
R & D tax credit in 2001 as promoting innovation, the reform of competition policy in two Acts in 1998 and 2003 as stimulating competition and
enterprise being encouraged by reforms to corporate taxation and by
reductions in the burden of regulation.9
Evaluating productivity policy
There is no doubt that the new approach of inflation targeting by the
Monetary Policy Committee has been associated with very stable macroeconomic conditions compared with other periods; the volatility of GDP
growth since the introduction of inflation targeting has been about twothirds that of the previously most stable period during the Bretton Woods
years.10 It is less clear that this will have a positive impact on growth
since the empirical literature has struggled to identify robust effects.11 As
18 HM Treasury, Productivity in the UK: The Evidence and the Government’s Approach
(London: TSO, 2000). This is placed explicitly in the context of endogenous growth economics in Nicholas Crafts and Mary O’Mahony, ‘A Perspective on UK Productivity
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