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The State Must Get Behind Industry

  • Government must stand ready to actively support British industry
  • Activist industrial strategy laid ground for today’s success in automotive and aerospace
  • Coalition’s limited ambition risks loss of production lines to China, Japan and Brazil

Britain will lose thousands more skilled manufacturing jobs to rival economies unless ministers are prepared to take a radically more interventionist approach to industry, a new Civitas report warns.

It proposes a public finance scheme to support domestic suppliers to the automotive industry and major investment in innovative new technologies that the private sector is unwilling to get involved in.

The aerospace and automotive sectors – the two main surviving success stories of UK manufacturing – face enormous pressures from global competition over the coming decades.

Without a return to the kind of activist industrial policy that enabled them to flourish in the second half of the 20th century, jobs and production lines will be lost to countries like China, Japan and Brazil whose governments are prepared to invest heavily in sectoral development.

“The coalition could and should be more ambitious in its industrial policy. It has proposed industrial strategies for both the aerospace and automotive sectors. However, the scale of these interventions is limited, focusing on resolving narrowly defined ‘market failures’,” the report’s author, Kaveh Pourvand, writes.

“The truth is that private dynamism does not occur in a vacuum. All successful markets are in part a product of robust government action. Governments have to get involved in industrial policy whether they like to or not.”

In a new paper entitled “Picking Winners: How UK industrial policy ensured the success of the aerospace and automobile industries”, Pourvand proposes two potentially ground-breaking government interventions.

A public finance scheme for automotive suppliers

Modelled on the “launch aid” schemes that supported the aerospace industry from the 1950s, this would help strengthen the domestic supply chain, which has been weakened by lack of finance.

“Shortage of finance is a key problem holding back automotive suppliers, but the government’s strategy document for the sector lacks any substantive proposals to remedy this problem,” Pourvand writes.

“The government could be much more ambitious here, perhaps by introducing a government finance scheme designed specifically for automotive suppliers. The scheme could be modelled on the ‘launch aid’ scheme that has been so successful for the aerospace sector.

“The government could also increase the £1 billion it has already put into producing a low-carbon vehicle.”

Major investment in new technologies

The role of the state can be crucial where an innovative new technology or product requires an investor that is not motivated simply by profit but also by the wider benefits to the economy. One idea is for the government to invest in a new short-haul aircraft which could maintain Britain’s place at the forefront of the aerospace industry.

“The UK industry is going to face major challenges in the upcoming decades. One is the impact of reduced defence spending in the UK and elsewhere and another is the entry of other countries such as China, Japan, Brazil and Canada that are trying to develop their domestic aerospace industries,” Pourvand writes.

The danger is that greater competition from abroad combined with less defence spending at home will eventually lead to aerospace jobs and production going overseas. Once lost these are very difficult if not impossible to re-establish.”

Pourvand demonstrates how interventionist industrial policy in previous decades – including under Margaret Thatcher’s government – has been key to the present strength of both the aerospace and automobile sectors.

He also shows how the US, despite its ostensible attachment to the free market, has always had an interventionist approach, often under the guise of defence spending. This government-funded research network has been critical to America’s economic dynamism.

He writes: “The reason we have a successful car and aerospace industry today is that previous governments were proactive in shaping a comparative advantage for Britain in these sectors. This was especially true of Margaret Thatcher.

“What is required now is a similar ethos, not of ‘big’ or ‘all-knowing’ government but bold government, prepared to take the steps necessary today to ensure economic success tomorrow.”

The range of necessary interventions extends beyond ‘horizontal’ measures of competitive taxation and low regulation to proactive interventions needed to create and sustain markets:

  • Undertaking “Schumpeterian entrepreneurship”, the state taking the lead in investing in radical new technologies before the private sector can be persuaded to invest, as happened in commercial aerospace after the Second World War;
  • Providing fill-in capital by subsidising private investments when a company cannot raise enough capital to invest in all the profitable investment opportunities it has available, as the government did for BAe plc for its initial investment in the Airbus programme;
  • Correcting coordination failures in the private sector to co-ordinating private sector agents to ensure mutually supporting investments take place;
  • Acting as an ‘investor of last resort’, as it did through the nationalisation of both Rolls-Royce and British Leyland ensured that crucial capacity and skills were retained that otherwise would have been lost had the market been allowed to take its course;
  • Providing institutional protection from the capital markets, as the government did with Rolls-Royce through ‘the golden share’.

“Comparative advantage in a given sector is a mixture of innovative private entrepreneurship and public action. All markets are in some sense ‘mixed’. If state action is the institutional prerequisite of well-functioning markets, then governments have no choice but to try and ‘pick winners’ in the economy,” Pourvand writes.

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