Recalibrating industrial policy

Roger Liddle

A new industrial activism is pivotal to how progressives respond to the global financial crisis and tackle the long-term need to rebalance our domestic economies. Anglo-America faces this challenge most acutely because the drivers of growth had become too dependent on financial services, cheap supplies of overseas capital, excess consumer debt and house price bubbles. But countries with strong export surpluses for which US demand has collapsed, or that have over-relied on the natural resource boom, may face similar long-term challenges.

For Europe, the political challenge is to devise a new activism that strengthens domestic capabilities and drives new sources of renewed growth without descending into economic nationalism and protectionism and sacrificing the benefits of European integration and globalisation. Reverting to protectionism is not an option. So as well as giving substance to this new activism, we have to define the lines it must not cross.

At stake is the political acceptability of globalisation
Anti-globalisation feeling was rising before the outbreak of the global financial crisis. The French rejection of the European Constitutional Treaty in May 2005 was a warning sign, while the increased support for right and left-wing populist parties in national elections and is now echoed by the mainstream poses of some European leaders. The classic response of the “progressive redistributionist” is to say “ok – let free markets do their work, but we need stronger social protection and more redistribution to make this politically acceptable”. In other words, a “Global Europe” must be a “Social Europe” as well. But we must now go further. In the US, the Democrats have struggled to define policies that make the dynamics of globalisation politically acceptable. They have proposed strengthened trade adjustment assistance and “wage insurance”. But as Gene Sperling has pointed out, workers and their trade unions see these policies as “funeral insurance”: easing the pain of losing a “good job” by helping people obtain less secure, lower paid jobs elsewhere, probably in services. The political challenge is to develop a new activism with “new jobs that will be good jobs as well”. It is about creating the policy frameworks, getting the conditions right and supporting the growth of businesses that will deliver these outcomes.

Intervention has to be market-based and business-friendly
A new industrial activism will not attract support if it does not learn the lessons of past failures. Governments cannot “pick winners”. Yet what they should do is mobilise all government arms to take advantage of new economic opportunities during low-carbon transition, and the pharmaceutical and new technology developments in an ageing demographic in western societies. To achieve this, better use of intervention from taxation to spending and regulation is required. We need to coordinate better action by government agencies on the ground, while ensuring that interventions meet specific business needs.

Classic horizontal policies to improve economic performance need to be deepened through recession
Progressives support investment in skills development, infrastructure, in research and innovation, and financial help for small and medium size enterprises. During a recession these horizontal policies become yet more important. Progressives must ensure that businesses retain access to a wide range of finance, through generous and accessible loan and credit guarantee schemes and prevent the withdrawal of venture capital from domestic markets, where necessary by setting up new public-backed financial institutions, such as the revival of post-war 3Is (investment in industry bank) in the UK. Progressives should incentivise the maintenance of employer investment in skills, with the offer of targeted subsidies, while ensuring that the skills training on offer relates to specific future business needs. Progressives must maintain public investment in research and increase financial support for closer-to-market innovation: funds should be allocated through independent agencies on the basis of commercial and scientific judgement.

The new activism has to be sectoral as well as horizontal
Within a deepened horizontal framework progressives must ensure that interventions are tailored for specific sectors or to meet new market opportunities. This broader market-based approach towards specific sectors is necessary for domestic industries to fully exploit emerging opportunities: for example, a comprehensive approach to the low-carbon transition which involves questions of skills, innovation, as well as infrastructure and planning. It is difficult to envisage a successful energy policy for the future without some return to long term state planning facilitating the investment in new infrastructure necessary for a low-carbon transition to become firmly entrenched; planning and coordinating this investment requires constant dialogue between government and business. Policy interventions which correct market failures, and provide a stable regulatory environment sector by sector, will help set the conditions of business success and are key to the new and recalibrated industrial activism.

Beware the ides of protectionism: it is but a few steps from the crisis-induced economic nationalism of the past few months
The renewed impetus behind industrial activism must lead neither to protectionism nor excessive economic nationalism. The new industrial activism is about enhancing the capabilities of domestically based firms, not discriminating in favour of nationally owned companies. For Europeans, the importance of a strong EU is paramount in this respect. Rules over state aid levels must be enforced, while the regulatory parameters of the single market must be zealously guarded and its principles of free and open competition buttressed. The EU must also do its utmost to persuade the US not to entrench the worrying resurgence in protectionist rhetoric in Congress, exemplified by the inclusion of a “Buy American” clause in the Obama stimulus package. Renewed protectionism would also sink the prospects of a global deal on climate change that will be a crucial component in our collective transition to low-carbon economies: protectionism is a strong disincentive for leading emitters, such as China and India, to partake in such an agreement. That is why a commitment to complete the Doha Trade Round would be of huge symbolic and practical importance.

Roger Liddle is vice-chair of Policy Network