A strong industrial strategy has many benefits9 August, 2016 / Articles
In a brief moment after the financial crisis, policymakers set their sights on something higher than mere growth: not a return to the consumption and (private) debt-driven growth that had created the trouble, but investment-led growth. Time passed, however. The obsession with austerity set in and that interesting debate dwindled away.
Now, British prime minister Theresa May’s revival of industrial strategy is an opportunity to engage in the conversation again. Certainly, the concept of having such a strategy has not lost its power to shock. Commentators have been swift to denounce its revival as misguided and protectionist, a 1970s’ tribute to failed attempts to revive zombie companies. But the idea that the choice is one between protectionist policies and the elimination of any strategic role for the state is false.
In South Korea, China, Finland, Israel and the US, for example, the state has played an active role in increasing innovation and the productive capacity of the economy. Almost every technology that makes the iPhone smart was funded by government. This was not just about basic research but rather engagement across the whole innovation chain, including demand-side procurement policies.
Today the argument ought not be about whether the state should or should not be involved in driving growth but how it can do this in the best way. There are, for example, legitimate concerns that certain approaches to industrial strategy can lead to incumbent companies and sectors winning unwarranted favours from governments through persistent lobbying. Sectoral approaches sometimes increase these risks.
Much better to look to the lessons of innovation policies that have focused on getting companies to find ways around social and technological problems by working together across sectors and with public agencies. The Apollo mission to put a man of the moon, for example, required collaboration between sectors from textiles and aerospace.
Such an approach demands new types of public-private partnerships, targeting real co-investments rather than concessions and subsidies . In the past, this led in the US to the likes of Bell Labs and Xerox Parc, engines of future innovation, and in the UK to chip designer Arm, through spillovers from BBC investments.
By increasing business expectations about growth areas, mission-oriented investments encourage private sector investment. Unlike indirect measures such as tax credits, these policies create animal spirits rather than assume them. They also allow greater synergy between macroeconomic stimulus, financial market reform and innovation. This can lead to bigger multipliers than “infrastructure spending,” the policymaker’s default panacea.
On the finance side, the problem is not quantity but quality: industrial and innovation policies require long-term, strategic finance, while the UK continues to reward short-term finance. The few attempts at building sources of patient public finance have been neglected, with the successful Green Investment Bank , for instance, in the process of being privatised.
Indeed, just as the debate should not be industrial strategy versus free market, at the organisational level it should also not be about public versus private. There is no reason for the government to sell its entire stake in the GIB. It could retain a significant share, ensuring that it is neither fully public nor wholly private, and use the public share to direct green innovation in the long term.
Similarly, there is no compelling reason for Channel 4, the British public service broadcaster, to be privatised. It can continue to offer opportunities for private sector broadcasting activity, through procurement; so far it has done this successfully with a good return for the taxpayer.
Why should the public sector not get some return on successful investments, sharing the risks and rewards, precisely so that it can cover the failures that inevitably come with innovation? This also entails seeing intellectual property (patents) not as “rights” but as contracts to be negotiated between government and business so that innovation is nurtured rather than stifled. We need the interesting conversation about investment-led growth but the last time it began it was cut short before it really started. This time, we must do better.
We do not need false or ideological choices between market and state. This time we need a real debate about the social missions that can drive public and private investment to claim the opportunities of the future.