MANCHESTER – The United Kingdom’s just-completed election was supposed to provide – as the Conservative Party’s campaign slogan put it – a “strong and stable” government. It ended up doing the opposite, producing a hung parliament and the likelihood of another general election later in the year.
Meanwhile, the clock is ticking for concluding negotiations with the other 27 EU members on the UK’s withdrawal from the European Union. To anyone with an inkling of how demanding and complicated the Brexit talks will be, and how ill-prepared British politicians and officials are for them, this is a depressing prospect.
Although a hung parliament, with the Tories attempting to form a minority government, might tilt UK politics in the direction of a “softer” Brexit, at least in terms of the future trade relationship with the EU, it will probably leave Britain’s political leaders even less able to cope with the negotiations. Britons will have to hope that EU leaders are willing to show some compassion: after all, the one clear message from voters was their lack of confidence in the alternatives on offer.
But the UK economy will be facing significant challenges – all but ignored during the election campaign – even without Brexit. One is the chasm between the winners and losers from trade and technology, a gap that goes a long way to explaining last year’s pro-Brexit vote.
Related to this is the UK’s shockingly low level of productivity. Of course, the gap between winners and losers – which broadly corresponds to the electoral map – is not unique to Britain; it has incited populism and other forms of anti-establishment politics across the West. Nor is the UK the only country to be experiencing flat or slow productivity growth.
But the UK’s productivity level is some 16% lower than the G7 average. And it is by far the most regionally unequal EU economy.
To improve UK productivity, the country’s underperforming regions must catch up. The Brexit vote makes it doubly necessary to focus on these poorer regions: to address the divisive politics that underpinned the narrow Leave majority, and to minimize the economic damage that the rupture with the UK’s biggest trading partners, especially if badly negotiated, is sure to cause.
The best hope to tackle the profound structural problems came with the May government’s pre-election announcement of its intention to adopt an industrial strategy. Although industrial policy is in line with May’s corporatist instincts, the UK’s policy classes have been allergic to the idea since the late 1970s.
Officials shudder at the memory of ill-fated interventions designed to prop up failing companies (such as carmakers and steel producers) or invest in ultimately doomed new technologies (Concorde, DeLorean cars). It did not take Margaret Thatcher long after her election in 1979 to downgrade the National Economic Development Office (known as Neddy), the body responsible for strategic state interventions, which was finally dismantled under Thatcher’s successor, John Major, in 1992.
The allergy to industrial policy is particularly acute among those who equate it with subsidies and tax breaks. Yet, given that the government constantly intervenes in the economy, it surely makes sense to think about its actions and interactions with the private sector in a far more strategic way. Indeed, some below-the-radar – or even accidental – industrial policies have been rather successful.
Finance is one beneficiary, thanks to benign regulation and huge investment in infrastructure in the City of London and Canary Wharf. The pharmaceutical industry has been another, owing to special tax breaks such as the “patent box” and the NHS as a huge customer.
The creative sector has benefited as well, thanks to the BBC. Although under constant political attack, the BBC acts exactly as a public partner should, undertaking research and development, setting technical standards, providing skills training, and adhering to open procurement from small and medium-size suppliers, which are among the UK’s most successful producers and exporters.
The economic case for industrial policy is compelling, so long as it is understood as a vehicle for strategy coordination, risk pooling, and the provision of public goods. The old mistakes – propping up lame-duck industries or betting on specific technologies – can largely be avoided through strong policies on competition and state aid (to ensure that support for the auto sector, say, is not seen as support only for current incumbents) and sunset clauses for specific assistance.
The case against not having an explicit industrial policy is also compelling. The accidental character of government intervention helps explain why the economy is so regionally lopsided. For example, cost-benefit analyses of proposed infrastructure projects that rely on market metrics such as wage rates or property prices to assess potential benefits will create ever-increasing investment around London, and a vicious circle of apparently decreasingly attractive investment in the UK’s north.
A strategic view would recognize the productivity benefits of seeding new clusters elsewhere – like the happenstance measures that put UK automakers in the northeast of England and the country’s second-biggest broadcast-media sector outside London in Salford, Greater Manchester, when the BBC moved part of its operations there.
There is ample historical evidence of the merits (and demerits) of specific policies. As Britain has long been plagued by seesaw policies and a plethora of headline-grabbing (but ineffective) initiatives, the real challenge will be to establish a political and institutional framework to implement viable initiatives, and to shape governmental interaction with the private sector.
Of course, any pre-election policy ideas might fall victim to political deals or simply the massive uncertainty implied by the recent election result. That would be a shame. The greater the political instability, the more acute is the need for a framework that will finally start to address the deep divisions and challenges facing the British economy.