Labour has mapped out an industrial strategy, which sits at the centre of its plan to generate economic growth.
Businesses will be delighted. According to the Society of Chemical Industry (SCI), over 50 business groups, think tanks and firms have called on the next government to develop an industrial strategy.
But what is an industrial strategy? And why are businesses so desperate that the next government deliver one?
What is industrial strategy?
Industrial strategy is the idea that there are objectives that the government is aiming towards and that intervention in the economy – be it through regulation, direct subsidies or some other means – can help achieve those goals.
If you think governments are always intervening in the economy, you’re not alone. “We can have an industrial strategy by default or design. Ignoring this reality is not a policy – it is just negligence,” Vince Cable said back in 2012.
Overt industrial strategies fell out of favour towards the end of the 20th Century as politicians grew sceptical about the state’s capacity to usefully interfere in the market process. They were often criticised for ‘picking winners‘ under the influence of well-connected lobbyists.
Since the financial crisis, however, they have edged back into favour. Greg Clark’s plan in 2017 was the last attempt to develop a full industrial strategy, before it was dumped just two years later by Boris Johnson.
Rishi Sunak was too much of a free marketeer to ever believe in industrial strategy. His government had a series of plans and strategies for various sectors, but its fair to say that there was no one overarching strategy.
Sunak himself never quite settled on a coherent vision for what he saw as Britain’s place in the global economy, and, if he did, he certainly never managed to impose that vision on his party.
Why do people think we need one?
One of the reasons economists tend to be cautious about industrial strategy is that the future is, famously, quite difficult to predict. However, there are some clear challenges which all economies will have to address in the coming years which require government intervention.
The green transition is an obvious example. Reaching net zero by 2050 is a huge challenge and will require big changes which simply are not possible without government guidance, if not direct intervention.
Its also fair to assume that artificial intelligence (AI) is only going to get more powerful and potentially more disruptive.
These big changes will require firms to change, and they will likely need government guidance to do so.
Jordan Cummins, director of competitiveness at the Confederation of British Industry (CBI) told City A.M. that “industrial strategy is most powerful in helping firms to bridge the gap between the old and new economy.”
The other big reason is that other major economies are already undertaking industrial strategies. Biden’s Inflation Reduction Act and the Green Industrial New Deal are clear attempts to actively structure and capture areas of the global economy.
Paul Drechsler, chair of the SCI and former chair of the CBI, said this was a major reason why the UK needed to get its act together. “Its all very well being an open market economy, but if all your partners don’t then you are putting yourself at a big disadvantage,” he said.
“We’ve been sitting idle for 10 years while other people are eating our lunch,” Drechsler added.
What should be in it?
The most important point of any industrial strategy is that it needs to accurately reflect the UK’s strengths and weaknesses.
“We can’t always match the US on fiscal firepower, which means doubling down on areas of competitive advantage,” Cummins told City A.M. “An industrial strategy isn’t always strategy, for every industry, instead the role of government should be to nail our calling card for investment”.
Drechsler agreed, saying its all about good situational analysis. “Industrial strategy looks at those strengths and seeks to work out how to play them intelligently and play them smartly”.
Those strengths include areas which the UK has not always been so good at celebrating, such as professional services and higher education. But, as the quotes imply, an industrial strategy also involves making choices about which sectors are unlikely to be globally competitive.
Giles Wilkes, who helped to write Theresa May’s industrial strategy, argued that governments need to set out their plans proactively rather than react to lobbyists.
“Sectors should be actively chosen – not determined by whichever sector body comes forth with a plan,” he wrote in a report for the Institute for Government.
He also said that policy needed to work with the market mechanism rather than against it, creating structures for the competitive process to work itself out. Going too far, and trying to get the government to direct markets, is a constant temptation that must be guarded against.
“The risks most likely to undermine a good industrial strategy arise when it is developed by those with the greatest confidence, and least awareness of these flaws,” he said.
What has Labour said?
Labour has said its industrial strategy will be genuinely different from previous iterations. In her Mais lecture, Rachel Reeves promised that a modern industrial strategy would reflect “the informational and capacity constraints of government”.
There were few concrete details in Labour’s manifesto about what its potential industrial strategy would look like, although there were a handful of clues.
First off, it would be “mission-driven”. It set out four missions: delivering clean power by 2030; harnessing data for the public good; caring for the future; and building a resilient economy.
The danger with missions is that they duck difficult choices – after all, who could oppose ‘building a resilient economy’ – but Labour also said it would “clear-eyed” about where the UK has a comparative advantage.
It identified excellent research institutions, professional services, advanced manufacturing and the creative sectors. “In government, we will set out plans for these and other vital sectors of the economy,” Labour said.
The most important question is whether these specific plans can work as part of a coherent strategy, with all of the government pulling in the same direction.
As Drechsler said, a recurrent problem has been that one single strategy has not been “tightly aligned across different departments”. Wilkes talked of the difficulties facing businesses in having to discuss investment plans with various different departments who did not always sing from the same hymn sheet.
Addressing this is a core problem for Labour. The party has said it will set up an Industrial Strategy Council to help join the dots between departments and has also promised a major overhaul of the civil service.
Whether these reforms are successful will be a major factor in determining whether Labour’s industrial strategy will be all that businesses expect it to be.