The merits of industrial policy have been long debated; with it’s of success less discernible. As a result, for a long period there governments have had no appetite to return to a purposeful industrial policy – that is, until now.
Earlier this year, the United Kingdom (UK) Government released a new Industrial Strategy green paper and it brings new thinking. There are modernisations to the strategy, in that, it is innovation and technology focused, business-led, focuses on cluster, is integrated with other policy objectives and aims to achieve wider societal goals such as equality through economic development. However, the biggest innovation is that its sectorial approach is administered at the place level. In other words, the strategy aims to develop sectorial policies that take into consideration the specific advantages and needs of places and their industries (The Conversation, 2017).
This renewed focus isn’t being driven just by the UK, the United States and other institutions such as the European Commission, OECD, World Bank, and the Centre for Cities are beginning to focus on industrial policy once again. So what is driving this renewed focus on industrial policy, what lessons are there to be had and should we be paying attention?
|Industrial policy is defined by the World Bank Group ( 2016) and the DCED (N.D) as “government efforts to alter industrial structure to promote productivity-based growth” and notes that industrial policy has been “used to support or protect sectors expected to offer better prospects for economic growth or societal welfare” (2016). Kroes (2006) provides a more contemporary definition as “one which frames the structural conditions necessary to ensure economic success in a globalising economy”.
The History of Industrial Policy
The history of industrial policy stems back to the days of protectionism and governments trying to create industries. Giuale (2014) notes that policies from the 1950-1980s treated industrial as “infants – in need of all kinds of support until they could survive on their own.” Public servants would pick industries based on their ability to create jobs, to attempt import substitution, to support flagging industries or where it was believed future growth opportunities. Governments provided these industries tax breaks, discounted credit, subsided utilities, government contracts and even capital injections when they became uncompetitive (Giuale, 2014). It has been argued that this period of industrial policy led to outcomes worse than market failures with few winners and the observation that public servants are not capable of picking winners (Giuale, 2014; World Bank Group, 2016).
The 1980-1990s focused more on export, privatisation, de-regulation and de-industrialisation of sectors. Eventually, industrial policy fell out of favour with governments from the 2000’s onwards, with a horizontal approach preferred. Instead industry support was broad-based, focusing on the business environment, innovation and competitive forces rather than sectors (Aiginger, 2014; The Conversation, 2017; World Bank Group, 2016). On occasions, some sectors were supported more where horizontal policies were found to not be specific enough or where instruments had an unintended impact (Aiginger, 2014). However, no industry has ever succeeded without some backing from its government.
Since the 2008 financial crisis, there has been a renewed push for “industry-oriented ‘integrated’ policies (Aiginger, 2014). The financial crisis highlighted that there was an imbalance in many developed economies with the financial sector making up a larger proportion than it should. This is because the financial sector is not a driver of innovation or export growth in itself (such as manufacturing and agriculture industrial sector) and therefore, it reaches a point in which growth of the sector does not correlate to economic growth (Aiginger, 2014, University of Bath, 2013; World Bank Group, 2016).
Although public policy cannot fully anticipate market demands and cycles, there is a role for governments to enable structural change through stakeholder collaboration on innovation and market development, pre-competitive investments in infrastructure and skills; and support structural change to achieve societies long term goals (i.e inclusiveness, environmental sustainability and job creation) (Aiginger, 2014; Altenburg et al, 2016). Evidence has shown that industrial policies that have focused on innovation, skills, technology development of sectors and promoted positive externalities have been more successful in achieving productivity improvements and societies long term goals (Aiginger, 2014; University of Bath, 2013; World Bank Group, 2016). Leading some to call for a reformed industrial agenda and argue that it provides “proper recipe for real economic growth and structural transformation” (World Bank Group, 2016).
Lessons from industrial policy
There have been many evaluations of industrial policy and there is now a deeper understanding of how industries grow and the types of government instruments that are more effective. The following is a summary of a few recent evaluations that have informed the new UK Industrial Strategy and perhaps, provide a platform for our own industrial policies:
- Macro policies shortfalls: Neo-liberal policies implemented since the 1980s (i.e. de-regulation, privatisation and reduced government role) have facilitated the growth and power of a few multinational corporates and the ability for a few company to destabilise the economy (University of Bath, 2013). While the London School of Economics (LSE) Growth Commission (2017) notes that monetary, fiscal and competition policy have gaps governments can do more to stimulate sustainable competition and economic growth;
- Picking Winners: Industrial policy should benefit everyone and not favour individual firms i.e. “pick winners”. Policies that enable firms to gain power and dominate the market locally (multinational national corporations) “can lead to situations where public interest may not met and enable hollowing out of the sector, tax avoidance and lower wages (Aiginger, 2014; University of Bath, 2013). Governments should only take specific firm level interventions when the long term success of an industry or a place is in distressed i.e. significant job losses, recessions (Aiginger, 2014);
- Locked-in: Industrial policies are “necessary to prevent locked-in situations” where industry continues to pursue conservative strategies or develop backward ‘dirty’ products because that was what had previously worked or considered the norm (Aiginger, 2014). That is because “development is fundamentally about structural change: it involves producing new goods with new technologies and transferring resources from traditional activities to these new ones” (Dani Rodrik, 2007);
- Co-operation: Industrial policy should enable an environment of co-operation between government and the private sector that facilitates cross-sectoral spill-overs that extend beyond financial gains (Aiginger, 2014). Industrial policy should be relatively business led and provide a framework to develop new comparative advantages through collaboration and competition between firms, with links with institutions (such as universities and research institutes) within and relationships outside regions to develop global markets and enable knowledge spill overs across sectors (Aiginger, 2014; University of Bath, 2013);
- Place-based: Industrial policies appear to be best “tailored at regional and local levels (in particular, cities) to promote regional re-generation, nurture and exploit cluster dynamics” (Centre for Cities, 2017; University of Bath, 2013). That is, industrial policy “needs to take a place-based perspective” and look to enhance the existing strengths, address growth constraints and strengthen agglomeration forces (Centre for Cities, 2017);
- Skills, knowledge and technology: Industrial policy has traditionally focused on sectors, however it is the “skills profile” of a locations business base that enables knowledge and technology development and therefore has a more important bearing on a place and its economic performance (Centre for Cities, 2017);
- Export Driven: Export businesses enable economic growth as they tend to be higher skilled, driving up productivity and bringing wealth into the community which flows on to create jobs in the local sectors such as shops, cafes and doctors (Centre for Cities, 2017). Export business also prefer city locations due to their ability to access “knowledge and ideas, deep pools of workers, and markets and suppliers” (Centre for Cities, 2017); and
- Integrated: Industrial policy should be integrated and forward-looking. Innovation is a key driver of economic growth and structural change. Therefore industrial policy should be “merged with innovation policy” and delivered through a systematic approach that aligns with other policies such as environmental sustainability, competition and education (Aiginger, 2014, Centre for Cities; 2017; LSE Growth Commission, 2017). Figure 1 provides a systemic view of integrated industrial and innovation policy.
Australia may not have as much of a reliance on the financial sector; however our sectors are rapidly losing competitiveness, while other places lack economic diversity. So is it time we reviewed our approach to supporting business, the type of development we aim to achieve and the way we support places and their firms to compete. Do we need a new industrial strategy like the UK?
You can also find out more information on the Centre for Cities, 10 ideas for a successful place-based industrial strategy here.
Aiginger, K. (2014) Industrial Policy for a sustainable growth path. European Union, Welfare Wealth Work. P.g.10
Giugale, M. (2014) Economic Development: What Everyone Needs to Know. Oxford University Press: New York.