Business has to make sure the next industrial strategy sticks – Inside track

This post is by Sam Alvis, director of energy and environment at Public First and associate fellow at IPPR.

The UK has a chequered history with industrial policy. We’ve had 11 of them since 2010, before the current government scrapped it altogether in 2021. Now Labour is promising to try again, but to do better.

Caption: UK industrial strategies have lasted on average 13 months. Good luck planning. Graphic: IPPR, November 2023, Making markets in practice

As we’ve written recently at IPPR, industrial strategy is all about achieving a specific goal, one that changes the competitiveness of specific industries. It’s creating the conditions for the private sector to do something it wasn’t doing before (what academics call additionality). Industrial strategy, therefore, requires choices and leadership. If the government wants to reduce emissions that will mean reducing the size of some industries (oil and gas), transforming others like steel through the shift to electric arc furnaces, or growing new ones, like green hydrogen.

Critics of industrial strategy will say that’s all well and good, but that’s what markets are for. Markets are better informed than government can ever be. The state is liable to capture by big companies and vested interests leading to a new wave of state-backed failing companies like British Leyland.

This critique falls down on two fronts. The first, as our IPPR paper points to, is that proper industrial strategy is not just subsidy. The government sets the rules for the production of goods and services, their purchasing and the marketplace itself. The state has a myriad of tools to shape certain outcomes, too long to list here, including procurement, product standards, tax levels or land use planning.

Caption: The government directly shapes how all markets operate, even by choosing not to intervene. Graphic: IPPR, November 2023, Making markets in practice

The Conservatives had a green industrial strategy The second is the pretence that markets deliver on their own. The government likes to suggest its emissions reduction so far has come from the all-seeing entity that is the market. The most pointed to example is the contracts for difference scheme which has seen the price of offshore wind (until recently) fall year on year. Yes, this was a market mechanism, ie an auction, but the goal of that mechanism (cost reduction), the rules (who’s eligible to bid and when) and the cost (the strike price) were all set by the government. Although they’d hate to say it now, the Conservatives ran a green industrial strategy. It’s just they chose not to optimise that market for other goals like the domestic production of wind turbines.

Industrial strategy actively shapes markets rather than the more laissez-faire ‘correcting market failures’. Emissions are the classic market failure, producers don’t pay for the cost of pollution. A simple market-led policy would be to apply a carbon tax across the board to price the pollution. But we know that a) the political economy of that is nigh on impossible, and b) you can punish polluting incumbents but that doesn’t make green challengers more competitive.

Take something like the electricity grid, where Labour has focused its initial efforts. Our out of date grid is not a market failure. The market was asked to deliver private profits and low costs, both of which it has done. To meet those goals those in the market (National Grid, Ofgem etc) chose to restrict investment. Policy hasn’t failed, but it does need to change the outcome we need now: pylons everywhere.

Labour is learning from the US Labour has been open that its industrial strategy is learning from Bidenomics. Despite the coverage, the White House is showing industrial strategy is not just about the cash. It is about building a new relationship between the private sector and the state.

Through the US Inflation Reduction and CHIPS Acts, companies are held to account on measurable milestones, like reducing emissions or meeting semiconductor production targets. As well as objectives, public finance for corporations comes with conditions. If you don’t deliver good pay or provide adequate childcare, you don’t get funding. This hasn’t put companies off, private investment is at record levels with $500 billion coming to the US.

Yet, despite industrial strategy being the central plank of the Labour’s economic policy, British business has been slow to respond. That’s unsurprising, the rupture and rewriting of strategies has been exhausting, especially with so few resulting in action. But I think in part it is also a lack of understanding of industrial policy and, therefore, how to engage.

Industrial strategy, as Labour likes to say, is partnership. It means responsibilities both for business and the state. Take the finance sector’s emissions. Current regulation expects firms to publish their climate-related financial exposure, ie the risk to their assets from a changing climate. New regulations will ask for transition plans too, setting out how they’ll shift businesses from polluting to low carbon activities. Currently, firms have to do that alone, leading to grumbles in the City that they can’t transition without more information from the government, or that many actions they need to take are too risky or too costly.

Labour has signalled that it will remove the sorts of barriers that hamper businesses trying to change. It has pledged to reduce the cost of electric arc furnaces for steel and to change planning rules to help developers build renewable infrastructure faster.

Business needs to communicate what it needs As we saw from Rachel Reeves’ announcement on the electricity grid, Labour will intervene if industry can articulate what is required. So, rather than complain that targets like 2030 clean power are impossible, a sensible business would communicate what it needs to make them achievable. This isn’t just about energy. What regulatory changes could help pharmaceutical companies widen access to their data? Is building more affordable housing simply a cost issue for developers?

Rachel Reeves and Jonny Reynolds are not setting up breakfast meetings because they love smashed avo. Labour is trying to understand where the point of maximum leverage is, and what tools are best applied.

Business can already check off the grid, planning and (for now) public investment as three wins from Labour’s proto-industrial strategy. But that means the ball is back in the private sector’s court. What will industry do now that it wasn’t able to before? And what’s the next wave of intervention required?

It’s not just Labour that should care about the success of its industrial strategy. Businesses have a big stake in it; if it struggles, so will they. So, yes, Labour may be promising a 12th industrial strategy in the name of consistency. But the onus is now on business to ensure this one sticks.

This blog was originally posted on electionenergy.com