Business and Trade Committee
Oral evidence: Industrial policy, HC 440
Tuesday 20 February 2024
Ordered by the House of Commons to be published on 20 February 2024.
Members present: Liam Byrne (Chair); Douglas Chapman; Antony Higginbotham; Julie Marson; Charlotte Nichols.
Questions 24 to 45
Witnesses
II: Sir Vince Cable, former Secretary of State for Business, Innovation and Skills; Lord Mandelson, former Secretary of State for Business, Innovation and Skills; Greg Clark MP, former Secretary of State for Business, Energy and Industrial Strategy.
Examination of Witnesses
Witnesses: Sir Vince Cable, Lord Mandelson and Greg Clark MP.
Q24 Chair: Welcome to the second panel of our inquiry into industrial policy in the UK. I am delighted to welcome three illustrious former Business Secretaries. Thank you so much indeed for joining us, and thank you for helping us set the stage for this inquiry this morning.
Lord Mandelson, perhaps I could start with you and just ask you to reflect on what you think has changed in the world since you returned to office back in 2008. How do you see the competitive landscape that we now face as a country having changed? What are the new challenges and opportunities that you observe?
Lord Mandelson: Thank you very much indeed for asking me and my illustrious successors to join you. Essentially, if I can perhaps answer your question and frame the discussion that we are going to have, two things have changed. One is that we have a massive growth challenge in this country. Secondly, the rest of the world has changed and deteriorated, and we have to come to terms with that.
The backcloth is that, since 2008, we have essentially moved from an acute crisis response to the global financial crisis to seeing a set not of acute, but chronic economic weaknesses crystallising in our country. Some of these are shared with other advanced economies, but others, frankly, are more unique to Britain. For example, we are the only economy in the G7 with investment now below 20% of our GDP. That is a terrible situation to be in.
Back in 2008, the backdrop was different. The backdrop was a UK economy that had grown consistently since 1997, at an annual average of around 3%. Today, we have meagre growth between 1% and 2% only, and for a decade and a half that has continued, and indeed the economy, as we know, shrank last year.
I do not like hyperbole, but we are, frankly, stuck in a fearful hole as a country that we urgently need to get out of, and we have to use all the instruments of policy at our disposal to do so. We need some genuinely new thinking about how we use these policy tools. Getting out is going to involve, incidentally, more than fostering value-added services, in which we excel in this country and are much favoured by think-tanks from the Aldwych to Queen Anne’s Gate. We also have to focus on value-added manufacturing if we want to continue to grow as a trading nation.
When I was brought back from Brussels in 2008, I came with a perspective. It was a new perspective for me. It was one that questioned the 1980s and 1990s Anglo-Saxon orthodoxy that Ministers and markets do not mix. That is, broadly speaking, what we had inherited from the 1980s and continued in the 1990s, and to an extent during the early years of the new Labour Government as well.
I favoured instead a rather more careful partnership approach with business, markets and other stakeholders, most obviously the workforces of our companies, and a view that we needed to operate together in a more proactive way. That is the new normal in the world. In a sense, we in Britain are now exceptions to the norm.
Q25 Chair: Why is that?
Lord Mandelson: Because we do not, in the main, accept that proactive partnership, joined-up intervention or partnership role for Government with business and markets and stakeholders in the economy to the extent that all our competitor economies do, not just in Europe but, as I saw as trade commissioner, in Asia as well.
I adopted a somewhat different approach when I became Business Secretary, and it produced concrete, growth-supporting benefits. The examples I would offer you are what we were able to do and turn round in the automotive sector, the energy transition with the green industrial strategy that we pursued, and what we did in bio and life sciences, where I set up a new focused Government of life sciences.
I would just highlight this, if I may. At the centre of my approach as Business Secretary was our great research-based universities in this country. They are indispensable. These are the shoulders, in my view, on which we are going to build our future prosperity as a nation, and therefore we have a duty to reform and sustain their funding model in the future.
Here is the point. We lost the election in 2010. In my view, over the 14 years since my time in the Business Department, industrial strategy has been an approach that has been followed only sporadically in Government, despite the best efforts first of Vince and then of Greg. We have gone through fits and starts and basically neglect of industrial policy, and this has had a disastrous impact, because the key requisites for a successful industrial policy are consistency and continuity between Ministers and between Governments. It relies on institutional durability, not stopping, starting, scrapping and reinventing all the time. It also depends on international trust if we are to going to compete effectively for international capital.
Here is the point. There is now a further dimension in all this. It is not just stagnating economic growth in our own country, and disastrously low levels of investment in the economy. Overlain on these domestic challenges in a much more pressing way than we saw in the 2000s are a set of external resilience and security risks in the world. There are important lessons to be learned from Covid, Putin’s invasion of Ukraine and the energy shock that ensued, China’s dominance of some key supply chains, including some critical raw materials, and also, I have to say, from what is happening in the United States.
In America, their strategy for resilience and security, let us be honest, is more nationalist than internationalist. Mr Biden’s subsidy policies through the Inflation Reduction Act, though attractive in principle, especially if you have a big enough chequebook to afford these subsidies, frankly are adding to Europe and Britain’s resilience problems and our industrial instability rather than finding, as I would prefer to see in the United States and Europe in a transatlantic way, shared allied solutions to resilience.
If I can just say this in conclusion, we face a double challenge of getting a growth strategy domestically that will enable us to turn the page in our economic story as a country, but, secondly, and as part of that, achieving greater resilience and security in the face of growing global risks.
Here I want to make a point; I do not know whether it is controversial or not. For me, both these dimensions are important, but growth is the more fundamental first-order challenge. In our eagerness to address risks abroad, we must be careful not to make it harder to achieve growth at home. In other words, we have to remain an open, competitive trading economy.
Let us be honest. There is a tension—I do not overstate it—between wanting a narrower range of more reliable economic partners in the world and maintaining sufficient competition and impetus from overseas innovation. As we grow the economy, we can build greater security and resilience into it—it is what Rachel Reeves calls securonomics—and do so in a way that is not at the expense of our living standards at home and cutting ourselves off from the global economy.
On the contrary, we are completely dependent on foreign direct investment, as Richard Harrington has been describing in his report, and we have to operate on that basis. To get that FDI, we need a much better total and positive business environment that addresses regulation, tax and labour market law. All these are the relevant factors that will determine how successful we are in the rest of the world.
Lastly, central Government and devolved Government has to work in a completely different way. I do not just mean the nations of the UK; I mean within England as well. We have to drill down and get that relationship right between a national industrial policy that is, in a sense, centrally designed, and our nations and regions in England that are responsible for so much of the supply side of the economy and delivering policies on the ground.
Q26 Chair: Thank you. That has given us a lot to unpack. Dr Cable, reflecting back on the time since you were in office, what has changed? What are the new opportunities and challenges that we now have to respond to by getting industrial policy right?
Sir Vince Cable: I agree with a lot of what Lord Mandelson has said. It was very important that he started off by referring to the financial crisis. I have likened it in literature to an economic heart attack. It had very profound long-term consequences, especially in the UK, because of the size of our banking sector, but generally. It changed the world, and it had drastic long-term effects on the way we perform.
In the case of the UK, we have now had three or four shocks within little over a decade: the financial crisis, the pandemic and the war. Some would argue Brexit; I do not want to reopen that whole issue here. The British economy has taken a battering, and adjusting to it has been difficult.
The second point I would want to make is that, in terms of how the Administration I was in approached these questions, it is fair to say that at the outset we approached this, as Lord Mandelson said, with the thinking of the 1980s and 1990s, that it did not require a great deal of active Government intervention beyond getting the macroeconomics right. It became clear to me very soon that that was not going to work.
There were two specific incidents that gave me what you might call a lightbulb moment. One of them was the decision to award a big rail contract to Siemens. The immediate consequences were going to be the closure of the Bombardier works in Derby and the whole supply chain associated with it. I agreed with the Transport Secretary, Philip Hammond, that we needed to construct public procurement and think about this industry in a much more systematic way.
The second event was a meeting with the five or six leading representatives of the aerospace industry: BAE Systems, Airbus, Bombardier and others. They pointed out rather brutally that, unless the Government intervened actively in support of research and development, there would not be an aerospace industry in Britain within a few years’ time.
On the basis of that, and broader thinking about what was happening in the economy, I wrote a letter to the Prime Minister, which was discussed in the Cabinet, suggesting that we constitute an industrial strategy, which had two basic principles, one of which was conversation and dialogue with business. Peter Mandelson’s experience with the Automotive Council was a very good model that we wanted to build on. The second was that we had to think long term, because the experience particularly of our advanced manufacturing industries was that their cycle for investment was considerably longer than the electoral cycle, let alone the behaviour of our financial institutions.
With those premises, we embarked upon a combination of sectoral work—I will come back to that later and how exactly we did it—together with what in the jargon are called horizontal measures: promoting training through reviving apprenticeships, supporting flows of finance, establishing the British Business Bank and the Green Investment Bank, and supporting innovation with the launch of the Catapult Network. There was a combination of horizontal and vertical measures, and that was the basis of the industrial strategy.
Before going on in detail about our experience and the lessons from it, I will just say something about the wider context. There is a tendency to think, particularly with the Biden programme in America, that this is all very new. Actually, there have been active industrial policies in almost every country since the Second World War. The United States has had a very active industrial policy. It does not call it that, but the use of defence procurement, particularly combined with DARPA and the other very intensive research institutions, has had a major impact on the growth of high productivity activities in the United States. Google’s first algorithm was generated through co-operation with Government institutions. Apple’s early applications came through Government co-operation.
Japan was the model for a long time. Certainly, at the beginning of the 1980s there was a lot of discussion in the UK and elsewhere about how to copy the Japanese. That has become less fashionable since their economy crashed, but the MITI model was widely used.
There were others. There is one I like to quote because it is a small, open economy. People often say in the UK, “Why are we not more like Singapore?” Industrial strategy was a core part of Singapore’s development. They have sectoral approaches based on bioscience and quantum computing. They understand, as we do, that modern value-added activities are not just manufacturing; they are services, so they have creative industries and design programmes. This whole idea of Government private sector co-operation and planning—not state direction, but certainly working very closely together and trying to adopt a long-term approach—is embedded in their system, as it is in many others.
Korea is another interesting model because it is about the same size as the UK. They pushed ahead with a lot of their core manufacturing activities. The car industry is a particularly interesting case because it was almost destroyed in the Asian financial crisis, but they kept going and, as a result, we have had Hyundai. We now have Samsung, which is pioneering a lot of the work around advanced electronics.
There are many countries that have tried industrial strategy. It did ebb a little bit in the 1980s and 1990s, when what people call Reaganomics or Thatcher economics was fashionable, but most countries have and sustain active industrial policies of one kind or another. Our challenge in the UK is to look at best practice and add that to our own experience.
Q27 Chair: You have argued consistently and very eloquently about the virtues of industrial strategy, and you have set out a number of thoughts in a very helpful pamphlet that you drew my attention to. Do you recognise what Lord Mandelson says around the new demands of resilience as well as growth? Does that basically emphasise the importance of industrial strategy for the future? Does it make it even more important than perhaps it was in the past?
Sir Vince Cable: Yes, competition is now much more intense, and we have a rising number of competitors, some of them unorthodox. I suppose China is the most obvious one, and that will intensify with all their excess capacity, so that is certainly one of the big new challenges.
We now find ourselves outside of the European Union. Again, we do not want to argue about the pros and cons here, but it is a fact of life. Britain as a medium-sized country alone in the world has to find a new way of dealing with that. Certainly, when I was in the Government, the activities of the Commission in constraining what we could advance in state aid, for example, was a major influence on the industrial strategy that no longer applies. These are some of the big changes in circumstances that we are going to face now.
Q28 Chair: Greg Clark, what are your reflections on how the world has changed since you were in office? What are the implications for industrial policy in the future?
Greg Clark: It has changed in a number of respects. One is that most of the rest of the world now have active industrial strategies that they communicate and promote, and which are important for attracting inward investment. Just at the time, partly driven by security reasons, that countries have looked to make sure that they can guarantee supplies and prosper in the world, we went through a period of abandoning industrial strategy, which was a mistake. As both my colleagues have said and Richard Harrington describes, we have had what might be described as an intermittent industrial strategy over many years.
I was struck by what our successor, the current Secretary of State for Business and Trade, said in launching the advanced manufacturing plan, which was an “industry-wide sustainable long-term plan”. Yes, but throughout our tenure, our various successors abolished the plans. I tried to draw on what my predecessors had done, including my two predecessors here. Peter would acknowledge the contribution of Lord Sainsbury in a lot of that early work, who was the science Minister. It is regrettable that we have had that intermittency.
Just to emphasise what I think is the clear demand for a coherent and consistent industrial strategy, with the change in the national security outlook, colleagues on this Committee will be familiar with the integrated review of security, defence, development and foreign policy that was published by this Government in 2021.
If I can quote from that, it says, “Our first goal is to grow the UK’s science and technology power in pursuit of strategic advantage. Achieving this objective requires a whole-of-UK effort in which the Government’s primary role is to create the enabling environment for a thriving science and technology ecosystem of scientists, researchers, inventors and innovators across academia, private sector regulators and standards bodies, working alongside the manufacturing base to take innovations through to markets. It also requires strategic choices and decisions by the Government, both on science and technology priorities and on how we use our national science and technology capability in support of wider policy goals from net zero through to economic growth”.
That is, it seems to me, a succinct statement of what industrial strategy should be. I note slightly ruefully that that integrated review and that statement was published on 16 March 2021. On 3 March 2021, less than two weeks before, the industrial strategy was abolished.
Q29 Chair: You could say technology is the “power” in “superpower”, and therefore it is a good idea to invest in it.
Greg Clark: Certainly, most nations seem to be coming to that conclusion.
Q30 Charlotte Nichols: In your opening remarks, all of you referred to the Inflation Reduction Act in the US and measures that other countries are taking in terms of their own industrial strategy. It is quite reassuring to hear all of you lament the fact that we do not currently have one.
We recently had Kemi Badenoch in front of this Committee, and she said that the announcement on something to replace the Industrial Strategy Council was that there was no announcement, because the Government were not interested in picking winners and losers. To what extent do you think the actions of other countries require the UK Government to take a more active role in shaping our own economy?
Lord Mandelson: The key thing is that what Government do and how well they do it is a key component in a country’s competitiveness. What I saw when I was trade commissioner, not just in Europe but travelling in South Korea and across Asia, was that what Governments were doing was adding to the competitive advantages of their own economies by operating in that intelligent, strategic, proactive way. In failing to do so in our own country consistently, we were putting our industrial economic players at a disadvantage vis-à-vis the rest of the world. That is the way to look at it.
I remember saying as Business Secretary, “The problem with the 1960s and the 1970s is the slightly clunky approach to industrial policy”. Government would sally forth looking for winners, and we would end up with the losers finding the Government. The sort of industrial policy we want is not about protecting, propping up and bailing out. She is living in a different rhetorical era, frankly. She needs to join the 21st century and see what everyone else is doing as part of this new normal.
Active industrial policy can be quite disconcerting. It is pro-change. It is pro-modernisation. It is pro-technology. It is pro-AI. It is pro a lot of things that some people in parts of the economy may initially feel threatened by.
In my view, a good, strong industrial policy can be as much about disruption as it is about sustaining a strong industrial base. In politics, we have to be aware that disruption is controversial and can bring problems from stakeholders and others who feel threatened by it rather than excited by it.
Sir Vince Cable: I will just make one point about the international context. Lord Mandelson is absolutely right that seriousness about the economy is not just about managing the macroeconomy problem and low inflation and demand management, but it is about industrial strategy, whatever we choose to call it.
There is one very important qualification when we are looking at the international context, which is the point that the Treasury never stopped pointing out to me when I was Secretary of State, which is that there is no such thing as a magic money tree. We are not in the position of the United States, which had a very extensive policy, even before Biden’s plan, which some people would argue was slightly over the top in financial terms.
The Chinese in many ways set the tone for the way that the modern trading system operates because it is the biggest trading country. They do not call it an industrial strategy, but they have thrown gigantic resources at their planning system through their state venture capital companies, as well as research and procurement and the rest of it. Even they are beginning to realise that there is a limit to how much money you can waste.
For the two superpowers, money is not really an object, but for countries like the UK, it clearly is, and we have to craft intelligent industrial strategies within financial and other resource limits. Certainly, when I was Secretary of State, the models that we looked at were some of the more directional ones with sectors.
I mentioned Korea and Singapore. The Germans have a completely different approach where you have an active Government, but it does not get into sector policy directly. They have KfW for finance; they have their apprenticeship system; and they have their Fraunhofers for promoting innovation, but they do not do sector industrial strategy. The issue for the UK is about which of those models for countries of our size and resource constraints is the most appropriate.
Q31 Charlotte Nichols: Would you agree with the assessment of Adam Posen, a former member of the Bank of England’s Monetary Policy Committee, who suggested that the UK should “think like a small country and specialise” rather than try to follow larger economies like the US, the EU and China?
Sir Vince Cable: Yes. We should be looking to small and medium-sized countries. There is some danger in just believing you can cut and paste the Biden model in the UK. It seems to me that many of the things they are doing are admirable and sensible from their point of view, but it is not a model that can be exported.
Greg Clark: First of all, you mentioned the Industrial Strategy Council having been abolished. That was dismaying, because knowing the intermittency historically of industrial policy, this was an attempt to make it endure, and to people it with some excellent people representing the whole of UK business, industry and political leadership. It was an unnecessary act of vandalism to destroy a new institution that was doing good work.
To the point about the traditional branding of industrial strategies or policies as picking winners, certainly in the industrial strategy that I was responsible for, there was no sense at all of funds being directed to deserving individual companies. To use a slightly different twist on the analogy, it was about picking races that we needed to compete in.
If I look at some of the initial recommendations that we made, we said in 2017 that we should expect and want to be competitive in AI and the analysis of big data; that we should look to build on our strengths in battery technology; and that we should look to develop a vaccine manufacturing capability. We did not specify any individual firms within that, and that was never the intention.
Even with the benefit of hindsight after a few years, they were not bad calls. It shows that there is some purpose in looking forward, and not in a crystal ball, but to see that if transport is going to decarbonise, cars are going that way and we have a valued car industry, then we need to not just develop but build on our capability in batteries. It is not about picking out winners.
Finally, and perhaps in contradistinction to some of what my predecessors have said, paradoxically, there are some elements of industrial strategy that the Government are not just pursuing but pursuing, in some ways, more vigorously than in our times. If I take investment in science and technology, which all of us agree is very important, one of the things that the Government have done is to nearly double the annual investment in the science and technology budget. It has continued with things like the Aerospace Technology Institute that Vince set up. The Faraday challenge for battery research that I established has continued, albeit after a period of worry that it was going to be discontinued.
There are elements there, but the words “industrial strategy” seem to be banned, and there is a sense of a strategy in which you should be able to talk about it. It should be something that brings together your policies in order to communicate them to investors and to the outside world. To have a surreptitious industrial strategy is rather self-defeating.
Q32 Charlotte Nichols: Lord Mandelson referred to Rachel Reeves’s plans and securonomics, and industrial strategy has certainly been something that the Labour Party has been really focusing its attentions on policy-wise. Given the lag between the 2017 statement of intent, if you like, and the act of vandalism, as you said, which I completely agree with, that has happened since, do you think that there is still the ability to catch up with our international competitors in these fields, or do you think we will have to recalibrate which areas we are looking to drive that investment into?
Greg Clark: Certainly, because a lot of the elements are there and are being implemented, there is not a sense that we are back at zero for this at all. My dismay is that we are not making enough of what we are doing and communicating that to the rest of the world. I found the industrial strategy a very important calling card. You heard evidence from Richard Harrington earlier about foreign direct investment. When I was Business Secretary, I found it useful to be able to explain to prospective investors what our policy was, so that is for the good.
Security and securonomics, or whatever you want to label it, is important. One of the positive features of national security is that policies that promote national security tend to be the subject of cross-party consensus and longevity, so I regard that as a point of optimism for establishing what is necessary, which is continuity and confidence in policy, such as what the current Business Secretary has said we need.
Q33 Chair: You reminded me of something that was said to me on Capitol Hill last year. If you call it industrial policy, sometimes people resile from voting for it; if you call it national security, people will vote for it all day.
Greg Clark: Quite so.
Q34 Douglas Chapman: All our representatives have mentioned the longevity of policy. Across the last 15 years, we have had 15 Ministers who have had responsibility in some way for industrial policy, and the Department itself has had five different iterations of Departments, so there has been a lot of churn, not just politically, but in terms of the Civil Service, in terms of establishing industrial policy or even giving a nod in that direction.
A previous Secretary of State said that people who say that the Government do not have an industrial strategy are just “not looking at what we are doing”. What is your take on that particular statement? Given the amount of change has happened, is there an underlying policy there that is being impactful and making a difference, or is it a series of minor adjustments to the economy that are not having the impact that they need to have? What would your view be on how we could change that situation?
Greg Clark: I agree with that. It perhaps follows on from what I just said. The elements are there, but if you are protesting that there really is an industrial strategy, then why not be upfront about it and promote it as such?
Q35 Chair: Do you think all the elements are there, or do you think there are chunks that are missing?
Greg Clark: There is no platonic ideal that covers everything. An industrial strategy, as Richard Harrington was saying, needs to be constantly refreshed and updated, and no doubt there will be things that should be added.
Q36 Douglas Chapman: The problem is that it is being added to and refreshed every 12 months, which is not a way of taking things forward that you would want.
Lord Mandelson: Is it not more makeshift, ad hoc firefighting? A cheque is signed here and a cheque is signed there. That is not strategic.
Greg Clark: There is another dimension to industrial strategy, which is why, even if the elements are there, it is worth having as a formal policy. There is the sense that a strategy is a long-term plan. It is an approach to the future, but there is another sense of strategy, which is that it is integrative; it brings the Government together. There is not just a danger, but an actuality that, between the silos of Government Departments, policies are not just not reinforcing; they can be contradictory. Having a coherent Government national industrial strategy makes you resolve those things.
If we take an application like battery technology, the Government would say they have a battery strategy. They would say it is important. You have different Departments. You have the Department for Transport that have a stake in that; you have a new Department for Science, Innovation and Technology; you have the Department for Energy Security and Net Zero, to name but three. The Treasury always has a role in that.
The great danger is that if you are a prospective investor, you have to go knocking on the door of all the different Departments, whose Secretaries of State may have different views on that, and it becomes more difficult to discern what the strategy is. Bringing things together and stopping the Whitehall shopping expedition approach that Lord Harrington described is another reason why we should have a coherent strategy.
Sir Vince Cable: We are going round and round a little bit. Is there an industrial strategy even if it is not called that? Every Government have an industrial strategy through Government procurement. The Ministry of Defence is setting an industrial strategy, depending on what it does with helicopters or aircraft carriers or whatever it is, or under the Department for Transport through its big rail orders. The question is whether you do it coherently in consultation with the business community and the trade unions, which we also would incorporate, or whether you just do it at random and, as Greg Clark said, within departmental silos.
I am sure you will want to come on to the silo issue anyway, but it is a major problem for Government Ministers trying to pursue this issue. It was easier in my time because BEIS was a big Government Department that covered a lot of areas, but we had to co-opt in DCMS in order to have a creative industries strategy, and it had slightly mixed feelings about it. The Department for Transport was crucial because of railways, but also now because of electric charging points and issues of this kind. There are several other Government Departments that, unless they are on board and committed, you are misfiring quite badly. The Home Office, of course, is crucial as well because of visas in key areas.
Lord Mandelson: Could I just very briefly, perhaps, help by putting it in this way? There are many sources of demand for products, such as advanced manufacturing and other related services. The question is about where they are supplied from. Public procurement, as Vince has rightly said, is a major source of demand in the economy. This does not mean to say, though, that the Ministry of Defence, a very big player in public procurement, is pursuing an industrial strategy in respect of the supply to meet the needs and demands that the Ministry of Defence has identified.
I believe that the correct mindset, in a sense, for industrial strategy is identifying the range of sources of demand and then maximising, where you can, the supply to meet that demand from your own British sources.
There is a big tension, as I alluded to at the beginning. You do not want to pursue a protectionist policy in which you say, at all costs, it has to be supplied from our own industrial base. We will not be able to do that. We do not have a big enough or sufficiently plural industrial base to do that.
Secondly, in a world of modern global supply chains, many elements and components that contribute to a production process are sourced in many different countries and cross borders many times. However, you can think more laterally, and in the long term, about how, with sufficient planning and investment, more of your demand can be better met from UK-based supply chains or parts of UK supply chains. That is a mindset that I would like to see more present in Government thinking.
Q37 Antony Higginbotham: I want to drill down into the last 15 or 20 years of industrial strategy and try to understand why we go through this cycle of focus and then not focus. Greg, in 2017 we had the industrial strategy, and then in 2021, which is not a long period of time, it was replaced, and we were told the conditions that existed in 2017 did not exist in 2021. Do you think that is fair? Are we setting an industrial strategy too narrow so that conditions change so dramatically and we have to keep replacing it?
Greg Clark: It is not an accurate description. Obviously, 2021 was post the pandemic, and there needed to be, as there were, some particular policy actions, but a strategy has to be for the long term. A short-term strategy is a contradiction in terms. In the 2017 industrial strategy, right at the beginning, we rooted it in productivity.
Peter Mandelson talked about investment. Another dimension or lens you could see it through is productivity. Without productivity, you cannot pay yourself better as a nation in the future. You cannot grow.
The graphs are very clear. Since the financial crisis, productivity growth has been sluggish, and in many cases has been flat. That is a long-term problem that faces the UK economy and other economies around the world, but you should not shrug your shoulders and say, “There is nothing to be done about it”, because there are causes and drivers of this.
Industrial strategy, as I perceived it, was an attempt to say, “What are the drivers of it, what is causing it, and how can we change them?” We had a policy to increase our innovative capacity with investment in R&D, skills and infrastructure. We talked about the drivers of productivity. These are long-term challenges that require a serious long-term solution, and the idea that they can be retired as no longer being relevant does not stack up.
Q38 Antony Higginbotham: Do you think it is almost too much at the whim and discretion of an individual Minister coming in and leading a Department? You would not do that with a national security strategy. You would have the strategy set for a period of time and stick with it.
Greg Clark: That is right, Mr Higginbotham. The Chair made reference, picking up on something that I said, to national security tending to endure, whereas the toing and froing of domestic policy seems to have plagued industrial strategy.
I would recommend to whoever is in Government after the next election that there should be a serious attempt to embed a long-term approach to industrial strategy. It almost does not matter whether you have precisely the right policies. In response to something that the Chair said, they are probably going to be decent attempts at it if you have done it in the right way and you have convened people. If you get eight out of 10 right, that is better than a council of perfection that says we cannot have anything unless it is absolutely perfect.
I hope that attempts will be made to embed this in the longer term. It could be the case that the recommendations of the Harrington review, if they are adopted—and Lord Harrington consulted parties across the House on this—might be a bridgehead into some continuity here.
Sir Vince Cable: Quite a lot of the industrial strategy has survived despite the capricious behaviour at ministerial level. I was surprised to discover this when I was recently invited to the 10th anniversary of the automotive propulsion group, which was one of the big success stories of that early stage of industrial strategy. We thought it had died, but it has flourished and it is growing. The same is true of the aerospace growth strategy too.
I also discovered—and I had not realised this—that the Automotive Council, which Peter set up and I continued and developed, still meets. There are quite a few other sector groups that we launched that are still operating below the surface. There are civil servants meeting businesspeople, and the spirit is still there. In fact, that is a piece of research you might want to do as to how many of those sector operations are still in operation.
Lord Mandelson: We must beware of the danger of extracting industrial policy as a thin entity or silo in itself, as if it is a specialist tool that you can just plug in. It is not quite like that. Greg has rightly talked about productivity growth and the lack of it. We had spectacular productivity growth during the Major years and the Blair years. It tailed off towards the end of the Brown years because of the global financial crisis, and we have not resumed. We have not taken it up to the same level ever since.
Productivity growth is driven principally by technology, skills and competition. Essentially, it is driven by competitive markets both at home and abroad, but here is the point: if you have, as we experience in this country, chronic underinvestment in technology, skills and infrastructure, then your productivity is going to fall. This is not rocket science. The truth is that public investment fell back during the austerity years; private investment has fallen back since Brexit. There has been a step change downwards, and we are basically plateauing out at a lower level.
We have a lack of efficient knowledge diffusion across our economy. In this country, we have a wonderful set of universities, a wonderful science base and tremendous research. We do not diffuse that knowledge efficiently enough across the private sector as a whole. We do not sufficiently commercialise new technologies to the extent that we could.
Thirdly, we suffer from institutional fragmentation in this country. England has incoherent policy geographies, if I can put it in that way. My own party is committed to further devolution or decentralisation in England, and I welcome that, but let us be realistic about this. We are competing with major, coherent, large-scale regions in Germany and France that are underpinned institutionally, in their governance and banking systems, in very serious and major ways, and we are talking about combined authorities.
I am all in favour of combined authorities, but I can tell you that we only have two in this country that approach the bottom of the scale that we need to compete with comparable regional governance areas or policy areas in France, Germany, Italy and Spain. One is the West Midlands and the other is Greater Manchester, but they are only knocking at the door in their scale.
When we talk, therefore, about devolution, we must do so with a global perspective. We want to create mid-level governance entities or authorities or whatever in England, quite rightly, in my view, but they are competing for foreign direct investment globally against other regions among our economic rivals that are bigger and have scale, impact and governance that, frankly, we have not even started to put in place.
I am not advocating a return to all the regional development agencies that we had, but it may be that we need some super agencies or mid-level governance agencies in the north-west or the north-east or the Midlands, for example, to do a job for us in projecting and promoting the inward investment from the rest of the world to those regions where we have to be much more competitive than we are at the moment.
Q39 Julie Marson: It has been a theme throughout this discussion about almost the branding and the use of the words “industrial policy” and “industrial strategy”. Lord Mandelson has mentioned the clunkiness of the image of the 1960s and 1970s. Greg mentioned whether we should be talking about productivity and innovation. Is it part of the whole image?
Greg, you have mentioned that the Prime Minister is somewhat enthusiastic. You have likened it to a guilty secret. Is that branding, the whole concept and the history of it holding us back? It might sound superficial, but do we need to rebrand the whole concept and sell it in a different way?
Greg Clark: We should not get hung up on the branding. For whatever reason, its use seems to annoy some people. I have never really understood why. It is better to have something clear and communicable rather than you having to squirrel it out from different Departments, but in some ways the branding is the most trivial aspect.
The real purpose of industrial strategy, like most strategy, is that it is an exercise in serious analysis, as any company would do, frankly, to look at how the world is developing and ask yourself the question, “Are we well equipped to prosper in that world and, if not, what do we need to do to put ourselves in a position to succeed?” and then to take those actions. That is a serious intellectual and policy exercise, which is why tying it to fundamental questions like productivity is important.
One of the answers to that, if you do approach it seriously, is in addition to having the discussion that we have had about the industries of the future and how we can make sure that we are at the cutting edge. That is very important. It is necessary but not sufficient, because if we want to drive up productivity, in the analysis of Andy Haldane, for example, who chaired the Industrial Strategy Council and was previously chief economist of the Bank of England, he talked about a long tail of underperformance in productivity. We have, in this country, some of the most productive companies and people on the planet, but we have many that, even living cheek by jowl with advanced technologies, do not implement them. If we only move companies’ productivity performance up a bit in that long tail, we would make a big difference to our national prosperity.
Part of the industrial strategy that I published involved, as well as investing in the cutting edge, initiating a project called Made Smarter, which we asked Jürgen Maier, who was then MD of Siemens, to head. That was about diffusing technologies, in the way that Peter Mandelson described, to smaller and medium-sized businesses across the economy, so that you are investing in promoting the whole of the economy. That is irrespective of what the industrial strategy is called, but it reflects, as we put into it—and I know that Peter and Vince did—a serious consideration of what we need to do to succeed in the future.
Q40 Julie Marson: Vince, you mentioned getting the balance right between the horizontal and the vertical strategy, and whether you invest in sector-based measures or more economically horizontal measures. You mentioned that it is important to get that balance right. How do you get that balance right?
Sir Vince Cable: It is with some difficulty. I would just underline the point that Greg has just made. This is not really a branding problem; it is about the whole of Government, and it is about long-term thinking.
I came into Parliament out of the Shell planning system, where you would normally think 20, 30 or 50 years ahead, and coming into Government was an appalling culture shock. There is not that capacity, but there are sectors of the economy where you just have to, because their activities go well beyond an electoral cycle, whether it is pensions policy or defence procurement. You have to build into Government the capacity to think of things in that long-term way.
Going back to your question, there is getting this mesh or matrix, if you like, between the vertical, sector-based activity and the horizontal, general policy. On the sector-based stuff, our approach to it was very flexible. We did an analytical study in the Department on—I am sorry; it is horrible economic jargon—revealed comparative advantage, which is about which of the sectors of the economy seem to be doing relatively well and therefore need a push behind them, but we added on an ad hoc basis. It did not include the chemical industry, so we encouraged the chemical industry to work with us.
One of the insights that was made is that, whereas the Department of Energy was happily proceeding with nuclear power and oil and gas licences, nobody was really thinking about how you make sure that there is a British input into the supply chain. You need to set up a structure to do that, and the industrial strategy provided a mechanism for it.
Although there was no clever economic reason for choosing the construction industry, we chose the construction industry because there were a lot of unconnected things going on in the industry. The big companies did not talk to the small ones, and the training was awful. Getting the industry around a table with Government was a very productive activity.
My approach to the vertical, sectoral stuff is just using a bit of common sense and being pragmatic, and not being tied to rigid formulae. For the broad, cross-cutting policies, as Peter Mandelson said, where Britain does science and innovation well, we do it extraordinarily well, but there is a serious underfunding of public sector R&D, and it cannot be the industrial strategy people determining that outcome. This is Treasury and Prime Minister level, so you need leadership at that level for the broad commitments of that kind.
Q41 Julie Marson: We talk about a lot of intervention. There is a case also to have maybe some institutional constraints and a high bar for intervention, where you do not intervene. It is equally important to know when not to intervene as when to intervene. How do you set that bar for intervention?
Lord Mandelson: I would not describe it as a bar. I would describe it as a purpose. How you define and prescribe the purpose is more important than the bar up and down, as it were. I am fine with signing a cheque for batteries, and I am fine with signing a cheque for steel. I would just prefer to see steel, for example, as part of a bigger, longer-term plan for the steel sector in this country. It is too makeshift.
By the way, it is not about simply protecting what exists. It is sometimes about making sure that you are changing with the times, the new technologies and new products. That can be a difficult thing for communities and workforces to embrace, but then you need a Government intervention that takes account of all those things.
It is just to do with being smart, intelligent and ahead of the game, foreseeing where things are going and making sure that our productive capacity and abilities in this country are keeping up with the curve or envelope that is moving forwards. Government have to play a role in doing that. They have to focus attention on the right things. They have to channel their energies into the right activities. It is about choosing and galvanising the right partners to work with you. That is what it is about.
It is not a magic key. There is not a single magic key. It is not a single magic plug that you are putting into the socket. It is not a series of events; it is about a mindset, a process, and a way of thinking about the long term.
Q42 Charlotte Nichols: Lord Harrington referred to a lack of clear figureheads for investors to go to, with funding sat across various different Government Departments. All of you today have referred to Whitehall silos. In the absence of an overarching industrial strategy, with the ad hoc measures that we have seen in the intervening period, such as the nuclear roadmap, for example, in many respects the Department driving it does not have control of the levers for addressing some of the key issues in things like planning and siting and so on.
I was six when Labour last came into Government, so Lord Mandelson, you will forgive me if I get the name of this wrong, but as I understand it, there was a Number 10 delivery unit that was set up to try to get across some of these Whitehall silos. Where do you think industrial strategy should be placed in order to bring the coherence that everyone today has said is so needed and so lacking?
Lord Mandelson: It certainly needs to be a whole-of-Government effort, as Greg has said, which is matched by a total business environment. There is no point in getting things half-right. We are competing with other countries on our regulatory nimbleness. We are competing with other countries on our tax treatment of the private sector. We are competing with other countries on the incentives that we offer to entrepreneurs who are taking the risk, and therefore the rewards they expect for that risk. We are competing with other countries in how we regulate our labour market and how we treat the new emerging digital economy.
International investors look at all these things, and they make their judgment, but they also form a view about the stability, predictability and continuity of those policies. As you would expect me to say, I believe that Brexit was a major setback for our country in a whole variety of different ways. We have lost our automatic trade and frictionless relationship with our largest source of inward investment and our largest export market, but the thing that made matters so much worse and multiplied the negative impact was the uncertainty, the divisions, the political coming and going, the succession of Prime Ministers, and our inability to resolve how to implement Brexit for years afterwards. That has left a terrible impression with the rest of the world about what it is like to do business in a country that has such political instability.
This is not an advertisement I am making for changing the Government. I am not making a case for how people should or should not vote at the forthcoming general election—of course I am not. But I would just say this: if we can get a political frame and a set of longer-term policies and continuity, and the sense among international companies and investors that what they see in Britain now is going to remain, broadly speaking, roughly the same in five or even 10 years’ time, it will make a colossal difference to how they view Britain as an investable destination and a place in which to do business.
Q43 Chair: That has been incredibly helpful. I just want to crystallise a couple of things for the record, so, if you can, give me a one-word answer. Can a good industrial policy improve the growth in GDP per capita?
Greg Clark: Yes, absolutely. If you look at the drivers and components of it, it is about investing in ideas in universities and research, making sure that we have the skills to be able to turn those ideas into products and services, and—a point we have not touched on other than lightly—making sure that we have good local leadership. Growth does not happen in the abstract. It happens in particular places. We need to have good leaders with powers there. These are all tangible things we can do, which is why I take an optimistic view.
Going back to your remarks at the beginning, Chair, this is an extraordinary time for innovation, discovery, change and disruption. The privilege of being in Government means that we can help and accelerate that.
Chair: That is a clear yes.
Greg Clark: Yes.
Sir Vince Cable: Mine would be a clear yes, but it is long term. It may be that the successor Government get the credit, and we have to be sufficiently grown up as a country to accept that.
Lord Mandelson: A clear yes, and you build on experience. This is an iterative process. In my day, what I called industrial activism, because I was nervous about calling it industrial policy for all the reasons that we have discussed, was of a fairly rudimentary kind, which Vince built on. He made it more sophisticated. Greg then, in his turn, built on what Vince had done and gave us the most sophisticated version of industrial strategy to date.
You build on what your predecessors have done; you do not scrap and start reinventing the wheel from the beginning all over again with each successive change of Government.
Q44 Chair: Is industrial policy today in the right place?
Lord Mandelson: No, absolutely not.
Sir Vince Cable: No.
Greg Clark: No, it needs to be more active and deliberate.
Q45 Chair: What are the risks that we run if we do not fix this?
Greg Clark: We have two risks. One is that we will not solve the productivity challenge that has been holding back our prosperity since the financial crisis. There is a risk of a missed opportunity. For a country that is so well placed in terms of its ingenuity, its institutions and influence on things like standard-setting, we can be, as we were in the first industrial revolution, a leading force in this, and it would be unacceptable, in my view, for us not to aspire to that.
Sir Vince Cable: The big risk is that you lose the engagement of business. They do not think Government are serious.
Lord Mandelson: The biggest risk is falling living standards, declining public services and a poorer country.
Chair: Thank you very much indeed. You have lit the stage for this inquiry in a brilliant way, and you have set out four or five really important challenges about getting the balance right between growth and security, horizontal and vertical interventions, between the centre and the local, between the coherent and fragmented. We have heard that loud and clear. Perhaps there is a tension between doing things in secret and doing things in a way that is more bold. Thank you so much indeed for helping us get this under way.