Written evidence from Centre for Local Economic Strategies (ISG 81)
About CLES:
The Centre for Local Economic Strategies (CLES) is the UK’s leading think-tank and research organisation dedicated to local economic development, regeneration and local governance. Over the last 30 years, CLES has been at the forefront of undertaking incisive policy research and action around local economies and evaluating the effectiveness of regeneration and other programmes and projects. As a registered charity, we are committed to addressing issues of inequality, poverty, and social exclusion. CLES undertakes a range of membership, research, training, and consultancy work with organisations across the public, commercial and social sectors. Our experience stretches across UK and beyond to Europe, Australasia, North America and Asia.
1.1 From CLES’ view an industrial strategy should be one which creates effective conditions and context for investment and indigenous development, and is focused upon rebalancing the economy in two ways: geographically and sectorally, in that the UK becomes focused upon production and innovation, and less upon a fragile services sector. An effective industrial strategy would raise levels of skills and productivity across the country, reinvigorating all regions and supporting a highly diverse economy which provides quality jobs. It needs to be a fundamental shift away from a hands off, small state approach, where the belief placed on ‘rising tide will lift all ships’, towards the development of existing capacity, activity and investment in places and industry, and where the spill-over effects will impact on both wider supply chains and local social growth. It has to result in meaningful positive change for people, businesses and places right across the country.
1.2 In any modern industrial strategy - which equips a country for the future - the maintenance of prevailing/traditional approaches to economic growth are important, including capital investment, labour and skills. However, in addition we must rapidly accelerate wider considerations of place and ‘total factors of production’ (business culture, innovative capacity, civil society, social action and democracy). These latter aspects are the basis to a new productive, inclusive economy, and increasingly considered as key elements to modern industrial strategy (and arguably elements which have been somewhat neglected within the UK economic growth model to date). This wider set of place activity represents a core element to future UK competitiveness and productivity. A wave in which advancing total factors of production is placed on equal footing to capital investment in hard infrastructure and labour/skills. Indeed we know from many other places that investment in total factors of production, can be a fillip of economic and social success.
2.1 An industrial strategy is a public policy plan. Thus by its very nature, it is interventionist. Given the deindustrialisation in some parts of the UK, the Government needs to introduce an industrial strategy which is voraciously interventionist. Up to now, the free market on its own has partly failed in providing the wider benefits of economic growth for all in society. For us, the re-introduction of a robust industrial strategy provides the opportunity for a more balanced and cohesive approach. It will provide the UK with a stronger foundation for greater equality and enable the UK to be more resilient in the face of market failures and be more agile in grabbing opportunities.
2.2 On the question of preventing takeovers of UK companies, there should be greater powers in place to proactively intervene where it is not in the national or local interest. Protecting innovative capacity for instance is clearly important, as is protecting jobs, terms and conditions, and supply chains, particularly in large companies which localities may disproportionately rely on. This should be gauged in terms of the extent to which it is positive investment in the long term economic future, against short term costs.
3 What lessons can be learnt from other/previous industrial strategies?
3.1 There are significant lessons to learn from aspects of the German model of industrial strategy. In Germany (and other countries across Europe), there is a progressive relationship between industrial strategies, skills enhancement, labour markets and industrial relations, with policy and partnerships in place to align skills and industrial priorities – for too long this has been absent in the UK. This means collaboration between government, employers, employees and unions as regards policy formulation, and strategic direction. This can result in better training standards and investment into skills by employers. The German model is also long term in its approach, and with only minor changes through successive governments - UK policymakers need to understand that short and medium term industrial strategies will not provide sustainable economic and social yields.
4. The pros and cons of an industrial strategy adopting a sectoral approach
4.1 The industrial strategy should not be overtly focused on a sector approach of picking winners - in successful economies now and in the future, sectors will be of equal if not lesser importance compared to specific skills, which can be applied across many sectors. A number of commentators will refer to a poor record within Government of picking winners, stating that it does not have the market insight nor expertise to be in a position to do so. Others believe that an industrial strategy must be muscular and focused mainly on a sector based approach. In our view the most appropriate course is more likely to lie in the middle.
4.2 Targeted support should be provided to nationally important and new industries, which in some localities, will be a key source of employment. Manufacturing and its multitude of sub-sectors and supply chains come to mind here, although the strategy should be wider in scope and scale than just this. This is not about seeking to prop up failing and declining sectors, rather it is about reforming and providing the basis for future innovation. This recognizes that governments can play a legitimate and crucial role in shaping the innovation capabilities of national economies. Further, this is central to the rebalancing of the economy, from an increasingly low paid and fragile services sector, to an outward focused economy based on innovation and where exports help redress the trade balance, where supply chains grow and strengthen, and where investment in skills across the private sector becomes much more systematic. This in turn, will help in geographical rebalancing, supporting localities across the country.
5. Geographical emphasis of the industrial strategy:
5.1 It is critical that a geographical focus is at the heart of the industrial strategy. Whilst the UK’s economy is growing (albeit at a slow rate), the gap between places is as extensive as ever. This is evident at a number of levels. Firstly there is a broad divide, between the north and south, and between regions. Indeed the UK now has the largest differences in economic output between regions than any country in Europe. Whilst such an imbalance exists, there are also more subtle differences than this, as within regions there are economic divides, and indeed this is the case within city regions. An effective industrial strategy is a prerequisite to addressing these long standing issues which have blighted the country for decades. This means industrial strategy as part of a wider economic plan, to include greater investment in infrastructure, developing skills, investment in research, increasing investment in small to medium sized enterprises (SMEs), and total factors of production, and crucially further devolving power and resources to cities and regions.
5.2 There is a problem within investment trends and financial markets which an industrial strategy must shift. Return from activity in the financial markets often takes precedence over return earned through investment in manufacturing and industry. This is manifest in the behaviour of financial markets, who when they look to invest, prefer those businesses with collateral, which can be pledged against the investment. This skews investment toward property and developers, typically in London and south and relatively buoyant parts of the north. This behaviour works against the smaller to medium-sized manufacturers, or businesses whose pledge is the knowledge and ideas within their own heads. In the absence of an industrial strategy, and little no dedicated regional investment vehicle, there are few genuine levers for genuine rebuilding of manufacturing and industry. As a result, many areas remain investment ready, but are underinvested in.
5.3 The argument towards geographical rebalancing is about maximising the country’s economic potential. Effective development and implementation of an industrial strategy would mean a more clear focus, and a sound strategic vision. If we are serious about rebalancing our economy from services and influence of the capital and South East alone, and geographically spreading prosperity and wealth across the country, then a more effective, strategically focused industrial strategy is a must.
5.4 Devolution should closely complement a progressive and geographical focused industrial strategy. This means providing the opportunities of fiscal devolution for local government. It needs to go a step further than the controls and powers being handed over as part of the current devolution deals. Places should be able to borrow against local revenues, and use these to invest in local growth initiatives and infrastructure that can act as a catalyst for further investment and sustainable growth in employment. But what devolution cannot be allowed to do is further widen divisions and inequalities between places as places that have stronger economies leverage more resources. Whilst we appreciate that cities are the main growth engines and as such require sufficient investment to create more jobs and attract further resource, how they connect to broader hinterlands, and how those places which are economically and geographically isolated are supported, needs to be of equal consideration.
5.5 A new industrial strategy needs to empower local government, utilising its role as a facilitator and place leader to implement progressive economic policy. Local government – together with its partners – needs to be allowed to have the space to invest and make decisions about the areas that it knows most about – for instance local labour markets, skills and business support. Industrial strategy therefore needs to work to support these components which are critical to growth and development. This means thinking for the long term and beyond quick wins in infrastructure and limited targeted sector investments for instance. Letting local government have a full control over its labour market policy and skills and business support budgets, will build the foundation for providing the base for future business investment, and provide a key link between skills and industrial policies. Local Enterprise Partnerships, working with Combined Authorities, should be able to be local pioneers in this, and not be hindered by central edicts and targets.